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As filed with the Securities and Exchange Commission on October 8, 2013.

Registration No. 333-             

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form S-1

REGISTRATION STATEMENT

UNDER THE SECURITIES ACT OF 1933

 

 

zulily, inc.

 

(Exact name of registrant as specified in its charter)

 

Delaware

 

5961

 

27-1202150

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

2200 First Avenue South

Seattle, WA 98134

(877) 779-5614

 

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Darrell Cavens

President and Chief Executive Officer

zulily, inc.

2200 First Avenue South

Seattle, WA 98134

(877) 779-5614

 

(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:

 

Eric C. Jensen

John W. Robertson

Michael E. Tenta

Cooley LLP

1700 Seventh Avenue, Suite 1900

Seattle, WA 98101

(206) 452-8700

 

Deirdre Runnette

General Counsel

zulily, inc.

2200 First Avenue South

Seattle, WA 98134

(877) 779-5614

 

Steven E. Bochner

Craig Sherman

Michael Nordtvedt

Wilson Sonsini Goodrich & Rosati, Professional Corporation

701 Fifth Avenue, Suite 5100

Seattle, WA 98104

(206) 883-2500

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  ¨     Accelerated filer   ¨
Non-accelerated filer  þ     (Do not check if a smaller reporting company)   Smaller reporting company  ¨

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of Securities to be Registered

 

Proposed Maximum Aggregate

Offering Price(1)(2)

  Amount of
Registration Fee(3)

Class A Common Stock, $0.0001 par value per share

  $100,000,000   $12,880

 

 

 

  (1) Estimated solely for the purpose of computing the amount of registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
  (2) Includes shares the underwriters have the option to purchase.

 

  (3) Calculated pursuant to Rule 457(o) under the Securities Act of 1933, as amended, based on an estimate of the proposed maximum aggregate offering price.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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

 

Subject to Completion. Dated October 8, 2013.

            Shares

 

LOGO

Class A Common Stock

 

 

This is an initial public offering of shares of Class A common stock of zulily, inc.

zulily is offering             shares of the Class A common stock to be sold in the offering. The selling stockholders identified in this prospectus are offering             additional shares of Class A common stock. zulily will not receive any of the proceeds from the sale of the shares being sold by the selling stockholders.

zulily has two classes of authorized common stock, Class A common stock and Class B common stock. The rights of the holders of Class A common stock and Class B common stock are identical, except with respect to voting and conversion rights. Each share of Class A common stock is entitled to one vote per share. Each share of Class B common stock is entitled to ten votes per share and is convertible into one share of Class A common stock. Outstanding shares of Class B common stock will represent approximately     % of the voting power of our outstanding capital stock immediately following the completion of this offering.

Prior to this offering, there has been no public market for the Class A common stock. It is currently estimated that the initial public offering price per share will be between $         and $        . We intend to apply to have our Class A common stock listed on the NASDAQ Global Select Market under the symbol “ZU.”

We are an “emerging growth company” as the term is used in the Jumpstart Our Business Startups Act of 2012 and, as such, have elected to comply with certain reduced public company reporting requirements. Investing in our Class A common stock involves risks.

 

 

See “Risk Factors” on page 12 to read about factors you should consider before buying shares of the Class A common stock.

 

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per Share      Total  

Initial public offering price

   $                    $                

Underwriting discount(1)

   $         $     

Proceeds, before expenses, to zulily

   $         $     

Proceeds, before expenses, to the selling stockholders

   $         $     

 

(1) We have agreed to reimburse the underwriters for certain expenses, see “Underwriting.”

To the extent that the underwriters sell more than              shares of Class A common stock, the underwriters have the option to purchase up to an additional              shares from             at the initial public offering price less the underwriting discount.

 

 

The underwriters expect to deliver the shares against payment in New York, New York on                     , 2013.

 

Goldman, Sachs & Co.   BofA Merrill Lynch    Citigroup

RBC Capital Markets

Allen & Company LLC

William Blair

 

 

Prospectus dated                     , 2013.


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TABLE OF CONTENTS

Prospectus

 

     Page  

Prospectus Summary

     1   

Risk Factors

     12   

Special Note Regarding Forward-Looking Statements

     42   

Use of Proceeds

     44   

Dividend Policy

     44   

Capitalization

     45   

Dilution

     47   

Selected Consolidated Financial and Other Data

     49   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     53   

Business

     79   

Management

     92   

Executive Compensation

     100   

Certain Relationships and Related Party Transactions

     107   

Principal and Selling Stockholders

     110   

Description of Capital Stock

     113   

Shares Eligible for Future Sale

     120   

Material U.S. Federal Income Tax Consequences to Non-U.S. Holders

     123   

Underwriting

     127   

Legal Matters

     133   

Experts

     133   

Where You Can Find More Information

     133   

Index to Consolidated Financial Statements

     F-1   

 

 

Through and including                     , 2013 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

 

We, the selling stockholders and the underwriters have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses prepared by or on behalf of us or to which we have referred you. We are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. The information contained in this prospectus is current only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.

For investors outside the United States: We, the selling stockholders and the underwriters have not done anything that would permit this offering, or possession or distribution of this prospectus, in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of Class A common stock and the distribution of this prospectus outside of the United States.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our Class A common stock, you should carefully read this entire prospectus, including our consolidated financial statements and the related notes thereto and the information set forth under the sections “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in each case included in this prospectus.

Unless the context otherwise requires, we use the terms “zulily,” “company,” “we,” “us” and “our” in this prospectus to refer to zulily, inc. and, where appropriate, our consolidated subsidiaries.

Company Overview

We launched the zulily website in January 2010 with the goal of revolutionizing the way moms shop. Today, we are one of the largest standalone e-commerce companies in the United States. Through our desktop and mobile websites and mobile applications, which we refer to as our “sites”, we help our customers discover new and unique products at great values that they would likely not find elsewhere. We provide moms a fun and entertaining shopping experience with a fresh selection of over 4,000 product styles offered on a typical day through various flash sales events, which are limited-time curated online sales of selected products launched each day on our sites. We source our merchandise from thousands of vendors, including emerging brands and smaller boutique vendors, as well as larger national brands. By bringing together millions of moms and a daily selection of products chosen from our vendor base, we have built a large scale and uniquely curated marketplace. Since inception through June 30, 2013, we have worked with over 10,000 brands, featured over 1.6 million product styles and sold over 42 million items to over 2.9 million customers across our platform.

zulily is a disruptive e-commerce company built to address a retail experience for moms that we believe has become uninspiring due to the concentration of sales among mass retailers and the commoditization of merchandise. We distinguish ourselves by offering a fresh and affordable selection of products that inspires moms to shop. Our merchandising team constantly scours the market for new and unique brands in children’s apparel, women’s apparel and other product categories, such as toys, infant gear, kitchen accessories and home décor. Once we find these brands, we invest in photography and editorial content to tell each brand’s story in our fun and engaging voice. We then sell these products through our flash sales model, creating an impulse-driven shopping experience that delivers entertainment, value and convenience for moms anytime and anywhere. Increasingly, moms are shopping at zulily throughout their day from their mobile devices, and as a result we have optimized our platform for mobile shopping. Our focus on delivering a better and more entertaining shopping experience for moms has driven strong new customer growth as well as repeat purchasing by existing customers, which have been the keys to the differentiated economics of our business.

We have become a trusted partner for our vendors because we provide them with access to a large and highly engaged consumer audience, creating significant brand exposure and revenue opportunities. Many of our vendors are small-to-medium sized businesses and may have difficulty reaching a targeted audience of moms on a broad scale. Our vendors can reach this audience while also eliminating wholesale, direct sales and fulfillment costs for the products they sell through our platform, making zulily an attractive channel for them.

To best serve our customers and vendors, we have in place a custom, fully integrated fulfillment infrastructure. Our supply chain solution efficiently handles the small-to-medium lot sizes and high inventory turnover required by our constantly changing, limited-time product offerings. We operate a

 

 

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minimal inventory, intermediary model where we typically take customer orders before we purchase inventory from our vendors. As a result, we are able to offer a much larger selection of products to our customers and to generate greater sales for our vendors, who are able to match a broader range of their product supply to actual customer demand.

Continual innovation through investment in technology is core to our business. We have custom built a proprietary and scalable technology platform to enable our unique business model. Our technology is built to handle the significant spikes in site traffic and transactions which frequently occur when we launch our events each day. In order to enhance relevance for our customers, we have developed extensive data collection and analytics capabilities which allow us to anticipate the shopping preferences of our customers and then personalize their site experience. Our technology platform is also designed to meet the rapid order fulfillment needs that are unique to our flash sales model.

At the scale at which we now operate, the combination of our customers, vendors and fulfillment infrastructure has resulted in powerful network effects, which we believe is a significant competitive advantage. Our large and growing customer base in a highly desirable demographic has allowed us to attract and retain vendors offering high quality and unique products. The breadth and quality of our vendors’ merchandise, which we curate daily to provide a fresh selection, enables us to attract new and repeat customers.

We have achieved the following significant milestones:

 

  Ÿ  

As of June 30, 2013, we had 2.2 million active customers, or customers who had purchased at least once in the last year, an increase of 93.1% from the 1.2 million active customers we had as of July 1, 2012.

 

  Ÿ  

For the 12 months ended June 30, 2013, we generated $214 of revenue per active customer, a 10.9% increase from the $193 of revenue per active customer we generated during the 12 months ended July 1, 2012.

 

  Ÿ  

For the 12 months ended June 30, 2013, 82.9% of our U.S. orders were placed by customers who had previously purchased from us, up from 79.1% during the 12 months ended July 1, 2012.

 

  Ÿ  

In the second quarter of 2013, approximately 42% of our U.S. orders were placed from a mobile device, up from approximately 39% in the first quarter of 2013 and approximately 31% in the fourth quarter of 2012.

For 2012 and the six months ended June 30, 2013, we reported $331.2 million and $272.0 million in net sales, representing growth of 132.4% and 114.2% from 2011 and the six months ended July 1, 2012, respectively. For 2012 and the six months ended June 30, 2013, we reported a net loss of $10.3 million and $2.4 million in net income, an improvement from net losses of $11.3 million and $6.2 million in 2011 and the six months ended July 1, 2012, respectively. For 2012 and the six months ended June 30, 2013, we reported $(5.9) million and $7.5 million in Adjusted EBITDA, an improvement from $(8.9) million and $(4.4) million in 2011 and the six months ended July 1, 2012, respectively. We have been free cash flow positive on an annual basis since 2011. For information on how we define and calculate active customers, revenue per active customer, the non-GAAP financial measures Adjusted EBITDA and free cash flow, and for reconciliations of Adjusted EBITDA to net loss and free cash flow to net cash (used in) provided by operating activities, see the sections of this prospectus captioned “Selected Consolidated Financial and Other Data—Non-GAAP Financial Measures” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—Key Financial Metrics.”

 

 

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Our Industry

e-Commerce is a Large and Growing Market.    Euromonitor, a consumer market research company, estimated that the North American retail market was $3.1 trillion in 2012 with online retail representing $183 billion, or 5.9% of the total retail market. As consumers continue to migrate online, the online retail market is expected to become a significantly larger portion of the total retail market. Euromonitor expects the North American online retail market to grow to $360 billion by 2017, a 14.5% compound annual growth rate, or CAGR, from 2012, as compared to a 2.9% CAGR for the offline retail market over the same time period.

Moms are an Influential Consumer Demographic.    According to a 2012 report from the U.S. Census Bureau, 39 million U.S. households have children under the age of 18, representing 121 million people. In these households, we believe moms generally control an outsized share of spending, particularly spending on children’s apparel, women’s apparel and home décor. According to a 2009 report from Advertising Age, an advertising industry publication, women controlled 73% of household spending. Additionally, women and moms are over-represented as Internet shoppers. According to comScore, a market research firm, in February 2010, women accounted for 49.8% of the U.S. online population but made 61.1% of online purchases.

Women’s and Children’s Boutique Brands are Highly Fragmented.    We believe that emerging brands and smaller boutique vendors are more prevalent in the children’s apparel, women’s apparel and home décor categories compared to other retail categories. We have sold products from over 10,000 brands to date and we discover new, emerging brands on a daily basis. This fragmentation is evident in our business, as over 65% of our U.S. product sales in 2012 came from vendors, generally emerging brands and smaller boutique vendors, selling less than $50,000 of product per event.

Mobile Commerce is Growing Rapidly.    The proliferation of smartphones and tablets has made mobile commerce one of the fastest growing retail channels. According to International Data Corporation, or IDC, a market research firm, the number of U.S. mobile online shoppers is expected to grow from 52 million in 2012 to 189 million in 2017, a 29.3% CAGR. Moms also spend more time mobile shopping than the general consumer. According to eMarketer, a market research company, 23% of moms who use the Internet shop on their mobile devices as compared to 15% of the rest of the general Internet user population. Since consumers have access to their mobile devices virtually anytime and anywhere, this allows them the opportunity to browse and shop during their spare minutes throughout the day. Mobile devices also enable “push commerce” features that prompt consumers to visit mobile websites and use mobile applications.

Our Opportunity

Transforming How Moms Shop Online.    A new wave of e-commerce is emerging. First generation e-commerce companies were generally vertically focused product websites that answered a consumer need for directed product search (for example, “I need a camera”). We believe moms are increasingly looking to the Internet to browse and be inspired through entertaining and engaging discovery-based online shopping (for example, “I want to go window shopping”), especially while they are out and about and on their mobile devices. We believe moms are increasingly using e-commerce as a form of entertainment in addition to satisfying specific product needs.

Transforming How Emerging Brands and Smaller Boutique Vendors Reach Moms.    It is challenging for emerging brands and smaller boutique vendors to reach consumers cost effectively at scale. Smaller vendors can have great products but typically have limited marketing and distribution

 

 

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capabilities. Without recognizable consumer brands, these vendors may struggle to attract consumers to their own websites, if they have them at all, and may also have trouble securing distribution among mass retailers. Additionally, many emerging brands and smaller boutique vendors can be limited by their branding, photographic and editorial capabilities and therefore can struggle to present their products to consumers in a compelling way, which we believe reduces consumer demand for these products.

Our Offering

Our Offering for Moms

Making shopping entertaining for moms is core to who we are and what we do. We think beyond just offering what our consumers are directly looking for and instead look to inspire purchasing by finding and offering a curated set of products from new and emerging brands that our customers could not otherwise easily find. Moms are passionate about buying products for their kids that stand out and make their kids look special, particularly at affordable prices. Our goal is to be part of mom’s daily routine, allowing her to visit our sites and discover a selection of fresh, new and affordable merchandise curated for her every morning.

Every morning, we launch a variety of flash sales events. Typically, these events feature over 4,000 product styles from different vendors and last for 72 hours. The day’s events are kicked off by an early morning email to our email subscribers and push communication to users of our mobile applications. Offerings are only available for a limited time and in a limited quantity, creating urgency to browse and purchase. The majority of our products are sourced from emerging brands and smaller boutique vendors that our customers may not have heard of and whose products are not widely available online. We also offer larger nationally known brands that appeal to our customers and draw new customers to our sites.

Before we launch an event, our photography team typically photographs our merchandise in our in-house studios and our editorial team writes about our merchandise so that we can present each day’s selection of product in our fun and engaging voice. The experience, creativity, resourcefulness and efficiency of our merchandising, creative and operations teams enable us to feature over 250,000 product styles per quarter. We work to create the most compelling price points for our customers, with the average item on our sites offered for over 50% off the manufacturer’s suggested retail price. We then use our proprietary technology, data analytics and personalization tools to segment our audience, offering each mom a curated and optimized shopping experience that features brands, products and events that we believe are most relevant for her.

Our Offering for Vendors

Our primary vendors are emerging brands and smaller boutique vendors. These are typically small-to-medium sized businesses, many of which were started by mom entrepreneurs. Since these vendors’ products are typically not available broadly online, the vendors generally work with us to gain brand awareness and generate incremental sales. We introduce these vendors to our large audience and help them tell their stories in a way that differentiates their products and properly reflects their brand attributes. Our entire operational infrastructure—photography studios, editorial writers, fulfillment operations and technology capabilities—is designed to showcase these emerging brands’ and smaller boutique vendors’ products in the most compelling, engaging and personalized way.

We serve as an important channel for our vendors because by working with us they eliminate wholesale, direct sales and fulfillment costs for the products they sell through our platform. Because of

 

 

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our minimal inventory, intermediary model and short event cycle, we are able to experiment with a broad range of new products and a wide variety of vendors on a regular basis. Our vendors typically provide us with first-run, in-season merchandise as they are incentivized to get their best products in front of the broadest potential customer base. We supplement our boutique brand offerings with events from larger national brands and often become a meaningful partner for these larger national brands as well, driving significant sales and vendor loyalty. Of the vendors we featured for the first time in 2011, 75% have returned to sell again at least once on our sites through June 30, 2013.

Our Strengths

We are one of the largest standalone e-commerce companies in the United States. We have achieved this due to our following key strengths:

 

  Ÿ  

our scale drives network effects;

 

  Ÿ  

highly regarded and trusted brand;

 

  Ÿ  

strong customer loyalty drives high purchase frequency and powerful economics;

 

  Ÿ  

large merchandising team sources unique selection of curated merchandise from diverse vendor group;

 

  Ÿ  

strong mobile offering drives customer convenience;

 

  Ÿ  

differentiated use of consumer data and technology drives personalization;

 

  Ÿ  

efficient, custom-built fulfillment operations; and

 

  Ÿ  

attractive economic profile with strong leverage.

Our Strategy

Our objective is to be the leading online retail destination for moms. We plan to attain this goal through the following key strategies:

 

  Ÿ  

continue to acquire new customers;

 

  Ÿ  

continue to increase customer loyalty and repeat purchasing;

 

  Ÿ  

continue to add new vendors and strengthen existing vendor relationships;

 

  Ÿ  

continue to invest in our mobile platform;

 

  Ÿ  

expand international presence; and

 

  Ÿ  

opportunistically pursue strategic acquisitions.

Risks Associated With Our Business

Our business is subject to numerous risks and uncertainties, including those highlighted in the section captioned “Risk Factors” immediately following this prospectus summary. These risks include, among others, the following:

 

  Ÿ  

because we have a short operating history in an evolving industry, our past results may not be indicative of future performance, and our future performance may fluctuate materially and increase your investment risk;

 

  Ÿ  

if we fail to effectively manage the growth of our business, our financial condition and operating results could be harmed;

 

 

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  Ÿ  

we have incurred significant operating losses in the past, including during the two most recent fiscal years;

 

  Ÿ  

our recent net sales growth may not be sustainable, and a failure to maintain an adequate growth rate will adversely affect our business, financial condition and operating results;

 

  Ÿ  

we may be unable to accurately forecast net sales and appropriately plan our expenses in the future;

 

  Ÿ  

competition presents an ongoing threat to the success of our business;

 

  Ÿ  

if we cannot acquire or retain customers or maintain or acquire high quality and differentiated merchandise on acceptable terms from vendors, our business, financial condition and operating results could be harmed;

 

  Ÿ  

if we do not successfully optimize, operate and manage the expansion of capacity of our fulfillment centers, our business, financial condition and operating results could be harmed; and

 

  Ÿ  

the dual class structure of our common stock and the existing ownership of capital stock by our executive officers, directors and their affiliates have the effect of concentrating voting control with our executive officers, directors and their affiliates for the foreseeable future, which will limit your ability to influence corporate matters.

Our Corporate Information

We were incorporated in 2009 in Delaware as BSI Holdings, Inc. and subsequently changed our name to zulily, inc. Our headquarters are located at 2200 First Avenue South, Seattle, WA 98134, and our telephone number is (877) 779-5614. Our website address is www.zulily.com. The information contained on, or that can be accessed through, our website is not part of, and is not incorporated into, this prospectus.

“zulily,” the zulily logo and other trademarks or service marks of zulily, inc. appearing in this prospectus are the property of zulily, inc. This prospectus contains additional trade names, trademarks and service marks of others, which are the property of their respective owners. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies.

 

 

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The Offering

 

Class A common stock offered by us

  

            shares

Class A common stock offered by the selling stockholders

  

            shares

Class A common stock to be outstanding after this offering

  

            shares

Class B common stock to be outstanding after this offering

  

            shares

Total Class A common stock and Class B common stock to be outstanding after this offering

  

            shares

Overallotment option of Class A common stock offered by us and the selling stockholders

  

            shares

Voting rights

   We have two classes of authorized common stock: Class A common stock and Class B common stock. The rights of the holders of Class A common stock and Class B common stock are identical, except with respect to voting and conversion rights. The holders of Class A common stock are entitled to one vote per share, and the holders of Class B common stock are entitled to ten votes per share, on all matters that are subject to stockholder vote. The Class B common stock also has approval rights for certain corporate actions. Following the completion of this offering, each share of Class B common stock may be converted into one share of Class A common stock at the option of its holder and will be automatically converted into one share of Class A common stock upon transfer thereof, subject to certain exceptions. In addition, upon the date on which there are fewer than              shares of Class B common stock outstanding (as adjusted for stock splits), all outstanding shares of Class B common stock shall convert automatically into Class A common stock. See the section of the prospectus captioned “Description of Capital Stock” for additional information.

Use of proceeds

   We estimate the net proceeds to us from this offering to be approximately $         million, assuming an initial public offering price of $         per share, which is the midpoint of the range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any of the

 

 

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   proceeds from the sale of shares by the selling stockholders. See the section of the prospectus captioned “Use of Proceeds.” The principal purposes of this offering are to create a public market for our Class A common stock, facilitate access to the public equity markets, increase our visibility in the marketplace, as well as to obtain additional capital. We intend to use the net proceeds from this offering for working capital and other general corporate purposes. We may also use a portion of the net proceeds to acquire complementary businesses, products or technologies, although we have no present commitments or agreements for any specific acquisitions.

Risk factors

   See the section of the prospectus captioned “Risk Factors” beginning on page 12 and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our Class A common stock.

Proposed NASDAQ symbol

  

“ZU”

The number of shares of our Class A common stock and Class B common stock to be outstanding after this offering is based on no shares of Class A common stock and 461,624,111 shares of Class B common stock outstanding as of June 30, 2013, including 14,408,855 shares issued pursuant to early exercise of stock options and restricted stock issuances that are subject to repurchase and excludes, as of June 30, 2013, the following shares:

 

  Ÿ  

54,822,283 shares of Class B common stock issuable upon the exercise of outstanding stock options issued as of June 30, 2013 pursuant to our 2009 Equity Incentive Plan, or our 2009 Plan, at a weighted-average exercise price of $1.59 per share;

 

  Ÿ  

             shares of Class B common stock issuable upon the exercise of outstanding stock options issued after June 30, 2013 pursuant to our 2009 Plan, at a weighted-average exercise price of $         per share;

 

  Ÿ  

9,709,892 shares of Class B common stock reserved for future issuance under our 2009 Plan as of June 30, 2013, which shares will cease to become available for future issuance immediately prior to the time our 2013 Equity Plan, or our 2013 Plan, becomes effective; and

 

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             shares of Class A common stock to be reserved for future issuance under our 2013 Plan as of the date the registration statement of which this prospectus forms a part is declared effective by the Securities and Exchange Commission, or SEC, (assuming that                  shares of Class B common stock are available for issuance under our 2009 Plan immediately prior to the time our 2013 Plan becomes effective) as well as any automatic increases in the number of shares of Class A common stock available for future issuance under this benefit plan.

Unless otherwise indicated, all information in this prospectus reflects and assumes the following:

 

  Ÿ  

the reclassification of our common stock into an equal number of our Class B common stock and the authorization of our Class A common stock;

 

 

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  Ÿ  

the conversion of all outstanding shares of our convertible preferred stock into an aggregate of 242,485,034 shares of our Class B common stock, which will occur immediately prior to the completion of this offering;

 

  Ÿ  

no exercise by the underwriters of their option to purchase up to              additional shares of our Class A common stock in this offering; and

 

  Ÿ  

the filing and effectiveness of our amended and restated certificate of incorporation immediately prior to the completion of this offering.

The share and per share numbers included in the sections of this prospectus captioned “—Summary Consolidated Financial and Other Data,” “Capitalization,” “Selected Consolidated Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes do not reflect the reclassification of our common stock into an equal number of our Class B common stock and the authorization of our Class A common stock, which will we expect will occur prior to the completion of this offering.

 

 

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SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA

You should read the summary consolidated financial and other data in conjunction with the sections of this prospectus captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Selected Consolidated Financial and Other Data” and the consolidated financial statements and related notes.

We have derived the consolidated statements of operations data for the fiscal years ended December 31, 2010, January 1, 2012 and December 30, 2012 from our audited consolidated financial statements appearing elsewhere in this prospectus. The consolidated statements of operations data for the year to date periods ended July 1, 2012 and June 30, 2013 and consolidated balance sheet data as of June 30, 2013 have been derived from our unaudited consolidated financial statements appearing elsewhere in this prospectus. We have prepared the unaudited consolidated financial data on the same basis as the audited consolidated financial statements. We have included, in our opinion, all adjustments, consisting only of normal recurring adjustments that we consider necessary for a fair presentation of the financial information set forth in those statements. Our historical results are not necessarily indicative of the results that should be expected in the future, and our interim results are not necessarily indicative of the results that should be expected for the full year or any other period.

Beginning with our fiscal year 2011, our fiscal year ends on the Sunday closest to December 31 of the respective calendar year. Each fiscal year consists of four 13-week quarters, with one extra week added in the fourth quarter every five to six years.

 

     Fiscal Years     Six Months Ended  
     2010     2011     2012     Jul. 1, 2012     Jun. 30, 2013  
     (in thousands, except share and per share amounts)  

Consolidated Statements of Operations Data

          

Net sales

   $ 18,376      $ 142,545      $ 331,240      $ 126,993      $ 272,021   

Cost of sales(1)

     12,574        104,949        240,943        91,252        191,506   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     5,802        37,596        90,297        35,741        80,515   

Operating expenses:

          

Marketing expenses(1)

     4,897        20,228        37,780        15,600        28,056   

Selling, general and administrative expenses(1)

     7,112        28,905        63,071        26,499        50,069   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     12,009        49,133        100,851        42,099        78,125   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

     (6,207     (11,537     (10,554     (6,358     2,390   

Interest (expense) income, net

     (169     20        43        16        64   

Other (expense) income, net

     (627     203        176        180        (48
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (7,003   $ (11,314   $ (10,335   $ (6,162   $ 2,406   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (7,448   $ (13,233   $ (46,822   $ (7,883   $ (2,656
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per common share(2):

          

Basic

   $ (0.11   $ (0.14   $ (0.31   $ (0.06   $ (0.01
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ (0.11   $ (0.14   $ (0.31   $ (0.06   $ (0.01
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in computing net loss per common share:

          

Basic

     65,390,625        96,411,124        151,906,924        138,402,501        193,075,922   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     65,390,625        96,411,124        151,906,924        138,402,501        193,075,922   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to common stockholders—pro forma:

       $ (42,447     $ 2,121   
      

 

 

     

 

 

 

Pro forma net (loss) income per common share(3):

          

Basic

       $ (0.11     $   
      

 

 

     

 

 

 

Diluted

       $ (0.11     $   
      

 

 

     

 

 

 

Shares used in computing pro forma net (loss) income per common share(3):

          

Basic

         375,217,245          443,434,097   
      

 

 

     

 

 

 

Diluted

         375,217,245          450,155,335   
      

 

 

     

 

 

 

 

 

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     Fiscal Years      Six Months Ended  
     2010     2011     2012      Jul. 1, 2012     Jun. 30, 2013  
     (in thousands, except revenue per active customer and
average order value)
 

Other Financial and Operations Data

           

Adjusted EBITDA(4)

   $ (3,734   $ (8,871   $ (5,920    $ (4,449   $ 7,469   

Free cash flow(5)

   $ (1,164   $ 3,749      $ 8,425       $ (10,076   $ (4,240

Active customers

     157        791        1,580         1,154        2,229   

Revenue per active customer

   $ 117      $ 180      $ 210       $ 110      $ 122   

Total orders placed

     384        2,998        6,950         2,779        5,696   

Average order value

   $ 52.52      $ 53.48      $ 53.37       $ 52.20      $ 53.23   

 

     As of Jun. 30, 2013
     Actual     Pro Forma,
As
Adjusted(6)
     (in thousands)

Consolidated Balance Sheet Data

    

Cash and cash equivalents

   $ 83,015     

Working capital

     61,240     

Total assets

     137,945     

Deferred revenue

     13,156     

Convertible redeemable preferred stock

     133,776     

Total stockholders’ deficit

     (55,613  

 

(1) Includes stock-based compensation expense as follows:

 

     Fiscal Year      Six Months Ended  
     2010      2011      2012      Jul. 1, 2012      Jun. 30, 2013  
     (in thousands)  

Cost of sales

   $       $ 2       $ 26       $ 15       $ 27   

Marketing expenses

     2         62         142         57         132   

Selling, general and administrative expenses

     2,396         2,015         1,097         395         2,441   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 2,398       $ 2,079       $ 1,265       $ 467       $ 2,600   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) Basic and diluted net loss per common share attributable to common stockholders for our fiscal year 2012 includes a deemed dividend distribution of $32.1 million. Such dividend is included as it represents distributed earnings attributable to participating securities. Please see Note 6 of the accompanying notes to our consolidated financial statements.
(3) Pro forma basic and diluted net loss per share represents net loss divided by the pro forma weighted-average shares of common stock outstanding. Pro forma weighted-average shares outstanding reflects the conversion of preferred stock into Class B common stock as though the conversion had occurred on the first day of the relevant period.
(4) Adjusted EBITDA is a non-GAAP financial measure that we calculate as earnings (loss) before interest and other income and expense, taxes, depreciation, amortization and stock-based compensation expense. Please see the section of this prospectus captioned “Selected Consolidated Financial and Other Data—Non-GAAP Financial Measures—Adjusted EBITDA” for more information.
(5) Free cash flow is a non-GAAP financial measure that we calculate as net cash (used in) provided by operating activities less net cash used in capital expenditures. Please see the section of this prospectus captioned “Selected Consolidated Financial and Other Data—Non-GAAP Financial Measures—Free Cash Flow” for more information.
(6) Reflects the items described in footnote (3) above and, on an as adjusted basis, our sale of              shares of Class A common stock that we are offering at the assumed initial public offering price of $         per share, which is the midpoint of the range set forth on the cover page of this prospectus, after deducting the underwriting fees and commissions and estimated offering expenses payable by us. The pro forma as adjusted balance sheet data is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing. Each $1.00 increase or decrease in the assumed initial public offering price of $         per share, which is the midpoint of the range set forth on the cover page of this prospectus, would increase or decrease each of cash and cash equivalents, working capital, total assets and total stockholders’ deficit on a pro forma as adjusted basis by approximately $        , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. We may also increase or decrease the number of shares we are offering. Each increase or decrease by              shares in the number of shares offered by us would increase or decrease each of cash and cash equivalents, working capital, total assets and total stockholders’ deficit by approximately $         million, assuming that the assumed initial price to public remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

 

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RISK FACTORS

Investing in our Class A common stock involves a high degree of risk. Before you invest in our Class A common stock, you should carefully consider the following risks, as well as general economic and business risks and all of the other information contained in this prospectus. Any of the following risks could have a material adverse effect on our business, operating results and financial condition and cause the trading price of our Class A common stock to decline, which would cause you to lose all or part of your investment. When determining whether to invest, you should also refer to the other information contained in this prospectus, including our financial statements and the related notes thereto.

Risks Related to Our Business and Industry

Because we have a short operating history in an evolving industry, our past results may not be indicative of future performance, and our future performance may fluctuate materially and increase your investment risk.

We launched our website in January 2010 and therefore have a short operating history in a rapidly evolving industry that may not develop as expected, if at all. Although we have experienced significant growth in net sales and the number of our active customers, our relatively short operating history makes it difficult to assess our future prospects. You should consider our business and prospects in light of the risks and difficulties we may encounter. These risks and difficulties include our ability to, among other things:

 

  Ÿ  

acquire new customers who purchase products from us at the same rate and of the same type as existing customers;

 

  Ÿ  

retain our existing customers and have them continue to purchase products from us at rates and methods consistent with their prior purchasing behavior;

 

  Ÿ  

encourage customers to expand the categories of products they purchase from us;

 

  Ÿ  

attract new vendors to supply quality products that we can offer to our customers at attractive prices;

 

  Ÿ  

retain our existing vendors and have them supply additional quality products that we can offer to our customers at attractive prices;

 

  Ÿ  

increase the awareness of our brand;

 

  Ÿ  

provide our customers and vendors with a superior experience;

 

  Ÿ  

fulfill and deliver orders in a timely way and in accordance with customer expectations, which may change over time;

 

  Ÿ  

respond to changes in consumer access to and use of the Internet and mobile devices;

 

  Ÿ  

react to challenges from existing and new competitors;

 

  Ÿ  

expand our business in new and existing markets, both domestic and international;

 

  Ÿ  

avoid interruptions or disruptions in our business;

 

  Ÿ  

develop a scalable, high-performance technology and fulfillment infrastructure that can efficiently and reliably handle increased usage globally, as well as the deployment of new features and the sale of new products and services;

 

  Ÿ  

respond to macroeconomic trends; and

 

  Ÿ  

hire, integrate and retain talented merchandise buyers and other personnel.

 

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We experience seasonal trends in our business, and our mix of product offerings is highly variable from day-to-day and quarter-to-quarter. This variability makes it difficult to predict sales and can result in significant fluctuations in our net sales from period-to-period. We base our expense levels and investment plans on our estimates of net sales and gross margins. A significant portion of our expenses and investments is fixed, and we may be unable to adjust our spending quickly if our net sales or our gross margins are worse than expected.

The cumulative effects of these factors or our inability to manage any of the risks and difficulties identified above and elsewhere in this section could result in large fluctuations and unpredictability in our quarterly and annual operating results. As a result, comparing our operating results on a period-to-period basis may not be meaningful. You should not rely on our past results as an indication of our future performance. This variability and unpredictability could also result in our failing to meet the expectations of industry or financial analysts or investors for any period. If our net sales or operating results fall below the expectations of analysts or investors or below any forecasts we may provide to the market, or if the forecasts we provide to the market are below the expectations of analysts or investors, the price of our Class A common stock could decline substantially. Such a stock price decline could occur even when we have met any previously publicly stated net sales or earnings forecasts that we may provide.

If we fail to effectively manage our growth, our business, financial condition and operating results could be harmed.

To effectively manage our growth, we must continue to implement our operational plans and strategies, improve and expand our infrastructure of people and information systems and expand, train and manage our employee and contractor base. We have rapidly increased employee and contractor headcount since our inception to support the growth in our business, and we intend for this growth to continue for the foreseeable future. The number of our employees increased from 329 as of December 31, 2011 to 886 as of June 30, 2013, and we expect to add a significant number of employees during the remainder of 2013. To support continued growth, we must effectively integrate, develop and motivate a large number of new employees, while maintaining our corporate culture. In particular, we intend to continue to make substantial investments to expand our merchandising and technology personnel. We face significant competition for personnel, particularly in the Seattle area where our headquarters is located. To attract top talent, we have had to offer, and believe we will need to continue to offer, competitive compensation packages before we can validate the productivity of those employees. The risks associated with a rapidly growing workforce will be particularly acute internationally. Additionally, we may not be able to hire new employees quickly enough to meet our needs. If we fail to effectively manage our hiring needs or successfully integrate our new hires, our efficiency and ability to meet our forecasts and our employee morale, productivity and retention could suffer, which may have a material adverse effect on our business, financial condition and operating results.

Additionally, the growth and expansion of our business and our product offerings place significant demands on our management. In particular, our mid-level management has not kept pace with the growth in our overall headcount, which we will need to devote significant resources to address. We produce new versions of our sites and emails to our customers on a daily basis, which generally requires new products, photos and text every day. The growth of our business may require significant additional resources to meet these daily requirements, which may not scale in a cost-effective manner or may negatively affect the quality of our sites and customer experience. We are also required to manage multiple relationships with various vendors, customers and other third parties. Further growth of our operations, our vendor base, our fulfillment centers, information technology systems or our internal controls and procedures may not be adequate to support our operations. If we are unable to manage the growth of our organization effectively, our business, financial condition and operating results may be materially and adversely affected.

 

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We have incurred significant operating losses in the past, and we may not be able to generate sufficient net sales to achieve or maintain profitability. Our recent net sales growth may not be sustainable, and a failure to maintain an adequate growth rate will materially and adversely affect our business, financial condition and operating results.

We incurred net losses of $11.3 million and $10.3 million in 2011 and 2012, respectively, and had an accumulated deficit of $55.6 million as of June 30, 2013. We anticipate that our operating expenses will increase substantially in the foreseeable future as we continue to invest to increase our customer base, increase the number and variety of products we offer, expand our marketing channels, expand our operations, hire additional employees and managers, incur the costs of being a public company and develop our technology platform and fulfillment infrastructure. These efforts may prove more expensive than we currently anticipate. Although our net sales have grown rapidly, increasing from $18.4 million in 2010 to $331.2 million in 2012, we may not be able to sustain this rate of net sales growth or to increase our net sales sufficiently to offset higher expenses. Some of our efforts to generate net sales from our business are new and unproven, and any failure to increase our net sales or improve our gross margins could prevent us from attaining or increasing profitability. In addition, we expect to invest to fund longer term initiatives, which will likely impact profitability or other operating results. We cannot be certain that we will be able to attain or increase profitability on a quarterly or annual basis. If we are unable to effectively manage these risks and difficulties as we encounter them, our business, financial condition and operating results may be materially and adversely affected.

We may be unable to accurately forecast net sales and appropriately plan our expenses in the future.

We may base our current and future expense levels on our operating forecasts and estimates of future net sales and gross margins. Net sales and operating results are difficult to forecast because they generally depend on the volume, timing and type of the orders we receive, all of which are uncertain. Additionally, our business is affected by general economic and business conditions in the United States, and we anticipate that it will be increasingly affected by conditions in international markets. A significant portion of our expenses is fixed, and as a result, we may be unable to adjust our spending in a timely manner to compensate for any unexpected shortfall in net sales. Any failure to accurately predict net sales or gross margins could cause our operating results in any given quarter, or a series of quarters, to be lower than expected, which could cause the price of our Class A common stock to decline substantially.

Our business is highly competitive. Competition presents an ongoing threat to the success of our business.

We expect competition in e-commerce generally, and with companies employing a flash sales model in particular, to continue to increase because there are no significant barriers to entry. We currently compete with and expect to increasingly compete with e-commerce businesses, such as Amazon.com, Inc., the e-commerce platforms of traditional retailers, such as Target Corporation, Toys“R”Us, Inc. and Wal-Mart Stores, Inc., and online marketplaces such as eBay Inc., particularly as some of these companies adopt flash sales business practices. A substantial number of flash sales sites have similar business models in related and unrelated market segments, including Fab, Inc., Gilt Groupe Holdings, Inc., HauteLook (which is owned by Nordstrom, Inc.), MyHabit (which is operated by Amazon.com), One Kings Lane Inc. and RueLaLa.com (which is operated by Retail Convergence.com LP). We also compete with the traditional offline retail industry, including discount and mass merchandisers, such as Target, Toys“R”Us and Walmart, as well as boutique sellers of children’s apparel, women’s apparel, and other product categories, such as toys, infant gear, kitchen accessories and home décor.

 

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We believe that our ability to compete depends upon many factors both within and beyond our control, including:

 

  Ÿ  

the size and composition of our customer base and vendor base;

 

  Ÿ  

the number of vendors and products we feature on our sites;

 

  Ÿ  

selling and marketing efforts;

 

  Ÿ  

the quality, price and reliability of products offered either by us or our competitors;

 

  Ÿ  

the convenience and entertainment of the shopping experience that we provide;

 

  Ÿ  

our ability to cost-effectively source, market and distribute our products and manage our operations; and

 

  Ÿ  

our reputation and brand strength relative to our competitors.

Many of our current competitors have, and potential competitors may have, longer operating histories, larger fulfillment infrastructures, greater technical capabilities, significantly faster shipping times as well as free or low-cost shipping, significantly greater financial, marketing and other resources and larger customer bases than we do. These factors may allow our competitors to derive greater net sales and profits from their existing customer base, acquire customers at lower costs or respond more quickly than we can to new or emerging technologies and changes in consumer habits. These competitors may engage in more extensive research and development efforts, undertake more far-reaching marketing campaigns and adopt more aggressive pricing policies, which may allow them to build larger customer bases or generate net sales from their customer bases more effectively than we do.

We depend on the continued growth of e-commerce in general and the flash sales model in particular.

The business of selling products over the Internet, particularly on the flash sales model, is dynamic and relatively new. The market segment for the flash sales model has grown significantly, and this growth may not be sustainable. If customers cease to find the flash sales model shopping experience fun, entertaining and a good value, or otherwise lose interest in shopping in this manner, we may not acquire new customers at rates consistent with historical or projected periods, and existing customers’ buying patterns and levels may be less than historical or projected rates. If the market segment for the flash sales model were to become saturated or decline overall, we may not be able to acquire new customers or engage existing customers, and our business, financial condition and operating results may suffer.

If we fail to acquire new customers, we may not be able to increase net sales or achieve profitability.

We have made significant investments related to customer acquisition and expect to continue to spend significant amounts to acquire additional customers. We must continue to acquire customers in order to increase net sales and achieve profitability. In order to expand our customer base, we must appeal to and acquire customers who have historically used other means of commerce to purchase products and may prefer alternatives to our offerings, such as in-store, the retailer’s own website or the websites of our competitors. In the United States, where our sites have been available since 2010 and we have achieved some level of market penetration, acquiring new customers may become more difficult and costly than it has been in the past. We cannot assure you that the net sales from new customers we acquire will ultimately exceed the cost of acquiring those customers. If we fail to deliver an entertaining shopping experience, or if consumers do not perceive the products we offer to be of high value and quality, we may not be able to acquire new customers. If we are unable to acquire new

 

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customers who purchase products in numbers sufficient to grow our business, the net sales we generate may decrease, and our business, financial condition and operating results may be materially and adversely affected.

We believe that many of our new customers originate from word-of-mouth and other non-paid referrals from existing customers, and therefore we must ensure that our existing customers remain loyal to us in order to continue receiving those referrals. If our efforts to satisfy our existing customers are not successful, we may not be able to acquire new customers in sufficient numbers to continue to grow our business, or we may be required to incur significantly higher marketing expenses in order to acquire new customers. If the level of usage by our customer base declines or does not grow as expected, we may suffer a decline in customer growth or net sales. A significant decrease in the level of usage or customer growth would have a material adverse effect on our business, financial condition and operating results.

We have relationships with social networking sites, such as Facebook, Pinterest, Twitter and Tumblr, online services, search engines, affiliate marketing websites, directories and other websites and e-commerce businesses to provide advertising and other links that direct customers to our sites. As e-commerce and social networking continue to rapidly evolve, we must continue to establish relationships with the channels that are used by our current and prospective customers and cost-effectively drive traffic to our sites. We rely on these relationships as significant sources of traffic to our sites and to generate new customers. If we are unable to develop or maintain these relationships on acceptable terms, our ability to attract new customers and our financial condition would suffer.

We have recently begun to periodically conduct national U.S. television branding and advertising campaigns. Such campaigns are expensive and may not result in the cost-effective acquisition of customers.

We base our decisions regarding expenditures in customer acquisition primarily on our analysis of the net sales generated from customers that we acquired in prior periods. Our estimates and assumptions may not accurately reflect our future results, and we may not be able to recover our customer acquisition costs.

Our success depends on our ability to attract customers in a cost-effective manner. Our decisions regarding investments in customer acquisition substantially depend upon our analysis of the net sales generated from customers we acquired in earlier periods. Our analysis regarding customer acquisition investment and net sales includes several assumptions, such as:

 

  Ÿ  

Many customers sign-up as subscribers to our sites for varying periods of time before they make their first purchase and become active customers. We make various assumptions with respect to the level of additional marketing or other expenses necessary to activate these subscribers and how these expenses vary from those required to generate subscriptions. If our assumptions regarding such expenses are incorrect, our net sales relative to customer acquisition cost could be less favorable than we believe.

 

  Ÿ  

We make various assumptions based on our historical data with respect to the repurchase rates of active customers. If our assumptions regarding such repurchase rates are incorrect, our net sales relative to customer acquisition cost could be less favorable than we believe.

 

  Ÿ  

The analysis which we present in the sections of this prospectus captioned “Business—Our Strengths” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting Our Performance” include a discussion of our Q1 2011 cohort. While we believe the trends reflected by this cohort are illustrative of our broader customer base, the Q1 2011 cohort results inherently reflect a distinct group of vendors and customers and may not be representative of our current or future composite group of vendors and

 

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customers, particularly as we grow and our customer base broadens. For example, our Q1 2011 cohort may reflect unique market dynamics or the novelty of our sites during the periods covered.

 

  Ÿ  

Our analysis focuses on the online marketing expenses incurred during the quarter in which the customers were originally acquired and makes various assumptions with respect to the level of additional marketing or other expenses necessary to maintain customer loyalty and generate purchase activity in subsequent periods. If our assumptions regarding such expenses in subsequent periods are incorrect, our net sales relative to customer acquisition cost could be less favorable than we believe.

If our assumptions regarding our customer acquisition investment and resulting net sales from these customers, including those relating to the effectiveness of our marketing expenditures, prove incorrect, our ability to generate net sales from our investments in new customer acquisitions may be less than we have assumed and than we have experienced in the past. In such case, we may need to increase expenses or otherwise alter our strategy, and our business, financial condition and operating results may be materially and adversely affected.

Our sales may be adversely affected if we fail to respond to changes in consumer preferences in a timely manner or are not successful in expanding our product offerings.

Our financial performance depends on our ability to identify, originate and define retail product trends, as well as to anticipate, gauge and react to changing consumer preferences in a timely manner. Our products must appeal to a broad range of moms and other consumers whose preferences cannot be predicted with certainty and are subject to change. Our business fluctuates according to changes in consumer preferences dictated in part by fashion trends, perceived product value and seasonal variations.

We have historically earned the largest portion of our net sales from the sale of children’s apparel. We have broadened our product offering to include women’s apparel, toys, infant gear, kitchen accessories, home décor and other categories. We continue to explore additional categories which may be accepted by our target customers. If we offer new products or categories that are not accepted by our customers, our sales may fall short of expectations, our brand and reputation could be adversely affected and we may incur expenses that are not offset by sales. If we expand into new categories, consumer demands may be different, and there is no assurance that the flash sales model will be successful in these new categories. We may make substantial investments in such new categories in anticipation of future net sales. If the launch of a new category requires investments greater than we expect, if we are unable to attract vendors that produce sufficient high quality, value-oriented products or if the sales generated from a new category grow more slowly or produce lower gross margins than we expect, our results of operations could be adversely impacted. Expansion of our product lines may also strain our management and operational resources, specifically the need to hire and manage additional merchandise buyers to source and curate these new products. We may also face greater competition in specific categories from Internet sites that are more focused on such categories. It may be difficult to differentiate our offering from other competitors as we offer additional product categories, and our customers may have additional considerations in deciding whether or not to purchase these additional product categories. In addition, the relative profitability, if any, of new product lines may be lower than what we have experienced historically, and we may not generate sufficient net sales from new product initiatives to recoup our investments in them. If any of these were to occur, it could damage our reputation, limit our growth and have a material adverse effect on our business, financial condition and operating results.

 

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Customer growth and activity on mobile devices depends upon effective use of mobile operating systems, networks and standards that we do not control.

Purchases using mobile devices by consumers generally, and by our customers specifically, have increased significantly, and we expect this trend to continue. To optimize the mobile shopping experience, we are somewhat dependent on our customers downloading our specific mobile applications for their particular device as opposed to accessing our sites from an Internet browser on their mobile device. As new mobile devices and platforms are released, it is difficult to predict the problems we may encounter in developing applications for these alternative devices and platforms, and we may need to devote significant resources to the creation, support and maintenance of such applications. In addition, our future growth and our results of operations could suffer if we experience difficulties in the future in integrating our mobile applications into mobile devices or if problems arise with our relationships with providers of mobile operating systems or mobile application download stores, such as those of Apple Inc. or Google Inc., if our applications receive unfavorable treatment compared to competing applications, such as the order of our products in the Apple AppStore, or if we face increased costs to distribute or have customers use our mobile app. We are further dependent on the interoperability of our sites with popular mobile operating systems that we do not control, such as iOS and Android, and any changes in such systems that degrade the functionality of our sites or give preferential treatment to competitive products could adversely affect the usage of our sites on mobile devices. In the event that it is more difficult for our customers to access and use our sites on their mobile devices, or if our customers choose not to access or to use our sites on their mobile devices or to use mobile products that do not offer access to our sites, our customer growth could be harmed and our business, financial condition and operating results may be materially and adversely affected.

Our business depends on a strong brand. We may not be able to maintain and enhance our brand, or we may receive unfavorable customer complaints or negative publicity, which could adversely affect our brand.

We believe that the brand we have built with our customers has significantly contributed to the success of our business. We also believe that maintaining and enhancing the “zulily” brand is critical to expanding our base of customers and vendors. Maintaining and enhancing our brand may require us to make substantial investments, and these investments may not be successful. If we fail to promote and maintain the “zulily” brand or if we incur excessive expenses in this effort, our business, operating results and financial condition may be materially and adversely affected. We anticipate that, as our market becomes increasingly competitive, maintaining and enhancing our brand may become increasingly difficult and expensive. Maintaining and enhancing our brand will depend largely on our ability to continue to provide reliable, trustworthy and high quality products to our customers and a reliable, trustworthy and profitable market to our vendors, which we may not do successfully.

Our brand depends on effective customer support, which requires significant personnel expense. If not managed properly, this expense could impact our profitability. Failure to manage or train our own or outsourced customer support representatives properly could compromise our ability to handle customer complaints effectively.

Customer complaints or negative publicity about our sites, products, product delivery times, customer data handling and security practices or customer support, especially on social media platforms such as blogs and social media websites, could rapidly and severely diminish consumer use of our sites and consumer and vendor confidence in us and cause our reputation to suffer.

 

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Uncertainties in global economic conditions and their impact on consumer spending patterns, particularly in the apparel, toys, infant gear, kitchen accessories and home décor segments, could adversely impact our operating results.

Our performance is subject to global economic conditions and their impact on levels of consumer spending worldwide, particularly spending on children and women’s apparel, toys, infant gear, kitchen accessories and home décor. Some of the factors adversely affecting consumer spending include levels of unemployment, consumer debt levels, changes in net worth based on market changes and uncertainty, home foreclosures and changes in home values, fluctuating interest rates, credit availability, government actions, fluctuating fuel and other energy costs, fluctuating commodity prices and general uncertainty regarding the overall future economic environment. Consumer purchases of discretionary items, including our merchandise, generally decline during periods when disposable income is adversely affected or there is economic uncertainty. Adverse economic changes in any of the regions in which we sell our products could reduce consumer confidence and could negatively affect net sales and have a material adverse effect on our operating results.

Our business is subject to seasonal sales fluctuations which could result in volatility or have an adverse effect on the market price of our Class A common stock.

We believe our results are impacted by a pattern of increased sales during the back-to-school shopping season in the third quarter and holiday shopping season in the fourth quarter which has resulted in increased sales during a portion of the third quarter and the fourth quarter each fiscal year, which then results in lower sequential growth in the first quarter. For example, net sales in the first quarter of 2013 decreased when compared with net sales in the fourth quarter of 2012. We also believe that we have experienced slower growth in orders placed during the late spring and early summer months, although we do not believe this pattern has affected net sales. Our historical growth rates and limited operating history make it difficult to discern the impact of any seasonality in our business. To the extent the growth of our business slows, these seasonal fluctuations may become more evident. Seasonality may cause our working capital cash flow requirements to vary from quarter-to-quarter depending on the variability in the volume and timing of sales. These factors, among other things, make forecasting more difficult and may adversely affect our ability to manage working capital and to predict financial results accurately, which could result in volatility or adversely affect the market price of our Class A common stock.

Failure to continue to provide our customers with differentiated merchandise from vendors will harm our business.

Our net sales growth depends, in part, on our ability to continue to source unique merchandise in sufficient quantities at competitive prices from vendors. Offering a variety of brands, styles, categories and products at affordable price points is important to our ability to acquire new customers and to keep our existing customers engaged and purchasing products. Typically, our events feature over 4,000 product styles from different vendors and last for 72 hours, and we believe our business requires us to continue this rapid pace of product introduction. Growth in the number of our customers, as well as increased competition, may make it difficult to source additional brands and styles in sufficient quantities and on acceptable terms to meet the demand of our customers. Since launching our sites, we have purchased our merchandise from over 10,000 brands, with a particular focus on emerging brands and smaller boutique vendors. We believe our ability to offer our customers a high volume of merchandise from emerging brands and smaller boutique vendors is particularly important to our long-term success.

We have no contractual assurances of continued supply, pricing or access to new products, and vendors could change the terms upon which they sell to us or discontinue selling to us for future sales at any time. As we grow, continuing to identify a sufficient number of new emerging brands and smaller

 

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boutique vendors may become more and more of a challenge. If we are not able to identify and effectively promote these new brands, we may lose customers to our competitors. Even if we identify new vendors, we may not be able to purchase desired merchandise in sufficient quantities on terms acceptable to us in the future, and products from alternative sources, if any, may be of a lesser quality or more expensive than those from existing vendors. In addition, larger national brands may offer products that are less unique, and it may be easier for our competitors to offer such products at prices or upon terms that may be compelling to consumers. An inability to purchase suitable merchandise on acceptable terms or to source new vendors could have a material adverse effect on our business, financial condition and operating results.

Our merchandise approach and the flash sales model is challenging and if not managed effectively, could adversely affect our operating results.

To support our large and diverse base of vendors and our flash sales model which requires constantly changing products, we must incur significant costs, including costs related to our merchandising team, photography studios and creative personnel. As our business grows, we may not be able to continue to expand our product offerings in a cost-effective manner. Expanding personnel in our merchandising and studio departments is challenging due to competition for such personnel, and expansion of our studio spaces may require fixed expenses and investments that will impact profitability and may not be recouped if sufficient additional net sales are not generated.

In addition, the variety in size and sophistication of our vendors presents different challenges to our infrastructure and operations. Our emerging brands and smaller boutique vendors may be less experienced in manufacturing and shipping, which in the past has lead to inconsistencies in quality, delays in the delivery of merchandise or additional fulfillment cost. Our larger national brands may impose additional requirements on us or offer less favorable terms than our smaller vendors related to margins and inventory ownership and risk. If we are unable to maintain and effectively manage our relationships with our emerging brands and smaller boutique vendors or our larger national brands, our business, financial condition and operating results could be materially and adversely affected.

Failure of our vendors to supply high quality and compliant merchandise in a timely manner may damage our reputation and brand and harm our business.

We depend on our vendors to supply high quality merchandise in a timely manner. The failure of these vendors to supply merchandise which meets our quality standards or the quality standards of our customers could damage our reputation and harm our business, financial condition and operating results.

Our vendors are subject to various risks, including raw material costs, inflation, labor disputes, union organizing activities, boycotts, financial liquidity, product merchantability, safety issues, inclement weather, natural disasters, disruptions in exports, trade restrictions, trade disruptions, currency fluctuations and general economic and political conditions that could limit the ability of our vendors to provide us with high quality merchandise on a timely basis and at prices and payment terms that are commercially acceptable. For these or other reasons, one or more of our vendors might not adhere to our vendor terms and conditions or their applicable contract or might stop providing us with high quality merchandise. If there are any deficiencies in the products our vendors have provided to us, we might not identify such deficiencies before products ship to our customers.

In addition, our vendors may have difficulty adjusting to our changing demands and growing business. Failure of our vendors to provide us with quality merchandise that complies with all applicable laws, including but not limited to product safety regulations and legislation, in a timely and effective manner could damage our reputation and brand and could lead to an increase in customer litigation against us and an increase in our routine and non-routine litigation costs. Further, any

 

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merchandise could become subject to a recall, regulatory action or legal claim, which could result in increased legal expenses as well as damage to our reputation and brand and harm to our business. We cannot predict whether any of the countries in which our merchandise currently is manufactured or may be manufactured in the future will be subject to additional trade restrictions imposed by the United States and other foreign governments, including the likelihood, type or effect of any such restrictions. Such developments could have a material adverse effect on our business, financial condition and operating results.

Any failure by our vendors to comply with product safety, labor or other laws, or our standard vendor terms and conditions or to provide safe factory conditions for their workers, may damage our reputation and brand and harm our business.

Many of the products we sell on our sites are subject to regulation by the Federal Consumer Product Safety Commission, the Federal Food and Drug Administration and similar state and international regulatory authorities. As a result, such products have been and could be in the future subject to recalls and other remedial actions. Many of the products we sell are for children, and these products are often subject to enhanced safety concerns and additional scrutiny and regulation. Product safety concerns may require us to voluntarily remove selected products from our sites. Such recalls and voluntary removal of products can result in, among other things, lost sales, diverted resources, potential harm to our reputation and increased customer service costs and legal expenses, which could have a material adverse effect on our business, financial condition and operating results.

Some of the products we sell may expose us to product liability claims and litigation or regulatory action relating to personal injury, death or environmental or property damage. Although we maintain liability insurance, we cannot be certain that our coverage will be adequate for liabilities actually incurred or that insurance will continue to be available to us on economically reasonable terms, or at all. In addition, some of our agreements with our vendors may not indemnify us from product liability for a particular vendor’s products, or our vendors may not have sufficient resources or insurance to satisfy their indemnity and defense obligations.

We purchase our merchandise from numerous domestic and international manufacturers. Our standard vendor terms and conditions require vendors to comply with applicable laws. Failure of our vendors to comply with applicable laws and regulations and contractual requirements could lead to litigation against us, resulting in increased legal expenses and costs. In addition, the failure of any such vendors to provide safe and humane factory conditions and oversight at their facilities could damage our reputation with consumers or result in legal claims against us.

If we do not successfully optimize, operate and manage the expansion of capacity of our fulfillment centers, our business, financial condition and operating results could be harmed.

If we do not optimize and operate our fulfillment centers successfully and efficiently, it could result in excess or insufficient fulfillment capacity, an increase in costs or impairment charges or harm our business in other ways. We have very limited experience designing and operating fulfillment centers. In addition, if we do not have sufficient fulfillment capacity or experience a problem fulfilling orders in a timely manner, our customers may experience delays in receiving their purchases, which could harm our reputation and our relationship with our customers.

We depend on a third party to provide staffing for our U.S. fulfillment centers. By using a third-party staffing organization, we face additional risks that are outside of our control, such as employment claims, issues arising from failure to comply with labor or other laws, union organizing activities and any deterioration in the finance and operations of such organization. If our third-party staffing organization is unable to adequately staff our fulfillment centers or if the cost of such staffing is higher

 

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than historical or projected costs, our operations could be harmed. Outside of the United States, we depend on a third party to provide fulfillment services, and we face similar risks with that third party.

We have designed and built our own fulfillment center infrastructure, including customizing third-party inventory and package handling software systems, which is tailored to meet the specific needs of our business. If we continue to add fulfillment and warehouse capabilities, add new businesses or categories with different fulfillment requirements or change the mix in products that we sell, our fulfillment network will become increasingly complex and operating it will become more challenging. For example, in our prior outsourced third-party fulfillment center, operational difficulties were encountered as our shipping volumes increased dramatically, which resulted in shipping delays and customer dissatisfaction. Failure to successfully address such challenges in a cost-effective and timely manner could impair our ability to timely deliver our customers’ purchases and could harm our reputation and ultimately, our business, financial condition and operating results.

Our current fulfillment center network has the capability to handle limited growth with the current mix of product offerings before additional capacity will be required. We anticipate the need to add additional fulfillment center capacity by late 2014. The expansion of our fulfillment center capacity will put pressure on our managerial, financial, operational and other resources. We cannot assure you that we will be able to locate suitable facilities on commercially acceptable terms in accordance with our expansion plans, nor can we assure you that we will be able to recruit qualified managerial and operational personnel to support our expansion plans. If we are unable to secure new facilities for the expansion of our fulfillment operations or to effectively control expansion-related expenses, our business, prospects, financial condition and operating results could be materially and adversely affected. If we grow faster than we anticipate, we may exceed our fulfillment center capacity sooner than we anticipate, we may experience problems fulfilling orders in a timely manner or our customers may experience delays in receiving their purchases, which could harm our reputation and our relationship with our customers, and we would need to increase our capital expenditures more than anticipated. Many of the expenses and investments with respect to our fulfillment centers are fixed, and any expansion of such fulfillment centers will require additional investment of capital. We expect to incur higher capital expenditures in the future for our fulfillment center operations. We may incur such expenses or make such investments in advance of expected sales, and such expected sales may not occur.

We generally do not hold inventory until products have been ordered by customers, which results in slower delivery time than other e-commerce retailers.

We generally do not order inventory from our vendors to be held in our fulfillment centers until after the products have been ordered by our customers. As a result, the time from when an order is placed on our sites to when the product is delivered to our customers is longer than for many other e-commerce retailers who generally carry significant inventory that enables them to expedite delivery. Our average order-to-ship time in the second quarter of 2013 was 10.6 days. Our relatively slower delivery times may place us at a competitive disadvantage to other e-commerce retailers. If we are required to decrease our delivery times to address this competition or to meet customer demands, we may be required to incur additional shipping costs, which we may or may not be able to pass on to our customers, or to change our operations to carry additional inventory and face additional inventory risk, either of which could adversely affect our business, financial condition and operating results.

Our business relies heavily on email and other messaging services, and any restrictions on the sending of emails or messages or an inability to timely deliver such communications could adversely affect our net sales and business.

Our business is highly dependent upon email and other messaging services for promoting our sites and products. We provide daily emails and mobile alerts to subscribers informing them of what is

 

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available for purchase on our sites that day, and we believe these emails are an important part of our customer experience and help generate a substantial portion of our net sales. If we are unable to successfully deliver emails or other messages to our subscribers, or if subscribers decline to open our emails or messages, our net sales and profitability would be adversely affected. Changes in how webmail applications organize and prioritize email may reduce the number of subscribers opening our emails. For example, Google Inc.’s Gmail service recently introduced a new feature that organizes incoming emails into categories (for example, primary, social and promotions). Such categorization or similar inbox organizational features may result in our emails being delivered in a less prominent location in a subscriber’s inbox or viewed as “spam” by our subscribers and may reduce the likelihood of that subscriber opening our emails. Actions by third parties to block, impose restrictions on or charge for the delivery of emails or other messages could also materially and adversely impact our business. From time to time, Internet service providers or other third parties may block bulk email transmissions or otherwise experience technical difficulties that result in our inability to successfully deliver emails or other messages to third parties. Changes in the laws or regulations that limit our ability to send such communications or impose additional requirements upon us in connection with sending such communications would also materially and adversely impact our business. Our use of email and other messaging services to send communications about our sites or other matters may also result in legal claims against us, which may cause us increased expenses, and if successful might result in fines and orders with costly reporting and compliance obligations or might limit or prohibit our ability to send emails or other messages. We also rely on social networking messaging services to send communications and to encourage customers to send communications. Changes to the terms of these social networking services to limit promotional communications, any restrictions that would limit our ability or our customers’ ability to send communications through their services, disruptions or downtime experienced by these social networking services or decline in the use of or engagement with social networking services by customers and potential customers could materially and adversely affect our business, financial condition and operating results.

We rely on a third-party service for the delivery of all our daily emails, and delay or errors in the delivery of such emails or other messaging we send may occur and are beyond our control. For example, the delivery of our daily emails to subscribers was recently delayed by two hours as a result of a third-party service error. Such delays could occur again in the future or be more severe, which could result in damage to our reputation or harm our business, financial condition and operating results. If we were unable to use our current email service or other messaging services, alternate services are available; however, we believe our sales could be impacted for some period as we transition to a new provider. Any disruption or restriction on the distribution of our emails or other messages, termination or disruption of our relationship with our messaging service providers, including our third-party service that delivers our daily emails, or any increase in our costs associated with our email and other messaging activities could materially and adversely affect our business, financial condition and operating results.

We may choose to expand or alter our operations by developing new sites or applications or by promoting new or complementary products, sales formats or services, which may increase our costs and may not be successful.

There can be no assurance that we will be able to expand or alter our operations in a cost-effective or timely manner or that any such efforts would be accepted by the market. Furthermore, any new business, website, application, product, promotion, sales format or service launched by us that is not favorably received by consumers could damage our reputation and brand. Any such expansion or alteration of our operations could also require significant additional expenses, management time and operations personnel that could impact our operating results. Any failure to generate satisfactory net sales from such expansion or alteration of our operations to offset their cost could have a material adverse effect on our business, financial condition and operating results.

 

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We are subject to payment-related risks.

We accept payments using a variety of methods, including credit card, debit card, PayPal and gift cards. As we offer new payment options to consumers, we may be subject to additional regulations, compliance requirements and fraud. For certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs and lower profitability. We are also subject to payment card association operating rules and certification requirements, including the Payment Card Industry Data Security Standard and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with the rules or requirements of any provider of a payment method we accept, among other things, we may be subject to fines or higher transaction fees and may lose, or face restrictions placed upon, our ability to accept credit and debit card payments from consumers or facilitate other types of online payments. If any of these events were to occur, our business, financial condition and operating results could be materially and adversely affected.

We also may incur significant losses from fraud. We may incur losses from claims that the consumer did not authorize the purchase, from merchant fraud, from erroneous transmissions and from consumers who have closed bank accounts or have insufficient funds in them to satisfy payments. In addition to the direct costs of such losses, if they are related to credit card transactions and become excessive, they could potentially result in our losing the right to accept credit cards for payment. In addition, under current credit card practices, we are liable for fraudulent credit card transactions because we do not obtain a cardholder’s signature. We do not currently carry insurance against this risk. To date, we have experienced minimal losses from credit card fraud, but we continue to face the risk of significant losses from this and other types of fraud. Our failure to adequately control fraudulent transactions could damage our reputation and brand and result in litigation or regulatory action, causing an increase in legal expenses and fees and substantially harm our business, financial condition and operating results.

Government regulation of the Internet and e-commerce is evolving, and unfavorable changes or failure by us to comply with these regulations could substantially harm our business and results of operations.

We are subject to general business regulations and laws as well as regulations and laws specifically governing the Internet and e-commerce. Existing and future regulations and laws could impede the growth of the Internet, e-commerce or mobile commerce. These regulations and laws may involve taxes, tariffs, privacy and data security, anti-spam, content protection, electronic contracts and communications, consumer protection and gift cards. It is not clear how existing laws governing issues such as property ownership, sales and other taxes and consumer privacy apply to the Internet as the vast majority of these laws were adopted prior to the advent of the Internet and do not contemplate or address the unique issues raised by the Internet or e-commerce. It is possible that general business regulations and laws, or those specifically governing the Internet or e-commerce, may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. We cannot guarantee that our practices have complied, comply or will comply fully with all such laws and regulations. Any failure, or perceived failure, by us to comply with any of these laws or regulations could result in damage to our reputation, a loss in business and proceedings or actions against us by governmental entities or others. Any such proceeding or action could hurt our reputation, force us to spend significant amounts in defense of these proceedings, distract our management, increase our costs of doing business, decrease the use of our sites by consumers and vendors and may result in the imposition of monetary liability. We may also be contractually liable to indemnify and hold harmless third parties from the costs or consequences of non-compliance with any such laws or regulations. In addition, it is possible that governments of one or more countries may seek to censor content available on our sites or may even attempt to completely block access to our sites. Adverse legal or regulatory developments could substantially harm our business. In particular, in the

 

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event that we are restricted, in whole or in part, from operating in one or more countries, our ability to retain or increase our customer base may be adversely affected, and we may not be able to maintain or grow our net sales and expand our business as anticipated.

Failure to comply with federal, state and international laws and regulations relating to privacy, data protection and consumer protection, or the expansion of current or the enactment of new laws or regulations relating to privacy, data protection and consumer protection, could adversely affect our business and our financial condition.

A variety of federal, state and international laws and regulations govern the collection, use, retention, sharing and security of consumer data. Laws and regulations relating to privacy, data protection and consumer protection are evolving and subject to potentially differing interpretations. We strive to comply with all applicable laws, regulations and other legal obligations relating to privacy, data protection and consumer protection, including those relating to the use of data for marketing purposes. It is possible, however, that these requirements may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another or may conflict with other rules or our practices. We cannot guarantee that our practices have complied, comply or will comply fully with all such laws, regulations, requirements and obligations. Any failure, or perceived failure, by us to comply with our posted privacy policies or with any federal, state or international privacy or consumer protection-related laws, regulations, industry self-regulatory principles, industry standards or codes of conduct, regulatory guidance, orders to which we may be subject or other legal obligations relating to privacy or consumer protection could adversely affect our reputations, brand and business, and may result in claims, proceedings or actions against us by governmental entities or others or other liabilities. Any such claim, proceeding or action could hurt our reputation, brand and business, force us to incur significant expenses in defense of such proceedings, distract our management, increase our costs of doing business, result in a loss of customers and vendors and may result in the imposition of monetary liability. We may also be contractually liable to indemnify and hold harmless third parties from the costs or consequences of non-compliance with any laws, regulations or other legal obligations relating to privacy or consumer protection or any inadvertent or unauthorized use or disclosure of data that we store or handle as part of operating our business.

Federal, state and international governmental authorities continue to evaluate the privacy implications inherent in the use of third-party “cookies” and other methods of online tracking for behavioral advertising and other purposes. U.S. and foreign governments have enacted, considered or are considering legislation or regulations that could significantly restrict the ability of companies and individuals to engage in these activities, such as by regulating the level of consumer notice and consent required before a company can employ cookies or other electronic tracking tools. Additionally, some providers of consumer devices and web browsers have implemented, or announced plans to implement, means to make it easier for Internet users to prevent the placement of cookies or to block other tracking technologies, which could if widely adopted result in the use of third-party cookies and other methods of online tracking becoming significantly less effective. The regulation of the use of these cookies and other current online tracking and advertising practices or a loss in our ability to make effective use of services that employ such practices could increase our costs of operations and limit our ability to acquire new customers on cost-effective terms and consequently, materially and adversely affect our business, financial condition and operating results.

Foreign data protection, privacy and other laws and regulations are often more restrictive than those in the United States. The European Union, for example, traditionally has imposed stricter obligations under its laws and regulations relating to privacy, data protection and consumer protection than the United States. Individual EU member countries have had discretion with respect to their interpretation and implementation of these laws, resulting in variation of privacy standards from country to country. Legislation and regulation in the European Union and some EU member states require

 

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companies to obtain specific types of notice and consent from consumers before using cookies or other tracking technologies. International expansion of our operations may require changes in the way we use consumer information in operating our business. Compliance with such laws and regulations will result in additional costs and may necessitate changes to our business practices, which may adversely affect our business and financial condition. Further, there is no harmonized approach to legal compliance in many of these regions, and there is little regulatory guidance. Consequently, we could be at risk of non-compliance with applicable foreign data protection laws as we continue our international expansion.

In addition, various federal, state and foreign legislative and regulatory bodies, or self-regulatory organizations, may expand current laws or regulations, enact new laws or regulations or issue revised rules or guidance regarding privacy, data protection and consumer protection. Any such changes may force us to incur substantial costs or require us to change our business practices. This could compromise our ability to pursue our growth strategy effectively and may adversely affect our ability to acquire customers or otherwise harm our business, financial condition and operating results.

Our failure or the failure of third-party service providers to protect our sites, networks and systems against security breaches, or otherwise to protect our confidential information, could damage our reputation and brand and substantially harm our business and operating results.

Our business employs sites, networks and systems through which we collect, maintain, transmit and store data about our customers, vendors and others, including credit card information and personally identifiable information, as well as other confidential and proprietary information. We also employ third-party service providers that store, process and transmit proprietary, personal and confidential information on our behalf. We rely on encryption and authentication technology licensed from third parties in an effort to securely transmit confidential and sensitive information, including credit card numbers. Advances in computer capabilities, new technological discoveries or other developments may result in the whole or partial failure of this technology to protect transaction data or other confidential and sensitive information from being breached or compromised. More generally, we take steps to protect the security, integrity and confidentiality of the information we collect, store or transmit, but there is no guarantee that inadvertent or unauthorized use or disclosure will not occur or that third parties will not gain unauthorized access to this information despite our efforts. Our security measures, and those of our third-party service providers, may not detect or prevent all attempts to hack our systems, denial-of-service attacks, viruses, malicious software, break-ins, phishing attacks, social engineering, security breaches or other attacks and similar disruptions that may jeopardize the security of information stored in or transmitted by our sites, networks and systems or that we or our third-party service providers otherwise maintain. We and our service providers may not have the resources or technical sophistication to anticipate or prevent all types of attacks, and techniques used to obtain unauthorized access to or sabotage systems change frequently and may not be known until launched against us or our third-party service providers. In addition, security breaches can also occur as a result of non-technical issues, including intentional or inadvertent breaches by our employees or by persons with whom we have commercial relationships.

Breaches of our security measures or those of our third-party service providers or cyber security incidents could result in unauthorized access to our sites, networks and systems; unauthorized access to and misappropriation of consumer information, including consumers’ personally identifiable information, or other confidential or proprietary information of ourselves or third parties; viruses, worms, spyware or other malware being served from our sites, networks or systems; deletion or modification of content or the display of unauthorized content on our sites; interruption, disruption or malfunction of operations; costs relating to breach remediation, deployment of additional personnel and protection technologies, response to governmental investigations and media inquiries and coverage; engagement of third party experts and consultants; litigation, regulatory action and other potential liabilities. If any of

 

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these breaches of security occur, our reputation and brand could be damaged, our business may suffer, we could be required to expend significant capital and other resources to alleviate problems caused by such breaches and we could be exposed to a risk of loss, litigation or regulatory action and possible liability. Actual or anticipated attacks may cause us to incur increasing costs, including costs to deploy additional personnel and protection technologies, train employees and engage third-party experts and consultants. In addition, any party who is able to illicitly obtain a subscriber’s password could access the subscriber’s transaction data or personal information. Any compromise or breach of our security measures, or those of our third-party service providers, could violate applicable privacy, data security and other laws, and cause significant legal and financial exposure, adverse publicity and a loss of confidence in our security measures, which could have an adverse and material effect on our business, financial condition and operating results. Although we maintain privacy, data breach and network security liability insurance, we cannot be certain that our coverage will be adequate for liabilities actually incurred or that insurance will continue to be available to us on economically reasonable terms, or at all. We may need to devote significant resources to protect against security breaches or to address problems caused by breaches, diverting resources from the growth and expansion of our business.

Changes in tax treatment of companies engaged in e-commerce may adversely affect the commercial use of our sites and our financial results.

Due to the global nature of the Internet, it is possible that various states or foreign countries might attempt to impose additional or new regulation on our business or levy additional or new sales, income or other taxes relating to our activities. Tax authorities at the international, federal, state and local levels are currently reviewing the appropriate treatment of companies engaged in e-commerce. New or revised international, federal, state or local tax regulations may subject us or our customers to additional sales, income and other taxes. For example, the U.S. Senate has recently passed legislation, the “Marketplace Fairness Act,” that would require companies engaged in e-commerce to collect sales tax taxes on Internet sales. The U.S. House of Representatives is currently considering such legislation. We cannot predict the effect of current attempts to impose sales, income or other taxes on e-commerce. New or revised taxes and, in particular, sales taxes, VAT and similar taxes would likely increase the cost of doing business online and decrease the attractiveness of advertising and selling products over the Internet. New taxes could also create significant increases in internal costs necessary to capture data and collect and remit taxes. Any of these events could have a material and adverse effect on our business, financial condition and operating results.

Taxing authorities may successfully assert that we should have collected or in the future should collect sales and use, VAT or similar taxes, and we could be subject to liability with respect to past or future sales, which could adversely affect our operating results.

We do not collect sales and use, VAT and similar taxes in all jurisdictions in which we have sales, based on our belief that such taxes are not applicable. Sales and use, VAT and similar tax laws and rates vary greatly by jurisdiction. Certain jurisdictions in which we do not collect such taxes on our sales may assert that such taxes are applicable, which could result in tax assessments, penalties and interest, and we may be required to collect such taxes in the future. Such tax assessments, penalties and interest or future requirements may materially and adversely affect our business, financial condition and operating results.

We may experience fluctuations in our tax obligations and effective tax rate, which could materially and adversely affect our operating results.

We are subject to taxes in the United States and numerous international jurisdictions. We record tax expense based on current tax payments and our estimates of future tax payments, which may

 

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include reserves for estimates of probable settlements of international and domestic tax audits. At any one time, multiple tax years are subject to audit by various taxing jurisdictions. The results of these audits and negotiations with taxing authorities may affect the ultimate settlement of these issues. As a result, we expect that throughout the year there could be ongoing variability in our quarterly tax rates as taxable events occur and exposures are re-evaluated. Further, our effective tax rate in a given financial statement period may be materially impacted by changes in tax laws, changes in the mix and level of earnings by taxing jurisdiction, changes to existing accounting rules or regulations or by changes to our ownership or capital structures. Fluctuations in our tax obligations and effective tax rate could materially and adversely affect our results of business, financial condition and operating results.

In addition, we are evaluating and may adopt a corporate structure to more closely align with our international operations and any future international expansion, which will require us to incur expenses but could fail to achieve the intended benefits. This proposed corporate structure may result in a reduction in our overall effective tax rate through changes in how we use our intellectual property, international procurement and sales operations. This proposed corporate structure may also allow us to obtain financial and operational efficiencies. If we adopt this revised structure, it will require us to incur expenses in the near term for which we may not realize related benefits. If the intended structure is not accepted by the applicable taxing authorities, changes in domestic and international tax laws negatively impact the proposed structure, including proposed legislation to reform U.S. taxation of international business activities or we do not operate our business consistent with the proposed structure and applicable tax provisions, we may fail to achieve the financial and operational efficiencies that we anticipate as a result of the proposed structure, and our business, financial condition and operating results may be materially and adversely affected.

Our business depends on network and mobile infrastructure, our single third-party data center hosting facility, other third-party providers and our ability to maintain and scale our technology. Any significant interruptions or delays in service on our sites or any undetected errors or design faults could result in limited capacity, reduced demand, processing delays and loss of customers or vendors.

A key element of our strategy is to generate a high volume of traffic on, and use of, our sites. Our reputation and ability to acquire, retain and serve our customers are dependent upon the reliable performance of our sites and the underlying network infrastructure. As our customer base and the amount of information shared on our sites continue to grow, we will need an increasing amount of network capacity and computing power. We have spent and expect to continue to spend substantial amounts on data centers and equipment and related network infrastructure to handle the traffic on our sites. The operation of these systems is expensive and complex and could result in operational failures. In the event that our customer base or the amount of traffic on our sites grows more quickly than anticipated, we may be required to incur significant additional costs to enhance the underlying network infrastructure. Interruptions or delays in these systems, whether due to system failures, computer viruses, physical or electronic break-ins, undetected errors, design faults or other unexpected events or causes, could affect the security or availability of our sites and prevent our customers from accessing our sites. For example, we recently experienced a significant spike in traffic and transactions on our sites, which caused an interruption in the operation of our sites for a period of time.

We depend on the development and maintenance of the Internet and mobile infrastructure. This includes maintenance of reliable Internet and mobile networks with the necessary speed, data capacity and security, as well as timely development of complementary products, for providing reliable Internet and mobile access and services.

We currently utilize a single third-party data center hosting facility located in Atlanta, Georgia. Nearly all of our data storage and analytics are conducted on, and the data and content we create

 

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associated with sales on our sites are processed through, servers in this facility. We also rely on email service providers, bandwidth providers, Internet service providers and mobile networks to deliver our email and “push” communications to subscribers and to allow subscribers to access our sites. Any damage to, or failure of, the systems of our third-party data center or our other third-party providers could result in interruptions to the availability or functionality of our sites. If for any reason our arrangements with our data center or third-party providers are terminated or interrupted, such termination or interruption could adversely affect our business. We exercise little control over these providers, which increases our vulnerability to problems with the services they provide. We could experience additional expense in arranging for new facilities, technology, services and support. In addition, the failure of our data center or any other third-party providers to meet our capacity requirements could result in interruptions in the availability or functionality of our sites.

The occurrence of a natural disaster, an act of terrorism, vandalism or sabotage, a decision to close the third-party data center on which we normally operate or the facilities of any third-party provider without adequate notice or other unanticipated problems at these facilities could result in lengthy interruptions in the availability of our solutions. While we have some limited disaster recovery arrangements in place, they have not been tested under actual disasters or similar events and may not effectively permit us to continue to provide our products in the event of any problems with respect to our data center or any other third-party facilities. To date, we have not experienced these types of events, but we cannot provide any assurances that they will not occur in the future. If any such event were to occur to our business, the delivery of our products could be impaired and our business, financial condition and operating results may be materially and adversely affected.

We may from time to time pursue acquisitions, which could have an adverse impact on our business, as could the integration of the businesses following acquisition.

As part of our business strategy, we may acquire other companies or businesses. Acquisitions involve numerous risks, any of which could harm our business, including: difficulties in integrating the technologies, operations, existing contracts and personnel of an acquired company; difficulties in supporting and transitioning vendors, if any, of an acquired company; diversion of financial and management resources from existing operations or alternative acquisition opportunities; failure to realize the anticipated benefits or synergies of a transaction; failure to identify all of the problems, liabilities or other shortcomings or challenges of an acquired company or technology, including issues related to intellectual property, regulatory compliance practices, revenue recognition or other accounting practices or employee or customer issues; risks of entering new markets in which we have limited or no experience; potential loss of key employees, customers and vendors from either our current business or an acquired company’s business; inability to generate sufficient net sales to offset acquisition costs; additional costs or equity dilution associated with funding the acquisition; and possible write-offs or impairment charges relating to acquired businesses.

Expansion of our international operations will require management attention and resources, involves additional risks, and may be unsuccessful, which could harm our future business development and existing domestic operations.

To date, we have conducted limited international operations in the United Kingdom but plan to further expand into international markets in order to grow our business. These expansion plans will require management attention and resources and may be unsuccessful. We have limited experience in selling our products to conform to different local cultures, standards and policies, and the flash sales model we employ and the products we offer may not appeal to moms in the same manner, if at all, in other geographies. In addition, we may need to vary our practices in ways with which we have limited or no experience or which are less profitable or carry more risk to us. For example, we permit customer returns in the United Kingdom and expect that we may be required to adopt similar policies in other

 

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jurisdictions. We may have to compete with local companies which understand the local market better than we do. In addition, to deliver satisfactory performance for customers in international locations, it may be necessary to locate physical facilities, such as fulfillment centers in foreign markets, and we may have to invest in these facilities before the success or lack thereof of our foreign operations. We have limited experience establishing such facilities overseas. We may not be successful in expanding into any international markets or in generating net sales from foreign operations. Furthermore, different privacy, censorship, liability, intellectual property and other laws and regulations in foreign countries may cause our business, financial condition and operating results to be materially and adversely affected.

Our future results could be adversely affected by a number of factors inherent in international operations, including:

 

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localization of our product offerings, including translation into foreign languages and adaptation for local practices;

 

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different consumer demand dynamics, which may make the flash sales model less successful compared to the United States;

 

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unexpected changes in regulatory requirements, taxes, trade laws, tariffs, export quotas, custom duties or other trade restrictions;

 

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differing labor regulations where labor laws may be more advantageous to employees as compared to the United States;

 

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more stringent regulations relating to data security and the unauthorized use of, or access to, commercial and personal information, particularly in the European Union;

 

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reluctance to allow personally identifiable data related to non-U.S. citizens to be stored in databases within the United States, due to concerns over the U.S. government’s right to access information in these databases or other concerns;

 

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changes in a specific country’s or region’s political or economic conditions;

 

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challenges inherent in efficiently managing an increased number of employees over large geographic distances, including the need to implement appropriate systems, policies, benefits and compliance programs;

 

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risks resulting from changes in currency exchange rates;

 

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limitations on our ability to reinvest earnings from operations in one country to fund the capital needs of our operations in other countries;

 

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different or lesser intellectual property protection; and

 

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exposure to liabilities under anti-corruption and anti-money laundering laws, including the U.S. Foreign Corrupt Practices Act and similar laws and regulations in other jurisdictions.

Operating internationally requires significant management attention and financial resources. We cannot be certain that the investment and additional resources required to establish and expand our international operations will produce desired levels of net sales or profitability. If we invest substantial time and resources to establish and expand our international operations and are unable to do so successfully and in a timely manner, our business, financial condition and operating results may be materially and adversely affected.

We rely on the performance of members of management and highly skilled personnel, and if we are unable to attract, retain and motivate well-qualified employees, our business could be harmed.

We believe our success has depended, and continues to depend, on the efforts and talents of Darrell Cavens, one of our founders and our chief executive officer, Mark Vadon, one our founders and

 

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chairman of the board of directors, and other members of our management team. Our success also depends on our highly skilled team of employees, including our merchandising and technology personnel. Our future success depends on our continuing ability to attract, develop, motivate and retain highly qualified and skilled employees, particularly mid-level managers and merchandising and technology personnel. The market for such positions in the Seattle area is particularly competitive. Qualified individuals are in high demand, and we may incur significant costs to attract them. In addition, the loss of any of our senior management or key employees or our inability to recruit and develop mid-level managers could materially and adversely affect our ability to execute our business plan, and we may not be able to find adequate replacements. All of our officers and other U.S. employees are at-will employees, meaning that they may terminate their employment relationship with us at any time, and their knowledge of our business and industry would be extremely difficult to replace. If we do not succeed in attracting well-qualified employees or retaining and motivating existing employees, our business, financial condition and operating results may be materially and adversely affected.

Our management team has limited experience managing a public company, and regulatory compliance may divert its attention from the day-to-day management of our business.

The individuals who now constitute our management team have limited experience managing a publicly-traded company and complying with the increasingly complex laws pertaining to public companies. Our management team may not successfully or efficiently manage our transition to being a public company subject to significant regulatory oversight and incremental reporting obligations under the federal securities laws. In particular, these new obligations will require substantial attention from our senior management and could divert their attention away from the day-to-day management of our business, which could materially and adversely affect our business, financial condition and operating results.

Adverse litigation judgments or settlements resulting from legal proceedings in which we may be involved could expose us to monetary damages or limit our ability to operate our business.

We may become involved from time to time in private actions, collective actions, investigations and various other legal proceedings by employees, suppliers, competitors, government agencies or others. For example, we were previously named in a class action lawsuit alleging violations of state gift card laws with respect to the credits we offer to our subscribers for referring new customers. The results of any such litigation, investigations and other legal proceedings are inherently unpredictable and expensive. Any claims against us, whether meritorious or not, could be time-consuming, result in costly litigation, damage our reputation, require significant amounts of management time and divert significant resources. If any of these legal proceedings were to be determined adversely to us, or we were to enter into a settlement arrangement, we could be exposed to monetary damages or limits on our ability to operate our business, which could have a material adverse effect on our business, financial condition and operating results.

We may not be able to adequately protect our intellectual property rights.

We regard our subscriber list, marks, domain names, copyrights, patents, trade dress, trade secrets, proprietary technology and similar intellectual property as critical to our success, and we rely on trademark, copyright and patent law, trade secret protection, agreements and other methods with our employees and others to protect our proprietary rights. We might not be able to obtain effective intellectual property protection in every country in which we sell products. The protection of our intellectual property rights may require the expenditure of significant financial, managerial and operational resources. Moreover, the steps we take to protect our intellectual property may not adequately protect our rights or prevent third parties from infringing or misappropriating our proprietary

 

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rights. Any of our patents, marks or other intellectual property rights may be challenged by others or invalidated through administrative process or litigation. Our patent applications may never be granted. Additionally, the process of obtaining patent protection is expensive and time-consuming, and we may not be able to prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. Even if issued, there can be no assurance that these patents will adequately protect our intellectual property, as the legal standards relating to the validity, enforceability and scope of protection of patent and other intellectual property rights are uncertain. We also cannot be certain that others will not independently develop or otherwise acquire equivalent or superior technology or intellectual property rights.

We might be required to spend significant resources to monitor and protect our intellectual property rights. We may not be able to discover or determine the extent of any infringement, misappropriation or other violation of our intellectual property rights and other proprietary rights. We may initiate claims or litigation against others for infringement, misappropriation or violation of our intellectual property rights or proprietary rights or to establish the validity of such rights. Despite our efforts, we may be unable to prevent third parties from infringing upon, misappropriating or otherwise violating our intellectual property rights and other proprietary rights. Any litigation, whether or not it is resolved in our favor, could result in significant expense to us and divert the efforts of our technical and management personnel, which may materially and adversely affect our business, financial condition and operating results.

We may be accused of infringing intellectual property rights of third parties.

We may in the future be subject to litigation and disputes related to our intellectual property rights and technology, as well as disputes related to intellectual property and product offerings of third-party vendors featured by us. The costs of supporting such litigation and disputes are considerable, and there can be no assurances that favorable outcomes will be obtained.

The e-commerce industry is characterized by vigorous protection and pursuit of intellectual property rights, which has resulted in protracted and expensive litigation for many companies. We are subject to claims and litigation by third parties that we infringe their intellectual property rights, and we expect additional claims and litigation with respect to infringement to occur in the future. As our business expands and the number of competitors in our market increases and overlaps occur, we expect that infringement claims may increase in number and significance. Any claims or proceedings against us, whether meritorious or not, could be time-consuming, result in costly litigation, require significant amounts of management time or result in the diversion of significant operational resources, any of which could materially and adversely affect our business, financial condition and operating results.

Legal claims regarding intellectual property rights are subject to inherent uncertainties due to the oftentimes complex issues involved, and we cannot be certain that we will be successful in defending ourselves against such claims. In addition, some of our larger competitors have extensive portfolios of issued patents. Many potential litigants, including patent holding companies, have the ability to dedicate substantially greater resources to enforce their intellectual property rights and to defend claims that may be brought against them. Furthermore, a successful claimant could secure a judgment that requires us to pay substantial damages or prevents us from conducting our business as we have historically done or may desire to do in the future. We might also be required to seek a license and pay royalties for the use of such intellectual property, which may not be available on commercially acceptable terms, or at all. Alternatively, we may be required to develop non-infringing technology or intellectual property, which could require significant effort and expense and may ultimately not be successful.

 

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We have received in the past, and we anticipate receiving in the future, communications alleging that certain items posted on or sold through our sites violate third-party copyrights, marks and trade names or other intellectual property rights or other proprietary rights. Brand and content owners and other proprietary rights owners have actively asserted their purported rights against online companies, including zulily. In addition to litigation from rights owners, we may be subject to regulatory, civil or criminal proceedings and penalties if governmental authorities believe we have aided and abetted in the sale of counterfeit or infringing products.

Such claims, whether or not meritorious, may result in the expenditure of significant financial, managerial and operational resources, injunctions against us or the payment of damages by us. We may need to obtain licenses from third parties who allege that we have violated their rights, but such licenses may not be available on terms acceptable to us, or at all. These risks have been amplified by the increase in third parties whose sole or primary business is to assert such claims.

The inability to acquire, use or maintain our “zulily” mark and domain names for our sites could substantially harm our business and operating results.

We currently are the registrant of the “zulily” mark in numerous jurisdictions and are the registrant of the Internet domain name for our website, zulily.com, as well as various related domain names. However, we have not registered the mark or domain name in all major international jurisdictions. Domain names generally are regulated by Internet regulatory bodies and are also controlled by trademark and other related laws of each country. If we do not have or cannot obtain on reasonable terms the ability to use our “zulily” mark in a particular country, or to use or register our domain name, we could be forced either to incur significant additional expenses to market our products within that country, including the development of a new brand and the creation of new promotional materials and packaging, or to elect not to sell products in that country. Either result could materially and adversely affect our business, financial condition and operating results.

Furthermore, the regulations governing domain names and laws protecting marks and similar proprietary rights could change in ways that block or interfere with our ability to use relevant domains or our current brand. Also, we might not be able to prevent third parties from registering, using or retaining domain names that interfere with our consumer communications or infringe or otherwise decrease the value of our marks, domain names and other proprietary rights. Regulatory bodies also may establish additional generic or country-code top-level domains or may allow modifications of the requirements for registering, holding or using domain names. As a result, we might not be able to register, use or maintain the domain names that utilize the name zulily in all of the countries in which we currently or intend to conduct business.

Some of our software and systems contain open source software, which may pose particular risks to our proprietary software and solutions.

We use open source software in our software and systems and will use open source software in the future. The licenses applicable to open source software typically require that the source code subject to the license be made available to the public and that any modifications or derivative works to open source software continue to be licensed under open source licenses. From time to time, we may face claims from third parties claiming infringement of their intellectual property rights, or demanding the release or license of the open source software or derivative works that we developed using such software (which could include our proprietary source code) or otherwise seeking to enforce the terms of the applicable open source license. These claims could result in litigation and could require us to purchase a costly license, publicly release the affected portions of our source code, be limited in the licensing of our technologies or cease offering the implicated solutions unless and until we can re-engineer them to avoid infringement or change the use of the implicated open source software. In addition to risks related to

 

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license requirements, use of certain open source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties, indemnities or other contractual protections with respect to the software (for example, non-infringement or functionality). Our use of open source software may also present additional security risks because the source code for open source software is publicly available, which may make it easier for hackers and other third parties to determine how to breach our sites and systems that rely on open source software. Any of these risks could be difficult to eliminate or manage, and, if not addressed, could have a material and adverse effect on our business, financial condition and operating results.

Our results could be adversely affected by natural disasters, public health crises, political crises or other catastrophic events.

Our principal offices are located in Seattle, Washington, an area that has experienced earthquakes in the past, and are thus vulnerable to damage. Natural disasters, such as hurricanes, tornadoes, floods, earthquakes and other adverse weather and climate conditions; unforeseen public health crises, such as pandemics and epidemics; political crises, such as terrorist attacks, war and other political instability; or other catastrophic events, whether occurring in the United States or internationally, could disrupt our operations or the operations of one or more of our vendors. In particular, these types of events could impact our product supply chain from or to the impacted region and could impact our ability or the ability of third parties to operate our sites. In addition, these types of events could negatively impact consumer spending in the impacted regions or depending upon the severity, globally. To the extent any of these events occur, our business, financial condition and operating results could be materially and adversely affected.

Our ability to raise capital in the future may be limited, and our failure to raise capital when needed could prevent us from growing.

In the future, we could be required to raise capital through public or private financing or other arrangements. Such financing may not be available on acceptable terms, or at all, and our failure to raise capital when needed could harm our business. We may sell Class A common stock, convertible securities and other equity securities in one or more transactions at prices and in a manner as we may determine from time to time. If we sell any such securities in subsequent transactions, investors may be materially diluted. New investors in such subsequent transactions could gain rights, preferences and privileges senior to those of holders of our Class A common stock. Debt financing, if available, may involve restrictive covenants and could reduce our operational flexibility or profitability. If we cannot raise funds on acceptable terms, we may not be able to grow our business or respond to competitive pressures.

Risks Related to this Offering and Ownership of our Class A Common Stock

There has been no prior market for our Class A common stock. An active market may not develop or be sustainable, and investors may not be able to resell their shares at or above the initial public offering price.

There has been no public market for our Class A common stock prior to this offering. The initial public offering price for our Class A common stock will be determined through negotiations between a representative of the underwriters and us and may vary from the market price of our Class A common stock following the completion of this offering. An active or liquid market in our Class A common stock may not develop upon completion of this offering or, if it does develop, it may not be sustainable. In the absence of an active trading market for our Class A common stock, you may not be able to resell those shares at or above the initial public offering price or at the time you would like to sell. We cannot predict the prices at which our Class A common stock will trade.

 

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Our stock price may be volatile or may decline regardless of our operating performance, resulting in substantial losses for investors purchasing shares in this offering.

The market price of our Class A common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

 

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actual or anticipated fluctuations in our results of operations;

 

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the financial projections we may provide to the public, any changes in these projections or our failure to meet these projections;

 

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failure of securities analysts to initiate or maintain coverage of our company, changes in financial estimates or ratings by any securities analysts who follow our company or our failure to meet these estimates or the expectations of investors;

 

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announcements by us or our competitors of significant technical innovations, acquisitions, strategic partnerships, joint ventures, operating results or capital commitments;

 

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changes in operating performance and stock market valuations of other technology or retail companies generally, or those in our industry in particular;

 

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price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;

 

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changes in our board of directors or management;

 

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sales of large blocks of our Class A common stock, including sales by our executive officers, directors and significant stockholders;

 

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lawsuits threatened or filed against us;

 

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changes in laws or regulations applicable to our business;

 

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the expiration of contractual lock-up agreements;

 

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changes in our capital structure, such as future issuances of debt or equity securities;

 

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short sales, hedging and other derivative transactions involving our capital stock;

 

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general economic conditions in the United States and abroad;

 

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other events or factors, including those resulting from war, incidents of terrorism or responses to these events; and

 

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the other factors described in this section of the prospectus captioned, “Risk Factors.”

In addition, stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many technology companies, including e-commerce companies. Stock prices of many technology companies, including e-commerce companies, have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business and materially and adversely affect our business, financial condition and operating results.

Substantial future sales of shares of our Class A common stock could cause the market price of our Class A common stock to decline.

Sales of a substantial number of shares of our Class A common stock in the public market following the completion of this offering, or the perception that these sales might occur, could depress the market price of our Class A common stock and could impair our ability to raise capital through the sale of additional equity securities. We are unable to predict the effect that such sales may have on the prevailing market price of our Class A common stock.

 

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All of our executive officers, senior management, directors and substantially all of the holders of our capital stock are subject to lock-up agreements that restrict their ability to transfer shares of our capital stock for 180 days from the date of this prospectus. Subject to certain exceptions, the lock-up agreements limit the number of shares of capital stock that may be sold immediately following this initial public offering. Subject to certain limitations, as of June 30, 2013, approximately              shares (assuming the sale of             shares of Class A common stock by the selling stockholders) and              shares of Class A common stock issuable upon conversion of outstanding Class B common stock will become eligible for sale upon expiration of the 180-day lock-up period. Goldman, Sachs & Co. may, in its sole discretion, permit our stockholders who are subject to these lock-up agreements to sell shares prior to the expiration of the lock-up agreements.

In addition, as of June 30, 2013, there were 54,822,283 shares of Class B common stock subject to outstanding options. We intend to register all of the shares of Class A common stock issuable upon conversion of the shares of Class B common stock issuable upon exercise of outstanding options, and upon exercise of settlement of any options or other equity incentives we may grant in the future, for public resale under the Securities Act of 1933, as amended, or the Securities Act. Accordingly, these shares will be able to be freely sold in the public market upon issuance as permitted by any applicable vesting requirements, subject to the lock-up agreements described above. The shares of Class A common stock issuable upon conversion of these shares will become eligible for sale in the public market to the extent such options are exercised, subject to the lock-up agreements described above and compliance with applicable securities laws.

Holders of 362,194,084 shares of Class B common stock, including 242,485,034 shares issuable upon conversion of outstanding preferred stock as of June 30, 2013 and without giving effect to the sale of shares in this offering by the selling stockholders, have rights, subject to some conditions, to require us to file registration statements for the public resale of the Class A common stock issuable upon conversion of such shares or to include such shares in registration statements that we may file for zulily or other stockholders.

The dual class structure of our common stock and the existing ownership of capital stock by our executive officers, directors and their affiliates have the effect of concentrating voting control with our executive officers, directors and their affiliates for the foreseeable future, which will limit your ability to influence corporate matters.

Our Class B common stock has ten votes per share, and our Class A common stock, which is the stock we are offering in this initial public offering, has one vote per share. Given the greater number of votes per share attributed to our Class B common stock, our existing stockholders, all of which hold shares of Class B common stock, will collectively beneficially own shares representing approximately     % of the voting power of our outstanding capital stock following the completion of this offering. Our executive officers and directors and their related parties, which include funds affiliated with Maveron LLC and August Capital, will collectively beneficially own shares representing approximately     % of the voting power of our outstanding capital stock following this offering. Consequently, the holders of Class B common stock collectively will continue to be able to control a majority of the voting power even if their stock holdings represent as few as approximately 9.1% of the outstanding number of shares of our common stock. This concentrated control will limit your ability to influence corporate matters for the foreseeable future. For example, these stockholders will be able to control elections of directors, amendments of our certificate of incorporation or bylaws, increases to the number of shares available for issuance under our equity incentive plans or adoption of new equity incentive plans and approval of any merger or sale of assets for the foreseeable future. This control may adversely affect the market price of our Class A common stock. Additionally, the holders of our Class B common stock may cause us to make strategic decisions or pursue acquisitions that could involve risks to you or may not be aligned with your interests.

 

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Future transfers by holders of Class B common stock will generally result in those shares converting on a 1:1 basis to Class A common stock, which will have the effect, over time, of increasing the relative voting power of those holders of Class B common stock who retain their shares in the long-term, which may include our executive officers and directors and their affiliates.

If securities or industry analysts do not publish research or reports about our business, or publish negative reports about our business, our share price and trading volume could decline.

The trading market for our Class A common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business, our market and our competitors. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our shares or change their opinion of our shares, our share price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.

We may invest or spend the proceeds of this offering in ways with which you may not agree or in ways that may not yield a return.

We currently intend to use the net proceeds to us from this offering primarily for general corporate purposes. We may also use a portion of the net proceeds from this offering for the acquisition of, or investment in, technologies, solutions or businesses that complement our business, although we have no present commitments or agreements to enter into any such acquisition or investment. Our management will have considerable discretion in the application of the net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. The net proceeds may be used for purposes that do not increase the value of our business or increase the risks to you, which could cause the price of our stock to decline. Until net proceeds are used, they may be placed in investments that do not produce significant income or that may lose value.

We are an “emerging growth company,” and we cannot be certain if the reduced disclosure requirements applicable to “emerging growth companies” will make our Class A common stock less attractive to investors.

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We will remain an “emerging growth company” for up to five years, although we will cease to be an “emerging growth company” upon the earliest of (1) the last day of the fiscal year following the fifth anniversary of this offering, (2) the last day of the first fiscal year in which our annual gross revenues are $1 billion or more, (3) the date on which we have, during the previous rolling three-year period, issued more than $1 billion in non-convertible debt securities and (4) the date on which we are deemed to be a “large accelerated filer” as defined in the Securities Exchange Act of 1934, or the Exchange Act. We cannot predict if investors will find our Class A common stock less attractive or our company less comparable to certain other public companies because we will rely on these exemptions.

 

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The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain additional executive management and qualified board members.

As a public company, we will be subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act, the listing requirements of the NASDAQ Global Select Market and other applicable securities rules and regulations. Compliance with these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources, particularly after we are no longer an “emerging growth company.” The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and results of operations. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could adversely affect our business and results of operations. We will need to hire additional employees or engage outside consultants to comply with these requirements, which will increase our costs and expenses.

In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time-consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us, and our business may be adversely affected.

We also expect that being a public company will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.

As a result of disclosure of information in this prospectus and in filings required of a public company, our business and financial condition will become more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and results of operations could be adversely affected, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and materially and adversely affect our business, financial condition and operating results.

 

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As a result of becoming a public company, we will be obligated to develop and maintain proper and effective internal control over financial reporting. If we fail to do so in a timely manner, or our internal control over financial reporting is not determined to be effective, this may adversely affect investor confidence in our company and, as a result, the value of our Class A common stock. In the course of preparing our consolidated financial statements, we have identified a material weakness in our internal control over financial reporting.

We will be required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for the first fiscal year beginning after the effective date of this offering. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting, as well as a statement that our independent registered public accounting firm has issued an opinion on our internal control over financial reporting, provided that our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting until our first annual report required to be filed with the SEC following the later of the date we are deemed to be an “accelerated filer” or a “large accelerated filer,” each as defined in the Exchange Act, or the date we are no longer an “emerging growth company,” as defined in the JOBS Act. We will be required to disclose changes made in our internal control and procedures on a quarterly basis. To comply with the requirements of being a public company, we may need to undertake various actions, such as implementing new internal controls and procedures and hiring accounting or internal audit staff. We are beginning the costly and challenging process of compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404, and we may not be able to complete our evaluation, testing and any required remediation in a timely fashion.

In the course of preparing our consolidated financial statements, we and our independent registered public accounting firm identified a material weakness in our internal control over financial reporting. A material weakness is a deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim consolidated financial statements will not be prevented or detected on a timely basis. The material weakness identified related to the lack of sufficient technical accounting skills within our accounting and finance organization. Related to the identified weakness, there were a number of post-close adjustments that were determined to be immaterial to the consolidated financial statements but resulted in the correction of our previously issued consolidated financial statements as of and for the years ended December 30, 2012, January 1, 2012, and December 31, 2010. These corrections are described in greater detail within the notes to the consolidated financial statements included with this prospectus.

We have taken steps to remediate the material weakness, including increasing the depth and experience within our accounting and finance organization, as well as designing and implementing improved processes and internal controls. However, our efforts to remediate this material weakness may not be effective or prevent future material weaknesses or significant deficiencies in our internal control over financial reporting.

In future periods, if during the evaluation and testing process, we identify any other material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal control over financial reporting is effective. If we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal control, we could lose investor confidence in the accuracy and completeness of our financial reports, which would cause the price of our Class A common stock to decline, and we may be subject to investigation or sanctions by the SEC.

 

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Anti-takeover provisions in our charter documents and under Delaware law and Washington law could make an acquisition of our company more difficult, limit attempts by our stockholders to replace or remove our current management and limit the market price of our Class A common stock.

Provisions in our certificate of incorporation and bylaws, as will be amended and restated upon completion of this offering, may have the effect of delaying or preventing a change of control or changes in our management. Our amended and restated certificate of incorporation and bylaws include provisions that:

 

  Ÿ  

establish a classified board of directors so that not all members of our board of directors are elected at one time;

 

  Ÿ  

permit the board of directors to establish the number of directors and fill any vacancies and newly created directorships;

 

  Ÿ  

provide that directors may only be removed for cause;

 

  Ÿ  

require super-majority voting to amend some provisions in our certificate of incorporation and bylaws;

 

  Ÿ  

authorize the issuance of “blank check” preferred stock that our board of directors could use to implement a stockholder rights plan;

 

  Ÿ  

eliminate the ability of our stockholders to call special meetings of stockholders;

 

  Ÿ  

prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;

 

  Ÿ  

provide that the board of directors is expressly authorized to make, alter or repeal our bylaws;

 

  Ÿ  

restrict the forum for certain litigation against us to Delaware;

 

  Ÿ  

reflect the dual class structure of our common stock, as discussed above; and

 

  Ÿ  

establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at annual stockholder meetings.

These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any holder of at least 15% of our capital stock for a period of three years following the date on which the stockholder became a 15% stockholder. Likewise, because our principal executive offices are located in Washington, the anti-takeover provisions of the Washington Business Corporation Act may apply to us under certain circumstances now or in the future. These provisions prohibit a “target corporation” from engaging in any of a broad range of business combinations with any stockholder constituting an “acquiring person” for a period of five years following the date on which the stockholder became an “acquiring person.”

 

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Our certificate of incorporation will also provide that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for any derivative action or proceeding brought on our behalf; any action asserting a breach of fiduciary duty; any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our certificate of incorporation or our bylaws; or any action asserting a claim against us that is governed by the internal affairs doctrine. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and other employees. Alternatively, if a court were to find the choice of forum provision contained in our certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business and financial condition.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus, particularly in the sections captioned “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” contains forward-looking statements that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future financial condition, business strategy and plans and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “believe,” “will,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “predict,” “could,” “potentially” or the negative of these terms or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions described in the section of this prospectus captioned “Risk Factors” and elsewhere in this prospectus, regarding, among other things:

 

  Ÿ  

our ability to predict our future prospects, net sales, expenses and operating results accurately;

 

  Ÿ  

our ability to effectively manage or sustain our growth;

 

  Ÿ  

our ability to generate net sales or achieve or maintain profitability;

 

  Ÿ  

the effects of increased competition and our ability to compete effectively;

 

  Ÿ  

the growth of e-commerce in general and the flash sales model in particular;

 

  Ÿ  

our ability to expand our customer base;

 

  Ÿ  

our ability to respond to consumer preferences and to expand our product offerings;

 

  Ÿ  

our ability to maintain and enhance our brand and intellectual property;

 

  Ÿ  

claims that we infringe intellectual property rights of others;

 

  Ÿ  

global economic conditions and their impact on consumer spending patterns;

 

  Ÿ  

seasonal sales fluctuations;

 

  Ÿ  

our ability to attract new vendors and retain existing vendors and our ability to obtain differentiated, high quality and compliant merchandise in sufficient quantities from vendors;

 

  Ÿ  

our ability to optimize, operate and manage our fulfillment centers;

 

  Ÿ  

our dependence on third-party service providers and technologies;

 

  Ÿ  

our ability to develop a scalable, high-performance technology and fulfillment infrastructure;

 

  Ÿ  

our ability to comply with modified or new laws and regulations applying to our business, including privacy regulation and tax laws;

 

  Ÿ  

our ability to effectively acquire other businesses or to expand internationally; and

 

  Ÿ  

the attraction and retention of key personnel and qualified employees.

These risks are not exhaustive. Other sections of this prospectus may include additional factors that could adversely impact our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time, and it is not possible for our management to predict all risk factors nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in, or implied by, any forward-looking statements.

 

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You should not rely upon forward-looking statements as predictions of future events. We cannot assure you that the events and circumstances reflected in the forward-looking statements will be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this prospectus or to conform these statements to actual results or to changes in our expectations.

You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement of which this prospectus is a part with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

This prospectus also contains market data and industry forecasts that were obtained from industry publications. These data involve a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. Although we have not independently verified any third-party information, we believe the information is reliable and the conclusions contained in the third-party information are reasonable. However, such market position, market opportunity and market size information included in this prospectus is inherently imprecise.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from this offering will be approximately $         million, assuming an initial public offering price of $         per share, which is the midpoint of the range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any of the proceeds from the sale of shares by the selling stockholders, although we will bear the costs, other than underwriting discounts and commissions, associated with those sales.

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) the net proceeds to us from this offering by $        , assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us. Each increase or decrease of shares by             shares in the number of shares offered by us would increase or decrease the net proceeds to us from this offering by approximately $        , assuming that the assumed initial price to public remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We do not expect that a change in the initial price to the public or the number of shares by these amounts would have a material effect on uses of the proceeds from this offering, although it may accelerate the time at which we will need to seek additional capital.

The principal purposes of this offering are to create a public market for our Class A common stock and thereby facilitate access to the public equity markets, increase our visibility in the marketplace, as well to obtain additional capital. We intend to use the net proceeds from this offering for working capital and other general corporate purposes. We may also use a portion of the net proceeds to acquire complementary business, products or technologies, although we have no present commitments or agreements for any specific acquisitions. Pending these uses, we plan to invest these net proceeds in short-term, interest bearing obligations, investment grade instruments, certificates of deposit or direct or guaranteed obligations of the United States.

We will have broad discretion in the application of the net proceeds, and investors will be relying on the judgment of our management regarding the application of the net proceeds of this offering.

DIVIDEND POLICY

We have never declared or paid dividends on our capital stock except for the deemed dividend to preferred stockholders in our fiscal year 2012; please see Note 6 of the accompanying notes to our consolidated financial statements. We currently intend to retain all available funds and any future earnings to support operations and to finance the growth and development of our business. We do not intend to declare or pay cash dividends on our capital stock in the foreseeable future. Any future determination to pay dividends will be made at the discretion of our board of directors subject to applicable laws, and will depend upon, among other factors, our results of operations, financial condition, contractual restrictions and capital requirements. Our future ability to pay cash dividends on our stock may be limited by the terms of any future debt or preferred securities.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and our capitalization as of June 30, 2013 on:

 

  Ÿ  

an actual basis; and

 

  Ÿ  

a pro forma as adjusted basis to reflect (1) the conversion of the outstanding shares of our preferred stock into Class B common stock, which will occur automatically upon the closing of this offering, (2) our sale of shares of Class A common stock in this offering at an assumed initial public offering price of $         per share, which is the midpoint of the range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us and (3) our receipt of the net proceeds from that sale after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

You should read this table together with the sections of this prospectus captioned “Selected Consolidated Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Description of Capital Stock” and our financial statements and related notes included elsewhere in this prospectus.

 

     As of June 30, 2013  
     Actual     Pro Forma,
As Adjusted (1)
 
     (in thousands, except share
amounts)
 

Cash and cash equivalents

   $ 83,015      $     
  

 

 

   

 

 

 

Convertible redeemable preferred stock:

    

Series B preferred stock
44,923,630 shares authorized, issued and outstanding, actual; no shares issued or outstanding, pro forma as adjusted

   $ 7,462      $     

Series C preferred stock
20,378,275 shares authorized, issued and outstanding, actual; no shares issued or outstanding, pro forma as adjusted

     36,972     

Series D preferred stock
40,975,703 shares authorized, issued and outstanding, actual; no shares issued or outstanding, pro forma as adjusted

     89,342     
  

 

 

   

 

 

 

Total convertible redeemable preferred stock

   $ 133,776     

Stockholders’ equity (deficit):

    

Series Seed convertible preferred stock; 38,643,800 shares authorized, of which 22,163,095 issued and outstanding, actual; no shares issued or outstanding, pro forma as adjusted

         

Series A convertible preferred stock; 115,502,600 shares authorized, of which 113,550,910 issued and outstanding, actual; no shares issued or outstanding, pro forma as adjusted

     2     

Common stock; 528,500,000 shares authorized and 219,139,077 shares issued or outstanding, actual;              shares authorized and              shares issued and outstanding, pro forma as adjusted

     5     

Additional paid-in capital

         

Accumulated other comprehensive income

     18     

Accumulated deficit

     (55,638  
  

 

 

   

 

 

 

Total stockholders’ (deficit) equity

     (55,613  
  

 

 

   

 

 

 

Total capitalization

   $ 137,945      $                
  

 

 

   

 

 

 

 

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(1) A $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) the pro forma as adjusted stockholders’ equity by $         and our total capitalization by $        , or $         if the underwriters exercise their option to purchase additional shares in full, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated expenses payable by us. Each increase or decrease of shares by              shares in the number of shares offered by us would increase or decrease cash and cash equivalents, additional paid in capital, total stockholders’ deficit and total capitalization by approximately $        , assuming that the assumed initial price to public remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The outstanding share information in the table above excludes, as of June 30, 2013, the following shares:

 

  Ÿ  

54,822,283 shares of Class B common stock issuable upon the exercise of outstanding stock options issued as of June 30, 2013 pursuant to our 2009 Plan at a weighted-average exercise price of $1.59 per share;

 

  Ÿ  

             shares of Class B common stock issuable upon the exercise of outstanding stock options issued after June 30, 2013 pursuant to our 2009 Plan, at a weighted-average exercise price of $         per share;

 

  Ÿ  

9,709,892 shares of Class B common stock available for future issuance under our 2009 Plan as of June 30, 2013, which shares will cease to become available for future issuance immediately prior to the time our 2013 Plan becomes effective; and

 

  Ÿ  

             shares of Class A common stock to be reserved for future issuance under our 2013 Plan, as of the date the registration statement of which this prospectus forms a part is declared effective by the SEC (assuming that              shares of Class B common stock are available for issuance under our 2009 Plan immediately prior to the time our 2013 Plan becomes effective) as well as any automatic increases in the number of shares of Class A common stock reserved for future issuance under this benefit plan.

 

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DILUTION

Dilution is the amount by which the offering price paid by the purchasers of the shares of Class A common stock sold in the offering exceeds the net tangible book value per share of common stock after the offering. Net tangible book value per share is determined at any date by subtracting our total liabilities from the total book value of our tangible assets and dividing the difference by the number of shares of Class A common stock and Class B common stock deemed to be outstanding at that date.

Our pro forma net tangible book value as of June 30, 2013 was $         million, or $         per share, which gives effect to the conversion of all outstanding shares of our preferred stock into an aggregate of 242,485,034 shares of our Class B common stock immediately prior to the completion of this offering. After giving effect to the receipt and our intended use of approximately $         million of net proceeds from our sale of shares of Class A common stock in this offering at an assumed offering price of $         per share, which is the midpoint of the range set forth on the cover page of this prospectus, our pro forma as adjusted net tangible book value as of June 30, 2013 would have been $         million, or $         per share. This represents an immediate increase in net tangible book value of $         per share to existing stockholders and an immediate dilution of $         per share to new investors purchasing shares of Class A common stock in the offering. The following table illustrates this substantial and immediate per share dilution to new investors.

 

Assumed initial public offering price per share

      $                

Historical net tangible book value per share at June 30, 2013

   $                   

Pro forma increase in net tangible book value per share at June 30, 2013 attributable to the conversion of convertible preferred stock

   $                   

Pro forma net tangible book value per share at June 30, 2013

   $                   

Pro forma increase per share attributable to investors in this offering

   $                   
  

 

 

    

Pro forma as adjusted net tangible book value per share after giving effect to this offering

      $                
     

 

 

 

Dilution in net tangible book value per share to investors in this offering

      $                
     

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share, which is the midpoint of the range set forth on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted net tangible book value by $        , the pro forma as adjusted net tangible book value per share by $         per share and the dilution per share to new investors in this offering by $        , or $         if the underwriters exercise their option to purchase additional shares in full, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us.

The following table summarizes, as of June 30, 2013:

 

  Ÿ  

the total number of shares of Class A common stock and Class B common stock purchased from us by our existing stockholders and by new investors purchasing shares in this offering;

 

  Ÿ  

the total consideration paid to us by our existing stockholders and by new investors purchasing Class A common stock in this offering, assuming an initial public offering of $         per share, which is the midpoint of the range set forth on the cover page of this prospectus (before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us in connection with this offering); and

 

  Ÿ  

the average price per share paid by existing stockholders and by new investors purchasing shares in this offering.

 

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     Shares Purchased     Total Consideration     Average Price
Per Share
 
    

Number

   Percent     Amount      Percent    

Existing stockholders

               $                             $                

Existing convertible preferred stockholders

            

Investors in this offering

            
  

 

  

 

 

   

 

 

    

 

 

   

 

 

 

Total

        100   $                      100   $                
  

 

  

 

 

   

 

 

    

 

 

   

 

 

 

The tables and calculations above are based on the number of shares of our Class A common stock and Class B common stock outstanding as of June 30, 2013, but do not include, as of June 30, 2013, the following shares:

 

  Ÿ  

54,822,283 shares of Class B common stock issuable upon the exercise of outstanding stock options issued as of June 30, 2013 pursuant to our 2009 Plan at a weighted-average exercise price of $1.59 per share;

 

  Ÿ  

             shares of Class B common stock issuable upon the exercise of outstanding stock options issued after June 30, 2013 pursuant to our 2009 Plan, at a weighted-average exercise price of $         per share;

 

  Ÿ  

9,709,892 shares of Class B common stock reserved for future issuance under our 2009 Plan as of June 30, 2013, which shares will cease to become available for future issuance immediately prior to the time our 2013 Plan becomes effective; and

 

  Ÿ  

             shares of Class A common stock to be available for future issuance under our 2013 Plan, as of the date the registration statement of which this prospectus forms a part is declared effective by the SEC (assuming that              shares of Class B common stock are reserved for issuance under our 2009 Plan immediately prior to the time our 2013 Plan becomes effective) as well as any automatic increases in the number of shares of Class A common stock reserved for future issuance under this benefit plan.

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) total consideration paid by existing stockholders, total consideration paid by new investors and the average price per share by $        , $          and $        , respectively, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and without deducting the estimated underwriting discounts and commissions and estimated expenses payable by us.

The foregoing table does not reflect any sales by existing stockholders in this offering. Sales by the selling stockholders in this offering will reduce the number of shares held by existing stockholders to              shares, or     % of the total number of shares of our common stock outstanding after this offering and will increase the number of shares held by new investors to                  shares, or     % of the total number of shares of our common stock outstanding after this offering. In addition, if the underwriters exercise their option to purchase additional shares in full, the number of shares held by the existing stockholders after this offering would be reduced to     , or     % of the total number of shares of our common stock outstanding after this offering, and the number of shares held by new investors would increase to     , or     %, of the total number of shares of our common stock outstanding after this offering.

The shares reserved for future issuance under our 2013 Plan will be subject to automatic annual increases in accordance with the terms of the plans. To the extent that options are exercised, new options are issued under our equity incentive plans, or we issue additional shares of common stock in the future, there will be further dilution to investors participating in this offering. In addition, we may choose to raise additional capital because of market conditions or strategic considerations, even if we believe that we have sufficient funds for our current or future operating plans. If we raise additional capital through the sale of equity or convertible debt securities, the issuance of these securities could result in further dilution to our stockholders.

 

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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

You should read the selected consolidated financial and other data in conjunction with the section of this prospectus captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as the consolidated financial statements and related notes.

We have derived the consolidated statements of operations data for the fiscal years ended December 31, 2010, January 1, 2012 and December 30, 2012 and the consolidated balance sheet data as of January 1, 2012, and December 30, 2012 from our audited consolidated financial statements appearing elsewhere in this prospectus. The consolidated statements of operations data for the year to date periods ended July 1, 2012 and June 30, 2013 and consolidated balance sheet data as of June 30, 2013 have been derived from our unaudited consolidated financial statements appearing elsewhere in this prospectus. We have prepared the unaudited consolidated financial data on the same basis as the audited consolidated financial statements. We have included, in our opinion, all adjustments, consisting only of normal recurring adjustments that we consider necessary for a fair presentation of the financial information set forth in those statements. Our historical results are not necessarily indicative of the results that should be expected in the future, and our interim results are not necessarily indicative of the results that should be expected for the full year or any other period.

Beginning with our fiscal year 2011, our fiscal year ends on the Sunday closest to December 31 of the respective calendar year. Each fiscal year consists of four 13-week quarters, with one extra week added in the fourth quarter every five to six years.

 

     Fiscal Years     Six Months Ended  
     2010     2011     2012     Jul. 1, 2012     Jun. 30, 2013  
     (in thousands, except per share data)  

Consolidated Statements of Operations Data

          

Net sales

   $ 18,376      $ 142,545      $ 331,240      $ 126,993      $ 272,021   

Cost of sales(1)

     12,574        104,949        240,943        91,252        191,506   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     5,802        37,596        90,297        35,741        80,515   

Operating expenses:

          

Marketing expenses(1)

     4,897        20,228        37,780        15,600        28,056   

Selling, general and administrative expenses(1)

     7,112        28,905        63,071        26,499        50,069   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     12,009        49,133        100,851        42,099        78,125   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

     (6,207     (11,537     (10,554     (6,358     2,390   

Interest (expense) income, net.

     (169     20        43        16        64   

Other (expense) income, net

     (627     203        176        180        (48
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (7,003   $ (11,314   $ (10,335   $ (6,162   $ 2,406   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (7,448   $ (13,233   $ (46,822   $ (7,883   $ (2,656
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per common share(2):

          

Basic

   $ (0.11   $ (0.14   $ (0.31   $ (0.06   $ (0.01
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ (0.11   $ (0.14   $ (0.31   $ (0.06   $ (0.01
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in computing net loss per common share:

          

Basic

     65,390,625        96,411,124        151,906,924        138,402,501        193,075,922   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     65,390,625        96,411,124        151,906,924        138,402,501        193,075,922   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to common stockholders—pro forma

       $ (42,447     $ 2,121   
      

 

 

     

 

 

 

Pro forma net (loss) income per common share(3):

          

Basic

       $ (0.11     $   
      

 

 

     

 

 

 

Diluted

       $ (0.11     $   
      

 

 

     

 

 

 

Shares used in computing pro forma net (loss) income per common share(3):

          

Basic

         375,217,245          443,434,097   
      

 

 

     

 

 

 

Diluted

         375,217,245          450,155,335   
      

 

 

     

 

 

 

 

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     Fiscal Years     Six Months Ended  
           2010                 2011                 2012               Jul. 1, 2012             Jun. 30, 2013      
     (in thousands, except revenue per active customer and average order value)  

Other Financial and Operations Data

          

Adjusted EBITDA(4)

   $ (3,734   $ (8,871   $ (5,920   $ (4,449   $ 7,469   

Free cash flow(5)

   $ (1,164   $ 3,749      $ 8,425      $ (10,076   $ (4,240

Active customers

     157        791        1,580        1,154        2,229   

Revenue per active customer

   $ 117      $ 180      $ 210      $ 110      $ 122   

Total orders placed

     384        2,998        6,950        2,779        5,696   

Average order value

   $ 52.52      $ 53.48      $ 53.37      $ 52.20      $ 53.23   

 

     As of  
     Jan. 1, 2012     Dec. 30, 2012     Jun. 30, 2013  
     (in thousands)  

Consolidated Balance Sheet Data

      

Cash and cash equivalents

   $ 28,361      $ 96,998      $ 83,015   

Working capital

     22,821        62,605        61,240   

Total assets

     58,323        130,737        137,945   

Deferred revenue

     3,520        9,653        13,156   

Convertible redeemable preferred stock

     45,519        128,714        133,776   

Total stockholders’ deficit

     (16,168     (55,750     (55,613

 

(1) Includes stock-based compensation expense as follows:

 

     Fiscal Year      Six Months Ended  
     2010      2011      2012      Jul. 1, 2012      Jun. 30, 2013  

Cost of sales

   $       $ 2       $ 26       $ 15       $ 27   

Marketing expenses

     2         62         142         57         132   

Selling, general and administrative expenses

     2,396         2,015         1,097         395         2,441   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense

   $ 2,398       $ 2,079       $ 1,265       $ 467       $ 2,600   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) Basic and diluted net loss per common share attributable to common stockholders for our fiscal year 2012 includes a deemed dividend distribution of $32.1 million. Such dividend is included as it represents distributed earnings attributable to participating securities. Please see Note 6 of the accompanying notes to our consolidated financial statements.
(3) Pro forma basic and diluted net loss per share represents net loss divided by the pro forma weighted-average shares of common stock outstanding. Pro forma weighted-average shares outstanding reflects the conversion of preferred stock into Class B common stock as though the conversion had occurred on the first day of the relevant period.
(4) Adjusted EBITDA is a non-GAAP financial measure that we calculate as earnings (loss) before interest and other income and expense, taxes, depreciation, amortization and stock-based compensation expense. Please see “—Non-GAAP Financial Measures—Adjusted EBITDA” below for more information and for a reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated and presented in accordance with GAAP.
(5) Free cash flow is a non-GAAP financial measure that we calculate as net cash (used in) provided by operating activities less net cash used in capital expenditures. Please see “—Non-GAAP Financial Measures—Free Cash Flow” below for more information and for a reconciliation of free cash flow to net cash (used in) provided by operating activities, the most directly comparable financial measure calculated and presented in accordance with GAAP.

Non-GAAP Financial Measures

Adjusted EBITDA

To provide investors with additional information regarding our financial results, we have disclosed in the table above and elsewhere in this prospectus Adjusted EBITDA, a non-GAAP financial measure that we calculate as earnings (loss) before interest and other income and expense, taxes, depreciation, amortization and stock-based compensation expense. We have provided a reconciliation below of Adjusted EBITDA to net loss, the most directly comparable GAAP financial measure.

We have included Adjusted EBITDA in this prospectus because it is a key measure used by our management and board of directors to evaluate our operating performance, generate future operating plans and make strategic decisions regarding the allocation of capital. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA facilitates operating performance comparisons on a period-to-period basis and, in the case of exclusion of the impact of stock-based compensation,

 

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excludes an item that we do not consider to be indicative of our core operating performance. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.

Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

 

  Ÿ  

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;

 

  Ÿ  

Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

  Ÿ  

Adjusted EBITDA does not consider the potentially dilutive impact of equity-based compensation;

 

  Ÿ  

Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; and

 

  Ÿ  

other companies, including companies in our industry, may calculate Adjusted EBITDA differently, which reduces its usefulness as a comparative measure.

Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net (loss) income and our other GAAP results.

The following table reflects the reconciliation of net loss to Adjusted EBITDA for each of the periods indicated:

 

     Fiscal Year     Six Months Ended  
     2010     2011     2012     Jul. 1, 2012     Jun. 30, 2013  
     (in thousands)  

Net (loss) income

   $ (7,003   $ (11,314   $ (10,335   $ (6,162   $ 2,406   

Excluding:

          

Interest income (expense), net

     169        (20     (43     (16     (64

Other income (expense), net

     627        (203     (176     (180     48   

Taxes

                                   

Depreciation and amortization

     75        587        3,369        1,442        2,479   

Stock-based compensation expense

     2,398        2,079        1,265        467        2,600   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ (3,734   $ (8,871   $ (5,920   $ (4,449   $ 7,469   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Free Cash Flow

To provide investors with additional information regarding our financial results, we have also disclosed in the table above and elsewhere in this prospectus free cash flow, a non-GAAP financial measure that we calculate as net cash (used in) provided by operating activities less net cash used in capital expenditures. We have provided a reconciliation below of adjusted free cash flow to net cash (used in) provided by operating activities, the most directly comparable GAAP financial measure.

 

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We have included free cash flow in this prospectus because it is a key measure used by our management and board of directors, which we believe is an important indicator of our business performance because it measures the amount of cash we generate. Free cash flow also reflects changes in working capital. Accordingly, we believe that free cash flow provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.

Free cash flow has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. There are limitations to using non-GAAP financial measures, including that other companies, including companies in our industry, may calculate free cash flow differently. Because of these limitations, you should consider free cash flow alongside other financial performance measures, including net cash (used in) provided by operating activities, capital expenditures and our other GAAP results.

 

The following table presents a reconciliation of free cash flow to net cash (used in) provided by operating activities for each of the periods indicated:

 

     Fiscal Year     Six Months Ended  
     2010     2011     2012     Jul. 1, 2012     Jun. 30, 2013  
     (in thousands)  

Net cash (used in) provided by operating activities

   $ (656   $ 8,864      $ 16,283      $ (6,047   $ 4,003   

Capital expenditures

     (508     (5,115     (7,858     (4,029     (8,243
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Free cash flow

   $ (1,164   $ 3,749      $ 8,425      $ (10,076   $ (4,240
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

You should read the following discussion and analysis of our financial condition and results of operations together with the “Selected Consolidated Financial and Other Data” section of this prospectus and our consolidated financial statements and related notes appearing elsewhere in this prospectus. Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. This discussion contains forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under the “Risk Factors” and “Special Note Regarding Forward-Looking Statements” sections and elsewhere in this prospectus, our actual results may differ materially from those anticipated in these forward-looking statements.

Overview

We launched the zulily website in January 2010 with the goal of revolutionizing the way moms shop. Today, we are one of the largest standalone e-commerce companies in the United States. Through our desktop and mobile websites and mobile applications, which we refer to as our “sites”, we help our customers discover new and unique products at great values that they would likely not find elsewhere. We provide moms a fun and entertaining shopping experience with a fresh selection of flash sales events with over 4,000 product styles offered on a typical day. We source these products from thousands of vendors, including emerging brands and smaller boutique vendors, as well as larger national brands. By bringing together millions of moms and a daily selection of products chosen from our vendor base, we have built a large scale and uniquely curated marketplace. Since inception through June 30, 2013, we have worked with over 10,000 brands, featured over 1.6 million product styles and sold over 42 million items to over 2.9 million customers across our platform.

We sell our products through a flash sales model, with offerings typically only available for 72 hours and in a limited quantity, creating an urgency to browse and purchase. We sell children’s apparel, women’s apparel and other categories such as toys, infant gear, kitchen accessories and home décor. Children’s apparel is our largest merchandise category today; however, we have expanded our categories over time such that all non-children’s apparel categories combined accounted for 53% of our U.S. units ordered in the six months ended June 30, 2013, up from 45% in all of 2012. We focus on providing significant value to consumers across all of our categories; the average item on our sites is offered for over 50% off the manufacturer’s suggested retail price.

We plan to further grow our customer base by cost-effectively acquiring new email subscribers and users of our mobile applications through targeted marketing campaigns and then converting them into active customers. In addition, we regularly introduce new categories, brands and products to our customers and work to maximize the relevance of the items we display, thereby improving customer satisfaction, increasing customer loyalty and driving repeat purchasing.

Mobile is a large and growing part of our business. We have invested heavily in our mobile platform to optimize our sites for use on iPhones, iPads and Android-based devices. In the second quarter of 2013, approximately 42% of our U.S. orders were placed from a mobile device, up from approximately 39% in the first quarter of 2013 and approximately 31% in the fourth quarter of 2012.

We have built a merchandising organization specifically designed to source, cultivate and manage relationships with thousands of vendors, including emerging brands and smaller boutique vendors as well as larger national brands. To identify and support our vendors and effectively tell their stories to moms, we have built a merchandising team of 302 employees and 39 in-house photography

 

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studios, supported by a substantial and talented photo editing, copyrighting and editorial team. By sourcing a large number of vendors and providing them with strong support, we are able to offer our customers a broad and unique selection of curated products that is refreshed on a daily basis. Of the vendors we featured for the first time in 2011, 75% have returned to sell again at least once on our sites through June 30, 2013. Our vendor base is highly diversified with our largest vendor in 2012 accounting for less than 1.5% of our net sales.

We typically receive customer orders before we purchase inventory from our vendors, greatly reducing our inventory risk. The result of this dynamic is that we are able to offer a much larger range of products to our customers and to generate greater sales for our vendors, who are able to match a broader range of their product supply to actual customer demand. To best serve our customers and vendors, we have in place a custom, fully integrated fulfillment infrastructure. Our proprietary supply chain system enables us to efficiently handle the unique features of our flash sales model, including small to medium lot sizes and high inventory turnover. This allows us to sell lower price point products cost-effectively, without needing to pre-stock substantial inventory. Our business model together with our fulfillment infrastructure has enabled us to conduct successful events of all sizes, including smaller ones. In 2012, 90% of our events generated less than $50,000 of U.S. product sales, and these smaller events accounted for approximately 65% of our U.S. product sales.

We had initially outsourced order fulfillment, but in October 2011 we elected to develop our own fulfillment operations. As of June 30, 2013 we had 1.1 million square feet of leased fulfillment space at facilities in Nevada and Ohio. Our fulfillment operations regularly handle over 100,000 items a day from thousands of product styles that change each day and require different handling processes. Because we have deliberately established an intermediary model in which we do not pre-purchase substantial inventory, our shipping times are generally slower than e-commerce retailers that hold inventory. We are continually investing in our systems and infrastructure to improve order-to-ship times for sales of products in the United States. We reduced our order-to-ship times from an average of 12.0 days in the second quarter of 2012 to 10.6 days in the second quarter of 2013.

To date, we have primarily focused on expanding our U.S. business and are just beginning to focus on our international strategy. In April 2012, we launched our first international site, with a small team based in the United Kingdom. For 2012 and the six months ended June 30, 2013, we generated $4.9 million and $5.9 million in net sales internationally, or 1.5% and 2.2% of total net sales, respectively. In addition, customers in 70 foreign countries have made purchases on our U.S.-based sites and have had their orders fulfilled through a third-party service provider. These purchases are included in our U.S. net sales. Purchases made on our U.K.-based sites are included in international net sales. We are gradually increasing our level of investment in international expansion and plan to continue to invest in and develop international markets, balanced with a continued focus on building the core North American market.

For 2012 and the six months ended June 30, 2013, we reported $331.2 million and $272.0 million in net sales, representing growth of 132.4% and 114.2% from 2011 and the six months ended July 1, 2012, respectively. For 2012 and the six months ended June 30, 2013, we reported a net loss of $10.3 million and $2.4 million in net income, an improvement from net losses of $11.3 million and $6.2 million in 2011 and the six months ended July 1, 2012, respectively. For 2012 and the six months ended June 30, 2013, we reported $(5.9) million and $7.5 million in Adjusted EBITDA, an improvement from $(8.9) million and $(4.4) million in 2011 and the six months ended July 1, 2012, respectively. We have been free cash flow positive on an annual basis since 2011.

 

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Key Financial and Operating Metrics

We measure our business using both financial and operating metrics. We use these metrics to assess the progress of our business, make decisions on where to allocate capital, time and technology investments and assess the near-term and longer-term performance of our business. The key financial and operating metrics we use are:

 

     Fiscal Years     Six Months Ended  
             2010                     2011                     2012             Jul. 1, 2012     Jun. 30, 2013  
     (in thousands, except revenue per active customer and average order
value)
 

Adjusted EBITDA

   $ (3,734   $ (8,871   $ (5,920   $ (4,449   $ 7,469   

Free cash flow

   $ (1,164   $ 3,749      $ 8,425      $ (10,076   $ (4,240

Active customers

     157        791        1,580        1,154        2,229   

Revenue per active customer

   $ 117      $ 180      $ 210      $ 110      $ 122   

Total orders placed

     384        2,998        6,950        2,779        5,696   

Average order value

   $ 52.52      $ 53.48      $ 53.37      $ 52.20      $ 53.23   

Adjusted EBITDA

Adjusted EBITDA is a non-GAAP financial measure that we calculate as earnings (loss) before interest and other income and expense, taxes, depreciation, amortization and stock-based compensation expense. Adjusted EBITDA is a key measure used by management to evaluate our operating performance, generate future operating plans and make strategic decisions regarding the allocation of capital. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA facilitates operating performance comparisons on a period-to-period basis and, in the case of exclusion of the impact of stock-based compensation, excludes an item that we do not consider to be indicative of our core operating performance. Adjusted EBITDA is not a measure calculated in accordance with GAAP. Please see the section of this prospectus captioned “Selected Consolidated Financial and Other Data—Non-GAAP Financial Measures—Adjusted EBITDA” for a discussion of the limitations of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net loss the most comparable GAAP measurement, for the periods presented.

Free Cash Flow

Free cash flow is a non-GAAP financial measure that we calculate as net cash (used in) provided by operating activities less net cash used in capital expenditures. We believe free cash flow is an important indicator of our business performance because it measures the amount of cash we generate. Free cash flow also reflects changes in working capital. Please see the section of this prospectus captioned “Selected Consolidated Financial and Other Data—Non-GAAP Financial Measures—Adjusted EBITDA” for a discussion of the limitations of free cash flow and a reconciliation of free cash flow to net cash (used in) provided by operating activities, the most directly comparable GAAP financial measure.

Active Customers

We define an active customer as an individual customer who has purchased from us at least once in the last year. In any particular period, we determine our number of active customers by counting the total number of customers who have made at least one purchase in the preceding 12 month period, measured from the last date of such period. We view the number of active customers as a key indicator of our growth, the reach of our sites, the value proposition and consumer awareness of our brand, the continued use of our sites by our customers and their desire to purchase our products. Our number of active customers drives both net sales and our appeal to vendors.

 

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Revenue Per Active Customer

We define revenue per active customer as our total net sales divided by our total number of active customers in any particular period. We view revenue per active customer as a key indicator of our customers’ pattern of use of our sites to purchase our products and a measure of our customers’ demand. It is important to note that the sum of the quarterly revenue per active customer amounts does not match our annual revenue per active customer amount. Each quarter has a different number of active customers which makes the sum of the quarterly calculations result in a different amount than the annual calculation.

Total Orders Placed

We define total orders placed as the total number of customer orders placed by our customers in any period. We view total orders placed as a key indicator of the velocity of our business and an indication of the desirability of our products and sites to our customers. We recognize revenue when an order is delivered and therefore total orders placed, together with average order value, is an indicator of the net sales we expect to recognize in a given period. Total orders placed and total orders delivered in any given period may differ slightly due to orders that are in transit at the end of any particular period.

Average Order Value

We define average order value as the sum of the total order values (including shipping and handling charges) in a given period divided by the total orders placed in that period. We view average order value as a key indicator of the desirability of our products and sites to our customers.

Factors Affecting Our Performance

Ability to Attract Site Visitors at Reasonable Cost

To increase our sales, expand our market presence and grow our business profitably, we must continue to acquire email subscribers, users of our mobile applications and customers at reasonable costs. We use a wide range of paid and unpaid marketing channels, including affiliate channels and partners, customer referrals, direct navigation, display advertising, key word search campaigns, search engine optimization, social media and television ads, to attract potential new customers to our sites. In the six months ended June 30, 2013, 76% of the U.S. daily visitors to our sites came via our email or mobile “push” communications or other unpaid sources, such as direct navigation and search engine optimization. We must maintain reasonable costs for these marketing efforts relative to the net sales we expect to derive from these visitors, once we convert them to customers. Failure to effectively attract new visitors, email subscribers and users of our mobile applications and convert them into customers on a cost-efficient basis would adversely affect our sales growth and operating results.

Customer Activation and Repeat Behavior

Once we have attracted potential new customers to our sites, and enrolled them as email subscribers or users of our mobile applications, our goal is to convert them into active customers and then encourage repeat purchases. We do this through a combination of strategies, including email and mobile “push” communications, personalized retargeting email messaging and other broad-based advertising campaigns.

To illustrate our costs of acquiring customers and the contribution to our operating results, we compared the estimated net sales and contribution margin generated from email subscribers that we

 

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acquired during the first quarter of 2011, which we refer to as our Q1 2011 cohort, to the total marketing expenses we incurred to acquire those subscribers. We chose this individual cohort to illustrate broader cohort performance because it provides more historical data than more recent cohorts and it is not in the top quartile of historical cohort results.

Contribution margin is a non-GAAP financial measure that we define as gross margin less merchant processing fees and our general and administrative expenses associated with our merchandising, customer service, order fulfillment and studio operations. We measure cohort return on investment, or ROI, based on contribution margin instead of gross margin because we believe it more closely matches marketing ROI. Contribution margin includes the variable expenses we believe are necessary to complete sales to customers. In addition, applying the expenses for our merchandising, studio, customer service, and fulfillment operations functions in addition to cost of goods sold provides a more conservative assessment of marketing ROI. Contribution margin has limitations as an analytical tool and you should not consider it as a substitute for analysis of our results reported under GAAP.

Our Q1 2011 cohort included 1.1 million email subscribers that we acquired in the first quarter of 2011 and which we have converted into 259,000 customers as of June 30, 2013. We initially spent $3.8 million in total marketing expenses to acquire the email subscribers in that quarter. Using estimated net sales and the total company contribution margin applied to such net sales, we estimate this cohort generated $31.3 million of U.S. net sales and $4.9 million of contribution margin in fiscal year 2011, $39.0 million of U.S. net sales and $6.3 million of contribution margin in fiscal year 2012, and $23.0 million of U.S. net sales and $4.3 million of contribution margin in the six months ended June 30, 2013. In the aggregate, we estimate our Q1 2011 cohort has generated $93.3 million of U.S. net sales and $15.4 million of contribution margin through June 30, 2013. These results are reflected in the graph below:

 

LOGO

We believe that the trends reflected by this cohort are illustrative of the value of our customer base; however, as we increase our subscriber and user base we may spend more in marketing costs to acquire new email subscribers and users of our mobile application or may see a change in the rate of activation from subscribers to active customers or a change in our customers’ repeat purchase behaviors. A change in purchasing patterns by email subscribers or users of our mobile application who have not yet made their first purchase or by existing customers could have a significant negative impact on our net sales and operating results.

 

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The following table reflects the reconciliation of gross profit to contribution margin for each of the periods indicated:

 

     Fiscal Year     Six Months
Ended
 
     2011     2012     Jun. 30, 2013  
     (in thousands)  

Gross profit

   $ 37,596      $ 90,297      $ 80,515   

Less:

      

Merchant processing fees

     (4,168     (8,155     (6,481

General and administrative expenses for merchandising, customer service, order fulfillment, and studio

     (11,369     (28,772     (22,873
  

 

 

   

 

 

   

 

 

 

Contribution margin

   $ 22,059      $ 53,370      $ 51,161   
  

 

 

   

 

 

   

 

 

 

Contribution margin % of net sales

     15.5     16.1     18.8

Estimated net sales for Q1 2011 cohort(1)

   $ 31,292      $ 38,955      $ 23,039   

Estimated contribution margin for Q1 2011 cohort

   $ 4,850      $ 6,272      $ 4,333   

 

(1) Estimated net sales for the Q1 2011 cohort have been calculated by taking the gross order value for all orders placed from customers in this cohort for each fiscal period listed and applying an estimate for returns, discounts, cancellations, and the timing of revenue recognition, which is based on orders delivered.

We consider contribution margin to be more indicative of variable profit than gross margin. While gross margin includes cost of goods sold, it does not include all variable expenses required to complete the sales to our customers. Measuring the marketing investment associated with acquiring new customers purely against the gross margin could lead to the exclusion of costs that we feel should be considered when evaluating marketing performance and future marketing investments.

Product Mix

Our products and categories have a range of margin profiles. Historically, variations in product mix and product or category margins have not generally been a significant driver of our business results. Going forward, however, shifts in product mix due to seasonality, purchasing trends, results of individual events or changes in the product margins of certain categories could affect our overall operating results or growth rates in a positive or negative manner. Internationally, we have limited results to evaluate whether product mix and product or category margins will be similar to those in our U.S. business and to the extent they are different, we may see an impact to our operating results.

Growth of Mobile Commerce

We expect that our customers will increasingly access our sites using mobile devices. In the second quarter of 2013, approximately 42% of our U.S. orders were placed from a mobile device, up from approximately 39% in the first quarter of 2013 and approximately 31% for fourth quarter of 2012. From inception through June 30, 2013, customers who access our sites through a mobile device have typically had a higher lifetime value. Due to the relative newness of smartphones, tablets and mobile shopping in general, we do not know if this trend will continue or whether it is a result of our mobile interface or simply indicative of a customer demographic that is an early adopter of mobile commerce. If we are unable to continue to attract customers who are predisposed to engage in mobile shopping or if over the longer term mobile shoppers are not more active than other customers, our sales growth rate and operating results could be negatively affected.

 

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Investment in Growth

We have aggressively invested in the growth of our business, and we intend to continue to do so. We anticipate that our operating expenses will increase substantially as we continue to expand our organization size in general, and our merchandising, technology, studio and fulfillment operations in particular. These increased expenses will result primarily from hiring additional employees, further developing our technology and scaling our fulfillment centers as our business grows. In addition, we may invest in infrastructure or capabilities that we believe will yield returns in the long term but for which there is not a near-term return.

Components of Our Results of Operations

Net Sales

Net sales consist primarily of sales of children’s apparel, women’s apparel and other product categories, such as toys, infant gear, kitchen accessories and home décor. We recognize product sales at the time title transfers to the customer, which is generally at delivery. Net sales represent the sales of these items plus shipping and handling charges to customers, net of estimated returns and promotional discounts. Net sales are primarily driven by growth in our active customers, the frequency with which customers purchase and average order value. Net sales also include sales generated from the sale of services events, which are primarily electronic vouchers or access codes for our customers to redeem directly with the vendor. Net sales of services events have not been material to date.

Cost of Sales

Cost of sales consists of our purchase price for merchandise sold to customers, inbound and outbound shipping and handling costs, shipping supplies and fulfillment costs. Fulfillment costs represent those costs incurred in operating and staffing the fulfillment centers, including costs attributed to receiving, inspecting, picking, packaging and preparing customer orders for shipment. Cost of sales also includes direct and indirect labor costs for fulfillment center oversight, including payroll and related benefit costs and stock-based compensation expense. Cost of sales are primarily driven by growth in orders placed by customers, the mix of the product available for sale on our sites and transportation costs related to delivering orders to our customers.

Marketing Expenses

Marketing expenses consist primarily of targeted online marketing costs, such as display advertising, key word search campaigns, search engine optimization and social media, and offline marketing costs, such as print, radio and television advertising. Marketing expenses also include payroll and related benefit costs and stock-based compensation expense for our employees involved in marketing activities. Marketing expenses are primarily driven by investments to grow and retain our customer base.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist primarily of payroll and related benefit costs and stock-based compensation expense for our employees involved in general corporate functions including customer service, merchandising, studio and technology, as well as costs associated with the use by these functions of facilities and equipment, including depreciation and rent. Selling, general and administrative expenses are primarily driven by increases in headcount required to support business growth.

 

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Interest (Expense) Income, Net

Interest (expense) income, net consists primarily of interest earned on cash, cash equivalents and short-term investments held by us.

Other (Expense) Income, Net

Other (expense) income, net consists primarily of income earned from our corporate purchasing card and foreign currency gains (losses).

Fiscal Year; Geographic Segments

Beginning with our fiscal year 2011, our fiscal year ends on the Sunday closest to December 31. Each fiscal year consists of four 13-week quarters, with one extra week added in the fourth quarter every five to six years. Our fiscal year 2012 ended on December 30, 2012, our fiscal year 2011 ended on January 1, 2012 and our fiscal year 2010 ended on December 31, 2010.

We organize our operations in two geographic segments. The U.S. segment consists of amounts earned from product and services sales through our U.S.-focused sites, including sales from the sites to customers in the United States and Canada and, through a third-party service provider, over 50 other countries. The U.K. segment consists of amounts earned from product and services sales through our U.K.-focused sites, including sales from the sites to customers in the United Kingdom and throughout Europe.

Results of Operations

The following tables set forth our results of operations for the periods presented and express the relationship of certain line items as a percentage of net sales for those periods. The period-to-period comparison of financial results is not necessarily indicative of future results.

 

     Fiscal Years     Six Months Ended  
     2010     2011     2012     Jul. 1, 2012     Jun. 30, 2013  
     (in thousands)  

Net sales

   $ 18,376      $ 142,545      $ 331,240      $ 126,993      $ 272,021   

Cost of sales

     12,574        104,949        240,943        91,252        191,506   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     5,802        37,596        90,297        35,741        80,515   

Operating expenses:

          

Marketing expenses

     4,897        20,228        37,780        15,600        28,056   

Selling, general and administrative expenses

     7,112        28,905        63,071        26,499        50,069   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     12,009        49,133        100,851        42,099        78,125   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

     (6,207     (11,537     (10,554     (6,358     2,390   

Interest (expense) income, net

     (169     20        43        16        64   

Other (expense) income, net

     (627     203        176        180        (48
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (7,003   $ (11,314   $ (10,335   $ (6,162   $ 2,406   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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     Fiscal Years     Six Months Ended  
     2010     2011     2012     Jul. 1, 2012     Jun. 30, 2013  

Net sales

     100.0     100.0     100.0     100.0     100.0

Cost of sales

     68.4        73.6        72.7        71.9        70.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     31.6        26.4        27.3        28.1        29.6   

Operating expenses:

          

Marketing expenses

     26.7        14.2        11.4        12.3        10.3   

Selling, general and administrative expenses

     38.7        20.3        19.0        20.9        18.4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     65.4        34.5        30.4        33.2        28.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

     (33.8     (8.1     (3.1     (5.0     0.9   

Interest (expense) income, net

     (0.9                            

Other (expense) income, net

     (3.4     0.2               0.1          
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

     (38.1 )%      (7.9 )%      (3.1 )%      (4.9 )%      0.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comparison of the Six Months Ended July 1, 2012 and June 30, 2013

Net Sales

 

     Six Months Ended      Change  
     Jul. 1, 2012      Jun. 30, 2013      $      %  
    

(dollars in thousands)

 

Net sales

   $ 126,993       $ 272,021       $ 145,028         114.2

The increase in net sales was primarily due to sales to a much larger group of customers, as the number of active customers increased 93.1% as of June 30, 2013 compared to the number of active customers as of July 1, 2012. Additionally, revenue per active customer increased 10.9% for the six months ended June 30, 2013 compared with the six months ended July 1, 2012. Net sales also increased as a result of the increase in average order value for the six months ended June 30, 2013 compared with the six months ended July 1, 2012.

Cost of Sales

 

     Six Months Ended     Change  
     Jul. 1, 2012     Jun. 30, 2013     $      %  
    

(dollars in thousands)

 

Cost of sales

   $ 91,252      $ 191,506      $ 100,254         109.9

Percentage of net sales

     71.9     70.4     

Of the increase in cost of sales, $75.9 million was due to the increase in products sold to our larger customer base. In addition, shipping and fulfillment costs increased $24.4 million as a result of the increase in products sold during the period.

Marketing Expenses

 

     Six Months Ended     Change  
     Jul. 1, 2012     Jun. 30, 2013     $      %  
    

(dollars in thousands)

 

Marketing expenses

   $ 15,600      $ 28,056      $ 12,456         79.8

Percentage of net sales

     12.3     10.3     

The increase in marketing expenses was primarily due to the increased number of new email subscribers acquired through paid online marketing channels, including display advertising, key word

 

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search campaigns, search engine optimization and social media. To a lesser extent, marketing expense increased due to an increase in personnel costs.

Selling, General and Administrative Expenses

 

     Six Months Ended     Change  
     Jul. 1, 2012     Jun. 30, 2013     $      %  
     (dollars in thousands)  

Selling, general and administrative expenses

   $ 26,499      $ 50,069      $ 23,570         88.9

Percentage of net sales

     20.9     18.4     

Of the increase in sales, general and administrative expenses, $14.3 million was due to the increase in salaries and related benefits and stock-based compensation expense for customer service, merchandising, studio and technology personnel as we continued to increase our headcount across functions to support business growth. To a lesser extent, this increase was attributable to a $3.7 million increase in professional services costs as a result of business growth and a related increase in business complexity and a $3.2 million increase in our merchant processing fees, which increase in total dollars as sales increase.

Comparison of Fiscal Years 2012, 2011 and 2010

Net Sales

 

     Fiscal Years      Change  
     2010      2011      2012      2010 to 2011     2011 to 2012  
     (dollars in thousands)  

Net sales

   $ 18,376       $ 142,545       $ 331,240       $ 124,169         675.7   $ 188,695         132.4

2012 Compared to 2011.    The increase in net sales was primarily a result of sales to a much larger group of customers, as the number of our active customers increased 99.7% in 2012 compared to 2011. Additionally, revenue per active customer increased 16.7% in 2012 compared to 2011.

2011 Compared to 2010.    The increase in net sales was primarily due to sales to a much larger group of customers, as the number of active customers increased 403.8% in 2011 compared to 2010. Additionally, revenue per active customer increased 53.8% in 2011 compared to 2010. To a lesser extent, net sales increased as a result of the increase in average order value during 2011 compared to 2010.

Cost of Sales

 

     Fiscal Years     Change  
     2010     2011     2012     2010 to 2011     2011 to 2012  
    

(dollars in thousands)

        

Cost of sales

   $ 12,574      $ 104,949      $ 240,943      $ 92,375         734.7   $ 135,994         129.6

Percentage of net sales

     68.4     73.6     72.7          

2012 Compared to 2011.    Of the increase in cost of sales, $101.3 million was due to the increase in products sold to our larger customer base. In addition, shipping and fulfillment costs increased $34.7 million as a result of higher overall level of net sales and the opening of our own fulfillment operations. In November 2011 and January 2012, we opened our fulfillment operations in Nevada and Ohio and discontinued our relationship with a third-party fulfillment company in April 2012. This allowed us to gain better control over our fulfillment operations and costs, which increased during the first part of the year as a result of operating three fulfillment centers during this transition to our own fulfillment operations.

 

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2011 Compared to 2010.    Of the increase in cost of sales, $65.5 million was due to the increase in products sold to our larger customer base. In addition, shipping and fulfillment costs increased $26.9 million as a result of higher overall level of net sales and an expansion of our fulfillment center infrastructure. During 2011, we transitioned from a smaller third-party fulfillment company to a larger third-party company due to significant growth in customer orders. As a result of this transition, in 2011 we experienced increases in the costs to fulfill customer orders due to the fixed costs involved in a larger fulfillment operation.

Marketing Expenses

 

     Fiscal Years     Change  
     2010     2011     2012     2010 to 2011     2011 to 2012  
     (dollars in thousands)  

Marketing expenses

   $ 4,897      $ 20,228      $ 37,780      $ 15,331         313.1   $ 17,552         86.8

Percentage of net sales

     26.7     14.2     11.4          

The increase in marketing expenses for each period was primarily due to the increased number of new email subscribers acquired through paid online marketing channels, including display advertising, key word search campaigns, search engine optimization and social media, partially offset by a decrease in the average cost to acquire a new subscriber.

Selling, General and Administrative Expenses

 

     Fiscal Years     Change  
     2010     2011     2012     2010 to 2011     2011 to 2012  
     (dollars in thousands)  

Selling, general and administrative expenses

   $ 7,112      $ 28,905      $ 63,071      $ 21,793         306.4   $ 34,166         118.2

Percentage of net sales

     38.7     20.3     19.0          

2012 Compared to 2011.    Of the increase in selling, general and administrative expenses, $19.6 million was due to the increase in salaries and related benefits and stock-based compensation expense for customer service, merchandising, studio and technology personnel as we continued to increase our headcount as a result of business growth. To a lesser extent, this increase was attributable to a $4.0 million increase in our merchant processing fees, which increase in total dollars as sales increase, a $3.4 million increase in our professional services and contract labor costs as a result of business growth and a $3.2 million increase in our rent and related facilities costs as a result of our added fulfillment operations in Nevada and Ohio.

2011 Compared to 2010.    Of the increase in selling, general and administrative expenses, $11.1 million was due to the increase in salaries and related benefits and stock compensation expense for customer service, merchandising, studio and technology personnel as we continued to increase our headcount as a result of business growth. To a lesser extent, this increase was attributable to a $4.6 million increase in our rent and related facilities costs as we expanded to larger office space in Seattle, Washington and to a larger fulfillment center space in Hebron, Kentucky; a $3.7 million increase in our merchant processing fees, which increase in total dollars as sales increase; and a $1.5 million increase in professional services and contract labor costs as a result of business growth.

Quarterly Results of Operations and Other Financial and Operations Data

The following tables set forth selected unaudited quarterly results of operations and other financial and operations data for the six quarters ended June 30, 2013, as well as the percentage that each line item represents of net sales. The information for each of these quarters has been prepared

 

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on the same basis as the audited annual financial statements included elsewhere in this prospectus and in the opinion of management, includes all adjustments, which include only normal recurring adjustments, necessary for the fair statement of our consolidated results of operations for these periods. This data should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. Our quarterly results of operations will vary in the future. These quarterly operating results are not necessarily indicative of our operating results for any future period.

 

    Three Months Ended  
    Apr. 1, 2012     Jul. 1, 2012     Sep. 30, 2012     Dec. 30, 2012     Mar. 31, 2013     Jun. 30, 2013  
    (in thousands)  

Net sales

  $ 58,564      $ 68,430      $ 75,767      $ 128,479      $ 127,012      $ 145,009   

Cost of sales

    42,238        49,014        55,804        93,887        90,400        101,106   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    16,326        19,416        19,963        34,592        36,612        43,903   

Operating expenses:

           

Marketing expenses

    7,988        7,613        11,120        11,059        15,439        12,617   

Selling, general and administrative expenses

    12,238        14,260        16,272        20,301        22,786        27,283   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    20,226        21,873        27,392        31,360        38,225        39,900   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

    (3,900     (2,457     (7,429     3,232        (1,613     4,003   

Interest income, net

    7        9        6        21        32        32   

Other income (expense), net

    46        134        5        (9     (14     (34
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

  $ (3,847   $ (2,314   $ (7,418   $ 3,244      $ (1,595   $ 4,001   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    Three Months Ended  
    Apr. 1, 2012     Jul. 1, 2012     Sep. 30, 2012     Dec. 30, 2012     Mar. 31, 2013     Jun. 30, 2013  

Net sales

    100.0     100.0     100.0     100.0     100.0     100.0

Cost of sales

    72.1        71.6        73.7        73.1        71.2        69.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    27.9        28.4        26.3        26.9        28.8        30.3   

Operating expenses:

           

Marketing expenses

    13.6        11.1        14.7        8.6        12.2        8.7   

Selling, general and administrative expenses

    20.9        20.8        21.5        15.8        17.9        18.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    34.5        31.9        36.2        24.4        30.1        27.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

    (6.7     (3.5     (9.9     2.5        (1.3     2.8   

Interest income, net

                                         

Other income (expense), net

    0.1        0.2                               
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

    (6.6 )%      (3.3 )%      (9.9 )%      2.5     (1.3 )%      2.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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    Three Months Ended  
    Apr. 1, 2012     Jul. 1, 2012     Sep. 30, 2012     Dec. 30, 2012     Mar. 31, 2013     Jun. 30, 2013  
   

(in thousands, except revenue per active customer

and average order value)

 

Other Financial and Operations Data

           

Adjusted EBITDA(1)

  $ (3,112   $ (1,337   $ (6,190   $ 4,719      $ 452      $ 7,017   

Free cash flow(2)

  $ (4,385   $ (5,691   $ 5,463      $ 13,038      $ 604      $ (4,844

Active customers

    1,018        1,154        1,344        1,580        1,906        2,229   

Revenue per active customer

  $ 58      $ 59      $ 56      $ 81      $ 67      $ 65   

Total orders placed

    1,410        1,369        1,843        2,328        2,881        2,815   

Average order value

  $ 52.07      $ 52.32      $ 53.57      $ 54.61      $ 53.05      $ 53.42   

 

(1) Adjusted EBITDA is a non-GAAP financial measure that we calculate as earnings (loss) before interest and other income and expense, taxes, depreciation, amortization and stock-based compensation expense. Please see the section of this prospectus captioned “Selected Consolidated Financial and Other Data—Non-GAAP Financial Measures—Adjusted EBITDA” for more information.

The following table reflects the reconciliation of net (loss) income to Adjusted EBITDA:

 

    Three Months Ended  
    Apr. 1, 2012     Jul. 1, 2012     Sep. 30, 2012     Dec. 30, 2012     Mar. 31, 2013     Jun. 30, 2013  
    (in thousands)  

Net (loss) income

  $ (3,847   $ (2,314   $ (7,418   $ 3,244      $ (1,595   $ 4,001   

Excluding:

           

Interest income, net

    (7     (9     (6     (21     (32     (32

Other income (expense), net

    (46     (134     (5     9        14        34   

Taxes

                                         

Depreciation and amortization

    642        799        889        1,039        1,167        1,312   

Stock-based compensation expense

    146        321        350        448        898        1,702   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ (3,112   $ (1,337   $ (6,190   $ 4,719      $ 452      $ 7,017   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(2) Free cash flow is a non-GAAP financial measure that we calculate as net cash provided by operating activities less net cash used in capital expenditures. Please see the section of this prospectus captioned “Selected Consolidated Financial and Other Data—Non-GAAP Financial Measures—Free Cash Flow” for more information.

The following table reflects the reconciliation of net cash (used in) provided by operating activities to free cash flow:

 

    Three Months Ended  
    Apr. 1, 2012     Jul. 1, 2012     Sep. 30, 2012     Dec. 30, 2012     Mar. 31, 2013     Jun. 30, 2013  
    (in thousands)  

Net cash (used in) provided by operating activities

  $ (1,371   $ (4,676   $ 6,998      $ 15,332      $ 3,509      $ 494   

Capital expenditures

    (3,014     (1,015     (1,535     (2,294     (2,905     (5,338
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Free cash flow

  $ (4,385   $ (5,691   $ 5,463      $ 13,038      $ 604      $ (4,844
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Seasonality and Quarterly Trends

We believe our results are impacted by a pattern of increased sales during the back-to-school shopping season in the third quarter and holiday shopping season in the fourth quarter which has resulted in increased sales during a portion of the third quarter and the fourth quarter each fiscal year, which then results in lower sequential growth in the first quarter. For example, net sales in the first quarter of 2013 decreased when compared with net sales in the fourth quarter of 2012. We also believe that we

 

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have experienced slower growth in orders placed during the late spring and early summer months, although we do not believe this pattern has affected net sales. We expect this seasonality to continue in future years. Our operating income (losses) have also been affected by these historical trends because many of our expenses are relatively fixed in the short term. If our growth rates were to slow, the impact of these seasonality trends on our results of operations would become more pronounced.

Our quarterly net sales increased sequentially quarter-to-quarter for all periods presented above other than the first quarter of 2013, reflecting increased demand for our products from new and existing customers. We cannot assure you that this pattern of sequential net sales growth will continue. As noted above, the seasonality of our business has resulted in net sales for the first quarter of 2013 being less than total net sales for the fourth quarter of 2012. As a result, we believe that comparisons of net sales and results of operations for a given quarter to net sales and results of operations for the corresponding quarter in the prior fiscal year are generally more meaningful than comparisons of net sales and results of operations for sequential quarters.

Our quarterly cost of sales increased sequentially quarter-to-quarter for substantially all periods presented above, primarily due to the increase in products sold to our customers during the period as well as due to corresponding increases in fulfillment and transportation costs.

Marketing expenses generally remained consistent or increased sequentially quarter-to-quarter for the periods presented above, primarily due to increased marketing programs to acquire and retain new email subscribers, users of our mobile applications and customers.

Selling, general and administrative expenses increased sequentially quarter-to-quarter for all periods presented above, primarily due to increases in salaries and related benefits as we continued to increase our headcount as a result of business growth, increases in professional services and contract labor costs as a result of business growth and increases in our merchant processing fees which increase in total dollars as sales increase.

Our business is directly affected by the behavior of consumers. Economic conditions and competitive pressures can significantly impact, both positively and negatively, the level of demand by moms and other customers for our products. Consequently, the results of any prior quarterly or annual periods should not be relied upon as indications of our future operating performance.

Liquidity and Capital Resources

The following tables show our cash and cash equivalents, short-term investments, accounts receivable and working capital as of the dates indicated:

 

     As of  
     Jan. 1, 2012      Dec. 30, 2012      Jun. 30, 2013  
     (in thousands)  

Cash and cash equivalents

   $ 28,361       $ 96,998       $ 83,015   

Short-term investments

     14,000         8,000         18,005   

Accounts receivable

     620         3,043         4,175   

Working capital

     22,821         62,605         61,240   

As of June 30, 2013, our cash and cash equivalents were held for working capital purposes, a majority of which were held in cash deposits and money market funds. Cash held internationally as of December 31, 2010, January 1, 2012, December 30, 2012 and June 30, 2013 was immaterial. We intend to increase our capital expenditures to support the growth in our business and operations. We believe that our existing cash and cash equivalents, together with cash generated from operations, will

 

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be sufficient to meet our anticipated cash needs for at least the next 12 months. However, our liquidity assumptions may prove to be incorrect, and we could exhaust our available financial resources sooner than we currently expect. In addition, we may elect to raise additional funds at any time through equity, equity-linked or debt financing arrangements. Our future capital requirements and the adequacy of available funds will depend on many factors, including those described in the section of the prospectus captioned “Risk Factors.” We may not be able to secure additional financing to meet our operating requirements on acceptable terms, or at all.

Sources of Liquidity

Since our inception, we have financed our operations and capital expenditures primarily through cash flows generated by operations and through private sales of convertible redeemable preferred stock and common stock. Since inception, we have raised a total of $94.8 million from the sale of preferred stock and common stock, net of costs and expenses associated with such financings and net of repurchases of $43.5 million of capital stock.

Historical Cash Flows

 

     Fiscal Year     Six Months Ended  
     2010     2011     2012     Jul. 1, 2012     Jun. 30, 2013  
                 (in thousands)              

Net cash (used in) provided by operating activities

   $ (656   $ 8,864      $ 16,283      $ (6,047   $ 4,003   

Net cash (used in) provided by investing activities

     (608     (21,615     (139     1,971        (18,162

Net cash provided by financing activities

     9,903        31,955        52,493        45        158   

Effect of exchange rates

                                 18   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ 8,639      $ 19,204      $ 68,637      $ (4,031   $ (13,983
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Cash Provided by (Used in) Operating Activities

Net cash provided by (used in) operating activities in each period presented has been influenced by changes in deferred revenue, inventory, accounts payable and accrued expenses. The increase in deferred revenue for each of the periods presented was primarily due to an increase in customer orders during the period which had not been delivered as of the end of the period. The changes in inventory were primarily due to changes in the number of items sold, which were either in the fulfillment centers awaiting shipment to customers or in-transit to customers. The increase in accounts payable and accrued expenses during most periods was primarily due to the growth in the business during the periods presented, which primarily relate to amounts owed to vendors for products sold on our sites, transportation expenses for products being shipped into and out of our fulfillment centers and member and customer acquisition marketing expenses. For the six months ended July 1, 2012 and June 30, 2013, accounts payable and accrued expenses decreased due to timing of payments to vendors during the period.

Net cash provided by operating activities was $4.0 million in the six months ended June 30, 2013, as a result of net income of $2.4 million, stock-based compensation expense and other non-cash charges of $5.1 million and changes in our operating assets and liabilities that used $3.5 million in cash. Inventory increased $2.5 million, accounts receivable increased $1.1 million and accounts payable decreased $5.1 million offset by increases in deferred revenue of $3.5 million and accrued expenses of $2.9 million. The increase in accounts receivable represented funds collected from our credit card processor, which

 

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were in-transit to us. The decrease in accounts payable represented additional payments to vendors, which can fluctuate depending on payment terms and timing of when we run events.

Net cash used in operating activities was $6.0 million in the six months ended July 1, 2012, as a result of net loss of $6.2 million, stock-based compensation expense and other non-cash charges of $1.9 million and changes in our operating assets and liabilities that used $1.8 million in cash. Inventory increased $2.0 million, accounts receivable increased $2.4 million and accounts payable decreased $2.1 million, partially offset by increases in deferred revenue of $3.6 million and accrued expenses of $2.2 million. The increase in accounts receivable represented funds collected from our credit card processor, which were in-transit to us. The decrease in accounts payable represents additional payments to vendors, which can fluctuate depending on payment terms and timing of when we run events.

Net cash provided by operating activities was $16.3 million in 2012, as a result of net loss of $10.3 million, stock-based compensation expense and other non-cash charges of $4.7 million and changes in our operating assets and liabilities that provided $21.9 million in positive cash flow. Accounts payable increased $14.2 million, accrued expenses increased $8.3 million, and deferred revenue increased $6.1 million, partially offset by a $3.0 million increase in inventory and a $2.4 million increase in accounts receivable. The increase in accounts payable and accrued expenses was primarily due to the growth in the business during 2012. The increase in accounts receivable represented funds collected from our credit card processor, which were in-transit to us.

Net cash provided by operating activities was $8.9 million in 2011, as a result of net loss of $11.3 million, stock-based compensation expense and other non-cash charges of $2.7 million and changes in our operating assets and liabilities that provided $17.5 million in positive cash flow. Accounts payable increased $16.3 million, accrued expenses increased $4.6 million and deferred revenue increased $2.5 million, partially offset by a $4.0 million increase in inventory.

Net cash used in operating activities was $0.7 million in 2010, as a result of net loss of $7.0 million, stock-based compensation expense and other non-cash charges of $3.3 million and changes in our operating assets and liabilities that provided $3.1 million in positive cash flow. Accrued expenses increased $2.1 million and deferred revenue increased $1.0 million.

Net Cash (Used in) Provided by Investing Activities

Our primary investing activities have consisted of purchases of property and equipment to support our fulfillment centers and our overall business growth. Purchases of property and equipment may vary from period-to-period due to timing of our expansion of our operations. Additionally, we have invested some of our excess cash balances in money market funds and commercial paper.

Net cash used in investing activities was $18.2 million in the six months ended June 30, 2013. This was primarily attributable to purchases of short-term investments related to excess cash of $18.0 million and $8.2 million in capital expenditures, which related to additional equipment for our fulfillment centers as well as software purchases and internally developed software offset by proceeds from maturities of securities of $8.0 million, which were transferred to cash.

Net cash provided by investing activities was $2.0 million in the six months ended July 1, 2012. This was primarily attributable to the proceeds from available for sale investments, which were transferred to cash, of $14.0 million and net proceeds from restricted cash of $2.0 million offset by purchases of short-term investments related to excess cash of $10.0 million and $4.0 million in capital expenditures, which related to additional equipment for our fulfillment centers as well as software purchases and internally developed software.

 

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Net cash used in investing activities was $0.1 million in 2012. This was primarily attributable to $7.9 million in capital expenditures, which related to equipment for our fulfillment centers, software purchases, internally developed software and hardware purchases for employees and general operations offset by $5.8 million in proceeds from available for sale investments, which were transferred to cash.

Net cash used in investing activities was $21.6 million in 2011. This was primarily attributable to cash transferred into short-term investments of $14.0 million, in addition to $5.1 million in capital expenditures, which related to software purchases, internally developed software and hardware purchases for employees and general operations.

Net cash used in investing activities was $0.6 million in 2010. This was primarily attributable to $0.5 million in capital expenditures, which related to internally developed software and computer and hardware for employees and general operations, in addition to a $0.1 million increase in restricted cash.

Net Cash Provided by Financing Activities

Net cash provided by financing activities was $0.2 million in the six months ended June 30, 2013. This was primarily attributable to proceeds from the exercise of stock options.

Net cash provided by financing activities in the six months ended July 1, 2012 was primarily attributable to proceeds from the exercise of stock options.

Net cash provided by financing activities was $52.5 million in 2012. This was primarily attributable to net proceeds from preferred stock financing of $84.9 million offset by the repurchase of preferred stock from existing investors of $32.5 million.

Net cash provided by financing activities was $32.0 million in 2011. This was primarily attributable to net proceeds from preferred stock financing of $31.9 million and from common stock financing of $11.0 million offset by the repurchase of common from existing employees of $11.0 million.

Net cash provided by financing activities was $9.9 million in 2010. This was primarily attributable to net proceeds from preferred stock financing of $9.9 million.

Off Balance Sheet Arrangements

We did not have any off balance sheet arrangements in 2010, 2011 or 2012, or as of the six months ended June 30, 2013, except for operating leases as discussed below.

Contractual Obligations

We lease various office and fulfillment facilities, including our corporate headquarters in Seattle, Washington under operating lease agreements that expire from 2013 to 2017. The terms of the lease agreements provide for rental payments on a graduated basis. We recognize rent expense on a straight-line basis over the lease periods. We do not have any debt or material capital lease obligations and all of our property, equipment and software have been purchased with cash. We have no material long-term purchase obligations outstanding with any vendors or third parties. Our future minimum payments under non-cancelable operating leases for equipment and office facilities are as follows as of December 30, 2012:

 

     Payments Due by Period  
     Total      Less Than
1 Year
     1 - 3
Years
     3 - 5
Years
     More Than
5 Years
 
     (in thousands)  

Operating lease obligations(1)

   $ 15,150       $ 5,057       $ 6,654       $ 3,439       $   —   

 

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(1) The contractual obligation amounts in the table exclude our lease agreement for office space in Seattle, Washington executed on May 2, 2013. The lease term expires in 2024 and future minimum lease payments are approximately $61.0 million.

The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding. Obligations under contracts that we can cancel without a significant penalty are not included in the table above.

Critical Accounting Policies

Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, net sales, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.

We believe that the assumptions and estimates associated with revenue recognition, inventory, income taxes and stock-based compensation have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates. For further information on all of our significant accounting policies, please see Note 1 of the accompanying notes to our consolidated financial statements.

Revenue Recognition

We generate net sales from sales of children’s apparel, women’s apparel and other categories, such as toys, infant gear, kitchen accessories and home décor. We generate net sales from shipping and handling charges to our customers. We also generate net sales from the sale of services events, which are primarily electronic vouchers or access codes for our customers to redeem directly with the vendor.

We recognize revenue when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed or determinable; and (4) collectability is reasonably assured. For product sales, these criteria are met when the customer orders an item through our sites via the electronic shopping cart, funds are collected from the customer and the item is fulfilled in one of our fulfillment centers or third-party fulfillment centers, shipped and delivered to the customer. Revenue from product sales is generally recorded at the gross amount as we are the primary obligor in the arrangement with the customer, have latitude in establishing the products available for sale and the price to the customer, are responsible for ensuring the delivery of the product to the customer and assume inventory and credit risk. For services sales, these criteria are met when the customer orders an item through our sites via the electronic shopping cart, funds are collected from the customer and the voucher or access code is downloaded from our sites. Revenue from services sales is generally recorded at the net amount, or the commission earned on the voucher, as we are acting as an agent on behalf of the vendor. The vendor is ultimately responsible for fulfilling the customer order directly with the customer and assumes the inventory risk. To date, services revenues have not been material. We defer revenue when cash is collected from our customer prior to the satisfaction of the revenue recognition criteria.

To encourage customers to purchase our products and services, we periodically provide incentive offers. Generally, these promotions include dollar-off and percentage-off discounts to be applied against current purchases. We also grant merchandise credits to participants in our referral program when the customer referral results in a sale. Merchandise credits issued through the referral program

 

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typically expire in 18 months. We record these discounts and merchandise credits as reductions of sales price at the date the promotion is redeemed. Additionally, we provide customers merchandise credits to be applied against future purchases in instances in which the customer is unsatisfied with an order. In these instances, we have established a sales reserve based on our historical experience. To date, these reserves have not been significant.

Income Taxes

Deferred tax assets and liabilities are determined based on the differences between financial reporting and the tax bases of assets and liabilities and are measured using the tax rates that will be in effect when the differences are expected to reverse. Future tax benefits are recognized to the extent that realization of such benefits is considered to be more likely than not. A valuation allowance is provided on deferred tax assets if it is determined that it is more likely than not that the deferred tax asset will not be realized. We have considered future market growth, historical and forecasted earnings, future taxable income and the mix of earnings in the jurisdictions in which we operate along with prudent, feasible and permissible tax planning strategies in determining the extent to which our deferred tax assets may be realizable. Projections inherently include a level of uncertainty that could result in lower or higher than expected future taxable income. When we determine that the deferred tax assets for which there is currently a valuation allowance would be realized in the future, the related valuation allowance would be reduced and a benefit to operations would be recorded. Conversely, if we were to make a determination that we will not be able to realize a portion of our net deferred tax assets in the future (using the “more likely than not” criteria), we record an adjustment to our valuation allowance and a charge to operations in the period such determination is made.

We use a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. We consider many factors when evaluating and estimating tax positions and tax benefits, which may require periodic adjustments and which may not accurately forecast actual outcomes. We do not have any unrecognized tax benefits. If interest and penalties related to unrecognized tax benefits were incurred, such amounts would be included in our provision for income taxes.

Stock-Based Compensation

Stock-based compensation is measured at the grant date based on the fair value of the award and is recognized as expense, net of estimated forfeitures, over the requisite service period, which is generally the vesting period of the award.

Determining the fair value of stock-based awards at the grant date represent management’s best estimates, but the estimates involve inherent uncertainties and the application of management’s judgment. Changes in judgments could have a material impact on our results of operations and financial position. We use the Black-Scholes option pricing model to determine the fair value of stock options. The determination of the grant date fair value of options using an option pricing model is affected by our estimated common stock fair value as well as assumptions regarding a number of other complex and subjective variables. These variables include the fair value of our common stock, our expected stock price volatility over the expected term of the options, stock option exercise and cancellation behaviors, risk-free interest rates and expected dividends, which are estimated as follows:

 

  Ÿ  

Fair Value of Our Common Stock.    Because our stock is not publicly traded, we must estimate the fair value of our common stock, as discussed in “—Common Stock Valuations” below.

 

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  Ÿ  

Expected Term.    The expected term represents the period that our stock-based awards are expected to be outstanding. As we do not have sufficient historical experience for determining the expected term of the stock option awards granted, we have based our expected term for awards issued to employees (including members of our board of directors) on the simplified method, which represents the average period from vesting to the expiration of the stock option. For grants to nonemployees, the expected term is equal to the contractual term, which is generally ten years.

 

  Ÿ  

Expected Volatility.    As we have been a private company and do not have a trading history for our common stock, the expected stock price volatility for our common stock was estimated by taking the average historical price volatility for industry peers, which we have designated, based on daily price observations over a period equivalent to the expected term of the stock option grants. Industry peers, which we have designated, consist of several public companies in the industry similar in size, stage of life cycle and financial leverage. These industry peers were also utilized in our common stock valuations. We intend to continue to consistently apply this process using the same or similar public companies until a sufficient amount of historical information regarding the volatility of our own common stock share price becomes available, or unless circumstances change such that the identified companies are no longer similar to us, in which case more suitable companies whose share prices are publicly available would be used in the calculation.

 

  Ÿ  

Risk-free Interest Rate.    The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected term of the options for each option group.

 

  Ÿ  

Expected Dividend Yield.    We have never declared or paid any cash dividends to common stockholders and do not presently plan to pay cash dividends in the foreseeable future. Consequently, we used an expected dividend yield of zero.

If any of the assumptions used in the Black-Scholes model change significantly, stock-based compensation for future awards may differ materially compared with the awards granted previously.

The following table presents the weighted-average assumptions used to estimate the fair value of options granted during the periods presented:

 

     Fiscal Years     Six Months Ended  
     2010     2011     2012     Jul. 1, 2012     Jun. 30, 2013  

Expected volatility

     65.7     61.7     61.7     62.0     51.0

Expected term (in years)

     6.16        5.69        5.98        5.96        6.78   

Risk-free interest rate

     2.3     1.6     1.0     1.0     1.2

Expected dividend yield

                                   

Common Stock Valuations

The fair value of the common stock underlying our stock options was determined by our board of directors, which intended all options granted to be exercisable at a price per share not less than the per-share value of our common stock underlying those options on the date of grant. The valuations of our common stock were determined in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. The assumptions used in the valuation model were based on future expectations combined with management judgment. Members of the board of directors and management team have extensive business, financial and investing experience. Because there had been no public market for our common stock, the board of directors with input from management exercised significant judgment and considered numerous objective and subjective factors to determine the fair value of common stock as of the date of each option grant, including the following factors:

 

  Ÿ  

contemporaneous third-party valuations of our common stock;

 

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  Ÿ  

the prices, rights, preferences and privileges of preferred stock relative to the common stock;

 

  Ÿ  

the prices of preferred stock sold to third-party investors in arms-length transactions;

 

  Ÿ  

the prices of common stock sold to third-party investors in secondary transactions or repurchased by us in arms-length transactions;

 

  Ÿ  

our operating and financial performance;

 

  Ÿ  

current business conditions and projections;

 

  Ÿ  

our stage of development;

 

  Ÿ  

the likelihood of achieving a liquidity event for the shares of common stock underlying these stock options, such as an initial public offering or sale of the company, given prevailing market conditions;

 

  Ÿ  

any adjustment necessary to recognize a lack of marketability for common stock;

 

  Ÿ  

the market performance of comparable publicly traded companies; and

 

  Ÿ  

the U.S. and global capital market conditions.

We granted stock options with the following exercise prices between January 1, 2012 and June 30, 2013:

 

Grant Date

   Common
Shares
Underlying
Options
Granted
     Exercise
Price
Per Share
     Fair Value
Per Common
Share for
Financial
Reporting
Purposes at
Grant Date
     Intrinsic
Value Per
Underlying
Common
Share
 

February 21, 2012

     849,000       $ 1.49       $ 1.49       $   

May 16, 2012

     1,893,850         1.82         1.82           

September 6, 2012

     394,150         1.86         1.86           

November 6, 2012

     5,255,840         1.87         1.87           

December 19, 2012

     1,180,500         1.87         1.87           

February 5, 2013

     2,869,350         1.98         1.98           

May 6, 2013

     575,375         2.57         3.08         0.51   

May 16, 2013

     23,213,352         2.57         3.08         0.51   

Based upon the assumed initial public offering price of $         per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, the aggregate intrinsic value of options outstanding as of June 30, 2013 was $         million, of which $         million related to vested options and $         million related to unvested options.

In order to determine the fair value of our common stock underlying option grants issued, we determined the enterprise value, added net cash, then allocated the equity value to each class of equity securities outstanding (preferred stock, common stock and options).

For the valuations completed in December 2011, March 2012 and June 2012, the enterprise value was estimated using the market approach using the comparable company method. The market approach considers multiples of financial metrics based on both acquisitions and trading multiples of a selected peer group of publicly traded companies. These multiples are then applied to our financial metrics to derive a range of estimated enterprise values.

For the valuations completed in September 2012, December 2012, March 2013 and May 2013, the enterprise value was estimated using the market approach and the income approach. The income

 

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approach estimates the fair value of the enterprise based on the present value of our future estimated cash flows and our residual value beyond the forecast period. The residual value was based on an exit or terminal multiple observed in the comparable company method analysis. The future cash flows and residual value are discounted to their present value to reflect the risks inherent in us achieving these estimated cash flows. The discount rate was based on benchmark venture capital studies of discount rates for other companies in or nearing an initial public offering, and the calculated weighted average cost of capital.

The equity value at each valuation date through March 2013 was allocated to the shares of preferred stock, common stock and options, using the option pricing method. An option pricing method treats common stock and convertible preferred stock as call options on a business, with exercise prices based on the liquidation preference of the convertible preferred stock. Therefore, the common stock has value only if the funds available for distribution to the stockholders exceed the value of the liquidation preference at the time of a liquidity event, such as a merger, sale or initial public offering, assuming the business has funds available to make a liquidation preference meaningful and collectible by the stockholders. The common stock is modeled as a call option with a claim on the business at an exercise price equal to the remaining value immediately after the convertible preferred stock is liquidated. The option pricing method uses the Black-Scholes option pricing model to price the call option. Estimates of the volatility applied in the Black-Scholes option pricing model were based on available information on the volatility of common stock of comparable, publicly traded companies. Management and the third-party valuation firm considered operational area, size, business model, industry, the description of comparable companies’ respective businesses set forth in public filings and the stage of their business efforts in selecting comparable companies. Although none of the comparable companies mirror our relatively unique business model, similar retailers (both online and traditional stores) were used in the peer group. A group of nine to eleven comparable companies was consistently used in both the market and income approaches. In addition, we considered secondary sales of our common stock that occurred during the relevant period. We selected the option pricing method to allocate the equity value to the common stock due to uncertainty surrounding potential exit timings. Lastly, we applied a discount for lack of marketability.

The equity value in May 2013 was allocated to the shares of preferred stock, common stock and options using both the option pricing method and the probability-weighted expected return method (“PWERM”) and then weighted to arrive at overall equity value. Under the PWERM, the value of equity is estimated based on analysis of future values for the enterprise assuming various possible outcomes and timing of those outcomes. Management and the third-party valuation firm considered two initial public offering scenarios based on information obtained from third-parties. Additionally, we applied a discount for lack of marketability.

We believe we applied a reasonable valuation method to determine the stock option exercise prices on the respective stock option grant dates. A combination of factors led to changes in the fair value of our common stock. Certain of the significant factors considered by our board of directors to determine the fair value per share of our common stock for purposes of calculating stock-based compensation costs during this period include:

February 2012

The U.S. economy and financial markets continued to gather strength during the fourth quarter of 2011 heading into the first quarter of 2012. We also continued to see strength in our business during this period. Total net sales increased from $36.5 million for the three months ended October 2, 2011 to $59.2 million for the three months ended January 1, 2012. We and a third-party valuation firm performed a valuation of our common stock as of December 31, 2011. We weighted the comparable company revenue multiple at 70% and the transaction revenue multiple at 30%. The transaction

 

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revenue multiple was weighted at only 30% due to the limited number of relevant acquisition comparables. We used the option pricing method to allocate the equity value to the common stock, and then applied a lack of marketability discount of 16%. The analysis resulted in an equity value of approximately $835 million and an estimated fair value of common stock of $1.488 per share. Based on the valuation and other factors described herein, our board of directors granted options to purchase 849,000 shares of common stock with an exercise price of $1.488 on February 21, 2012.

May 2012

The U.S. economy and financial markets continued to gather strength during the first quarter of 2012 heading in the second quarter. We also continued to see strength in our business during this period. Total net sales remained consistent at $59.2 million for the three months ended January 1, 2012 and $58.6 million for the three months ended April 1, 2012. We and a third-party valuation firm performed a valuation of our common stock as of March 31, 2012 using the market approach. We weighted the comparable company revenue multiple at 70% and the transaction multiple at 30%. The transaction revenue multiple was weighted at only 30% due to the limited number of relevant acquisition comparables. We used the option pricing method to allocate the equity value to the common stock, and then applied a lack of marketability discount of 15%. The analysis resulted in an equity value of approximately $984 million and an estimated fair value of common stock of $1.82 per share. In addition, in April 2012, one of our employees sold shares of common stock to an existing investor for $1.802 per share. Based on the valuation, such sale of shares and other factors described herein, our board of directors granted options to purchase 1,893,850 shares of common stock with an exercise price of $1.82 per share.

September 2012

The U.S. economy and financial markets continued to strengthen during the second and third quarters of 2012. We also continued to see strength in our business during this period. Total net sales increased from $58.6 million for the three months ended April 1, 2012 to $68.4 million for the three months ended July 1, 2012. We and a third-party valuation firm performed a valuation of our common stock as of June 30, 2012 using the market approach. Consistent with the prior valuation, we weighted the comparable company revenue multiple at 70% and the transaction revenue multiple at 30%. The transaction multiple was weighted at only 30% due to the limited number of relevant acquisition comparables. The comparable company multiple remained at 70% due primarily to the number of relevant public company comparables and how closely they relate to our company. We used the option pricing method to allocate the equity value to the common stock, and then applied a lack of marketability discount of 15%. The analysis resulted in an equity value of approximately $1.0 billion and an estimated fair value of common stock of $1.86 per share. Based on the valuation and other factors described herein, our board of directors granted options to purchase 394,150 shares of common stock with an exercise price of $1.86 per share.

November 2012

The U.S. economy and financial markets continued to strengthen during the third quarter of 2012. We also continued to see strength in our business during this period. Total net sales increased from $68.4 million for the three months ended July 1, 2012 to $75.8 million for the three months ended September 30, 2012.

In October 2012, we received a term sheet for our Series D preferred stock financing. In November 2012, we completed the Series D preferred stock financing. Total proceeds were $85 million at a price of $2.0744 per share. In connection with the financing, we agreed to use up to $40 million of the proceeds to repurchase preferred stock from certain existing investors at a purchase price of

 

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$1.7632. In November 2012 we repurchased 18.4 million shares of our Series Seed preferred stock and Series A preferred stock.

We and a third-party valuation firm performed a valuation of our common stock as of September 30, 2012 utilizing both the market approach and the income approach. We weighted the market approach at 75% and the income approach at 25%. The market approach was weighted at 75% due to our consistent execution of our near-term business and revenue growth plan. We used the option pricing method to allocate the equity value to the common stock, and then applied a lack of marketability discount of 15%. The analysis resulted in an equity value of approximately $1.0 billion and an estimated fair value of common stock of $1.87 per share. Based on this valuation, the Series D preferred stock financing and other factors described herein, our board of directors granted options to purchase 5,255,840 shares of common stock with an exercise price of $1.87 per share.

December 2012

The U.S. economy and financial markets continued to strengthen during the fourth quarter of 2012. We also continued to see strength in our business during this period. In December 2012, an employee sold shares of common stock to an existing investor at a purchase price of $1.87 per share. Based on the valuation as of September 30, 2012, the Series D preferred stock financing in November 2012 and other factors described herein, our board of directors granted options to purchase 1,180,500 shares of common stock with an exercise price of $1.87 per share.

February 2013

The U.S. economy and financial markets continued to strengthen in early 2013. We also continued to see strength in our business during this period. Total net sales increased from $75.8 million for the three months ended September 30, 2012 to $128.5 million for the three months ended December 30, 2012. We and a third-party valuation firm performed a valuation of our common stock as of December 31, 2012 utilizing both the market approach and the income approach. Consistent with the prior valuation, we weighted the market approach at 75% and the income approach at 25%. We used the option pricing method to allocate the equity value to the common stock, and then applied a lack of marketability discount of 15%. The analysis resulted in an equity value of approximately $1.1 billion and an estimated fair value of common stock of $1.98 per share. Based on the valuation and other factors described herein, our board of directors granted options to purchase 2,869,350 shares of common stock with an exercise price of $1.98 per share.

March 2013

The U.S. economy and financial markets continued to strengthen during the first quarter of 2013. We also continued to see strength in our business during this period. Total net sales remained consistent at $127.0 million for the three months ended March 31, 2013 compared with $128.5 million for the three months ended December 30, 2012. We and a third-party valuation firm performed a valuation of our common stock as of December 31, 2012 utilizing both the market approach and the income approach. Consistent with the prior valuation, we weighted the market approach at 75% and the income approach at 25%. We used the option pricing method to allocate the equity value to the common stock, and then applied a lack of marketability discount of 12.5%. The analysis resulted in an equity value of approximately $1.4 billion and an estimated fair value of common stock of $2.57 per share.

 

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May 2013

The U.S. economy and financial markets remained strong into the second quarter of 2013. We also continued to see strength in our business during this period. Based on the valuation as of March 31, 2013 and other factors described herein, our board of directors granted options to purchase 575,375 shares of common stock on May 6, 2013 and 23,213,352 shares of common stock on May 16, 2013 with an exercise price of $2.57 per share.

Subsequent to the May 2013 option grants, we re-evaluated our estimate of fair value of our common stock for financial reporting purposes as a result of our improving financial performance, our belief that an initial public offering was increasingly viable and the generally improving conditions in the capital markets in the second quarter of 2013. We and a third-party valuation firm performed a valuation of our common stock as of May 16, 2013 utilizing a hybrid approach of both the market approach and the income approach, in a consistent manner with our prior valuation, and combined this with the PWERM. We then weighted the result of the market approach and the income approach at 60% and the PWERM at 40%. The resulting equity value was $1.7 billion. The analysis resulted in an estimated fair value of common stock of $3.08 per share. As a result of our re-evaluation, we determined that the fair value of our common stock was higher than the fair market values determined in good faith by our board of directors for the options granted in May 2013. As a result, we retroactively adjusted the fair value per common share as of that date and recognized additional stock compensation expense for the six months ended June 30, 2013.

Quantitative and Qualitative Disclosures about Market Risk

We have operations both within the United States and internationally, and we are exposed to market risks in the ordinary course of our business, including the effects of foreign currency fluctuations, interest rate changes and inflation. Information relating to quantitative and qualitative disclosures about these market risks is set forth below.

Interest Rate Sensitivity

Cash and cash equivalents and short-term investments were held primarily in cash deposits and money market funds. The fair value of our cash, cash equivalents and short-term investments would not be significantly affected by either an increase or decrease in interest rates due mainly to the short-term nature of these instruments.

Foreign Currency Risk

Most of our sales are denominated in U.S. dollars, and therefore, our revenues are not currently subject to significant foreign currency risk. Our operating expenses are denominated in the currencies of the countries in which our operations are located, and may be subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the British Pound and European Euro. Fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in our statement of operations. To date, foreign currency transaction gains and losses have not been material to our financial statements, and we have not engaged in any foreign currency hedging transactions.

Inflation

We do not believe that inflation has had a material effect on our business, financial condition or results of operations. We continue to monitor the impact of inflation in order to minimize its effects

 

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through pricing strategies, productivity improvements and cost reductions. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.

Emerging Growth Company Status

Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we are choosing to “opt out” of such extended transition period, and as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

 

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BUSINESS

Overview

We launched the zulily website in January 2010 with the goal of revolutionizing the way moms shop. Today, we are one of the largest standalone e-commerce companies in the United States. Through our desktop and mobile websites and mobile applications, which we refer to as our “sites,” we help our customers discover new and unique products at great values that they would likely not find elsewhere. We provide moms a fun and entertaining shopping experience with a fresh selection of over 4,000 product styles offered on a typical day through various flash sales events, which are limited-time curated online sales of selected products launched each day on our sites. We source our merchandise from thousands of vendors, including emerging brands and smaller boutique vendors, as well as larger national brands. By bringing together millions of moms and a daily selection of products chosen from our vendor base, we have built a large scale and uniquely curated marketplace. Since inception through June 30, 2013, we have worked with over 10,000 brands, featured over 1.6 million product styles and sold over 42 million items to over 2.9 million customers across our platform.

zulily is a disruptive e-commerce company built to address a retail experience for moms that we believe has become uninspiring due to the concentration of sales among mass retailers and the commoditization of merchandise. While unique and differentiated merchandise for moms can still be found at boutique retailers, discovering these products can be time consuming, and the merchandise is often expensive. We distinguish ourselves by offering a fresh and affordable selection of products that inspires moms to shop. Our merchandising team constantly scours the market for new and unique brands in children’s apparel, women’s apparel and other product categories, such as toys, infant gear, kitchen accessories and home décor. Once we find these brands, we invest in photography and editorial content to tell each brand’s story in our fun and engaging voice. We then sell these products through our flash sales model, creating an impulse-driven shopping experience that delivers entertainment, value and convenience for moms anytime and anywhere. Increasingly, moms are shopping at zulily throughout their day from their mobile devices, and as a result we have optimized our platform for mobile shopping. Our focus on delivering a better and more entertaining shopping experience for moms has driven strong new customer growth as well as repeat purchasing by existing customers, which have been the keys to the differentiated economics of our business.

We have become a trusted partner for our vendors because we provide them with access to a large and highly engaged consumer audience, creating significant brand exposure and revenue opportunities. Many of our vendors are small-to-medium sized businesses and may have difficulty reaching a targeted audience of moms on a broad scale. Our vendors can reach this audience while also eliminating wholesale, direct sales and fulfillment costs for the products they sell through our platform, making zulily an attractive channel for them.

To best serve our customers and vendors, we have in place a custom, fully integrated fulfillment infrastructure consisting of our receiving, sorting, inventory management and repackaging systems which are coordinated by our proprietary fulfillment management software. Our supply chain solution efficiently handles the small-to-medium lot sizes and high inventory turnover required by our constantly changing, limited-time product offerings. We operate a minimal inventory, intermediary model where we typically take customer orders before we purchase inventory from our vendors. As a result, we are able to offer a much larger selection of products to our customers and to generate greater sales for our vendors, who are able to match a broader range of their product supply to actual customer demand.

Continual innovation through investment in technology is core to our business. We have custom built a proprietary and scalable technology platform to enable our unique business model. Our technology is built to handle the significant spikes in site traffic and transactions which frequently occur

 

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when we launch our events each day. In order to enhance relevance for our customers, we have developed extensive data collection and analytics capabilities which allow us to anticipate the shopping preferences of our customers and then personalize their site experience. Our technology platform is also designed to meet the rapid order fulfillment needs that are unique to our flash sales model. We have invested in a wide range of proprietary and third-party technology tools to, among other things, support our vendor base, protect the privacy of our customers and data, manage our large scale email notification system and deliver an optimized mobile experience to our customers.

At the scale at which we now operate, the combination of our customers, vendors and fulfillment infrastructure has resulted in powerful network effects, which we believe is a significant competitive advantage. Our large and growing customer base in a highly desirable demographic has allowed us to attract and retain vendors offering high quality and unique products. The breadth and quality of our vendors’ merchandise, which we curate daily to provide a fresh selection, enables us to attract new and repeat customers. The more revenue we generate, the more we are able to reinvest in and enhance our merchandising, product, technology and operations while driving significant cost efficiencies, thus allowing us greater operating leverage and the ability to offer a broader selection, more affordable prices and a higher level of customer service. This superior customer experience drives greater customer growth, increased loyalty and repeat purchasing, which in turn attracts more vendors.

We have achieved the following significant milestones:

 

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As of June 30, 2013, we had 2.2 million active customers, or customers who had purchased at least once in the last year, an increase of 93.1% from the 1.2 million active customers we had as of July 1, 2012.

 

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For the 12 months ended June 30, 2013, we generated $214 of revenue per active customer, a 10.9% increase from the $193 of revenue per active customer we generated during the 12 months ended July 1, 2012.

 

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For the 12 months ended June 30, 2013, 82.9% of our U.S. orders were placed by customers who had previously purchased from us, up from 79.1% during the 12 months ended July 1, 2012.

 

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In the second quarter of 2013, approximately 42% of our U.S. orders were placed from a mobile device, up from approximately 39% in the first quarter of 2013 and approximately 31% in the fourth quarter of 2012.

For 2012 and the six months ended June 30, 2013, we reported $331.2 million and $272.0 million in net sales, representing growth of 132.4% and 114.2% from 2011 and the six months ended July 1, 2012, respectively. For 2012 and the six months ended June 30, 2013, we reported a net loss of $10.3 million and $2.4 million in net income, an improvement from net losses of $11.3 million and $6.2 million in 2011 and the six months ended July 1, 2012, respectively. For 2012 and the six months ended June 30, 2013, we reported $(5.9) million and $7.5 million in Adjusted EBITDA, an improvement from $(8.9) million and $(4.4) million in 2011 and the six months ended July 1, 2012, respectively. We have been free cash flow positive on an annual basis since 2011. For information on how we define and calculate active customers, revenue per active customer, non-GAAP financial measures Adjusted EBITDA and free cash flow, and for reconciliations of Adjusted EBITDA to net loss and free cash flow to net cash (used in) provided by operating activities, see the sections of this prospectus captioned “Selected Consolidated Financial and Other Data—Non-GAAP Financial Measures” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—Key Financial Metrics.” All U.S. financial and other data in this prospectus includes such data related to our customers in Canada.

 

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Our Industry

e-Commerce is a Large and Growing Market.     Euromonitor, a consumer market research company, estimated that the North American retail market was $3.1 trillion in 2012 with online retail representing $183 billion, or 5.9% of the total retail market. As consumers continue to migrate online, the online retail market is expected to become a significantly larger portion of the total retail market. Euromonitor expects the North American online retail market to grow to $360 billion by 2017, a 14.5% compound annual growth rate, or CAGR, from 2012, as compared to a 2.9% CAGR for the offline retail market over the same time period.

Moms are an Influential Consumer Demographic.    According to a 2012 report from the U.S. Census Bureau, 39 million U.S. households have children under the age of 18, representing 121 million people. In these households, we believe moms generally control an outsized share of spending, particularly spending on children’s apparel, women’s apparel and home décor. According to a 2009 report from Advertising Age, an advertising industry publication, women controlled 73% of household spending. Additionally, women and moms are over-represented as Internet shoppers. According to comScore, a market research firm, in February 2010, women accounted for 49.8% of the U.S. online population but made 61.1% of online purchases.

Women’s and Children’s Boutique Brands are Highly Fragmented.    We believe that emerging brands and smaller boutique vendors are more prevalent in the children’s apparel, women’s apparel and home décor categories compared to other retail categories. We have sold products from over 10,000 brands to date and we discover new, emerging brands on a daily basis. This fragmentation is evident in our business, as over 65% of our U.S. product sales in 2012 came from vendors, generally emerging brands and smaller boutique vendors, selling less than $50,000 of product per event.

Mobile Commerce is Growing Rapidly.    The proliferation of smartphones and tablets has made mobile commerce one of the fastest growing retail channels. According to International Data Corporation (or IDC), a market research firm, the number of U.S. mobile online shoppers is expected to grow from 52 million in 2012 to 189 million in 2017, a 29.3% CAGR. Moms also spend more time mobile shopping than the general consumer. According to eMarketer, a market research company, 23% of moms who use the Internet shop on their mobile devices as compared to 15% of the rest of the general Internet user population. Since consumers have access to their mobile devices virtually anytime and anywhere, this allows them the opportunity to browse and shop during their spare minutes throughout the day. Mobile devices also enable “push commerce” features that prompt consumers to visit mobile websites and use mobile applications. These “push” features are part of our mobile applications and allow us to send information to the users of these applications via alerts and messages, even when the application is not actively in use. For example, if these “push” features are enabled by the user, our mobile application sends an alert every morning, which appears on the screen of the mobile device prompting the user to visit our site.

Our Opportunity

Transforming How Moms Shop Online.    A new wave of e-commerce is emerging. First generation e-commerce companies were generally vertically focused product websites that answered a consumer need for directed product search (for example, “I need a camera”). We believe moms are increasingly looking to the Internet to browse and be inspired through entertaining and engaging discovery-based online shopping (for example, “I want to go window shopping”), especially while they are out and about and on their mobile devices. We believe moms are increasingly using e-commerce as a form of entertainment in addition to satisfying specific product needs.

Transforming How Emerging Brands and Smaller Boutique Vendors Reach Moms.    It is challenging for emerging brands and smaller boutique vendors to reach consumers cost effectively at

 

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scale. Smaller vendors can have great products but typically have limited marketing and distribution capabilities. Without recognizable consumer brands, these vendors may struggle to attract consumers to their own websites, if they have them at all, and may also have trouble securing distribution among mass retailers. Additionally, many emerging brands and smaller boutique vendors can be limited by their branding, photographic and editorial capabilities and therefore can struggle to present their products to consumers in a compelling way, which we believe reduces consumer demand for these products.

Our Offering

Our Offering for Moms

Making shopping entertaining for moms is core to who we are and what we do. We think beyond just offering what our consumers are directly looking for and instead look to inspire purchasing by finding and offering a curated set of products from new and emerging brands that our customers could not otherwise easily find. Moms are passionate about buying products for their kids that stand out and make their kids look special, particularly at affordable prices. Our goal is to be part of mom’s daily routine, allowing her to visit our sites and discover a selection of fresh, new and affordable merchandise curated for her every morning.

Every morning, we launch a variety of flash sales events. Typically, these events feature over 4,000 product styles from different vendors and last for 72 hours. The day’s events are kicked off by an early morning email to our email subscribers and “push” communication to users of our mobile applications. Offerings are only available for a limited time and in a limited quantity, creating urgency to browse and purchase. The majority of our products are sourced from emerging brands and smaller boutique vendors that our customers may not have heard of and whose products are not widely available online. We also offer larger nationally known brands that appeal to our customers and draw new customers to our sites. To date, we have featured and sold products from over 10,000 brands.

Before we launch an event, our photography team typically photographs our merchandise in our in-house studios and our editorial team writes about our merchandise so that we can present each day’s selection of product in our fun and engaging voice. The experience, creativity, resourcefulness and efficiency of our merchandising, creative and operations teams enable us to feature over 250,000 product styles per quarter. We work to create the most compelling price points for our customers, with the average item on our sites offered for over 50% off the manufacturer’s suggested retail price. We then use our proprietary technology, data analytics and personalization tools to segment our audience, offering each mom a curated and optimized shopping experience that features brands, products and events that we believe are most relevant for her.

Our Offering for Vendors

Our primary vendors are emerging brands and smaller boutique vendors. These are typically small-to-medium sized businesses, many of which were started by mom entrepreneurs. Since these vendors’ products are typically not available broadly online, the vendors generally work with us to gain brand awareness and generate incremental sales. We introduce these vendors to our large audience and help them tell their stories in a way that differentiates their products and properly reflects their brand attributes. Our entire operational infrastructure—photography studios, editorial writers, fulfillment operations and technology capabilities—is designed to showcase these emerging brands’ and smaller boutique vendors’ products in the most compelling, engaging and personalized way, providing great value to our customers and revenue to our vendors as cost-effectively as possible.

We serve as an important channel for our vendors because by working with us they eliminate wholesale, direct sales and fulfillment costs for the products they sell through our platform. Because of

 

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our minimal inventory, intermediary model and short event cycle, we are able to experiment with a broad range of new products and a wide variety of vendors on a regular basis. Our vendors typically provide us with first-run, in-season merchandise as they are incentivized to get their best products in front of the broadest potential customer base. We supplement our boutique brand offerings with events from larger national brands and often become a meaningful partner for these larger national brands as well, driving significant sales and vendor loyalty. Of the vendors we featured for the first time in 2011, 75% have returned to sell again at least once on our sites through June 30, 2013. We typically purchase merchandise from our vendors through purchase orders we issue as we conduct flash sales events. We do not typically have long-term agreements or exclusive arrangements with our vendors.

Our Strengths

We are one of the largest standalone e-commerce companies in the United States. We have achieved this due to our following key strengths:

Our Scale Drives Network Effects.    We have built significant scale with over 2.9 million customers who have purchased over 42 million items from over 10,000 brands on our sites. Our scale is fundamental to our business as it has enhanced our operating leverage and enabled us to continue our significant investment in merchandising, product, technology and operations while driving significant cost efficiencies. Our scale also allows us to attract and retain more customers by offering a greater selection and more affordable prices in our curated marketplace, which leads to higher volumes sold for our vendors. This powerful network effect enables us to build on our current market leadership by continuing to attract thousands of vendors and millions of moms.

Highly Regarded and Trusted Brand.    Since 2010, we have worked to build a deep connection with our passionate audience of moms. Customers associate the zulily brand with helping moms discover emerging brands and smaller boutique vendors and offering new and unique products at great values in a fun and entertaining format. Moms are passionate about zulily, and the role we play in their daily lives is what keeps them coming back. As our scale grows, our brand value is increasingly becoming a significant point of differentiation with both customers and vendors.

Strong Customer Loyalty Drives High Purchase Frequency and Powerful Economics.    For many moms, browsing and shopping zulily is a part of their daily routine which is demonstrated by the frequency of their purchases from us. While we continue to add new customers in larger monthly cohorts, previous cohorts of customers continue to purchase from our sites at a consistent rate. Our low customer acquisition cost, high customer loyalty and high repeat purchasing rate drive high customer lifetime value and rapid marketing payback.

To illustrate the costs of acquiring customers and the contribution to our operating results, we compared the estimated net sales and contribution margin generated from email subscribers acquired during the first quarter of 2011, which we refer to as our Q1 2011 cohort, to the total marketing expenses we incurred to acquire those subscribers. Contribution margin is a non-GAAP financial measure, which we define as our gross margin less our merchant processing fees and our general and administrative expenses associated with our merchandising, customer service, order fulfillment and studio operations. The Q1 2011 cohort included 1.1 million email subscribers who we initially spent $3.8 million in total marketing expenses to acquire in that quarter, and which we have converted into approximately 259,000 customers as of June 30, 2013. We estimate this cohort has generated an aggregate of $93.3 million in U.S. net sales and $15.4 million in contribution margin through June 30, 2013. We believe that the trends demonstrated by this cohort are evident of our broader customer base. Please see the section of this prospectus captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting Our Performance” for more information on contribution margin and a reconciliation to gross profit.

 

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Large Merchandising Team Sources Unique Selection of Curated Merchandise From Diverse Vendor Group.    We have built a large scale merchandising organization specifically designed to source new and unique products from emerging brands and smaller boutique vendors, as well as larger national brands. Our team of 302 merchandising professionals source, cultivate and manage thousands of vendor relationships, resulting in a highly diversified vendor base, with our largest vendor in 2012 accounting for less than 1.5% of our net sales. By sourcing a large number of vendors and providing them with strong support, we are able to offer our customers a broad and unique selection of curated products that is refreshed on a daily basis.

Strong Mobile Offering Drives Customer Convenience.    Mobile is a large and growing part of our business. In the second quarter of 2013, approximately 42% of our U.S. orders were placed from a mobile device, up from approximately 39% in the first quarter of 2013 and approximately 31% in the fourth quarter of 2012. We find that moms want to browse our products whenever they have a few minutes of free “mom time” regardless of their location. We have invested in technology to optimize our platform and shopping experience for use on the majority of mobile devices including mobile applications for the iPhone, iPad and Android-based devices. We believe that our ability to anticipate and react to significant platform shifts by our audience will continue to drive growth in our business.

Differentiated Use of Consumer Data and Technology Drives Personalization.    Our scale and product depth across categories, brands and styles, along with our customers’ high visit frequency and the requirement to provide a username and password to enter our sites, provides us meaningful behavioral data on our customers. We use rigorous data analytics and our proprietary technology to understand our email subscribers’ and customers’ browsing and shopping patterns and personal preferences and then target daily events to them with the goal of maximizing relevance, engagement, sales and repeat purchasing. Personalization allows us to offer large scale breadth and depth of selection while maintaining curated niche product discovery and enabling us to move into adjacent categories without losing relevance to our target customer.

Efficient, Custom-Built Fulfillment Operations.    Our operational infrastructure differs greatly from that of many online and offline retailers in that it was custom built to handle small to medium sized inventory lots, a large number of rapidly changing items and high inventory turnover, all while maintaining minimal inventory levels. We also designed our systems to support emerging brands and smaller boutique vendors that often need more help shipping and delivering their products. To support our unique minimal inventory, intermediary model and to control quality, speed and efficiency, we developed and currently operate our own fulfillment system in the United States that as of June 30, 2013 encompassed 1.1 million square feet of leased fulfillment space and a warehouse management system that we specifically designed for our flash sales model. Our proprietary fulfillment operations regularly handle over 100,000 items a day from thousands of product styles that change each day and require different handling processes.

Attractive Economic Profile with Strong Leverage.    Our business model has been carefully planned to maximize performance and efficiency. It enables us to conduct successful and profitable events at all sizes, including smaller ones. For example, in 2012, 90% of our events generated less than $50,000 in U.S. product sales and these smaller events accounted for approximately 65% in U.S. product sales. Because we typically take customer orders before purchasing the inventory from our vendors, we are able to hold minimal inventory while maintaining favorable payment terms from vendors. Relative to our scale, we have required modest capital expenditures to support our operations. Our business has been cash flow positive on an annual basis since 2011, while continuing to experience significant growth. The strength of our economic profile allows us flexibility to further invest in our business.

 

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Our Strategy

Our objective is to be the leading online retail destination for moms. We plan to attain this goal through the following key strategies:

Continue to Acquire New Customers.    We believe that there is significant room to further grow our customer base cost effectively. We plan to grow our customer base by attracting visitors to our sites through targeted and cost-effective marketing campaigns and then converting these email subscribers into active customers. We test new marketing channels and campaigns aimed at attracting new email subscribers and converting existing email subscribers into customers, constantly and rigorously measuring the returns on these campaigns.

Continue to Increase Customer Loyalty and Repeat Purchasing.    Our goal is to maintain our leadership as a preeminent e-commerce company by continuing to offer a wide variety of new and unique products, refreshed daily and curated specifically for moms, at compelling values and presented in a fun and entertaining format. Ultimately, we aim to become part of each of our customer’s daily routine by broadening the ways in which we interact with our customers, including via mobile, social and email channels. We also regularly introduce new categories, brands and products of interest to moms, and work to maximize the relevance of the items we display, thereby improving customer satisfaction, increasing customer loyalty and driving higher repeat purchasing.

Continue to Add New Vendors and Strengthen Existing Vendor Relationships.    Our merchandising team is continually discovering new vendors with compelling and unique merchandise to add to our large base of existing repeat vendors. We use the substantial structural advantages in our business model to build strong long-term relationships with our vendor partners. Our platform creates a large scale marketing, technology and distribution advantage that our vendors can leverage, efficiently and cost-effectively, to drive greater brand awareness and significant incremental sales. We will continue to develop tools that allow us to provide our new and existing vendors with a compelling return on investment and a successful platform to scale their businesses.

Continue to Invest in Our Mobile Platform.    The e-commerce industry’s shift to mobile represents a key growth opportunity for us. We expect our mobile revenue to continue to grow overall and as a percentage of net sales, and as a result, we place a significant emphasis on enhancing and developing our mobile applications, as well as our mobile websites.

Expand International Presence.    To date, we have primarily focused on expanding our U.S. business (in which we include Canada) and are just beginning to focus on our international strategy. In April 2012, we launched our first international site, with a small team based in the United Kingdom. For 2012 and the six months ended June 30, 2013, we generated $4.9 million and $5.9 million in net sales internationally, or 1.5% and 2.2% of total net sales, respectively. We are gradually increasing the level of investment in our international expansion and plan to continue to invest in and develop international markets, balanced with a continued focus on building the core North American market.

Opportunistically Pursue Strategic Acquisitions.    We may expand our business through opportunistic acquisitions that will allow us to enhance our customer offering, enter new geographies or leverage our existing platform capabilities, among other things.

Our Merchandise

We offer merchandise primarily targeted at moms purchasing for their children, themselves and their homes. Our merchandise includes children’s apparel, women’s apparel, and other product categories such as toys, infant gear, kitchen accessories and home décor. Many of our customers initially purchase children’s apparel from us, but as they discover new products on our sites, they begin

 

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purchasing other categories as well. While children’s apparel is our largest merchandise category today, we have expanded our categories over time such that all non-children’s apparel categories combined accounted for 53% of our U.S. units ordered in the six months ended June 30, 2013, up from 45% in all of 2012. Our model of rapidly launching new styles allows us to easily experiment with new categories efficiently and cost-effectively. The average value of an order placed during the six months ended June 30, 2013 was $53.23. Our current categories include:

 

Category

  

Offering

Children’s Apparel

   Infant, Two to Six Year Old Children, Tween Girls, Tween Boys, Accessories, Shoes

Women’s Apparel

   Apparel, Special Sizes, Maternity/Nursing, Intimates, Accessories, Shoes

Children’s Merchandise

   Infant Gear, Sports Equipment, Toys, Books

Other Merchandise

   Kitchen Accessories, Home Décor, Entertainment, Electronics, Pet Accessories

We employ a team of 302 merchandising professionals who are specifically trained to source, cultivate and manage relationships with emerging brands and smaller boutique vendors as well as larger national brands and to buy new and unique products for our high volume, limited-time events. We launch events with over 4,000 product styles on a typical day, and therefore, our merchandising team is a strong competitive advantage for us. We have also built processes around our merchandising efforts, such that we are able to launch an event for a new vendor within a few days of receipt of that vendor’s product samples.

Sales and Marketing

We acquire new email subscribers through a diverse set of paid and unpaid marketing channels, including affiliate channels and partners, customer referrals, direct navigation, display advertising, key word search campaigns, search engine optimization, social media and television ads. Core to our business model is that we acquire customers once via paid and unpaid sources, and then we drive engagement and repeat purchases from those customers over a long period of time through the sending of daily emails and mobile “push” communications. In the six months ended June 30, 2013, 76% of the U.S. daily visitors to our sites came via our email or mobile “push” communications or other unpaid sources, such as direct navigation and search engine optimization.

We evaluate each of our marketing initiatives for its return on investment based on marketing spend measured against net sales and contribution margin generated. Although some of the visitors to our sites become customers when they first sign up, other visitors may sign up to receive our emails and “push” communications months before they make their first purchase. A portion of our marketing spend is meant to target these visitors for whom the conversion to purchasing comes after we have built a substantial relationship with them through regular contact and outreach over time.

Technology

Continual innovation through investment in technology is core to our business. We use our technology platform to improve the experience of our customers and vendors, increase the purchase frequency and average order size of our customers and optimize the efficiency of our business operations. Our technology team is focused on rapid innovation through advanced agile software development processes. Our scalable platform uses custom-built and third-party technologies to support our specific customer and vendor requirements, including handling significant spikes in site traffic and transactions on a daily basis, and the rapid order fulfillment needs that are unique to our flash sales and minimal inventory model. We believe we can quickly scale our infrastructure to

 

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accommodate significantly higher volumes of site traffic, customers, orders and the overall growth in our business. As of June 30, 2013, our technology team consisted of 89 employees.

We have built a comprehensive set of technology solutions, including:

 

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e-Commerce Platform.    Our core e-commerce platform consists of our customer facing desktop website, our mobile website and applications, our order processing and customer service systems. We designed our platform to be stable, secure and cost-effective.

 

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Mobile Platform and Applications.    Mobile is a key component of our long-term strategy and we have made significant investments in our mobile functionality. Our mobile website and applications for iPhone, iPad and Android-based devices were custom built for our unique needs and are powered by the same core platform that powers our e-commerce platform.

 

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Relevancy and Personalization Systems.    Our system is designed to provide a customized and personalized experience in real time to each email subscriber and customer in order to maximize the relevancy of the products we present to them. To provide this personalized experience, we process and analyze the large amounts of data generated by our email subscribers’ and customers’ browsing and shopping patterns on our sites.

 

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Customer Messaging.    Every morning we send millions of personalized emails and alerts to our email subscribers and users of our mobile applications in less than 20 minutes. To do this we have built an advanced customized messaging platform leveraging both our own proprietary technology solutions and third-party software solutions. In addition, our systems manage standard e-commerce customer communications such as order and shipment confirmations on a routine basis.

 

  Ÿ  

Merchandising and Vendor Tools.    We have built tools, including vendor management, vendor portal, catalog and price management and event management, that leverage our own proprietary technology and open source technology to manage our event process from end-to-end. Our platform supports hundreds of internal users and thousands of vendors and is designed specifically to effectively support emerging brands and smaller boutique vendors who may have limited systems and technical expertise.

 

  Ÿ  

Fulfillment Management Systems.    Our fulfillment management system combines custom-built and third-party software to satisfy our unique needs in a flexible and efficient manner. Our system allows us to efficiently manage inventory, track orders, fulfill orders and deliver the products to our customers in a timely manner. Our fulfillment management systems are integrated with our customer messaging system in order to provide real time information on order status and expected delivery date.

Our Operations

Studios

As of June 30, 2013, we operated 39 in-house studios in the United States and the United Kingdom, where our teams efficiently style, photograph, photo edit and compose copy of products. Over the past year, we have significantly increased the number of styles that we offer, and have achieved scale benefits in our cost structure.

Customer Service

Our goal in customer service is to “deliver magical service that inspires customers to be advocates for life.” We use both in-house operations in Seattle and a third-party customer service center in Eastern Washington which allows us to deliver high quality service at lower costs. Our goal is

 

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to deliver the highest quality of customer service to our customers, and our customer service operators are empowered to make the right decision for the customer and strengthen her experience with zulily.

Fulfillment

We lease and operate fulfillment centers in Nevada and Ohio, and rely on a third party to operate a fulfillment center for us in the United Kingdom, to receive, package and ship merchandise. We have 1.1 million square feet of fulfillment center space in the United States and, in the six months ended June 30, 2013, regularly handled more than 100,000 items per day through our U.S. fulfillment centers. We designed our fulfillment centers to receive shipments of small to medium sized inventory lots that often arrive without barcodes or universal product codes already on them, then sort these shipments and repackage them together with other products to send to customers. Additionally, because we have constantly changing inventory, our systems and processes are customized for different product sizes, types and other specifications. We invest in our fulfillment centers to support our business growth, while maintaining the flexibility to adjust to changes and adopt new process improvements. We believe that our fulfillment center capacity is sufficient to support our current needs and near-term growth.

Our Culture

Our culture is defined by our goal to surprise and delight moms on a daily basis and to make our vendors feel like “hero for a day” each time they are featured on our sites. To be the best place to shop for moms, babies and kids, we use these principles to guide our culture:

 

  Ÿ  

We Work for Mom.    Everything we do each day—big and small—is focused on delighting her. Details matter.

 

  Ÿ  

zuperheroes Can do Anything.    We make the impossible happen. And we do it on zulily time—fast!

 

  Ÿ  

Embrace Change.    6am is coming. Do great work, but welcome feedback and change. We can always do better.

 

  Ÿ  

Color Outside the Lines.    Don’t chase or imitate competitors; innovate ahead of them. Our business model means every day is different.

 

  Ÿ  

Take Ownership.    Learn to do your job well, then pick your head up and see what else you can do. Never say “that’s not my job.” Pitch in, do more with your resources. And spend money as if it’s your own—carefully and for the right reasons.

 

  Ÿ  

Use Your Words.    Make personal connections. Talk to each other and know you have access to everyone in the company.

 

  Ÿ  

Take a Moment to Have Fun.    We’re building a great retail brand, and that means a lot of hard work. Instead of letting it weigh us down, we make room for lighthearted moments. It takes smiles to make something delightful.

Competition

We view our target market broadly, based on our target mom demographic, and we believe we are competitive with any retailer where our customers shop. We face significant competition from both online and offline retailers. Our customers have a wide variety of shopping options that include:

 

  Ÿ  

Direct e-Commerce Websites and Online Marketplaces.    These websites include pure play e-commerce companies, such as Amazon.com, the e-commerce platforms of traditional retailers, such as Target, Toys“R”Us and Walmart, and online marketplaces such as eBay.

 

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  Ÿ  

In-person Stores and Boutiques.    These include discount and mass-merchandisers, such as Target, Toys“R”Us and Walmart, as well as boutique sellers of children’s apparel, women’s apparel, toys, infant gear, kitchen accessories and home décor and other products.

We compete based on: product curation and selection, personalization, value, convenience, ease of use, consumer experience, vendor satisfaction and shipping time and cost. While our industry is evolving rapidly and is becoming increasingly competitive, we believe that we compete favorably across these dimensions taken as a whole.

Intellectual Property

We rely on laws and regulations, as well as contractual restrictions, to protect our intellectual property and proprietary rights. As of June 30, 2013, we had two pending patent applications directed to our technology in the United States. In addition, we pursue the registration of our key trademarks and domain names in the United States and in certain locations outside the United States.

As of June 30, 2013, we had nine trademark registrations and 95 trademark applications pending. Our trademark applications, which have been filed in approximately 20 countries or regions, have focused primarily on the following trademarks: zulily, the zulily design mark and the “Z” design associated with our mobile application. These trademarks are material to our business; they enable others to easily identify us as the source of our products and services and are essential to our brand identity. We also rely on copyright laws to protect the photographs and content on our site, as well as our sites themselves and some components of our software, although we have not sought copyright registrations to date. We have registered numerous Internet domain names related to our business. We control access to our confidential information by entering into confidentiality agreements with our employees, contractors and third parties, such as vendors, service providers, individuals and entities that may be exploring a business relationship with us. Our employees and contractors also enter into agreements to assign to us the inventions and content they produce in performing their jobs.

Circumstances outside our control could pose a threat to our intellectual property rights. For example, effective intellectual property protection may not be available in the United States, Canada, the European Union or other countries in which we operate. Also, the efforts we have taken to protect our trademarks and confidential information may not be sufficient or effective. We may be unable to prevent competitors from acquiring domain names or marks that are similar to, infringe upon or diminish the value of our domain names, marks, copyrights and our other intellectual property rights. Any significant impairment of our intellectual property rights could harm our business or our ability to compete. Also, protecting and enforcing our intellectual property rights is costly and time-consuming. Any unauthorized disclosure or use of our confidential information could make it more expensive to do business and harm our operating results.

Companies in the e-commerce, apparel, retail and other industries may own large numbers of patents, copyrights and marks and may frequently request license agreements, threaten litigation or file suit against us based on allegations of infringement or other violations of intellectual property rights. We routinely offer third-party goods, promote third-party content and feature third-party brands. We have been subject to, and expect to continue to face, allegations that we have infringed or otherwise violated the marks, copyrights, patents and other intellectual property or proprietary rights of third parties. Any intellectual property infringement claim or similar claim against us, regardless of merit, could be time consuming and expensive to settle or litigate and could divert our management’s attention and other resources. These claims also could subject us to significant liability for damages and could result in our having to stop using technology, content, branding or business methods found to be in violation of another party’s rights. Further, although we contractually require our vendors to indemnify us against any liability for claims that arise out of their brands and their materials being featured on our sites, vendors

 

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may not be solvent or financially able to indemnify us. We might be required or may opt to seek a license for rights to intellectual property rights held by others, which may not be available on commercially reasonable terms, or at all. Even if a license is available, we could be required to pay significant royalties, which would increase our operating expenses. We may also be required to develop alternative non-infringing technology, content, branding or business methods, which could require significant effort and expense and which we may not be able to perform efficiently or at all. If we cannot use, license or develop technology, content, branding, or business methods for any allegedly infringing aspect of our business, we may be unable to compete effectively. Further, as we face increasing competition and as our business grows, we will likely face more claims of infringement.

Employees

As of June 30, 2013, we had 886 employees, including 302 in merchandising, 89 in technology, 75 in fulfillment and 47 in marketing. Additionally, we rely on independent contractors and temporary personnel to supplement our workforce, primarily in our fulfillment centers. None of our employees is represented by a labor union or covered by a collective bargaining agreement. We consider our relationship with our employees to be good.

Facilities

Our corporate headquarters currently occupy approximately 110,000 square feet of office space in Seattle, Washington pursuant to a lease that expires in June 2014. By February 2014 we anticipate completing the move into our new corporate headquarters in Seattle. The lease for our new facility is for up to 236,000 square feet and expires in 2024, and provides for a right to terminate in January 2021, subject to satisfaction of certain payment obligations. Following completion of this move, with approval of the landlord, we may sublease our current corporate headquarters office space. We lease an approximately 737,000 square foot fulfillment center in Lockbourne, Ohio, pursuant to a lease that expires in May 2017. We also lease an approximately 17,000 square foot corporate office which houses a merchandising team and production studios in Columbus, Ohio, pursuant to a lease that expires in May 2017. Additionally, we lease an approximately 328,000 square foot fulfillment center in McCarran, Nevada, pursuant to a lease that expires in December 2014. We maintain offices in the United Kingdom, leasing approximately 7,000 square feet, pursuant to a lease that expires in February 2017. We believe that our facilities are suitable and adequate to meet our current needs. We intend to add new facilities and fulfillment centers or expand existing facilities and fulfillment centers as needed as we add employees and expand operations. We believe that suitable additional or substitute space will be available as needed to accommodate any such expansion of our operations.

Legal Matters

From time to time, we receive claims and become subject to regulatory investigations or actions, consumer protection, employment, intellectual property and other commercial litigation related to the conduct of our business. We also pursue enforcement actions to protect our legal rights. We may also become more vulnerable to third-party claims as we become subject to laws in jurisdictions where the underlying laws with respect to the potential liability of online intermediaries are either unclear or less favorable, or as the law in this area evolves. Such litigation is costly and time consuming and can divert our management and key personnel from our business operations. The uncertainty of litigation increases these risks. In connection with such litigation, we may be subject to significant damages, associated costs, or equitable remedies relating to the operation of our business and the sale of products on our site. Any such litigation may materially harm our business, prospects, results of operations, financial condition or cash flows.

 

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These and other types of claims could result in increased costs of doing business through legal expenses, adverse judgments or settlements or require us to change our business practices in expensive and significant ways. In addition, litigation could result in interpretations of the law that require us to change our business practices or otherwise increase our costs.

Additional litigation may be necessary in the future to enforce our intellectual property rights, our contract rights, to protect our confidential information or to determine the validity and scope of the proprietary rights of others. Any litigation, regardless of outcome or merit, could damage our reputation, and could result in substantial costs and diversion of management and technical resources, any of which could materially harm our business.

Government Regulation

Our business is subject to a number of foreign and domestic laws and regulations that affect companies conducting business on the Internet, many of which are still evolving and could be interpreted in ways that could harm our business. These laws and regulations include federal and state consumer protection laws protecting the privacy of consumer information and regulations prohibiting unfair and deceptive trade practices. In particular, under federal and state privacy laws and regulations, we must provide notice to consumers of our policies on sharing sensitive information with third parties, advance notice of any changes to our policies and, in some instances, we may be obligated to give customers the right to prevent sharing of their sensitive information with unaffiliated third parties. The growth and demand for e-commerce could result in more stringent consumer protection laws that impose additional compliance burdens on online companies. These consumer protection laws could result in substantial compliance costs.

In many jurisdictions, there is currently great uncertainty whether or how existing laws governing issues such as property ownership, sales and other taxes, libel and personal privacy apply to the Internet and e-commerce. In addition, new tax regulations in jurisdictions where we do not now collect state and local taxes may subject us to the obligation to collect and remit state and local taxes, or subject us to additional state and local sales and income taxes, or to requirements intended to assist states with their tax collection efforts. New legislation or regulation, the application of laws and regulations from jurisdictions whose laws do not currently apply to our business or the application of existing laws and regulations to the Internet and e-commerce could result in significant additional taxes on our business. These taxes or tax collection obligations could have an adverse effect on our cash flows and results of operations. Further, there is a possibility that we may be subject to significant fines or other payments for any past failures to comply with these requirements.

 

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MANAGEMENT

Executive Officers and Directors

The following table sets forth certain information with respect to our executive officers and directors as of September 30, 2013:

 

Name

   Age     

Position

Darrell Cavens

     40       Co-Founder, President, Chief Executive Officer and Director

Mark Vadon(2)(3)

     43       Co-Founder and Chairman of the Board

Marc Stolzman

     47       Chief Financial Officer

Lori Twomey

     51       Chief Merchant

Luke Friang

     43       Chief Information Officer

Robert Spieth

     51       Chief Operating Officer

David Atchison

     34       Senior Vice President, Marketing

W. Eric Carlborg(1)

     49       Director

Dan Levitan(2)(3)

     56       Director

Youngme Moon(1)(3)

     49       Director

Michael Potter(1)

     52       Director

Spencer Rascoff(2)

     37       Director

 

(1) Member of the audit committee.
(2) Member of the compensation committee.
(3) Member of the nominating and corporate governance committee.

Executive Officers

Darrell Cavens, one of our co-founders, has served as our President, Chief Executive Officer and a member of our board of directors since October 2009. From July 2008 to October 2009, Mr. Cavens served as the director of BizTalk Server and SQL Server at Microsoft Corporation, a software company. From 1999 to 2008, Mr. Cavens held various positions at Blue Nile, Inc., an online retailer of fine jewelry, most recently serving as Senior Vice President of Marketing and Technology. From 1996 to 1999, Mr. Cavens served as a staff engineer within the Advanced Development team at Starwave Corp., a software and website company that merged with InfoSeek Corporation, an Internet search and navigation company, and was later acquired by The Walt Disney Company, a worldwide entertainment company. Mr. Cavens attended the University of Victoria in Canada from 1990 to 1994. Mr. Cavens is also on the board of directors of Trupanion, Inc., a pet insurance company.

Mr. Cavens was selected to serve on our board of directors because he is a co-founder, our Chief Executive Officer and a significant stockholder.

Mark Vadon, one of our co-founders, has served as Chairman of our board of directors since October 2009 and has been an employee since July 2013. From 1999 to February 2008, Mr. Vadon was Chief Executive Officer of Blue Nile, which he founded in 1999, and he is currently Chairman of the board of directors of Blue Nile. From 1992 to 1999, Mr. Vadon was a consultant for Bain & Company, a management consulting firm. Mr. Vadon holds an A.B. in Social Studies from Harvard University and an M.B.A. from Stanford University. Mr. Vadon is also on the board of directors of The Home Depot Inc., a home improvement retailer.

Mr. Vadon was selected to serve on our board of directors because he is a co-founder, has extensive retail experience and is a significant stockholder.

 

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Marc Stolzman has served as our Chief Financial Officer since September 2012. From August 2011 to September 2012, Mr. Stolzman served as Chief Financial Officer, Secretary and Principal Accounting Officer at Zumiez Inc., an action sports lifestyle retailer. From June 2008 to November 2010, Mr. Stolzman served as Chief Financial Officer at Blue Nile. From 2007 to 2008, Mr. Stolzman served as Chief Financial Officer at Imperium Renewables Inc., a biodiesel producer. From 1994 to 2007, Mr. Stolzman held various roles at Starbucks Corporation, a retailer of specialty coffee, most recently serving as Senior Vice President of International Finance and Business Development. From 1988 to 1994, Mr. Stolzman served as Director of Finance at Lamonts Apparel, Inc., a chain of department stores. Mr. Stolzman holds a B.A. in Finance from Washington State University.

Lori Twomey has served as our Chief Merchant since October 2010 and prior to that had served as our Vice President, Merchandising since November 2009. From April 2007 to March 2009, Ms. Twomey held various roles at Charming Shoppes, Inc., a specialty apparel retailer, including serving as President of the Charming Direct division from September 2008 to March 2009 and President of the Crosstown Traders division from April 2007 to September 2008, where she launched the Lane Bryant Woman catalog. From 1991 to 2007, Ms. Twomey held various roles at Eddie Bauer Holdings Inc., a holding company that operates the Eddie Bauer clothing store chain, most recently serving as General Merchandise Manager of direct-to-consumer sales from 2000 to 2007. Ms. Twomey received her fashion retail and business certificate in fashion merchandising from Renton Technical College.

Luke Friang has served as our Chief Information Officer since February 2011. From 2006 to January 2011, Mr. Friang served as Vice President and Chief Information Officer at drugstore.com, inc., an online retailer of health and beauty products, which was acquired by Walgreens Co., a drugstore chain, in 2011. From 2001 to 2006, Mr. Friang served as Senior Director of e-Commerce Technologies at Costco Wholesale Corporation, a membership warehouse retailer. From 1997 to 2001, Mr. Friang served in a variety of roles at Spiegel, Inc., a retailer and direct marketer of apparel, and its associated companies, including Eddie Bauer, Inc., an apparel retailer, and The Spiegel Catalog, a catalog and online retailer of clothing and home products. At Eddie Bauer, Mr. Friang served as Director of Internet Technologies and was responsible for the development of www.eddiebauer.com in 1999 and 2000. Mr. Friang studied business administration, computer sciences and Internet technology at Edmonds Junior College and North Seattle Community College. Mr. Friang served on the board of directors for the Washington Technology Industry Association from January 2010 to December 2011.

Robert Spieth has served as our Chief Operating Officer since February 2013. From 1999 to 2013, Mr. Spieth held various positions at Ozburn-Hessey Logistics, LLC, a third party logistics company, including serving as President of the Contract Logistics division from 2006 to 2013, serving as Chief Information Officer from 2003 to 2006 and serving as Senior Vice President of Operations from 1999 to 2003. From 1996 to 1998, Mr. Spieth served as General Manager at Arrow Electronics, Inc., a products, services and solutions provider for users of electronic components. Mr. Spieth holds an A.B. in Physics from Princeton University and an M.B.A. from Harvard Business School.

David Atchison has served as our Senior Vice President, Marketing since June 2013 and prior to that had served as our Vice President, Marketing since January 2010. From July 2008 to January 2010, Mr. Atchison served as Director of Marketing and Analytics at RedEnvelope, Inc., an online provider of high quality gifts and a division of Provide Commerce, Inc., an e-commerce company. From 2005 to 2008, Mr. Atchison served as Director of Analytics at ProFlowers, Inc., an online florist and also a division of Provide Commerce. Mr. Atchison holds a B.S.E. in Operations Research and Financial Engineering from Princeton University.

 

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Non-Employee Directors

W. Eric Carlborg has served as a member of our board of directors since October 2011. Since June 2010, Mr. Carlborg has served as a partner at August Capital, a venture capital firm. From April 2006 to June 2010, Mr. Carlborg served as a partner at Continental Investors LLC, an investment company. From 2005 to 2006, Mr. Carlborg served as Chief Financial Officer of Provide Commerce. From 2001 to 2004, Mr. Carlborg was a managing director of investment banking with Merrill Lynch & Co., a financial services company, and also served as Co-Head of Technology Investment Banking. Mr. Carlborg holds a B.A. in Economics from the University of Illinois and an M.B.A. from the University of Chicago. Mr. Carlborg previously served on the board of directors of Bodybuilding.com, LLC, an online sports nutrition and supplement company, Big Lots, Inc., a discount chain of retail stores, and Veritec Solutions, LLC, a database provider. Mr. Carlborg is also on the board of directors of Blue Nile, Snagajob.com, Inc., an online hourly employment recruiting company, Avant Credit Corporation, an online personal loan lender, PubMatic, Inc., an online advertising revenue optimization company, and Dydacomp Development Corporation, a software company.

Mr. Carlborg was selected to serve on our board of directors based on his extensive background in accounting and financial management.

Dan Levitan has served as a member of our board of directors since May 2010. In 1998, Mr. Levitan co-founded Maveron LLC, a venture capital firm that invests in consumer companies. From 1983 to 1997, Mr. Levitan was an employee of Wertheim Schroder & Co., an investment banking firm that was sold to Salomon Smith Barney Inc. in 2000, most recently serving as a managing director. Mr. Levitan holds an A.B. from Duke University and an M.B.A. from Harvard Business School. Mr. Levitan previously served on the board of directors of Cranium, Inc., a game company, drugstore.com and The Motley Fool, Inc., a multimedia financial services company. Mr. Levitan also serves on the board of directors for PayNearMe Inc., a cash-based payment platform company, Pinkberry, Inc., a premium frozen yogurt retailer, Potbelly Sandwich Works, LLC, a national quick service restaurant chain, and Trupanion. In addition, Mr. Levitan is also on the advisory board of the Arthur Rock Center for Entrepreneurship at Harvard Business School and the board of trustees of Seattle Children’s Hospital Foundation.

Mr. Levitan was selected to serve on our board of directors based on his extensive experience with consumer companies and the venture capital industry.

Youngme Moon has served as a member of our board of directors since July 2013. Dr. Moon has been Senior Associate Dean and Chair, M.B.A. Program, since August 2010 and the Donald K. David Professor of Business Administration at Harvard Business School since July 2008, having joined the faculty in June 1998. From 1997 to 1998, Dr. Moon was a professor at the Massachusetts Institute of Technology. Dr. Moon holds a B.A. from Yale University, an M.A. from Stanford University and a Ph.D. from Stanford University. Dr. Moon is also on the board of directors of Avid Technology, Inc., a supplier of non-linear video and audio editing systems.

Dr. Moon was selected to serve on our board of directors based on her expertise in innovative consumer and other marketing strategies.

Michael Potter has served as a member of our board of directors since March 2011. From October 2011 to March 2012, Mr. Potter served as our Chief Operating Officer. From 1991 to 2005, Mr. Potter held various positions with Big Lots, most recently serving as Chairman, President and Chief Executive Officer. Mr. Potter holds a B.S. in Management and Finance from the University of Oregon and an M.B.A. from Capital University. Mr. Potter previously served on the board of directors of Newegg Inc., an online retailer, and Big Lots. Mr. Potter also currently serves on the board of directors of Blue Nile and Coldwater Creek Inc., a retailer of clothing and household goods.

 

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Mr. Potter was selected to serve on our board of directors based on his experience as a board member with numerous retail and e-commerce companies as well as his experience as an executive and Chairman and Chief Executive Officer for a Fortune 500 company.

Spencer Rascoff has served as a member of our board of directors since June 2013. Since September 2010, Mr. Rascoff has been the Chief Executive Officer of Zillow, Inc., a provider of real estate and home-related information marketplaces. Mr. Rascoff joined Zillow as one of the founding employees in 2005 as Vice President of Marketing and Chief Financial Officer, and served as Chief Operating Officer from December 2008 until he was promoted to Chief Executive Officer. From 2003 to 2005, Mr. Rascoff served as Vice President of Lodging for Expedia, Inc., an online travel company. In 1999, Mr. Rascoff co-founded Hotwire, Inc., an online travel company, and managed several of Hotwire’s product lines before Hotwire was acquired in 2003 by IAC/InterActiveCorp, Expedia’s parent company at the time. Mr. Rascoff holds an A.B. in Government from Harvard University. He serves on Harvard University’s Digital Community & Social Networking Advisory Group. Mr. Rascoff is also on the board of directors of Zillow, Julep Beauty Incorporated, an online beauty brand company, and TripAdvisor Incorporated, a travel services company.

Mr. Rascoff was selected to serve on our board of directors based on his extensive experience with Internet businesses and his broad business experience.

Board Composition

Certain members of our board of directors were elected pursuant to the provisions of our voting agreement, as amended. Under the voting agreement, our stockholders who are party to the voting agreement agreed to vote their shares to elect to our board of directors (1) one director designated by Maveron Equity Partners IV, L.P. (Mr. Levitan); (2) one director designated by August Capital V, L.P. (Mr. Carlborg); (3) one director designated by Meritech Capital Partners IV L.P. (a vacant seat); (4) the person serving as Chief Executive Officer (Mr. Cavens); (5) two directors designated by the holders of our Class B common stock (Mr. Vadon and a vacant seat); and (6) three directors designated by the holders of our Class B common stock and preferred stock, voting together as a single class (Dr. Moon, Mr. Potter and Mr. Rascoff). The voting agreement will terminate upon the completion of this offering and none of our stockholders will have any special rights regarding the election or designation of members of our board of directors.

Our board of directors will consist of seven members upon completion of this offering. In accordance with our certificate of incorporation to be filed in connection with this offering, immediately after this offering, our board of directors will be divided into three classes with staggered three-year terms. At each annual general meeting of stockholders, the successors to directors whose terms then expire will be elected to serve from the time of election and qualification until the third annual meeting following election. Our directors will be divided among the three classes as follows:

 

  Ÿ  

The Class I directors will be Mr. Levitan and Mr. Vadon, and their terms will expire at the annual meeting of stockholders to be held in 2014;

 

  Ÿ  

The Class II directors will be Mr. Rascoff and Dr. Moon, and their terms will expire at the annual meeting of stockholders to be held in 2015; and

 

  Ÿ  

The Class III directors will be Mr. Carlborg, Mr. Cavens and Mr. Potter, and their terms will expire at the annual meeting of stockholders to be held in 2016.

We expect that 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 directors. The division of our board of directors into three classes with staggered three-year terms may delay or prevent a change of our management or a change in control.

 

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Director Independence

Under the listing requirements and rules of the NASDAQ Stock Market LLC, or NASDAQ, independent directors must comprise a majority of our board of directors as a listed company within one year of the closing of this offering.

Our board of directors has undertaken a review of its composition, the composition of its committees and the independence of each director. Based upon information requested from and provided by each director concerning his or her background, employment and affiliations, including family relationships, our board of directors has determined that Mr. Carlborg, Mr. Levitan, Mr. Rascoff and Dr. Moon do not have any relationships that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directors is “independent” as that term is defined under the applicable rules and regulations of the SEC and the listing requirements and rules of NASDAQ. In making this determination, our board of directors considered the current and prior relationships that each non-employee director has with our company and all other facts and circumstances our board of directors deemed relevant in determining their independence, including the beneficial ownership of our capital stock by each non-employee director.

Board Committees

Our board of directors has established an audit committee, a compensation committee and a nominating and corporate governance committee. Our board of directors may establish other committees to facilitate the management of our business. The composition and functions of each committee are described below. Members serve on these committees until their resignation or until otherwise determined by our board of directors.

Audit Committee

Our audit committee currently consists of Mr. Carlborg, Mr. Potter and Dr. Moon. Our board of directors has determined that Mr. Carlborg and Dr. Moon are independent under the NASDAQ listing standards and Rule 10A-3(b)(1) of the Exchange Act. The chair of our audit committee is Mr. Carlborg. Our board of directors has determined that each of Mr. Carlborg and Mr. Potter is an “audit committee financial expert” within the meaning of the SEC regulations. Our board of directors has also determined that each member of our audit committee can read and understand fundamental financial statements in accordance with applicable requirements. In arriving at these determinations, the board of directors has examined each audit committee member’s scope of experience and the nature of their employment in the corporate finance sector. The functions of this committee include:

 

  Ÿ  

selecting a qualified firm to serve as the independent registered public accounting firm to audit our financial statements;

 

  Ÿ  

helping to ensure the independence and performance of the independent registered public accounting firm;

 

  Ÿ  

discussing the scope and results of the audit with the independent registered public accounting firm, and reviewing, with management and the independent accountants, our interim and year-end operating results;

 

  Ÿ  

developing procedures for employees to submit concerns anonymously about questionable accounting or audit matters;

 

  Ÿ  

reviewing our policies on risk assessment and risk management;

 

  Ÿ  

reviewing related party transactions;

 

  Ÿ  

obtaining and reviewing a report by the independent registered public accounting firm at least annually, that describes our internal quality-control procedures, any material issues with such procedures, and any steps taken to deal with such issues when required by applicable law; and

 

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  Ÿ  

approving (or, as permitted, pre-approving) all audit and all permissible non-audit services, other than de minimis non-audit services, to be performed by the independent registered public accounting firm.

Compensation Committee

Our compensation committee consists of Mr. Rascoff, Mr. Levitan and Mr. Vadon. Our board of directors has determined that each of Mr. Rascoff and Mr. Levitan is independent under the NASDAQ listing standards, is a “non-employee director” as defined in Rule 16b-3 promulgated under the Exchange Act and is an “outside director” as that term is defined in Section 162(m) of the U.S. Internal Revenue Code of 1986, as amended, or Section 162(m). The chair of our compensation committee is Mr. Rascoff. The functions of this committee include:

 

  Ÿ  

reviewing and approving, or recommending that our board of directors approve, the compensation of our executive officers;

 

  Ÿ  

reviewing and recommending to our board of directors the compensation of our directors;

 

  Ÿ  

reviewing and approving, or recommending that our board of directors approve, the terms of compensatory arrangements with our executive officers;

 

  Ÿ  

administering our stock and equity incentive plans;

 

  Ÿ  

selecting independent compensation consultants and assessing conflict of interest compensation advisers;

 

  Ÿ  

reviewing and approving, or recommending that our board of directors approve, incentive compensation and equity plans; and

 

  Ÿ  

reviewing and establishing general policies relating to compensation and benefits of our employees and reviewing our overall compensation philosophy.

Nominating and Corporate Governance Committee

Our nominating and corporate governance committee consists of Mr. Vadon and Mr. Levitan and Dr. Moon. Our board of directors has determined that Mr. Levitan and Dr. Moon are independent under the NASDAQ listing standards. The chair of our nominating and corporate governance committee is Mr. Vadon. The functions of this committee include:

 

  Ÿ  

identifying, evaluating and selecting, or recommending that our board of directors approve, nominees for election to our board of directors and its committees;

 

  Ÿ  

evaluating the performance of our board of directors and of individual directors;

 

  Ÿ  

considering and making recommendations to our board of directors regarding the composition of our board of directors and its committees;

 

  Ÿ  

reviewing developments in corporate governance practices;

 

  Ÿ  

evaluating the adequacy of our corporate governance practices and reporting;

 

  Ÿ  

reviewing management succession plans;

 

  Ÿ  

developing and making recommendations to our board of directors regarding corporate governance guidelines and matters; and

 

  Ÿ  

overseeing an annual evaluation of the board of directors’ performance.

 

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Code of Business Conduct and Ethics

We have adopted a Code of Business Conduct and Ethics that applies to all of our employees, officers, including our principal executive officer, principal financial officer and principal accounting officer or controller, or persons performing similar functions and agents and representatives, including directors and consultants. The full text of our Code of Business Conduct and Ethics will be posted on our website at www.zulily.com. We intend to disclose future amendments to certain provisions of our Code of Business Conduct and Ethics, or waivers of such provisions applicable to any principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, and our directors, on our website identified above.

Compensation Committee Interlocks and Insider Participation

During 2012, our compensation committee, which was inactive, consisted of Mr. Levitan and Mr. Carlborg. None of the members of the compensation committee is currently or has been at any time one of our employees. None of our executive officers currently serves, or has served during the last year, as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board of directors or compensation committee.

Non-Employee Director Compensation

Cash Compensation

No cash compensation was paid to our non-employee directors in 2012. Although we do not have a written policy, we generally reimburse our directors for their reasonable out-of-pocket expenses incurred in attending board of directors and committee meetings.

Equity Incentive Compensation

No equity incentive compensation was paid to our non-employee directors in 2012.

In March 2011, in consideration for Mr. Potter’s service as a director, we granted to Mr. Potter an option to acquire 925,000 shares of Class B common stock with an exercise price of $0.078 per share. Mr. Potter’s option has a term of four years and vests in 48 monthly installments commencing with Mr. Potter’s appointment to the board of directors; however, if Mr. Potter’s service with us ends due to a change in control, then any unvested options will become vested and exercisable upon such termination.

In May 2013, in consideration for Mr. Vadon’s service as a director, we granted to Mr. Vadon options to purchase 5,261,563 shares of our Class B common stock at an exercise price of $2.57 per share. These options are divided into five equal sub-grants. Each of Mr. Vadon’s sub-grants has a term of four years and vests in 48 monthly installments commencing on the following dates: May 16, 2013 (first sub-grant), May 16, 2014 (second sub-grant), May 16, 2015 (third sub-grant), May 16, 2016 (fourth sub-grant), and May 16, 2017 (fifth sub-grant).

In August 2013, in connection with the election of Mr. Rascoff to the board of directors in June 2013 and in consideration for his service as a director, we granted to Mr. Rascoff an option to purchase 78,027 shares of our Class B common stock at an exercise price of $3.36 per share. Mr. Rascoff’s option has a term of one year and vests in 12 monthly installments commencing with Mr. Rascoff’s appointment to the board of directors.

In August 2013, in connection with the election of Dr. Moon to the board of directors in July 2013 and in consideration for her service as a director, we granted to Dr. Moon an option to purchase

 

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78,027 shares of our Class B common stock at an exercise price of $3.36 per share. Dr. Moon’s option has a term of one year and vests in 12 monthly installments commencing with Dr. Moon’s appointment to the board of directors.

We have not issued stock options or other stock awards to any of our other non-employee directors in consideration for service on our board of directors.

Future Director Compensation

Following the closing of this offering, we may implement a formal policy pursuant to which our non-employee directors will be eligible to receive compensation for service on our board of directors and committees of our board of directors.

 

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EXECUTIVE COMPENSATION

Our named executive officers, or NEOs, for 2012, which consist of our principal executive officer and the next two most highly compensated executive officers, are:

 

  Ÿ  

Darrell Cavens, President and Chief Executive Officer;

 

  Ÿ  

Marc Stolzman, Chief Financial Officer; and

 

  Ÿ  

Lori Twomey, Chief Merchant.

2012 Summary Compensation Table

The following table sets forth all of the compensation awarded to, earned by or paid to our NEOs during 2012.

 

Name and principal position

   Year      Salary ($)(1)      Bonus ($)(2)     Option Awards
($)(4)
     Total ($)  

Darrell Cavens

     2012         250,000         40,000                290,000   

President and Chief Executive Officer

             

Marc Stolzman

     2012         87,500         150,000 (3)      3,040,229         3,277,729   

Chief Financial Officer

             

Lori Twomey

     2012         220,000         30,000        525,548         775,547   

Chief Merchant

             

 

(1) Mr. Stolzman joined us in September 2012, and the amount reported in the “Salary” column reflects a partial year of service.
(2) Amount represents annual performance-based cash bonuses earned for 2012 but paid in 2013.
(3) Amount represents (a) a $125,000 signing bonus and (b) a $25,000 annual performance-based cash bonus earned for 2012 but paid in 2013.
(4) Amounts shown in this column do not reflect dollar amounts actually received by our NEOs. Instead, these amounts reflect the aggregate grant date fair value of each stock option granted in the fiscal year ended December 30, 2012, computed in accordance with the provisions of FASB ASC Topic 718. Assumptions used in the calculation of these amounts are included in Note 7 to our consolidated financial statements included in this prospectus. As required by SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. Our NEOs will only realize compensation to the extent the trading price of our Class A common stock is greater than the exercise price of such stock options.

Outstanding Equity Awards at December 30, 2012

The following table provides information regarding outstanding equity awards held by each of our NEOs as of December 30, 2012.

 

    Option Awards  

Name

  Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
    Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
    Option Exercise
Price ($)
     Option
Expiration Date
 

Darrell Cavens

                            

Marc Stolzman

           2,892,440 (1)(3)      1.87           11/5/2022   

Lori Twomey

    3,700,000 (1)(2)             0.007         3/10/2020   
    375,000 (1)(2)             0.182         6/26/2021   
           500,000 (1)      1.87           11/05/2022   

 

(1) The shares subject to the stock option vest over a four-year period as follows: 25% of the shares underlying the options vest on the one-year anniversary of the vesting commencement date and thereafter 1/48th of the shares vest each month, subject to continued service with us through each vesting date.

 

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(2) This option is early exercisable and to the extent any of such shares are unvested as of a given date, such shares will remain subject to a right of repurchase by us.
(3) This option is subject to accelerated vesting upon a qualifying termination of his employment with us following a change in control, as described under “—Potential Payments and Acceleration of Equity upon Termination in Connection with a Change in Control.”

Offer Letter Agreements

Darrell Cavens

We entered into an offer letter agreement with Darrell Cavens, our Chief Executive Officer, dated November 19, 2009. The offer letter has no specific term and constitutes an at-will employment arrangement. Mr. Cavens’ annual base salary as of December 30, 2012 was $250,000.

Marc Stolzman

We entered into an offer letter agreement with Marc Stolzman, our Chief Financial Officer, dated August 16, 2012. The offer letter has no specific term and constitutes an at-will employment arrangement. Mr. Stolzman received a $125,000 signing bonus, which he would be required to repay to us if he resigns prior to the first anniversary of his employment with us. Mr. Stolzman’s annual base salary as of December 30, 2012 was $300,000. In connection with his employment, Mr. Stolzman was granted an option covering 2,892,440 shares of our Class B common stock at an exercise price of $1.87 per share. Mr. Stolzman is eligible for accelerated vesting of this option grant in full in connection with a change in control and termination of employment without cause or for good reason in connection with such change in control or within 12 months after such change in control. If Mr. Stolzman is terminated without cause, provided his timely execution of a general release of claims in our favor, he will continue to receive his base salary for a period of 12 months following his termination date.

Lori Twomey

We entered into an offer letter agreement with Lori Twomey, our Chief Merchant, dated November 23, 2009. The offer letter has no specific term and constitutes an at-will employment arrangement. Ms. Twomey’s annual base salary as of December 30, 2012 was $220,000. In connection with her employment, Ms. Twomey was granted an option covering 4,000,000 shares of our Class B common stock at an exercise price of $0.007 per share.

Potential Payments and Acceleration of Equity upon Termination in Connection with a Change in Control

The section below describes the payments that we would have made to our NEOs in connection with certain terminations of employment or certain corporate transactions like a change in control, if such events had occurred on December 30, 2012.

Darrell Cavens

Under a restricted stock purchase agreement, dated as of October 26, 2009, as amended, Mr. Cavens is entitled to acceleration of all of the remaining unvested shares of restricted stock issued thereunder upon a change in control, if Mr. Cavens is terminated without cause or resigns for good reason within 12 months after such change in control.

 

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Marc Stolzman

Under the stock option agreement for the option to purchase 2,892,440 shares of Class B common stock granted on November 6, 2012, Mr. Stolzman is entitled to acceleration of vesting of all of the remaining unvested shares upon a change in control, if Mr. Stolzman is terminated without cause or resigns for good reason in connection with such change in control or within 12 months after such change in control. If Mr. Stolzman is terminated without cause, including in connection with a change in control, provided his timely execution of a general release of claims in our favor, he will continue to receive his base salary for a period of 12 months following his termination date.

Employee Benefit Plans

The principal features of our equity incentive plans and our 401(k) plan are summarized below. These summaries are qualified in their entirety by reference to the actual text of the plans, which, other than the 401(k) plan, are filed as exhibits to the registration statement of which this prospectus is a part.

2013 Equity Plan

We expect that our board of directors will adopt and our stockholders will approve prior to the closing of this offering our 2013 Equity Plan, or 2013 Plan. The 2013 Plan will become effective on the date the registration statement of which this prospectus forms a part is declared effective by the SEC. The 2013 Plan will be the successor to and continuation of our 2009 Equity Incentive Plan, or 2009 Plan. Once the 2013 Plan becomes effective, no further grants will be made under our 2009 Plan.

The 2013 Plan will provide for the discretionary grant of incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards and other stock awards to our employees, directors, and consultants. Incentive stock options, or ISOs, may be granted only to our employees.

Authorized Shares.    The maximum number of shares of our Class A common stock that may be issued under our 2013 Plan is              , which number represents a number of shares of Class A common stock equal to (1)              new shares, plus (2)            , the number of shares of Class B common stock available for issuance under our 2009 Plan at the time our 2013 Plan became effective, plus (3)            , the maximum number of shares subject to stock options or other stock awards granted under the 2009 Plan that may be returned to our 2009 Plan, such as upon the expiration or termination of a stock award prior to vesting. Additionally, the number of shares of our Class A common stock reserved for issuance under our 2013 Plan will automatically increase on the first day of each fiscal year for a period of up to ten years, commencing on the first day of the fiscal year following the year in which the 2013 Plan becomes effective, in an amount equal to 4% of the total number of shares of our capital stock outstanding on the last day of the preceding fiscal year or a lesser number of shares determined by our board of directors. The maximum number of shares of our Class A common stock that may be issued upon the exercise of ISOs under our 2013 Plan is             . In addition, a maximum of              shares of our common stock may be granted to any one non-employee director during any one calendar year pursuant to stock awards.

Shares subject to stock awards granted under our 2013 Plan that expire or terminate without being exercised in full, or that are paid out in cash rather than in shares, do not reduce the number of shares available for issuance under our 2013 Plan. Additionally, shares issued pursuant to stock awards under our 2013 Plan that we repurchase or that are forfeited, as well as shares used to pay the exercise price of a stock award or to satisfy the tax withholding obligations related to a stock award, become available for future grant under our 2013 Plan.

 

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Plan Administration.    Our board of directors, or a duly authorized committee of our board of directors, will administer our 2013 Plan. Our board of directors may also delegate to one or more of our officers the authority to (1) designate employees (other than officers) to receive specified stock awards, and (2) determine the number of shares subject to such stock awards. Subject to the terms of our 2013 Plan, the board of directors has the authority to determine the terms of awards, including recipients, the exercise, purchase or strike price of stock awards, if any, the number of shares subject to each stock award, the fair market value of a share of our Class A common stock, the vesting schedule applicable to the awards, together with any vesting acceleration, and the form of consideration, if any, payable upon exercise or settlement of the award and the terms of the award agreements for use under our 2013 Plan.

The board of directors has the power to modify outstanding awards under our 2013 Plan. The board of directors has the authority to reprice any outstanding option or stock appreciation right, cancel any outstanding stock award in exchange for new stock awards, cash or other consideration, or take any other action that is treated as a repricing under generally accepted accounting principles, with the consent of any adversely affected participant.

Corporate Transactions.    Our 2013 Plan will provide that in the event of certain specified significant corporate transactions, as defined under our 2013 Plan, each outstanding award will be treated as the administrator determines. The administrator may (1) arrange for the assumption, continuation or substitution of a stock award by a successor corporation; (2) arrange for the assignment of any reacquisition or repurchase rights held by us to a successor corporation; (3) accelerate the vesting, in whole or in part, of the stock award and provide for its termination prior to the transaction; (4) arrange for the lapse, in whole or in part, of any reacquisition or repurchase rights held by us; or (5) cancel or arrange for the cancellation of the stock award prior to the transaction in exchange for a cash payment, if any, determined by the board. The plan administrator is not obligated to treat all stock awards or portions of stock awards, even those that are of the same type, in the same manner.

Transferability.    A participant may not transfer stock awards under our 2013 Plan other than by will, the laws of descent and distribution or as otherwise provided under our 2013 Plan.

Plan Amendment or Termination.    Our board of directors has the authority to amend, suspend or terminate our 2013 Plan, provided that such action does not materially impair the existing rights of any participant without such participant’s written consent. No awards may be granted after the tenth anniversary of the date our board of directors adopted our 2013 Plan. No stock awards may be granted under our 2013 Plan while it is suspended or after it is terminated.

2009 Equity Incentive Plan

Our board of directors adopted and our stockholders approved our 2009 Plan, in December 2009. Our 2009 Plan was amended most recently in May 2013. The 2009 Plan provides for the discretionary grant of ISOs, nonstatutory stock options, stock appreciation rights, restricted stock awards and restricted stock unit awards to our employees, directors and consultants or our affiliates. ISOs may be granted only to our employees or employees of our affiliates.

The 2009 Plan will be terminated following the date the 2013 Plan becomes effective. However, any outstanding options granted under the 2009 Plan will remain outstanding, subject to the terms of our 2009 Plan and stock option agreements, until such outstanding options are exercised or until they terminate or expire by their terms.

Authorized Shares.    The maximum number of shares of our Class B common stock that may be issued under our 2009 Plan is 72,421,252. The maximum number of shares that may be issued upon the exercise of ISOs under our 2009 Plan is 72,421,252.

 

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Plan Administration.    Our board of directors or a duly authorized committee of our board of directors administers our 2009 Plan and the stock awards granted under it. Our board of directors may also delegate to one or more of our officers the authority to (1) designate officers and employees to receive specified stock awards and (2) determine the number of shares subject to such stock awards. Subject to the terms of our 2009 Plan, the board of directors has the authority to determine and amend the terms of awards, including recipients, the exercise, purchase or strike price of stock awards, if any, the number of shares subject to each stock award, the fair market value of a share of our Class B common stock, the vesting schedule applicable to the awards, together with any vesting acceleration, and the form of consideration, if any, payable upon exercise or settlement of the award and the terms of the award agreements for use under our 2009 Plan.

The board of directors has the power to modify outstanding awards under our 2009 Plan. The board of directors has the authority to reprice any outstanding option or stock appreciation right, cancel any outstanding stock award in exchange for new stock awards, cash or other consideration, or take any other action that is treated as a repricing under GAAP, with the consent of any adversely affected participant.

Corporate Transactions.    Our 2009 Plan provides that in the event of certain specified significant corporate transactions, as defined under our 2009 Plan, each outstanding award will be treated as the administrator determines. The administrator may (1) arrange for the assumption, continuation or substitution of a stock award by a successor corporation, or the acquiring corporation’s parent company; (2) arrange for the assignment of any reacquisition or repurchase rights held by us to a successor corporation, or the acquiring corporation’s parent company; (3) accelerate the vesting, in whole or in part, of the stock award and provide for its termination prior to the transaction; (4) arrange for the lapse, in whole or in part, of any reacquisition or repurchase rights held by us; (5) cancel or arrange for the cancellation of the stock award prior to the transaction in exchange for a cash payment, if any, determined by the board; or (6) make a payment in such form as determined by the board of directors equal to the excess of the value of the property that would have been received and the exercise price. The plan administrator is not obligated to treat all stock awards or portions of stock awards, even those that are of the same type, in the same manner.

Transferability.    A participant may not transfer stock awards under our 2009 Plan other than by will, the laws of descent and distribution, or as otherwise provided under our 2009 Plan.

Plan Amendment or Termination.    Our board of directors has the authority to amend, suspend or terminate our 2009 Plan, provided that such action is approved by our stockholders to the extent stockholder approval is necessary and that such action does not impair the existing rights of any participant without such participant’s written consent. As described above, our 2009 Plan will be terminated upon the date of the prospectus and no future stock awards will be granted thereunder.

401(k) Plan

We maintain a tax-qualified retirement plan that provides eligible U.S. employees with an opportunity to save for retirement on a tax advantaged basis. Eligible employees are able to defer eligible compensation subject to applicable annual U.S. Internal Revenue Code of 1986, as amended, which we refer to as the Code, limits. We have the ability to make discretionary contributions to the 401(k) plan but have not done so to date. Employees’ pre-tax contributions are allocated to each participant’s individual account and are then invested in selected investment alternatives according to the participants’ directions. Employees are immediately and fully vested in their contributions. The 401(k) plan is intended to be qualified under Section 401(a) of the Code with the 401(k) plan’s related trust intended to be tax exempt under Section 501(a) of the Code. As a tax-qualified retirement plan, contributions to the 401(k) plan and earnings on those contributions are not taxable to the employees until distributed from the 401(k) plan.

 

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Pension Benefits

Our NEOs did not participate in, or otherwise receive any benefits under, any pension or retirement plan sponsored by us during 2012.

Nonqualified Deferred Compensation

Our NEOs did not earn any nonqualified deferred compensation benefits from us during 2012.

Limitations on Liability and Indemnification Matters

Upon the completion of this offering, our certificate of incorporation will contain provisions that limit the liability of our current and former directors for monetary damages to the fullest extent permitted by Delaware law. Delaware law provides that directors of a corporation will not be personally liable for monetary damages for any breach of fiduciary duties as directors, except liability for:

 

  Ÿ  

any breach of the director’s duty of loyalty to the corporation or its stockholders;

 

  Ÿ  

any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;

 

  Ÿ  

unlawful payments of dividends or unlawful stock repurchases or redemptions; or

 

  Ÿ  

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 rescission.

Our certificate of incorporation and our bylaws will provide that we are required to indemnify our directors to the fullest extent permitted by Delaware law. Our bylaws will also provide that, upon satisfaction of certain conditions, we shall advance expenses incurred by a director in advance of the final disposition of any action or proceeding, and permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in that capacity regardless of whether we would otherwise be permitted to indemnify him or her under the provisions of Delaware law. Our certificate of incorporation and bylaws will also provide our board of directors with discretion to indemnify our officers and employees when determined appropriate by the board. We have entered and expect to continue to enter into agreements to indemnify our directors, executive officers and other employees as determined by the board of directors. With certain exceptions, these agreements provide for indemnification for related expenses including, among other things, attorneys’ fees, judgments, fines and settlement amounts incurred by any of these individuals in any action or proceeding. We believe that these bylaw provisions and indemnification agreements are necessary to attract and retain qualified persons as directors and officers. We also maintain customary directors’ and officers’ liability insurance.

The limitation of liability and indemnification provisions in our certificate of incorporation and bylaws may discourage stockholders from bringing a lawsuit against our directors for breach of their fiduciary duty. They may also reduce the likelihood of derivative litigation against our directors and officers, even though an action, if successful, might benefit us and other stockholders. Further, a stockholder’s investment may be adversely affected to the extent that we pay the costs of settlement and damage awards against directors and officers as required by these indemnification provisions. At present, there is no pending litigation or proceeding involving any of our directors, officers or employees for which indemnification is sought, and we are not aware of any threatened litigation that may result in claims for indemnification.

 

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Rule 10b5-1 Sales Plans

Our directors and executive officers may adopt written plans, known as Rule 10b5-1 plans, in which they will contract with a broker to buy or sell shares of our common stock on a periodic basis. Under a Rule 10b5-1 plan, a broker executes trades pursuant to parameters established by the director or officer when entering into the plan, without further direction from them. The director or officer may amend a Rule 10b5-1 plan in some circumstances and may terminate a plan at any time. Our directors and executive officers also may buy or sell additional shares outside of a Rule 10b5-1 plan when they are not in possession of material nonpublic information subject to compliance with the terms of our insider trading policy. Prior to 180 days after the date of this offering (subject to early termination), the sale of any shares under such plan would be subject to the lock-up agreement that the director or officer has entered into with the underwriters.

 

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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

The following is a summary of transactions since January 1, 2010 to which we have been a participant in which the amount involved exceeded or will exceed $120,000, and in which any of our directors, executive officers or holders of more than five percent of our capital stock, or any member of the immediate family of the foregoing persons, had or will have a direct or indirect material interest.

Sales of Preferred Stock

In May 2010, we issued an aggregate of 115,502,600 shares of our Series A preferred stock to six accredited investors at a per share price of $0.03645, except as described below, for aggregate consideration of $4,008,769. In July 2010, we issued an aggregate of 44,923,630 shares of our Series B preferred stock to seven accredited investors at a per share price of $0.13356, for aggregate consideration of $6,000,000. In August 2011, we issued an aggregate of 20,378,275 shares of our Series C preferred stock to ten accredited investors at a per share price of $1.5703, for aggregate consideration of $32,000,005. In November 2012, we issued an aggregate of 40,975,703 shares of our Series D preferred stock to 17 accredited investors at a per share price of $2.0744, for aggregate consideration of $84,999,998. The following table summarizes purchases of shares of our preferred stock by our directors, executive officers and holders of more than 5% of our capital stock since January 1, 2010:

 

Stockholder

  Series A
(shares)
    Series B
(shares)
    Series C
(shares)
    Series D
(shares)
    Total Purchase
Price ($)
 

Entities affiliated with Maveron LLC(1)

    94,856,550        11,455,525                      4,836,576 (2) 

Mark Vadon

    18,891,200                             642,506 (3) 

W. Eric Carlborg

    516,100                             17,553 (4) 

August Capital V, L.P.(5)

           32,494,760        1,910,465               7,340,003   

Entities affiliated with Meritech Capital(6)

                  10,189,140        866,066        17,796,574   

Entities affiliated with Andreessen Horowitz(7)

                         33,150,932        68,768,293   

 

(1) Affiliates of Maveron LLC holding our securities whose shares are aggregated for purposes of reporting share ownership information include Maveron Equity Partners IV, L.P., Maveron IV Entrepreneurs’ Fund, L.P. and MEP Associates IV, L.P. Dan Levitan, a member of our board of directors, is affiliated with Maveron LLC.
(2) 24,905,350 shares of Series A preferred stock were purchased pursuant to the conversion of one or more convertible promissory notes at a price of $0.03038 per share.
(3) 7,596,100 shares Series A preferred stock were purchased pursuant to the conversion of a convertible promissory note at a price of $0.03038 per share.
(4) 207,500 shares Series A preferred stock were purchased pursuant to the conversion of a convertible promissory note at a price of $0.03038 per share.
(5) W. Eric Carlborg, a member of our board of directors, is a member of August Capital Master Management Company, LLC, the management company of August Capital V, L.P. Mr. Carlborg does not have voting or investment power with respect to the shares held by August Capital V, L.P.
(6) Affiliates of Meritech Capital holding our securities whose shares are aggregated for purposes of reporting share ownership information include Meritech Capital Partners IV L.P. and Meritech Capital Affiliates IV L.P. Craig Sherman, a member of our board of directors until July 30, 2013, is a managing director at Meritech Capital.
(7) Affiliates of Andreessen Horowitz holding our securities whose shares are aggregated for purposes of reporting share ownership information include Andreessen Horowitz Fund III, L.P., as nominee, and AH Parallel Fund III, L.P., as nominee.

 

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Repurchase of Securities

The following table summarizes shares of our capital stock we repurchased from our directors, executive officers and holders of more than 5% of our capital stock since January 1, 2010:

 

Stockholder

   Shares Repurchased    Total
Purchase
Price ($)
     Date of Repurchase

Darrell Cavens

     6,802,975       Class B Common      9,577,636       August 2, 2011

Lori Twomey

     300,000       Class B Common      422,358       August 2, 2011

Entities affiliated with Maveron LLC(1)

     16,480,705       Series Seed Preferred      29,058,779       November 14, 2012
     1,951,690       Series A Preferred      3,441,220       November 14, 2012

 

(1) Affiliates of Maveron LLC holding our securities whose shares are aggregated for purposes of reporting share ownership information include Maveron Equity Partners IV, L.P., Maveron IV Entrepreneurs’ Fund, L.P. and MEP Associates IV, L.P. Dan Levitan, a member of our board of directors, is affiliated with Maveron LLC.

Sale of Securities by Our Chief Executive Officer

In December 2010, Mr. Cavens sold an aggregate of 9,133,900 shares of our Class B common stock to entities affiliated with Trinity Ventures and entities affiliated with Maveron LLC, at a per share price of $0.32845, for aggregate consideration of approximately $3,000,000.

Investor Rights Agreement

On November 5, 2012, we entered into an amended and restated investor rights agreement with the holders of our outstanding preferred stock and certain holders of our outstanding common stock, including entities with which certain of our directors are affiliated. We expect that this investor rights agreement will be amended and restated in connection with this offering. As of June 30, 2013, the holders of 362,194,084 shares of our Class B common stock, including 242,485,034 shares of the Class B common stock issuable upon the conversion of our preferred stock, are entitled to rights with respect to the registration of their shares following the completion of this offering. For a more detailed description of these registration rights, see the section of the prospectus captioned “Description of Capital Stock—Stockholder Registration Rights.” In addition, this agreement gives the stockholders that are parties thereto the right to participate in new issuances of equity securities by us, subject to certain exceptions. This right to participate in new issuances of equity securities will terminate by its terms upon the completion of this offering.

Employment Offer Letters

We have entered into offer letter agreements with our executive officers. For more information regarding these agreements, see the section of the prospectus captioned “Executive Compensation—Offer Letter Agreements.”

Indemnification Agreements

Our certificate of incorporation, which will be effective upon the completion of this offering, will contain provisions limiting the liability of directors, and our bylaws will provide that we will indemnify each of our directors to the fullest extent permitted under Delaware law. Our certificate of incorporation and bylaws will also provide our board of directors with discretion to indemnify our officers and employees when determined appropriate by the board. In addition, we have entered into an indemnification agreement with each of our directors and our executive officers. For more information regarding these agreements, see the section of the prospectus captioned “Executive Compensation—Limitations on Liability and Indemnification Matters.”

 

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Policy on Future Related Party Transactions

All future transactions between us and our officers, directors, principal stockholders and their affiliates will be approved by the audit committee, or a similar committee consisting of entirely independent directors, according to the terms of our Code of Business Conduct and Ethics.

 

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PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information with respect to the beneficial ownership of our capital stock as of June 30, 2013, as adjusted to reflect the sale of Class A common stock offered by us and the selling stockholders in this offering, for:

 

  Ÿ  

each of our named executive officers;

 

  Ÿ  

each of our directors;

 

  Ÿ  

all of our directors and executive officers as a group;

 

  Ÿ  

each person, or group of affiliated persons, known by us to beneficially own more than 5% of our Class A common stock or Class B common stock; and

 

  Ÿ  

each of the selling stockholders.

Beneficial ownership is determined in accordance with the rules of the SEC and generally includes any shares over which a person exercises sole or shared voting or investment power. Shares of common stock issuable under options or warrants that are exercisable within 60 days after June 30, 2013 are deemed beneficially owned, and such shares are used in computing the percentage ownership of the person holding the options or warrants but are not deemed outstanding for the purpose of computing the percentage ownership of any other person. The information contained in the following table is not necessarily indicative of beneficial ownership for any other purpose, and the inclusion of any shares in the table does not constitute an admission of beneficial ownership of those shares. Unless otherwise indicated, based on the information supplied to us by or on behalf of the selling stockholders, no selling stockholder is a broker-dealer or an affiliate of a broker-dealer.

Unless otherwise indicated below, to our knowledge, all persons named in the table have sole voting and investment power with respect to their shares of Class B common stock, except to the extent authority is shared by spouses under community property laws.

Our calculation of the percentage of beneficial ownership prior to this offering is based on no shares of our Class A common stock and 461,624,111 shares of our Class B common stock (including preferred stock on an as-converted basis) outstanding as of June 30, 2013. We have based our calculation of the percentage of beneficial ownership after this offering on                  shares of our Class A common stock and                  shares of our Class B common stock outstanding immediately after the closing of this offering (assuming no exercise of the underwriters’ option to purchase additional shares of Class A common stock and the sale of                  shares of our Class A common stock by the selling stockholders).

Unless otherwise indicated below, the address of each beneficial owner listed in the table below is c/o zulily, inc., 2200 First Avenue South, Seattle, WA 98134.

 

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Name of

Beneficial Owner

  Shares Beneficially Owned
Prior to this Offering
    Number of
Shares

Being
Sold
  Shares Beneficially Owned
Following this Offering
  Class A     Class B     % of
Total

Voting
Power†
      Class A   Class B   % of
Total

Voting
Power†
  Shares     %     Shares     %         Shares   %   Shares   %  

Named Executive Officers and Directors:

                     

Darrell Cavens(1)

                  99,847,814        20.9        20.9               

Mark Vadon(2)

                  141,832,313        30.4        30.4               

Marc Stolzman

                                              

Lori Twomey(3)

                  4,075,000        *        *               

W. Eric Carlborg(4)

                  1,300,000        *        *               

Dan Levitan(5)

                  108,927,335        23.6        23.6               

Youngme Moon(6)

                                              

Spencer Rascoff(7)

                                              

Michael Potter(8)

                  1,216,174        *        *               

Craig Sherman(9)

                  11,065,634        2.4        2.4               

All executive officers and directors as a group (total of 13 persons)(10)

                  375,874,270        76.24        76.24               

Other 5% Stockholders:

                     

Entities affiliated with Maveron(5)

                  108,927,335        23.6        23.6               

August Capital(11)

                  34,405,225        7.5        7.5               

Entities affiliated with Andreessen Horowitz(12)

                  33,550,134        7.3        7.3               

 

* Represents beneficial ownership of less than one percent (1%) of the outstanding common stock.
Represents the voting power with respect to all shares of our Class A common stock and Class B common stock, voting as a single class. Each share of Class A common stock will be entitled to one vote per share, and each share of Class B common stock will be entitled to ten votes per share. The Class A common stock and Class B common stock will vote together on all matters (including the election of directors) submitted to a vote of stockholders, except under limited circumstances described in “Description of Capital Stock—Class A common stock and Class B Common Stock—Voting Rights.”
(1) Consists of (a) 84,063,125 shares held by Darrell Cavens and (b) 15,784,689 shares issuable pursuant to stock options exercisable within 60 days of June 30, 2013.
(2) Consists of (a) 32,367,684 shares held by Mark Vadon, (b) 5,261,563 shares issuable pursuant to stock options exercisable within 60 days of June 30, 2013, (c) 4,500,000 shares held by Vadon Holdings, LLC and (d) 99,703,066 shares held by Lake Tana LLC, with respect to all of which Mr. Vadon holds sole voting and investment power. Mr. Vadon has an economic interest in Maveron Equity Partners IV, L.P. and Maveron General Partner IV LLC but does not have voting or investment power over the shares held by such entities and, accordingly, such shares are not included as beneficially owned by Mr. Vadon.
(3) Includes 4,075,000 shares issuable pursuant to stock options exercisable within 60 days of June 30, 2013.
(4) Includes 1,300,000 shares issuable pursuant to stock options exercisable within 60 days of June 30, 2013. Excludes shares owned by August Capital V, L.P. as described in further detail in footnote (11) below. Although Mr. Carlborg is a member of August Capital Master Management Company, LLC, the management company of August Capital V, L.P., Mr. Carlborg does not have voting or investment power with respect to the shares held by August Capital V, L.P.
(5) Consists of (a) 97,598,876 shares held by Maveron Equity Partners IV, L.P. (Maveron Equity Partners), (b) 3,158,901 shares held by Maveron IV Entrepreneurs’ Fund, L.P. (Maveron Entrepreneurs’ Fund) and (c) 8,169,558 shares held by MEP Associates IV, L.P. (MEP Associates). Maveron General Partner IV LLC (Maveron General Partner), the general partner of Maveron Equity Partners, Maveron Entrepreneurs’ Fund and MEP Associates, has sole voting and investment power with respect to the shares held by Maveron Equity Partners, Maveron Entrepreneurs’ Fund and MEP Associates. The managing members of Maveron General Partner are Dan Levitan, Clayton Lewis, Pete McCormick and Jason Stoffer. The address for each of these entities is 411 First Avenue South, Suite 600, Seattle, Washington 98104.
(6) As of July 30, 2013, Dr. Moon joined our board of directors.
(7) As of June 24, 2013, Mr. Rascoff joined our board of directors.
(8) Consists of (a) 200,000 shares held by Michael Potter and (b) 1,016,174 shares issuable pursuant to stock options exercisable within 60 days of June 30, 2013.
(9) Consists of (a) 10,798,951 shares held by Meritech Capital Partners IV L.P. and (b) 266,683 shares held by Meritech Capital Affiliates IV L.P. Meritech Capital Associates IV L.L.C., the general partner of Meritech Capital Partners IV L.P. and Meritech Capital Affiliates IV L.P., has sole voting and investment power with respect to the shares held by Meritech Capital Partners IV L.P. and Meritech Capital Affiliates IV L.P. The managing members of Meritech Capital Associates IV L.L.C. are Paul Madera, Michael Gordon, Robert Ward, George Bischof and Craig Sherman, each of whom disclaim beneficial ownership of these shares except to the extent of their pecuniary interest therein. The address for each of these entities is 245 Lytton Avenue, Suite 350, Palo Alto, California 94301. As of July 30, 2013, Mr. Sherman resigned from our board of directors.

 

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(10) Consists of (a) 344,511,844 shares held by the directors and executive officers as of June 30, 2013, of which 14,408,855 may be repurchased by us at the original exercise price within 60 days of June 30, 2013 and (b) 31,362,426 shares issuable pursuant to stock options exercisable within 60 days of June 30, 2013.
(11) Consists of 34,405,225 shares held of record by August Capital V, L.P., as nominee for August Capital V, L.P., August Capital Strategic Partners V, L.P. and related individuals (August Capital V). Howard Hartenbaum, David M. Hornik, John R. Johnston, David F. Marquardt, Vivek Mehra and Andrew S. Rappaport, as members of August Capital Management V, L.L.C., the general partner of August Capital V, share voting and investment power with respect to the shares held of record by August Capital V. The address for each of these entities is 2480 Sand Hill Road, Suite #101, Menlo Park, California 94025.
(12) Consists of (a) 10,812,330 shares held of record by Andreessen Horowitz Fund III, L.P. (AH Fund), for itself and as nominee for Andreessen Horowitz Fund III-A, L.P., Andreessen Horowitz Fund III-B, L.P. and Andreessen Horowitz Fund III-Q, L.P. and (b) 22,737,804 shares of common stock held of record by AH Parallel Fund III, L.P. (AH Parallel), for itself and as nominee for AH Parallel Fund III-A, L.P., AH Parallel Fund III-B, L.P. and AH Parallel Fund III-Q, L.P. AH Equity Partners III, L.L.C. is the general partner of AH Fund and has sole voting and investment power over the securities held for itself and as nominee by AH Fund. The managing members of AH Equity Partners III, L.L.C. are Marc Andreessen and Ben Horowitz. AH Equity Partners III (Parallel), L.L.C. is the general partner of AH Parallel and has sole voting and investment power over the securities held for itself and as nominee by AH Parallel. The managing members of AH Equity Partners III (Parallel), L.L.C. are Marc Andreessen and Ben Horowitz. The address for each of these entities is 2865 Sand Hill Road, Suite 101, Menlo Park, California 94025.

 

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DESCRIPTION OF CAPITAL STOCK

The description below of our capital stock and provisions of our certificate of incorporation and bylaws that will be in effect upon completion of the offering are summaries and are qualified by reference to the certificate of incorporation and the bylaws, which are filed as exhibits to the registration statement of which this prospectus is part, and by the applicable provisions of Delaware law.

General

Our certificate of incorporation provides for two classes of common stock: Class A common stock and Class B common stock. In addition, our certificate of incorporation will authorize shares of undesignated preferred stock, the rights, preferences and privileges of which may be designated form time to time by our board of directors.

Upon the completion of this offering, our authorized capital stock will consist of              shares, all with a par value of $0.0001 per share, of which:

 

  Ÿ  

            shares are designated as Class A common stock;

 

  Ÿ  

            shares are designated as Class B common stock; and

 

  Ÿ  

            shares are designated as preferred stock.

The following information reflects the filing of our amended and restated certificate of incorporation and the conversion of all outstanding shares of our convertible preferred stock into shares of Class B common stock upon the completion of this offering.

As of June 30, 2013, there were outstanding:

 

  Ÿ  

461,624,111 shares of Class B common stock held by 101 stockholders, including 14,408,855 shares of Class B common stock issued pursuant to early exercise of stock options and restricted stock issuances that are subject to repurchase; and

 

  Ÿ  

54,822,283 shares of Class B common stock issuable upon exercise of outstanding options.

Our shares of Class A common stock and Class B common stock are not redeemable and, following the completion of this offering, will not have preemptive rights.

Class A Common Stock and Class B Common Stock

Voting Rights

Holders of our Class A common stock and Class B common stock have identical rights, provided that, except as otherwise expressly provided in our certificate of incorporation or required by applicable law, on any matter that is submitted to a vote of our stockholders, holders of our Class A common stock are entitled to one vote per share of Class A common stock and holders of our Class B common stock are entitled to ten votes per share of Class B common stock. Holders of shares of Class A common stock and Class B common stock will vote together as a single class on all matters (including the election of directors) submitted to a vote of stockholders, except that there will be a separate vote of our Class A common stock and Class B common stock in the following circumstances:

 

  Ÿ  

if we propose to treat the shares of a class of our common stock differently with respect to any dividend or distribution of cash, property or shares of our stock paid or distributed by us;

 

  Ÿ  

if we propose to treat the shares of a class of our common stock differently with respect to any subdivision or combination of the shares of a class of our common stock; or

 

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  Ÿ  

if we propose to treat the shares of a class of our common stock differently in connection with a change in control with respect to any consideration into which the shares are converted or any consideration paid or otherwise distributed to our stockholders.

In addition, there will be a separate vote of our Class B common stock in order for us to, directly or indirectly, take action in the following circumstances:

 

  Ÿ  

if we propose to amend, alter or repeal any provision of our certificate of incorporation or our bylaws that modifies the voting, conversion or other powers, preferences or other special rights or privileges or restrictions of the Class B common stock; or

 

  Ÿ  

if we reclassify any outstanding shares of Class A common stock into shares having rights as to dividends or liquidation that are senior to the Class B common stock or the right to more than one vote for each share thereof.

Upon the completion of this offering, under our certificate of incorporation, we may not increase or decrease the authorized number of shares of Class A common stock or Class B common stock without the affirmative vote of the holders of a majority of the combined voting power of the outstanding shares of Class A common stock and Class B common stock, voting together as a single class. In addition, we may not issue any shares of Class B common stock, unless that issuance is approved by the affirmative vote of the holders of a majority of the outstanding shares of Class B common stock.

We have not provided for cumulative voting for the election of directors in our amended and restated certificate of incorporation.

Economic Rights

Except as otherwise expressly provided in our certificate of incorporation or required by applicable law, shares of Class A common stock and Class B common stock will have the same rights and privileges and rank equally, share ratably and be identical in all respects as to all matters, including, without limitation, those described below.

Dividends. Any dividend or distributions paid or payable to the holders of shares of Class A common stock and Class B common stock shall be paid pro rata, on an equal priority, pari passu basis, unless different treatment of the shares of each such class is approved by the affirmative vote of the holders of a majority of the outstanding shares of the applicable class of stock treated adversely, voting separately as a class; provided, however, that if a dividend or distribution is paid in the form of Class A common stock or Class B common stock (or rights to acquire shares of Class A common stock or Class B common stock), then the holders of the Class A common stock shall receive Class A common stock (or rights to acquire shares of Class A common stock) and holders of Class B common stock shall receive Class B common stock (or rights to acquire shares of Class B common stock).

Liquidation. In the event of our liquidation, dissolution or winding-up, upon the completion of the distributions required with respect to any series of preferred stock that may then be outstanding, our remaining assets legally available for distribution to stockholders shall be distributed on an equal priority, pro rata basis to the holders of Class A common stock and Class B common stock.

Subdivisions and Combinations. If we subdivide or combine in any manner outstanding shares of Class A common stock or Class B common stock, then the outstanding shares of all common stock will be subdivided or combined in the same proportion and manner.

 

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Change of Control Transaction. In connection with any change of control, the holders of Class A common stock and Class B common stock will be treated equally and identically with respect to shares of Class A common stock or Class B common stock owned by them, unless different treatment of the shares of each class is approved by the affirmative vote of the holders of a majority of the outstanding shares of Class A common stock and Class B common stock, each voting separately as a class.

Conversion

Each share of Class B common stock is convertible at any time at the option of the holder into one share of Class A common stock. In addition, each share of Class B common stock will convert automatically into one share of Class A common stock upon any transfer, whether or not for value and whether voluntary or involuntary or by operation of law, except for certain transfers described in our certificate of incorporation, including, without limitation, certain transfers for tax and estate planning purposes. In addition, upon the date on which there are fewer than              shares of Class B common stock outstanding (as adjusted for stock splits), which represents approximately     % of the outstanding shares of Class A common stock and Class B common stock upon the completion of this offering, all outstanding shares of Class B common stock shall convert automatically into Class A common stock, and no additional shares of Class B common stock will be issued.

Preferred Stock

As of June 30, 2013, there were 241,991,613 shares of our preferred stock outstanding, which will be converted into 242,485,034 shares of Class B common stock immediately prior to the completion of this offering.

Upon the completion of this offering, our board of directors may, without further action by our stockholders, fix the rights, preferences, privileges and restrictions of up to an aggregate of                  shares of preferred stock in one or more series and authorize their issuance. These rights, preferences and privileges could include dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, sinking fund terms and the number of shares constituting any series or the designation of such series, any or all of which may be greater than the rights of our common stock. The issuance of our preferred stock could adversely affect the voting power of holders of our common stock and the likelihood that such holders will receive dividend payments and payments upon liquidation. In addition, the issuance of preferred stock could have the effect of delaying, deferring or preventing a change of control or other corporate action. Upon the completion of this offering, no shares of preferred stock will be outstanding, and we have no present plan to issue any shares of preferred stock.

Options

As of June 30, 2013, under our 2009 Plan, options to purchase an aggregate of 54,822,283 shares of Class B common stock (excluding 580,730 shares issued pursuant to early exercise of options that are subject to repurchase by us) were outstanding and 9,709,892 additional shares of Class B common stock were available for future grant. For additional information regarding the terms of these plans, see the section of this prospectus captioned “Executive Compensation—Employee Benefit Plans.”

Stockholder Registration Rights

After our initial public offering, certain holders of shares of our Class B common stock, including certain holders of 5% of our capital stock and entities affiliated with certain of our directors, will be entitled to certain rights with respect to registration of such shares under the Securities Act. These shares are referred to as registrable securities. The holders of these registrable securities possess

 

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registration rights pursuant to the terms of the investor rights agreement and are described in additional detail below.

The registration of shares of our common stock pursuant to the exercise of registration rights described below would enable the holders to trade these shares without restriction under the Securities Act when the applicable registration statement is declared effective. We will pay the registration expenses, other than underwriting discounts, selling commissions and stock transfer taxes, of the shares registered pursuant to the demand, piggyback and Form S-3 registrations described below.

Generally, in an underwritten offering, the managing underwriter, if any, has the right, subject to specified conditions, to limit the number of shares the holders may include. The demand, piggyback and Form S-3 registration rights described below will expire three years after the effective date of the registration statement, of which this prospectus forms a part, or, with respect to any particular holder, at such time that such holder can sell its shares under Rule 144 of the Securities Act during any three-month period.

Demand Registration Rights

The holders of the registrable securities will be entitled to certain demand registration rights. At any time beginning on the earlier of November 5, 2017 and 180 days following the completion of this offering, the holders of at least 35% of the registrable securities, on not more than two occasions, may request that we register all or a portion of their shares, subject to certain specified exceptions. Such request for registration must cover securities the aggregate offering price of which, before payment of underwriting discounts and commissions, exceeds $15,000,000.

Piggyback Registration Rights

In connection with this offering, the holders of the registrable securities were entitled to, and the necessary percentage of holders waived, their rights to notice of this offering and to include their shares of registrable securities in this offering. If we propose to register for offer and sale any of our securities under the Securities Act in another offering, either for our own account or for the account of other security holders, the holders of these shares will be entitled to certain “piggyback” registration rights allowing them to include their shares in such registration, subject to certain marketing and other limitations. As a result, whenever we propose to file a registration statement under the Securities Act, including a registration statement on Form S-3 as discussed below, other than with respect to a demand registration or a registration statement on Forms S-4 or S-8 or related to stock issued upon conversion of debt securities, the holders of these shares are entitled to notice of the registration and have the right, subject to limitations that the underwriters may impose on the number of shares included in the registration, to include their shares in the registration.

Form S-3 Registration Rights

The holders of the registrable securities will be entitled to certain Form S-3 registration rights. Any holder of these shares can make a request that we register for offer and sale their shares on Form S-3 if we are qualified to file a registration statement on Form S-3, subject to certain specified exceptions. Such request for registration on Form S-3 must cover securities the aggregate offering price of which, before payment of the underwriting discounts and commissions, equals or exceeds $2,000,000. We will not be required to effect more than two registrations on Form S-3 within any 12-month period.

 

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Anti-Takeover Provisions

Section 203 of the Delaware General Corporation Law

We are subject to Section 203 of the Delaware General Corporation Law, which prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years after the date that such stockholder became an interested stockholder, with the following exceptions:

 

  Ÿ  

before such date, the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder;

 

  Ÿ  

upon completion of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction began, excluding for purposes of determining the voting stock outstanding (but not the outstanding voting stock owned by the interested stockholder) those shares owned (1) by persons who are directors and also officers and (2) employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or

 

  Ÿ  

on or after such date, the business combination is approved by the board of directors and authorized at an annual or special meeting of the stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder.

In general, Section 203 defines a “business combination” to include the following:

 

  Ÿ  

any merger or consolidation involving the corporation and the interested stockholder;

 

  Ÿ  

any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder;

 

  Ÿ  

subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder;

 

  Ÿ  

any transaction involving the corporation that has the effect of increasing the proportionate share of the stock or any class or series of the corporation beneficially owned by the interested stockholder; or

 

  Ÿ  

the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits by or through the corporation.

In general, Section 203 defines an “interested stockholder” as an entity or person who, together with the person’s affiliates and associates, beneficially owns, or within three years prior to the time of determination of interested stockholder status did own, 15% or more of the outstanding voting stock of the corporation.

Washington Business Corporation Act

The laws of Washington, where our principal executive offices are located, impose restrictions on certain transactions between certain foreign corporations and significant stockholders. In particular, the Washington Business Corporation Act, or WBCA, prohibits a “target corporation,” with certain exceptions, from engaging in certain “significant business transactions” with a person or group of persons which beneficially owns 10% or more of the voting securities of the target corporation, an

 

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“acquiring person,” for a period of five years after such acquisition, unless the transaction or acquisition of shares is approved by a majority of the members of the target corporation’s board of directors prior to the time of acquisition. Such prohibited transactions may include, among other things:

 

  Ÿ  

any merger or consolidation with, disposition of assets to, or issuance or redemption of stock to or from, the acquiring person;

 

  Ÿ  

any termination of 5% or more of the employees of the target corporation as a result of the acquiring person’s acquisition of 10% or more of the shares; and

 

  Ÿ  

allowing the acquiring person to receive any disproportionate benefit as a stockholder.

After the five-year period, a significant business transaction may take place as long as it complies with certain fair price provisions of the statute or is approved at an annual or special meeting of stockholders.

We will be considered a “target corporation” so long as our principal executive office is located in Washington, and: (1) a majority of our employees are residents of the state of Washington or we employ more than one thousand residents of the state of Washington; (2) a majority of our tangible assets, measured by market value, are located in the state of Washington or we have more than $50 million worth of tangible assets located in the state of Washington; and (3) any one of the following: (a) more than 10% of our stockholders of record are resident in the state of Washington; (b) more than 10% of our shares are owned of record by residents of the state of Washington; or (c) 1,000 or more of our stockholders of record are resident in the state of Washington.

If we meet the definition of a target corporation, the WBCA may have the effect of delaying, deferring or preventing a change of control.

Certificate of Incorporation and Bylaws to be in Effect upon the Completion of this Offering

Our certificate of incorporation to be in effect upon the completion of this offering will provide for our board of directors to be divided into three classes with staggered three-year terms. Only one class of directors will be elected at each annual meeting of our stockholders, with the other classes continuing for the remainder of their respective three-year terms. Because our stockholders do not have cumulative voting rights, stockholders holding a majority of the shares of common stock outstanding will be able to elect all of our directors. Our certificate of incorporation and our bylaws to be effective upon the completion of this offering will also provide that directors may be removed by the stockholders only for cause upon the vote of a majority of our outstanding common stock. Furthermore, the authorized number of directors may be changed only by resolution of the board of directors, and vacancies and newly created directorships on the board of directors may, except as otherwise required by law or determined by the board, only be filled by a majority vote of the directors then serving on the board, even though less than a quorum.

Our certificate of incorporation and bylaws will also provide that all stockholder actions must be effected at a duly called meeting of stockholders and will eliminate the right of stockholders to act by written consent without a meeting. Our bylaws will also provide that only our chairman of the board, chief executive officer or the board of directors pursuant to a resolution adopted by a majority of the total number of authorized directors may call a special meeting of stockholders.

Our certificate of incorporation provides for a two-class common stock structure, which provides our founders, current stockholders, executives and employees with significant influence over all matters requiring stockholder approval, including the election of directors and significant corporate transactions, such as a merger or other sale of our company or its assets.

 

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Our bylaws will also provide that stockholders seeking to present proposals before a meeting of stockholders to nominate candidates for election as directors at a meeting of stockholders must provide timely advance notice in writing, and will specify requirements as to the form and content of a stockholder’s notice.

Our certificate of incorporation and bylaws will provide that the stockholders cannot amend many of the provisions described above except by a vote of 66 2/3% or more of our outstanding common stock.

The combination of these provisions will make it more difficult for our existing stockholders to replace our board of directors as well as for another party to obtain control of us by replacing our board of directors. Since our board of directors has the power to retain and discharge our officers, these provisions could also make it more difficult for existing stockholders or another party to effect a change in management. In addition, the authorization of undesignated preferred stock makes it possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to change our control.

These provisions are intended to enhance the likelihood of continued stability in the composition of our board of directors and its policies and to discourage coercive takeover practices and inadequate takeover bids. These provisions are also designed to reduce our vulnerability to hostile takeovers and to discourage certain tactics that may be used in proxy fights. However, such provisions could have the effect of discouraging others from making tender offers for our shares and may have the effect of delaying changes in our control or management. As a consequence, these provisions may also inhibit fluctuations in the market price of our stock that could result from actual or rumored takeover attempts. We believe that the benefits of these provisions, including increased protection of our potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure our company, outweigh the disadvantages of discouraging takeover proposals, because negotiation of takeover proposals could result in an improvement of their terms.

Choice of Forum

Our certificate of incorporation will provide that the Court of Chancery of the State of Delaware will be the exclusive forum for any derivative action or proceeding brought on our behalf; any action asserting a breach of fiduciary duty; any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our certificate of incorporation or our bylaws; or any action asserting a claim against us that is governed by the internal affairs doctrine.

Listing

We intend to apply to list our Class A common stock on the NASDAQ Global Select Market under the trading symbol “ZU.”

Transfer Agent and Registrar

The transfer agent and registrar for our Class A common stock and Class B common stock is American Stock Transfer & Trust Company, LLC. The transfer agent’s address is 6201 15th Avenue, Brooklyn, New York 11219.

 

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SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, no public market existed for our capital stock. Future sales of shares of our Class A common stock in the public market after this offering, and the availability of shares for future sale, could adversely affect the market prices prevailing from time to time. As described below, only a limited number of shares will be available for sale shortly after this offering due to contractual and legal restrictions on resale. Nonetheless, sales of substantial amounts of our Class A common stock, or the perception that these sales could occur, could adversely affect prevailing market prices for our Class A common stock and could impair our future ability to raise equity capital.

Based on the number of shares outstanding on June 30, 2013, upon completion of this offering,             shares of Class A common stock and             shares of Class B common stock will be outstanding, assuming no exercise of the underwriters’ option to purchase additional shares of Class A common stock, no exercise of outstanding options and the conversion of the shares sold by the selling stockholders in this offering into shares of Class A common stock. All of the shares sold in this offering will be freely tradable without restrictions or further registration under the Securities Act, except for any shares sold to our “affiliates,” as that term is defined under Rule 144 under the Securities Act.

The shares of Class B common stock outstanding following the completion of this offering are “restricted securities,” as that term is defined in Rule 144 under the Securities Act and are subject to lock-up agreements with us as described below. Following the expiration of the lock-up period, restricted securities may be sold in the public market only if registered or if their resale qualifies for exemption from registration described below under Rule 144 or 701 promulgated under the Securities Act, described in greater detail below.

Rule 144

In general, persons who have beneficially owned restricted shares of our common stock for at least six months, and any affiliate of ours who owns either restricted or unrestricted shares of our common stock, are entitled to sell their securities without registration with the SEC under an exemption from registration provided by Rule 144 under the Securities Act.

In general, a person who has beneficially owned restricted shares of our common stock for at least six months would be entitled to sell their securities provided that (1) such person is not deemed to have been one of our affiliates at the time of, or at any time during the 90 days preceding, a sale, (2) we have been subject to the Exchange Act periodic reporting requirements for at least 90 days before the sale, and (3) we are current in our Exchange Act reporting at the time of sale.

Persons who have beneficially owned restricted shares of our common stock for at least six months, but who are our affiliates at the time of, or any time during the 90 days preceding, a sale, would be subject to additional restrictions, by which such person would be entitled to sell within any three-month period only a number of securities that does not exceed the greater of either of the following:

 

  Ÿ  

1% of the number of shares of our Class A common stock then outstanding, which will equal approximately             shares immediately after the completion of this offering based on the number of common shares outstanding as of                     , 2013; and

 

  Ÿ  

the average weekly trading volume of our Class A common stock on             during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale.

Such sales by affiliates must also comply with the manner of sale, current public information and notice provisions of Rule 144.

 

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Rule 701

In general, under Rule 701 a person who purchased shares of our common stock pursuant to a written compensatory plan or contract and who is not deemed to have been one of our affiliates during the immediately preceding 90 days may sell these shares in reliance upon Rule 144, but without being required to comply with the notice, manner of sale, public information requirements or volume limitation provisions of Rule 144. Rule 701 also permits affiliates to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. All holders of Rule 701 shares, however, are required to wait until 90 days after the date of this prospectus before selling such shares pursuant to Rule 701. As of June 30, 2013, 2,392,202 shares of our outstanding common stock had been issued in reliance on Rule 701 as a result of exercises of stock options and issuance of restricted stock. However, substantially all Rule 701 shares are subject to lock-up agreements as described below and will become eligible for sale upon the expiration of the restrictions set forth in those agreements.

Form S-8 Registration Statements

As soon as practicable after the completion of this offering, we intend to file with the SEC one or more registration statements on Form S-8 under the Securities Act to register the offer and sale of shares of our common stock that are issuable pursuant to our 2009 Plan and 2013 Plan. These registration statements will become effective immediately upon filing. Shares covered by these registration statements will then be eligible for sale in the public markets, subject to vesting restrictions, any applicable lock-up agreements described below and Rule 144 limitations applicable to affiliates.

Lock-Up Agreements

We and all of our directors and officers, as well as the other holders of substantially all shares of our common stock outstanding immediately prior to the completion of this offering, have agreed with the underwriters that, for a period of 180 days following the date of this prospectus, subject to certain exceptions, we and they will not, directly or indirectly, offer, sell, contract to sell, pledge, grant any option to purchase, make any short sale or otherwise dispose of or hedge any of our shares of common stock, any options or warrants to purchase shares of our common stock, or any securities convertible into, or exchangeable for or that represent the right to receive shares of our common stock. Goldman, Sachs & Co., in its sole discretion, may at any time release all or any portion of the shares from the restrictions in such agreements.

The lock-up agreements do not contain any pre-established conditions to the waiver by Goldman, Sachs & Co. on behalf of the underwriters of any terms of the lock-up agreements. Any determination to release shares subject to the lock-up agreements would be based on a number of factors at the time of determination, including but not necessarily limited to the market price of the common stock, the liquidity of the trading market for the common stock, general market conditions, the number of shares proposed to be sold, and the timing, purpose and terms of the proposed sale.

In addition to the restrictions contained in the lock-up agreements described above, we have entered into agreements with certain security holders, including the investor rights agreement and our standard form of option agreement, that contain market stand-off provisions imposing restrictions on the ability of such security holders to offer, sell or transfer our equity securities for a period of 180 days following the date of this prospectus.

 

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Registration Rights

Upon the completion of this offering and assuming no exercise of the underwriters’ option to purchase additional shares, the holders of 362,194,084 shares of our Class B common stock, or their transferees, will be entitled to certain rights with respect to the registration of the offer and sale of their shares under the Securities Act. Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration. See the section of this prospectus captioned “Description of Capital Stock—Stockholder Registration Rights” for additional information.

 

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MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS

The following is a general discussion of the material U.S. federal income and estate tax considerations applicable to non-U.S. holders with respect to their ownership and disposition of shares of our Class A common stock issued pursuant to this offering. All prospective non-U.S. holders of our Class A common stock should consult their own tax advisors with respect to the U.S. federal, state, local and non-U.S. tax consequences of the purchase, ownership and disposition of our Class A common stock. In general, a non-U.S. holder means a beneficial owner of our Class A common stock (other than a partnership or an entity or arrangement treated as a partnership for U.S. federal income tax purposes) that is not, for U.S. federal income tax purposes:

 

  Ÿ  

an individual who is a citizen or resident of the United States;

 

  Ÿ  

a corporation, or an entity treated as a corporation for U.S. federal income tax purposes, created or organized in the United States or under the laws of the United States or of any state thereof or the District of Columbia;

 

  Ÿ  

an estate, the income of which is subject to U.S. federal income tax regardless of its source; or

 

  Ÿ  

a trust if (1) a U.S. court can exercise primary supervision over the trust’s administration and one or more U.S. persons have the authority to control all of the trust’s substantial decisions or (2) the trust has a valid election in effect under applicable U.S. Treasury Regulations to be treated as a U.S. person.

This discussion is based on current provisions of the U.S. Internal Revenue Code of 1986, as amended, which we refer to as the Code, existing U.S. Treasury Regulations promulgated thereunder, published administrative rulings and judicial decisions, all as in effect as of the date of this prospectus. These laws are subject to change and to differing interpretation, possibly with retroactive effect. Any change or differing interpretation could alter the tax consequences to non-U.S. holders described in this prospectus.

We assume in this discussion that a non-U.S. holder holds shares of our Class A common stock as a capital asset within the meaning of Section 1221 of the Code (generally, for investment). This discussion does not address all aspects of U.S. federal income and estate taxation that may be relevant to a particular non-U.S. holder in light of that non-U.S. holder’s individual circumstances, nor does it address any aspects of U.S. state, local or non-U.S. taxes. This discussion also does not consider any specific facts or circumstances that may apply to a non-U.S. holder and does not address the special tax rules applicable to particular non-U.S. holders, such as holders that own, or are deemed to own, more than 5% of our capital stock (except to the extent specifically set forth below), corporations that accumulate earnings to avoid U.S. federal income tax, tax-exempt organizations, banks, financial institutions, insurance companies, brokers, dealers or traders in securities, commodities or currencies, tax-qualified retirement plans, holders subject to the alternative minimum tax or Medicare contribution tax, holders who hold or receive our Class A common stock pursuant to the exercise of employee stock options or otherwise as compensation, holders holding our Class A common stock as part of a hedge, straddle or other risk reduction strategy, conversion transaction or other integrated investment, holders deemed to sell our Class A common stock under the constructive sale provisions of the Code, controlled foreign corporations, passive foreign investment companies and certain former U.S. citizens or long-term residents.

In addition, this discussion does not address the tax treatment of partnerships (or entities or arrangements that are treated as partnerships for U.S. federal income tax purposes) or persons that hold their Class A common stock through such partnerships. If a partnership, including any entity or arrangement treated as a partnership for U.S. federal income tax purposes, holds shares of our Class A common stock, the U.S. federal income tax treatment of a partner in such partnership will

 

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generally depend upon the status of the partner and the activities of the partnership. Such partners and partnerships should consult their own tax advisors regarding the tax consequences of the purchase, ownership and disposition of our Class A common stock.

There can be no assurance that the Internal Revenue Service, which we refer to as the IRS, will not challenge one or more of the tax consequences described herein, and we have not obtained, nor do we intend to obtain, a ruling with respect to the U.S. federal income or estate tax consequences to a non-U.S. holder of the purchase, ownership or disposition of our Class A common stock.

Distributions on Our Class A Common Stock

Distributions, if any, on our Class A common stock generally will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. If a distribution exceeds our current and accumulated earnings and profits, the excess will be treated as a tax-free return of the non-U.S. holder’s investment, up to such holder’s adjusted tax basis in the Class A common stock. Any remaining excess will be treated as capital gain from the sale or exchange of such Class A common stock, subject to the tax treatment described below in “Gain on Sale, Exchange or Other Disposition of Our Class A Common Stock.” Any such distribution will also be subject to the discussion below under the heading “Foreign Accounts.”

Dividends paid to a non-U.S. holder will generally be subject to withholding of U.S. federal income tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty between the United States and such holder’s country of residence.

Dividends that are treated as effectively connected with a trade or business conducted by a non-U.S. holder within the United States and, if an applicable income tax treaty so provides, that are attributable to a permanent establishment or a fixed base maintained by the non-U.S. holder within the United States, are generally exempt from the 30% withholding tax if the non-U.S. holder satisfies applicable certification and disclosure requirements. However, such U.S. effectively connected income, net of specified deductions and credits, is taxed at the same graduated U.S. federal income tax rates applicable to U.S. persons (as defined in the Code). Any U.S. effectively connected income received by a non-U.S. holder that is a corporation may also, under certain circumstances, be subject to an additional “branch profits tax” at a 30% rate or such lower rate as may be specified by an applicable income tax treaty between the United States and such holder’s country of residence.

A non-U.S. holder of our Class A common stock who claims the benefit of an applicable income tax treaty between the United States and such holder’s country of residence generally will be required to provide a properly executed IRS Form W-8BEN (or successor form) and satisfy applicable certification and other requirements. Non-U.S. holders are urged to consult their tax advisors regarding their entitlement to benefits under a relevant income tax treaty.

A non-U.S. holder that is eligible for a reduced rate of U.S. withholding tax under an income tax treaty may obtain a refund or credit of any excess amounts withheld by timely filing an appropriate claim for refund with the IRS.

 

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Gain on Sale, Exchange or Other Disposition of Our Class A Common Stock

Subject to the discussion below regarding backup withholding and foreign accounts, in general, a non-U.S. holder will not be subject to any U.S. federal income tax on any gain realized upon such holder’s sale, exchange or other disposition of shares of our Class A common stock unless:

 

  Ÿ  

the gain is effectively connected with a U.S. trade or business of the non-U.S. holder and, if an applicable income tax treaty so provides, is attributable to a permanent establishment or a fixed base maintained in the United States by such non-U.S. holder, in which case the non-U.S. holder generally will be taxed at the graduated U.S. federal income tax rates applicable to U.S. persons (as defined in the Code) and, if the non-U.S. holder is a foreign corporation, the branch profits tax described above in “Distributions on Our Class A Common Stock” also may apply;

 

  Ÿ  

the non-U.S. holder is a nonresident alien individual who is present in the United States for 183 days or more in the taxable year of the disposition and certain other conditions are met, in which case the non-U.S. holder will be subject to a 30% tax (or such lower rate as may be specified by an applicable income tax treaty) on the net gain derived from the disposition, which may be offset by U.S. source capital losses of the non-U.S. holder, if any (even though the individual is not considered a resident of the United States); or

 

  Ÿ  

our Class A common stock constitutes a U.S. real property interest because we are, or have been, at any time during the five-year period preceding such disposition (or the non-U.S. holder’s holding period, if shorter) a “U.S. real property holding corporation.” Even if we are or become a U.S. real property holding corporation, provided that our Class A common stock is regularly traded on an established securities market, our Class A common stock will be treated as a U.S. real property interest only with respect to a non-U.S. holder that holds more than 5% of our outstanding Class A common stock, directly or indirectly, actually or constructively, during the shorter of the 5-year period ending on the date of the disposition or the period that the non-U.S. holder held our Class A common stock. In such case, such non-U.S. holder generally will be taxed on its net gain derived from the disposition at the graduated U.S. federal income tax rates applicable to U.S. persons (as defined in the Code). Generally, a corporation is a U.S. real property holding corporation only if the fair market value of its U.S. real property interests equals or exceeds 50% of the sum of the fair market value of its worldwide real property interests plus its other assets used or held for use in a trade or business. Although there can be no assurance, we do not believe that we are, or have been, a U.S. real property holding corporation, or that we are likely to become one in the future. No assurance can be provided that our Class A common stock will be regularly traded on an established securities market for purposes of the rules described above.

U.S. Federal Estate Tax

Shares of our Class A common stock that are owned or treated as owned at the time of death by an individual who is not a citizen or resident of the United States, as specifically defined for U.S. federal estate tax purposes, are considered U.S. situs assets and will be included in the individual’s gross estate for U.S. federal estate tax purposes. Such shares, therefore, may be subject to U.S. federal estate tax, unless an applicable estate tax or other treaty provides otherwise.

Backup Withholding and Information Reporting

We must report annually to the IRS and to each non-U.S. holder the gross amount of the dividends on our Class A common stock paid to such holder and the tax withheld, if any, with respect to such dividends. Non-U.S. holders will have to comply with specific certification procedures to establish that the holder is not a U.S. person (as defined in the Code) in order to avoid backup withholding at the applicable rate with respect to dividends on our Class A common stock. Dividends

 

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paid to non-U.S. holders subject to the U.S. withholding tax, as described above in “Distributions on Our Class A Common Stock,” generally will be exempt from U.S. backup withholding.

Information reporting and backup withholding will generally apply to the proceeds of a disposition of our Class A common stock by a non-U.S. holder effected by or through the U.S. office of any broker, U.S. or foreign, unless the holder certifies its status as a non-U.S. holder and satisfies certain other requirements, or otherwise establishes an exemption. Generally, information reporting and backup withholding will not apply to a payment of disposition proceeds to a non-U.S. holder where the transaction is effected outside the United States through a non-U.S. office of a broker. However, for information reporting purposes, dispositions effected through a non-U.S. office of a broker with substantial U.S. ownership or operations generally will be treated in a manner similar to dispositions effected through a U.S. office of a broker. Non-U.S. holders should consult their own tax advisors regarding the application of the information reporting and backup withholding rules to them.

Copies of information returns may be made available to the tax authorities of the country in which the non-U.S. holder resides or is incorporated under the provisions of a specific treaty or agreement.

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules from a payment to a non-U.S. holder may be allowed as a credit against the non-U.S. holder’s U.S. federal income tax liability, if any, and may entitle such holder to a refund, provided that the required information is timely furnished to the IRS.

Foreign Accounts

The Code generally imposes a U.S. federal withholding tax of 30% on dividends and the gross proceeds of a disposition of our Class A common stock paid to a “foreign financial institution” (as specifically defined for this purpose), unless such institution enters into an agreement with the U.S. government to, among other things, withhold on certain payments and to collect and provide to the U.S. tax authorities substantial information regarding U.S. account holders of such institution (which includes certain equity and debt holders of such institution, as well as certain account holders that are foreign entities with U.S. owners). A U.S. federal withholding tax of 30% also applies to dividends and the gross proceeds of a disposition of our Class A common stock paid to a non-financial foreign entity, unless such entity provides the withholding agent with either a certification that it does not have any substantial direct or indirect U.S. owners or provides information regarding substantial direct and indirect U.S. owners of the entity. The withholding provisions described above will generally apply to dividends on our Class A common stock paid on or after July 1, 2014 and with respect to gross proceeds of a sale or other disposition of our Class A common stock on or after January 1, 2017. Under certain circumstances, a non-U.S. holder might be eligible for refunds or credits of such taxes.

 

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UNDERWRITING

We, the selling stockholders and the underwriters named below, have entered into an underwriting agreement with respect to the shares being offered. Subject to certain conditions, each underwriter has severally agreed to purchase the number of shares indicated in the following table. Goldman, Sachs & Co. is the representative of the underwriters.

 

                       Underwriters    Number
of Shares

Goldman, Sachs & Co.

  

Merrill Lynch, Pierce, Fenner & Smith

                   Incorporated

  

Citigroup Global Markets Inc.

  

RBC Capital Markets, LLC

  

Allen & Company LLC

  

William Blair & Company, L.L.C.

  
  

 

Total

  
  

 

The underwriters are committed to take and pay for all of the shares being offered, if any are taken, other than the shares covered by the option described below unless and until this option is exercised.

The underwriters have an option to buy up to an additional             shares from us and the selling stockholders to cover sales by the underwriters of a greater number of shares than the total number set forth in the table above. They may exercise that option for 30 days. If any shares are purchased pursuant to this option, the underwriters will severally purchase shares in approximately the same proportion as set forth in the table above.

The following tables show the per share and total underwriting discounts and commissions to be paid to the underwriters by us and the selling stockholders. Such amounts are shown assuming both no exercise and full exercise of the underwriters’ option to purchase             additional shares.

Paid by the Company

 

     No Exercise      Full Exercise  

Per Share

   $                    $                

Total

   $         $     

Paid by the Selling Stockholders

 

     No Exercise      Full Exercise  

Per Share

   $                    $                

Total

   $         $     

Shares sold by the underwriters to the public will initially be offered at the initial public offering price set forth on the cover of this prospectus. Any shares sold by the underwriters to securities dealers may be sold at a discount of up to $         per share from the initial public offering price. After the initial offering of the shares, the representative may change the offering price and the other selling terms. The offering of the shares by the underwriters is subject to receipt and acceptance and subject to the underwriters’ right to reject any order in whole or in part.

 

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We and our officers, directors and holders of substantially all of our common stock, including the selling stockholders, have agreed with the underwriters, subject to certain exceptions, not to dispose of or hedge any of their common stock or securities convertible into or exchangeable for shares of common stock during the period from the date of this prospectus continuing through the date 180 days after the date of this prospectus, except with the prior written consent of Goldman, Sachs & Co. See the section of this prospectus captioned “Shares Eligible for Future Sale” for a discussion of certain transfer restrictions.

Prior to the offering, there has been no public market for the shares. The initial public offering price will be negotiated between us and the underwriters. Among the factors to be considered in determining the initial public offering price of the shares, in addition to prevailing market conditions, will be our historical performance, estimates of the business potential and our earnings prospects, an assessment of our management and the consideration of the above factors in relation to market valuation of companies in related businesses.

We intend to apply to have our Class A common stock listed on the NASDAQ Global Select Market under the symbol “ZU.” In order to meet one of the requirements for listing the Class A common stock on the NASDAQ Global Select Market, the underwriters have undertaken to sell lots of 100 or more shares to a minimum of 450 beneficial holders.

In connection with the offering, the underwriters may purchase and sell shares of Class A 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, and a short position represents the amount of such sales that have not been covered by subsequent purchases. A “covered short position” is a short position that is not greater than the amount of additional shares for which the underwriters’ option described above may be exercised. The underwriters may cover any covered short position by either exercising their option to purchase additional shares or purchasing shares in the open market. In determining the source of shares to cover the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase additional shares pursuant to the option described above. “Naked” short sales are any short sales that create a short position greater than the amount of additional shares for which the option described above may be exercised. The underwriters must cover any such 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 our Class A 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 Class A 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 Goldman, Sachs & Co. has repurchased shares sold by or for the account of such underwriter in stabilizing or short covering transactions.

Purchases to cover a short position and stabilizing transactions, as well as other purchases by the underwriters for their own accounts, may have the effect of preventing or retarding a decline in the market price of our stock, and together with the imposition of the penalty bid, may stabilize, maintain or otherwise affect the market price of our Class A common stock. As a result, the price of our Class A common stock may be higher than the price that otherwise might exist in the open market. The underwriters are not required to engage in these activities and may end any of these activities at any time. These transactions may be effected on the            , in the over-the-counter market or otherwise.

 

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The underwriters do not expect sales to discretionary accounts to exceed five percent of the total number of shares offered.

We and the selling stockholders estimate that our share of the total expenses of the offering, including registration, filing and listing fees, printing fees and legal and accounting expenses and the expenses of FINRA qualification that we will reimburse to the underwriters in an amount up to $            , but excluding underwriting discounts and commissions, will be approximately $            .

We and the selling stockholders have agreed to indemnify the several underwriters against certain liabilities, including liabilities under the Securities Act.

The underwriters and their respective affiliates are full service financial institutions engaged in various activities, which may include sales and trading, commercial and investment banking, advisory, investment management, investment research, principal investment, hedging, market making, brokerage and other financial and non-financial activities and services. Certain of the underwriters and their respective affiliates have provided, and may in the future provide, a variety of these services to us and to persons and entities with relationships with us, for which they received or will receive customary fees and expenses.

In the ordinary course of their various business activities, the underwriters and their respective affiliates, officers, directors and employees may purchase, sell or hold a broad array of investments and actively trade securities, derivatives, loans, commodities, currencies, credit default swaps and other financial instruments for their own account and for the accounts of their customers, and such investment and trading activities may involve or relate to assets, securities and/or instruments of ours (directly, as collateral securing other obligations or otherwise) and/or persons and entities with relationships with us. The underwriters and their respective affiliates may also communicate independent investment recommendations, market color or trading ideas and/or publish or express independent research views in respect of such assets, securities or instruments and may at any time hold, or recommend to clients that they should acquire, long and/or short positions in such assets, securities and instruments.

Notice to Prospective Investors in European Economic Area

In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a Relevant Member State), each underwriter has represented and agreed that with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State (the Relevant Implementation Date) it has not made and will not make an offer of shares to the public in that Relevant Member State prior to the publication of a prospectus in relation to the shares which has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance with the Prospectus Directive, except that it may, with effect from and including the Relevant Implementation Date, make an offer of shares to the public in that Relevant Member State at any time:

 

  (a) to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities;

 

  (b) to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year, (2) a total balance sheet of more than 43,000,000 and (3) an annual net turnover of more than 50,000,000, as shown in its last annual or consolidated accounts;

 

  (c) to fewer than 100 natural or legal persons (other than qualified investors as defined in the Prospectus Directive) subject to obtaining the prior consent of the representatives for any such offer; or

 

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  (d) in any other circumstances which do not require the publication by the Issuer of a prospectus pursuant to Article 3 of the Prospectus Directive.

For the purposes of this provision, the expression an “offer of shares to the public” in relation to any shares in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the shares to be offered so as to enable an investor to decide to purchase or subscribe the shares, as the same may be varied in that Relevant Member State by any measure implementing the Prospectus Directive in that Relevant Member State and the expression Prospectus Directive means Directive 2003/71/EC and includes any relevant implementing measure in each Relevant Member State.

Notice to Prospective Investors in United Kingdom

Each underwriter has represented and agreed that:

 

  (a) it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the FSMA) received by it in connection with the issue or sale of the shares in circumstances in which Section 21(1) of the FSMA does not apply to the Issuer; and

 

  (b) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the shares in, from or otherwise involving the United Kingdom.

Notice to Prospective Investors in Hong Kong

The shares may not be offered or sold by means of any document other than (a) in circumstances which do not constitute an offer to the public within the meaning of the Companies Ordinance (Cap. 32, Laws of Hong Kong), or (b) to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong) and any rules made thereunder, or (c) in other circumstances which do not result in the document being a “prospectus” within the meaning of the Companies Ordinance (Cap. 32, Laws of Hong Kong), and no advertisement, invitation or document relating to the shares may be issued or may be in the possession of any person for the purpose of issue (in each case whether in Hong Kong or elsewhere), which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the laws of Hong Kong) other than with respect to shares which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong) and any rules made thereunder.

Notice to Prospective Investors in Singapore

This prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this prospectus and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the shares may not be circulated or distributed, nor may the shares be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore (the “SFA”), (ii) to a relevant person, or any person pursuant to Section 275(1A), and in accordance with the conditions, specified in Section 275 of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.

 

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Where the shares are subscribed or purchased under Section 275 by a relevant person which is: (a) a corporation (which is not an accredited investor) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or (b) a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary is an accredited investor, shares, debentures and units of shares and debentures of that corporation or the beneficiaries’ rights and interest in that trust shall not be transferable for 6 months after that corporation or that trust has acquired the shares under Section 275 except: (1) to an institutional investor under Section 274 of the SFA or to a relevant person, or any person pursuant to Section 275(1A), and in accordance with the conditions, specified in Section 275 of the SFA; (2) where no consideration is given for the transfer; or (3) by operation of law.

Notice to Prospective Investors in Japan

The securities have not been and will not be registered under the Financial Instruments and Exchange Law of Japan (the Financial Instruments and Exchange Law) and each underwriter has agreed that it will not offer or sell any securities, directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan (which term as used herein means any person resident in Japan, including any corporation or other entity organized under the laws of Japan), or to others for re-offering or resale, directly or indirectly, in Japan or to a resident of Japan, except pursuant to an exemption from the registration requirements of, and otherwise in compliance with, the Financial Instruments and Exchange Law and any other applicable laws, regulations and ministerial guidelines of Japan.

Notice to Prospective Investors in Australia

No placement document, prospectus, product disclosure statement or other disclosure document has been lodged with the Australian Securities and Investments Commission (“ASIC”), in relation to the offering. This prospectus does not constitute a prospectus, product disclosure statement or other disclosure document under the Corporations Act 2001 (the “Corporations Act”), and does not purport to include the information required for a prospectus, product disclosure statement or other disclosure document under the Corporations Act.

Any offer in Australia of the shares may only be made to persons (the “Exempt Investors”) who are “sophisticated investors” (within the meaning of section 708(8) of the Corporations Act), “professional investors” (within the meaning of section 708(11) of the Corporations Act) or otherwise pursuant to one or more exemptions contained in section 708 of the Corporations Act so that it is lawful to offer the shares without disclosure to investors under Chapter 6D of the Corporations Act.

The shares applied for by Exempt Investors in Australia must not be offered for sale in Australia in the period of 12 months after the date of allotment under the offering, except in circumstances where disclosure to investors under Chapter 6D of the Corporations Act would not be required pursuant to an exemption under section 708 of the Corporations Act or otherwise or where the offer is pursuant to a disclosure document which complies with Chapter 6D of the Corporations Act. Any person acquiring shares must observe such Australian on-sale restrictions.

This prospectus contains general information only and does not take account of the investment objectives, financial situation or particular needs of any particular person. It does not contain any securities recommendations or financial product advice. Before making an investment decision, investors need to consider whether the information in this prospectus is appropriate to their needs, objectives and circumstances, and, if necessary, seek expert advice on those matters.

 

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Notice to Prospective Investors in the Dubai International Financial Centre

This prospectus relates to an Exempt Offer in accordance with the Offered Securities Rules of the Dubai Financial Services Authority (“DFSA”). This prospectus is intended for distribution only to persons of a type specified in the Offered Securities Rules of the DFSA. It must not be delivered to, or relied on by, any other person. The DFSA has no responsibility for reviewing or verifying any documents in connection with Exempt Offers. The DFSA has not approved this prospectus nor taken steps to verify the information set forth herein and has no responsibility for the prospectus. The shares to which this prospectus relates may be illiquid and/or subject to restrictions on their resale. Prospective purchasers of the shares offered should conduct their own due diligence on the shares. If you do not understand the contents of this prospectus you should consult an authorized financial advisor.

Notice to Prospective Investors in Switzerland

We have not and will not register with the Swiss Financial Market Supervisory Authority (“FINMA”) as a foreign collective investment scheme pursuant to Article 119 of the Federal Act on Collective Investment Scheme of 23 June 2006, as amended (“CISA”), and accordingly the securities being offered pursuant to this prospectus have not and will not be approved, and may not be licenseable, with FINMA. Therefore, the securities have not been authorized for distribution by FINMA as a foreign collective investment scheme pursuant to Article 119 CISA and the securities offered hereby may not be offered to the public (as this term is defined in Article 3 CISA) in or from Switzerland. The securities may solely be offered to “qualified investors,” as this term is defined in Article 10 CISA, and in the circumstances set out in Article 3 of the Ordinance on Collective Investment Scheme of 22 November 2006, as amended (“CISO”), such that there is no public offer. Investors, however, do not benefit from protection under CISA or CISO or supervision by FINMA. This prospectus and any other materials relating to the securities are strictly personal and confidential to each offeree and do not constitute an offer to any other person. This prospectus may only be used by those qualified investors to whom it has been handed out in connection with the offer described herein and may neither directly or indirectly be distributed or made available to any person or entity other than its recipients. It may not be used in connection with any other offer and shall in particular not be copied and/or distributed to the public in Switzerland or from Switzerland. This prospectus does not constitute an issue prospectus as that term is understood pursuant to Article 652a and/or 1156 of the Swiss Federal Code of Obligations. We have not applied for a listing of the securities on the SIX Swiss Exchange or any other regulated securities market in Switzerland, and consequently, the information presented in this prospectus does not necessarily comply with the information standards set out in the listing rules of the SIX Swiss Exchange and corresponding prospectus schemes annexed to the listing rules of the SIX Swiss Exchange.

 

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LEGAL MATTERS

The validity of the shares of Class A common stock offered hereby will be passed upon for us by Cooley LLP, Seattle, Washington. As of the date of this prospectus, GC&H Investments, LLC and GC&H Investments, entities comprised of partners and associates of Cooley LLP, beneficially own an aggregate 48,207 shares of our preferred stock, which will be converted into 48,787 shares of our Class B common stock upon completion of this offering. Wilson Sonsini Goodrich & Rosati, Professional Corporation, Seattle, Washington is acting as counsel to the underwriters.

EXPERTS

The consolidated financial statements of Zulily, Inc. as of January 1, 2012 and December 30, 2012 and for each of the three years in the period ended December 30, 2012 included in this prospectus have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report appearing herein. Such financial statements have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the shares of our Class A common stock offered under this prospectus. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement and the exhibits. For further information about us and our Class A common stock, you should refer to the registration statement and the exhibits and schedules filed with the registration statement. With respect to the statements contained in this prospectus regarding the contents of any agreement or any other document, in each instance, the statement is qualified in all respects by the complete text of the agreement or document, a copy of which has been filed as an exhibit to the registration statement.

Upon completion of this offering, we will be required to file annual, quarterly and current reports, proxy statements and other information with the SEC pursuant to the Exchange Act. You may read and copy this information at the SEC at its public reference facilities located at 100 F Street N.E., Room 1580, Washington, D.C. 20549, at prescribed rates. You may obtain information on the operation of the public reference rooms by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website that contains periodic reports, proxy statements and other information about issuers, like us, that file electronically with the SEC. The address of that site is www.sec.gov.

We intend to furnish our stockholders with annual reports containing audited financial statements and to file with the SEC quarterly reports containing unaudited interim financial data for the first three quarters of each fiscal year. We also maintain a website on the Internet at www.zulily.com. However, the information contained in or accessible through our website is not part of this prospectus or the registration statement of which this prospectus forms a part, and investors should not rely on such information in making a decision to purchase our Class A common stock in this offering.

 

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ZULILY, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

     Page  

Report of Independent Registered Public Accounting Firm

     F-2   

Consolidated Balance Sheets

     F-3   

Consolidated Statements of Operations

     F-4   

Consolidated Statements of Comprehensive Operations

     F-5   

Consolidated Statements of Convertible Redeemable Preferred Stock and Stockholders’ Equity (Deficit)

     F-6   

Consolidated Statements of Cash Flows

     F-7   

Notes to Consolidated Financial Statements

     F-8   

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Zulily, Inc.

Seattle, Washington

We have audited the accompanying consolidated balance sheets of Zulily, Inc. and subsidiary (the “Company”) as of January 1, 2012 and December 30, 2012, and the related consolidated statements of operations, comprehensive operations, convertible redeemable preferred stock and stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 30, 2012. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by 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 Zulily, Inc. and subsidiary as of January 1, 2012 and December 30, 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 30, 2012 in conformity with accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche LLP

Seattle, Washington

August 8, 2013

(September 25, 2013 as to Notes 12 and 13)

 

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ZULILY, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

 

    January 1,
2012
    December 30,
2012
    June 30,
2013
    Pro Forma
Stockholders’
Equity
June 30,
2013
 
                (unaudited)  

ASSETS

       

CURRENT ASSETS:

       

Cash and cash equivalents

  $ 28,361      $ 96,998      $ 83,015     

Short-term investments

    14,000        8,000        18,005     

Restricted cash

    2,600        681        600     

Accounts receivable

    620        3,043        4,175     

Inventories

    4,603        7,571        10,083     

Prepaid expenses and other current assets

    878        1,700        3,058     

Merchandise deposits

    591        946        692     
 

 

 

   

 

 

   

 

 

   

Total current assets

    51,653        118,939        119,628     

PROPERTY AND EQUIPMENT—Net

    6,394        11,191        17,198     

OTHER NON-CURRENT ASSETS

    276        607        1,119     
 

 

 

   

 

 

   

 

 

   

TOTAL ASSETS

  $ 58,323      $ 130,737      $ 137,945     
 

 

 

   

 

 

   

 

 

   

LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

       

CURRENT LIABILITIES:

       

Accounts payable

  $ 19,844      $ 34,198      $ 29,763     

Accrued expenses

    5,468        12,483        15,469     

Deferred revenue

    3,520        9,653        13,156     
 

 

 

   

 

 

   

 

 

   

Total current liabilities

    28,832        56,334        58,388     

NON-CURRENT LIABILITIES

    140        1,439        1,394     
 

 

 

   

 

 

   

 

 

   

Total liabilities

    28,972        57,773        59,782     
 

 

 

   

 

 

   

 

 

   

COMMITMENTS AND CONTINGENCIES (Note 5)

       

CONVERTIBLE REDEEMABLE PREFERRED STOCK

       

Series Seed convertible redeemable preferred stock, $0.00002 par value—authorized 38,643,800; issued and outstanding, 38,643,800 as of January 1, 2012 and 22,163,095 as of December 30, 2012 and June 30, 2013, respectively (preference in liquidation of $344); pro forma, no shares issued and outstanding (unaudited)

    604                        

Series A convertible redeemable preferred stock, $0.00002 par value—authorized 115,502,600; issued and outstanding, 115,502,600 as of January 1, 2012 and 113,550,910 as of December 30, 2012 and June 30, 2013, respectively (preference in liquidation of $4,139); pro forma, no shares issued and outstanding (unaudited)

    5,310                        

Series B convertible redeemable preferred stock, $0.00002 par value—authorized, issued and outstanding 44,923,630 shares as of January 1, 2012, December 30, 2012, and June 30, 2013 (preference in liquidation of $6,000); pro forma, no shares issued and outstanding (unaudited)

    6,645        7,182        7,462          

Series C convertible redeemable preferred stock, $0.00002 par value—authorized, issued and outstanding 20,378,275 shares as of January 1, 2012, December 30, 2012, and June 30, 2013 (preference in liquidation of $32,000); pro forma, no shares issued and outstanding (unaudited)

    32,960        35,590        36,972          

Series D convertible redeemable preferred stock, $0.00002 par value—40,975,703 authorized; issued and outstanding, zero as of January 1, 2012 and 40,975,703 as of December 30, 2012 and June 30, 2013 (preference in liquidation of $85,000); pro forma, no shares issued and outstanding (unaudited)

           85,942        89,342          
 

 

 

   

 

 

   

 

 

   

 

 

 

Total convertible redeemable preferred stock

    45,519        128,714        133,776          

STOCKHOLDERS’ EQUITY (DEFICIT)

       

Series Seed convertible preferred stock, $0.00002 par value—authorized 38,643,800; issued and outstanding, 38,643,800 as of January 1, 2012 and 22,163,095 as of December 30, 2012 and June 30, 2013, respectively (preference in liquidation of $344); pro forma, no shares issued and outstanding (unaudited)

                           

Series A convertible preferred stock, $0.00002 par value—authorized 115,502,600; issued and outstanding, 115,502,600 as of January 1, 2012 and 113,550,910 as of December 30, 2012 and June 30, 2013, respectively (preference in liquidation of $4,139); pro forma, no shares issued and outstanding (unaudited)

           2        2          

Common stock, $.00002 par value—authorized 528,500,000; issued and outstanding, 217,329,020, 218,247,058, and 219,139,077 as of January 1, 2012, December 30, 2012, and June 30, 2013, respectively; including 36,935,416 and 13,828,125 shares subject to repurchase as of December 30, 2012 and June 30, 2013, respectively; pro forma, 461,624,111 shares issued and outstanding (unaudited)

    4        5        5        9   

Additional paid-in capital

    2,229                      133,774   

Accumulated other comprehensive (loss) income

           (6     18        18   

Accumulated deficit

    (18,401     (55,751     (55,638     (55,638
 

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity (deficit)

    (16,168     (55,750     (55,613     78,163   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities, convertible redeemable preferred stock, and stockholders’ equity (deficit)

  $ 58,323      $ 130,737      $ 137,945          
 

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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ZULILY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)

 

     Year Ended     Six Months Ended  
     December 31,
2010
    January 1,
2012
    December 30,
2012
    July 1, 2012     June 30,
2013
 
                       (unaudited)  

NET SALES

   $ 18,376      $ 142,545      $ 331,240      $ 126,993      $ 272,021   

COST OF SALES

     12,574        104,949        240,943        91,252        191,506   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

GROSS PROFIT

     5,802        37,596        90,297        35,741        80,515   

OPERATING EXPENSES:

          

Marketing

     4,897        20,228        37,780        15,600        28,056   

Selling, general, and administrative

     7,112        28,905        63,071        26,499        50,069   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL OPERATING EXPENSES

     12,009        49,133        100,851        42,099        78,125   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(LOSS) INCOME FROM OPERATIONS

     (6,207     (11,537     (10,554     (6,358     2,390   

INTEREST (EXPENSE) INCOME—Net

     (169     20        43        16        64   

OTHER (EXPENSE) INCOME—Net

     (627     203        176        180        (48
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET (LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES

     (7,003     (11,314     (10,335     (6,162     2,406   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

PROVISION FOR INCOME TAXES

                                   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET (LOSS) INCOME

   $ (7,003   $ (11,314   $ (10,335   $ (6,162   $ 2,406   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (7,448   $ (13,233   $ (46,822   $ (7,883   $ (2,656
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders:

          

Basic

   $ (0.11   $ (0.14   $ (0.31   $ (0.06   $ (0.01
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ (0.11   $ (0.14   $ (0.31   $ (0.06   $ (0.01
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding used to compute net loss per share attributable to common stockholders:

          

Basic

     65,390,625        96,411,124        151,906,924        138,402,501        193,075,922   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     65,390,625        96,411,124        151,906,924        138,402,501        193,075,922   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to common stockholders—pro forma (unaudited)

       $ (42,447     $ 2,121   
      

 

 

     

 

 

 

Pro forma net (loss) income per common share (unaudited):

          

Basic

       $ (0.11     $   
      

 

 

     

 

 

 

Diluted

       $ (0.11     $   
      

 

 

     

 

 

 

Weighted average shares outstanding used to compute pro forma net (loss) income per common share (unaudited):

          

Basic

         375,217,245          443,434,097   
      

 

 

     

 

 

 

Diluted

         375,217,245          450,155,335   
      

 

 

     

 

 

 

See notes to consolidated financial statements.

 

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Table of Contents

ZULILY, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS

(in thousands)

 

    Year Ended     Six Months
Ended
 
    December 31,
2010
    January 1,
2012
    December 30,
2012
    July 1,
2012
    June 30,
2013
 
                      (unaudited)  

NET (LOSS) INCOME

  $ (7,003   $ (11,314   $ (10,335   $ (6,162   $ 2,406   

OTHER COMPREHENSIVE INCOME (LOSS):

         

Unrealized holding gains (losses) on available-for-sale securities

                  5        1        (1

Foreign currency translation adjustment

                  (11     (4     25   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

OTHER COMPREHENSIVE INCOME (LOSS), NET

                  (6     (3     24   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL COMPREHENSIVE (LOSS) INCOME

  $ (7,003   $ (11,314   $ (10,341   $ (6,165   $ 2,430   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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Table of Contents

ZULILY, INC.

CONSOLIDATED STATEMENTS OF CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

(in thousands, except share amounts)

 

 

    Convertible Redeemable
Preferred Stock
         Convertible
Preferred Stock
    Common Stock     Additional
Paid-In
Capital
    Accumulated
Other
Comprehensive
(Loss) Income
    Accumulated
Deficit
    Total
Stockholders’
Deficit
 
    Shares     Amount          Shares     Amount     Shares     Amount          

BALANCES—January 1, 2010

    38,643,800      $ 503                 $        211,250,000      $ 4      $ 13      $      $ (84   $ (67
 

Net loss

                                                                (7,003     (7,003

Issuance of convertible redeemable preferred stock—net of issuance costs of $106

    160,426,230        10,761                                                               

Accretion of convertible redeemable preferred stock

           445                                        (445                   (445

Stock-based compensation

                                                  2,401                      2,401   
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCES—December 31, 2010

    199,070,030        11,709                          211,250,000        4        1,969               (7,087     (5,114
 

Net loss

                                                                (11,314     (11,314

Issuance of convertible redeemable preferred stock—net of issuance costs of $109

    20,378,275        31,891                                                               

Accretion of convertible redeemable preferred stock

           1,919                                        (1,919                   (1,919

Issuance of common stock

                                    13,571,785               11,031                      11,031   

Issuance of common stock for services

                                    320,510               246                      246   

Repurchase and retirement of common stock

                                    (7,813,275            (11,000                   (11,000

Stock-based compensation

                                                  1,902                      1,902   
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCES—January 1, 2012

    219,448,305        45,519                          217,329,020        4        2,229               (18,401     (16,168
 

Net loss

                                                                (10,335     (10,335

Other comprehensive loss, net

                                                         (6            (6

Issuance of convertible redeemable preferred stock—net of issuance costs of $85

    40,975,703        84,916                                                               

Transfer of convertible redeemable preferred stock to convertible preferred stock

    (154,146,400     (6,096         154,146,400        2                      6,094                      6,096   

Repurchase of convertible preferred stock

                      (18,432,395                          (6,557            (25,943     (32,500

Accretion of convertible redeemable preferred stock

           4,375                                        (3,303            (1,072     (4,375

Issuance of common stock

                                    918,038        1        91                      92   

Stock-based compensation

                                                  1,446                      1,446   
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCES—December 30, 2012

    106,277,608        128,714            135,714,005        2        218,247,058        5               (6     (55,751     (55,750
 

Net income (unaudited)

                                                                2,406        2,406   

Other comprehensive income, net (unaudited)

                                                         24               24   

Accretion of convertible redeemable preferred stock

           5,062                                        (2,769            (2,293     (5,062

Issuance of common stock (unaudited)

                                    892,019               162                      162   

Stock-based compensation (unaudited)

                                                  2,607                      2,607   
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCES—June 30, 2013 (unaudited)

    106,277,608      $ 133,776            135,714,005      $ 2        219,139,077      $ 5      $      $ 18      $ (55,638   $ (55,613
 

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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ZULILY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

    Year Ended     Six Months
Ended
 
    December 31,
2010
    January 1,
2012
    December 30,
2012
    July 1,
2012
    June 30,
2013
 
                      (unaudited)  

CASH FLOWS FROM OPERATING ACTIVITIES:

         

Net (loss) income

  $ (7,003   $ (11,314   $ (10,335   $ (6,162   $ 2,406   

Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:

         

Depreciation and amortization

    75        587        3,369        1,442        2,479   

Stock-based compensation

    2,398        2,079        1,265        467        2,600   

Loss on disposal of assets

           50        74        11        18   

Noncash interest expense

    163                               

Noncash other expense

    627                               

Changes in operating assets and liabilities:

         

Accounts receivable

    (211     (409     (2,422     (2,393     (1,132

Inventory

    (576     (4,027     (2,968     (1,960     (2,512

Prepaid and other assets

    968        (915     (910     (755     (1,507

Merchandise deposits

    (220     (567     (355     (406     253   

Accounts payable

    (24     16,300        14,150        (2,091     (5,051

Accrued expenses and other liabilities

    2,105        4,602        8,329        2,229        2,946   

Deferred Revenue

    1,042        2,478        6,086        3,571        3,503   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by operating activities

    (656     8,864        16,283        (6,047     4,003   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

         

Capital expenditures

    (508     (5,115     (7,858     (4,029     (8,243

Purchases of short term and other investments

           (14,000     (10,200     (10,000     (18,000

Proceeds from sale of available-for-sale securities

                  6,000        4,000          

Proceeds from maturity of available-for-sale securities

                  10,000        10,000        8,000   

Purchases of restricted cash

           (8,600     (9,281     (5,300     (3,600

Proceeds from maturity of restricted cash

    (100     6,100        11,200        7,300        3,681   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by investing activities

    (608     (21,615     (139     1,971        (18,162
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

         

Proceeds from issuance of convertible redeemable preferred stock

    10,009        32,000        85,000                 

Convertible redeemable preferred stock issuance costs

    (106     (109     (85              

Proceeds from issuance of common stock

           11,031        78        45        158   

Repurchase and retirement of common stock

           (11,000                     

Proceeds from early exercise of stock options

           33                        

Repurchase and retirement of preferred stock

                  (32,500              
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by financing activities

    9,903        31,955        52,493        45        158   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

                                18   

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

    8,639        19,204        68,637        (4,031     (13,983

CASH AND CASH EQUIVALENTS—Beginning of period

    518        9,157        28,361        28,361        96,998   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS—End of period

  $ 9,157      $ 28,361      $ 96,998      $ 24,330      $ 83,015   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:

         

Payable for capital purchases

  $      $ 1,414      $ 205      $ 430      $ 255   

Investment in common stock warrant

                  47                 

Stock-based compensation capitalized

    3        68        181        82        7   

SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES

         

Noncash interest expense

  $ 163      $      $      $      $   

Noncash other expense

    627                               

Vesting of early exercised shares

                  13        8        4   

Deferred initial public offering cost accruals

                                361   

See notes to consolidated financial statements.

 

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ZULILY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. DESCRIPTION OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company—Zulily, Inc. (the “Company”) is an online flash sale retailer offering moms a fun and entertaining shopping experience with a fresh selection of new product styles launched each day. Through the Company’s desktop and mobile sites and mobile applications, the Company helps its customers discover new and unique products at great values that they would likely not find elsewhere. The Company, a Delaware corporation formed in 2009, conducts its buying, marketing and administrative functions in Seattle, Washington. The Company also operates a buying and studio office in Columbus, Ohio with fulfillment centers in McCarran, Nevada and Lockbourne, Ohio.

Zulily UK Ltd. was incorporated in the United Kingdom in October 2011 and is a wholly owned subsidiary of Zulily, Inc. The principal corporate offices are located in London, England.

Principles of Consolidation—The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Zulily UK Ltd. All intercompany transactions and balances are eliminated in consolidation.

Fiscal Year—In 2011, the Company adopted a retail calendar whereby the fiscal year ends on the Sunday closest to December 31. Each fiscal year consists of four 13-week quarters, with one extra week added in the fourth quarter every five to six years.

Unaudited Interim Financial Information—The accompanying consolidated balance sheet as of June 30, 2013, the consolidated statements of operations, consolidated statements of comprehensive operations, and cashflow for the six months ended July 1, 2012 and June 30, 2013, and the consolidated statement of convertible redeemable preferred stock and stockholders’ equity (deficit) for the six months ended June 30, 2013 are unaudited. The unaudited interim financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s financial position as of June 30, 2013 and results of operations and cash flows for the six months ended July 1, 2012 and June 30, 2013. The financial data and the other information disclosed in these notes to the consolidated financial statements related to these six month periods are unaudited.

Unaudited Pro Forma Stockholders’ Equity—Upon the consummation of the initial public offering contemplated by the Company, all of the outstanding shares of convertible preferred stock will automatically convert into shares of common stock. The June 30, 2013 unaudited pro forma consolidated balance sheet data has been prepared assuming the conversion of the convertible preferred stock outstanding into 242,485,034 shares of common stock.

Accounting Estimates—The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Some of the more significant estimates include assumptions related to: the valuation of common shares and determination of the grant date fair value of stock-based awards; the determination of the lower of cost or market adjustment for inventory; the recoverability of long-lived assets; and the determination of deferred income taxes, including related valuation allowances. Actual results could differ materially from those estimates.

 

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Foreign Currency Translation—The functional currency of the Company’s foreign subsidiary is the British Pound Sterling. Assets and liabilities of the subsidiary are translated at the exchange rate in effect at each period-end. Income statement amounts are translated at the average rate of exchange prevailing during the period. Translation adjustments arising from the use of differing exchange rates from period to period are included in accumulated other comprehensive loss within stockholders’ equity.

Cash and Cash Equivalents—Cash and cash equivalents include cash and highly-liquid investments with maturities of three months or less from the date of purchase, which are carried at amortized cost.

Short-Term Investments—The Company classifies highly-liquid investments with maturities greater than three months but less than one year as short-term investments. Short-term investments are comprised of available-for-sale securities. Available-for-sale securities are recorded at fair value, and unrealized holding gains and losses are recorded as a component of other comprehensive income (loss).

Restricted Cash—On January 20, 2011, the Company entered into a multi-year agreement with a third-party logistics and fulfillment company that required collateral in the form of a standby letter of credit (“LOC”). The Company is required to maintain with the issuing bank a compensating balance, restricted as to use, of not less than the sum of the available amount of the letter of credit totaling $2 million, which decreases to $1.3 million over time and expires in 2014. The LOC may be drawn if certain conditions occur, including payment of fees associated with termination of the agreement or upon bankruptcy of the Company. The LOC was not drawn against and was terminated in April 2012.

In November 2011, the Company entered into a lease agreement for warehouse space in Ohio that required a security deposit in the form of an irrevocable standby letter of credit totaling $0.6 million, which decreases to $0.2 million over time and expires in 2017. The Company is required to maintain with the issuing bank a compensating balance, restricted as to use, of not less than the sum of the available amount of the letter of credit. The standby letter of credit may be drawn if certain conditions occur, including default on payments, and payment of fees associated with termination of the agreement or upon bankruptcy of the Company. The standby letter of credit has not been drawn against as of December 30, 2012 or June 30, 2013.

Accounts Receivable—The majority of sales are conducted with credit cards and accounts receivable are composed primarily of amounts due from financial institutions related to those credit card sales. The Company does not maintain an allowance for doubtful accounts as payment is typically received within a few business days after the sale.

Inventories—The Company’s inventories, which consist primarily of apparel, infant gear, and toys are stated at the lower of cost or market and valued on an average cost basis. Inventory costs primarily consist of product costs from suppliers, as well as inbound shipping and handling fees. The majority of the Company’s inventories are not purchased until the Company receives a customer order and is subsequently relieved from inventories when it is delivered to the customer.

Merchandise Deposits—Merchandise deposits represent advance payments to vendors for products for which the Company has placed a purchase order but does not have title to the inventory.

 

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Property and Equipment—Property and equipment are stated at cost, less accumulated depreciation. Maintenance and repairs are expensed as incurred. Depreciation is calculated on a straight-line basis over the estimated useful lives of the following asset categories:

 

Asset Category

   Depreciation Period

Computer equipment and capitalized software

   1 to 3 years

Leasehold improvements

   Lesser of 5 years or lease term

Furniture and other equipment

   3 to 5 years

Capitalized Software—The Company capitalizes costs to develop its websites and internal-use software and amortizes such costs on a straight-line basis over the estimated useful life of the software once it is available for use. Capitalization of such costs begins when the preliminary project stage is completed, management with the relevant authority authorizes and commits to the funding of the software project, and it is probable that the project will be completed and the software will be used to perform the function intended.

Capitalized software costs, net of accumulated amortization, totaled $1.2, $1.9 and $2.3 million as of January 1, 2012, December 30, 2012 and June 30, 2013, respectively, and are included in property and equipment—net in the accompanying consolidated balance sheets. Amortization expense related to capitalized software costs was $0.0, $0.2, $0.6, $0.3, and $0.5 million for the years ended December 31, 2010, January 1, 2012 and December 30, 2012, and the six months ended July 1, 2012 and June 30, 2013, respectively, and is included in selling, general, and administrative expenses in the accompanying consolidated statements of operations.

Impairment of Long-Lived Assets—The Company reviews the carrying value of its long-lived assets, including property and equipment and definite-lived intangible assets, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. To the extent the estimated future cash inflows attributable to the assets, less estimated future cash outflows, are less than the carrying amount, an impairment loss would be recognized. No impairment losses were recorded in the periods presented.

Other Investments—On November 6, 2012, the Company acquired a non-controlling stake through a cash purchase of convertible preferred shares in a privately held company. In conjunction with the purchase of the convertible preferred shares, the Company also received a fully-earned, nonforfeitable common stock warrant in the privately held company. These investments are accounted for using the cost method of accounting as the Company does not have the ability to exercise significant influence. As of December 30, 2012 and the six months ended June 30, 2013, these investments totaled $0.2 million and are included in noncurrent assets in the accompanying consolidated balance sheets. There was no impairment recognized on these investments as of December 30, 2012 and the six months ended June 30, 2013.

Fair Value of Financial Instruments—The carrying amounts for the Company’s cash, cash equivalents, short-term investments, restricted cash, accounts receivable, accounts payable and accrued liabilities approximate fair value due to their short maturities.

Income Taxes—Deferred tax assets and liabilities are determined based on the differences between financial reporting and tax basis of assets and liabilities and are measured using the tax rates that will be in effect when the differences are expected to reverse. Future tax benefits are recognized to the extent that realization of such benefits is considered to be more likely than not. A valuation allowance is provided on deferred tax assets if it is determined that it is more likely than not that the deferred tax asset will not be realized.

 

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The Company uses a two-step approach for recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount, which is more than 50% likely of being realized upon ultimate settlement. The Company considers many factors when evaluating and estimating tax positions and tax benefits, which may require periodic adjustments and which may not accurately forecast actual outcomes. The Company does not have any unrecognized tax benefits as of January 1, 2012, December 30, 2012, and June 30, 2013. Interest and penalties related to unrecognized tax benefits, if any, are included in the provision for income taxes.

Certain Risks and Concentrations—The Company maintains the majority of its cash and cash equivalents in accounts with major financial institutions within the United States, generally in the form of demand and money market accounts. Deposits in these institutions may exceed federally insured limits. The Company has not experienced any losses on its deposits of cash and cash equivalents.

The Company is subject to certain risks and concentrations, including dependence on third-party technology providers and hosting services, exposure to risks associated with online commerce security, consumer credit risk, and credit card fraud, as well as the interpretation of state and local laws and regulations in regards to the collection and remittance of sales and use taxes and occupancy taxes. The Company also depends upon third-party service providers for processing customer orders.

Revenue Recognition

The Company generates net sales from sales of children’s apparel, women’s apparel and other categories, such as toys, infant gear, kitchen accessories and home décor. The Company generates net sales from shipping and handling charges to the Company’s customers. The Company also generates net sales from the sale of services events, which are primarily electronic vouchers or access codes for the Company’s customers to redeem directly with the vendor.

The Company recognizes revenue when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed or determinable; and (4) collectability is reasonably assured. For product sales, these criteria are met when the customer orders an item through the Company’s sites via the electronic shopping cart, funds are collected from the customer and the item is fulfilled in one of the Company’s fulfillment centers or third-party fulfillment centers, shipped and delivered to the customer. Revenue from product sales is generally recorded at the gross amount as the Company is the primary obligor in the arrangement with the customer, has latitude in establishing the products available for sale and the price to the customer, is responsible for ensuring the delivery of the product to the customer and assume inventory and credit risk. For services sales, these criteria are met when the customer orders an item through the Company’s sites via the electronic shopping cart, funds are collected from the customer and the voucher or access code is downloaded from the Company’s sites. Revenue from services sales is generally recorded at the net amount, or the commission earned on the voucher, as the Company is acting as an agent on behalf of the vendor. The vendor is ultimately responsible for fulfilling the customer order directly with the customer and assumes the inventory risk. To date, services revenue has not been material. The Company defers revenue when cash is collected from the customer prior to the satisfaction of the revenue recognition criteria.

To encourage customers to purchase the Company’s products and services, the Company periodically provides incentive offers. Generally, these promotions include dollar-off and percentage-off discounts to be applied against current purchases. The Company also grants merchandise credits to participants in the Company’s referral program when the customer referral results in a sale. Merchandise credits issued through the referral program typically expire in 18 months. The Company

 

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records these discounts and merchandise credits as reductions of the sales price at the date the promotion is redeemed. Additionally, the Company provides customers merchandise credits to be applied against future purchases in instances in which the customer is unsatisfied with an order. In these instances, the Company has established a sales reserve based on the Company’s historical experience. To date, these reserves have not been significant.

Gift cards and merchandise credits issued in lieu of a cash refund are recorded as a liability upon purchase of the gift card or issuance of the merchandise credit and do not expire. The Company reduces the liability for gift cards and merchandise credits when redeemed by a customer. If a gift card or merchandise credit is not redeemed, the Company recognizes revenue when the likelihood of its redemption becomes remote. The Company has not recognized revenue related to unredeemed gift cards and merchandise credits.

The Company has procedures in place to detect and prevent credit card fraud as the Company has exposure to losses from fraudulent charges. Due to the insignificant losses related to chargebacks, the Company records such losses as incurred.

Taxes collected from customers are accounted for on a net basis and are excluded from net sales.

Cost of Sales—Cost of sales consists of the purchase price of merchandise sold to customers, inbound and outbound shipping and handling costs, shipping supplies and fulfillment costs. Fulfillment costs represent those costs incurred in operating and staffing the fulfillment centers, including costs attributed to receiving, inspecting, picking, packaging and preparing customer orders for shipment. Cost of sales also includes direct and indirect labor for fulfillment center oversight, including payroll and related benefit costs and stock-based compensation expense.

Marketing—Marketing expenses are expensed as incurred and consist primarily of targeted online marketing costs, such as display advertising, key word search campaigns, search engine optimization and social media and offline marketing costs such as television, radio and print advertising. Marketing expenses also include payroll and related benefit costs and stock-based compensation expense for employees involved in marketing activities. Marketing expenses are primarily related to growing and retaining the customer base.

Selling, General and Administrative Expenses—Selling, general and administrative expenses (“SG&A”) consist primarily of payroll and related benefit costs and stock-based compensation expense for employees involved in general corporate functions including merchandising, studio, technology and customer service, as well as costs associated with the use by these functions of facilities and equipment, including depreciation, rent and occupancy. Also included in SG&A is rent and depreciation related to fulfillment centers.

The Company generally does not extend credit to customers. The majority of sales are through credit cards, and accounts receivable are composed primarily of amounts due from financial institutions related to credit card sales.

Stock-Based Compensation—The Company measures compensation cost for all stock options and restricted stock awards granted at their grant date estimated fair value. Stock-based compensation expense, net of estimated forfeitures, is recognized on a straight-line basis over the vesting period for each award. The fair value of stock option awards is estimated on the grant date using the Black-Scholes option valuation model. The fair value of each restricted stock award is based on the estimated fair market value of the Company’s common stock on the date of the award. See Note 6 for additional details.

Recent Accounting Pronouncements Adopted—In May 2011, the Financial Accounting Standards Board (“FASB”) issued guidance to amend the fair value measurement and disclosure requirements. The new authoritative guidance requires entities to provide information about valuation

 

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techniques and unobservable inputs used in Level 3 fair value measurements and provide a narrative description of the sensitivity of Level 3 measurements to changes in unobservable inputs. This amendment became effective for the Company beginning on January 2, 2012. The adoption of this new guidance did not have a material impact on the Company’s financial statements.

In 2011, the FASB issued two Accounting Standards Updates (“ASU”), ASU 2011-05 and ASU 2011-12, which amend the guidance for the presentation of comprehensive income. The amended guidance requires an entity to present components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. The option to report other comprehensive income and its components in the statement of stockholders’ equity will be eliminated. Although the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under existing guidance. The Company adopted these ASUs at the beginning of fiscal year 2012. Adoption of these ASUs changed the Company’s presentation of comprehensive income but did not impact the Company’s net income, financial position or cash flows.

NOTE 2. ACCRUED EXPENSES

Accrued expenses consist of the following:

 

     January 1,
2012
     December 30,
2012
     June 30,
2013
 
            (in thousands)         
                   (unaudited)  

Accrued payroll

   $ 612       $ 2,531       $ 3,085   

Accrued marketing

     1,650         5,223         4,158   

Accrued shipping

     368         2,075         4,760   

Other accrued expenses

     2,838         2,654         3,466   
  

 

 

    

 

 

    

 

 

 

Total accrued expenses

   $ 5,468       $ 12,483       $ 15,469   
  

 

 

    

 

 

    

 

 

 

NOTE 3. FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To increase the comparability of fair value measures, the following hierarchy prioritizes the inputs to valuation methodologies used to measure fair value:

Level 1—Quoted prices for identical assets and liabilities in active markets. The Company classifies cash equivalents as Level 1 in the fair value hierarchy. Cash equivalents are comprised of highly-liquid investments, including money market funds with original maturities of less than six months. The fair value measurement of these assets is based on quoted market prices in active markets and, therefore, these assets are recorded at fair value on a recurring basis.

Level 2—Assets and liabilities valued based on observable market data for similar instruments, such as quoted prices for similar assets or liabilities or other inputs that are observable or can be corroborated by observable market data. The Company classifies restricted cash and short-term investments as Level 2 in the fair value hierarchy. Restricted cash is comprised of certificates of deposit funds with original maturities of less than three months. Short-term investments consist of commercial paper. The fair value measurement of these assets is based on observable market-based inputs or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

 

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Level 3—Unobservable inputs reflecting the Company’s assumptions, consistent with reasonably available assumptions made by other market participants. These valuations require significant judgment. The Company does not have assets classified as Level 3 in the fair value hierarchy.

The following table present the balance of assets measured at fair value as of the dates presented:

 

     January 1, 2012  
     Total      Level 1      Level 2      Level 3  
     (in thousands)  

Cash equivalents:

           

Money market funds

   $ 20,011       $ 20,011       $       $   

Short-term investments:

           

Commercial paper

     14,000                 14,000           

Restricted cash:

           

Certificate of deposit

     2,600                 2,600           
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 36,611       $ 20,011       $ 16,600       $   
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 30, 2012  
     Total      Level 1      Level 2      Level 3  
     (in thousands)  

Cash equivalents:

           

Money market funds

   $ 18,018       $ 18,018       $       $   

Short-term investments:

           

Commercial paper

     8,000                 8,000           

Restricted cash:

           

Certificate of deposit

     600                 600           

Demand deposit

     81                 81           
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 26,699       $ 18,018       $ 8,681       $   
  

 

 

    

 

 

    

 

 

    

 

 

 
     June 30, 2013  
     Total      Level 1      Level 2      Level 3  
    

(in thousands)

(unaudited)

 

Cash equivalents:

  

Money market funds

   $ 18,020       $ 18,020       $       $   

Short-term investments:

           

Commercial paper

     18,005                 18,005           

Restricted cash:

           

Certificate of deposit

     600                 600           
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 36,625       $ 18,020       $ 18,605       $   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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NOTE 4. PROPERTY AND EQUIPMENT

The balance of property and equipment—net is as follows:

 

     January 1,
2012
    December 30,
2012
    June 30,
2013
 
           (in thousands)        
                 (unaudited)  

Computer equipment and capitalized software

   $ 5,108      $ 10,027      $ 12,327   

Leasehold improvements

     114        623        767   

Furniture and other equipment

     1,404        4,123        4,435   

Work in progress

     398        327        6,035   

Less: accumulated depreciation and amortization

     (630     (3,909     (6,366
  

 

 

   

 

 

   

 

 

 

Total property and equipment, net

   $ 6,394      $ 11,191      $ 17,198   
  

 

 

   

 

 

   

 

 

 

Depreciation and amortization expense of property and equipment totaled $0.1, $0.6, $3.4, $1.4, and $2.5 million during the years ended December 31, 2010, January 1, 2012 and December 30, 2012, and the six months ended July 1, 2012 and June 30, 2013, respectively.

NOTE 5. COMMITMENTS AND CONTINGENCIES

Leases—The Company leases office and warehouse space and equipment used in connection with its operations under various operating leases, some of which contain escalation clauses and free rent periods. At the inception of the lease, the Company evaluates each agreement to determine whether the lease will be accounted for as an operating or capital lease. The term of the lease used for this evaluation includes renewal option periods only in instances in which the exercise of the renewal option can be reasonably assured and failure to exercise such option would result in an economic penalty. Rent expense is recorded on a straight-line basis over the lease term with the difference between the rent paid and the straight-line rent expense recorded as a deferred rent liability. Total rent expense was $0.1, $1.4, $4.6, $2.2, and $2.7 million for the years ended December 31, 2010, January 1, 2012 and December 30, 2012, and the six months ended July 1, 2012 and June 30, 2013, respectively.

Future minimum payments under noncancelable operating leases as of December 30, 2012 are as follows:

 

Fiscal Years Ending

   Amount  
     (in thousands)  

2013

   $ 5,057   

2014

     4,274   

2015

     2,380   

2016

     2,445   

2017

     994   
  

 

 

 

Total

   $ 15,150   
  

 

 

 

Legal Proceedings—In the ordinary course of business, the Company may be subject from time to time to various proceedings, lawsuits, disputes, or claims. Although the Company cannot predict with assurance the outcome of any litigation, it does not believe there are currently any such actions that, if resolved unfavorably, would have a material impact on the Company’s financial condition, results of operations, or cash flows.

 

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NOTE 6. CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)

Common Stock—The Company is authorized to issue up to 528,500,000 shares of common stock with a par value of $0.00002 per share. The Company has a single class of common stock. Each holder of common stock is entitled to one vote per share. At its discretion, the board of directors may declare dividends on shares of common stock, subject to the prior rights of the Company’s preferred stockholders. Upon liquidation or dissolution, holders of common stock will receive distributions only after preferred stock preferences have been satisfied. The following shares of common stock have been reserved for future issuance under the Company’s 2009 Equity Incentive Plan (the “2009 Plan”) at December 30, 2012 and June 30, 2013:

 

     December 30,
2012
     June 30,
2013
 
            (unaudited)  

Employee stock options outstanding under the 2009 Plan

     28,422,538         53,522,283   

Nonemployee stock options outstanding under the 2009 Plan

     1,300,000         1,300,000   

Employee stock options available for grant under the 2009 Plan

     14,655,404         9,709,892   

Conversion of preferred shares

     241,991,613         242,485,034   
  

 

 

    

 

 

 

Total shares reserved for future issuance

     286,369,555         301,017,209   
  

 

 

    

 

 

 

Convertible Redeemable Preferred Stock—The Company has designated five outstanding series of convertible redeemable preferred stock (Series Seed, Series A, Series B, Series C, and Series D).

On December 7, 2009, the Company entered into a multiple element financing agreement to issue 38,643,800 Series Seed Shares at a price per share of $0.016 for proceeds of $0.5 million, net of issuance costs. As part of consummating the Series Seed Purchase Agreement, the Company also entered into a series of additional interrelated agreements with the Series Seed investors, which afforded both the investors and the Company with the following significant rights and privileges:

Series Seed investors held an immediately exercisable call option to purchase 82,295,550 shares of Series A preferred stock at a price of $0.037 per share (the “Series A Call”).

Correspondingly, the Company held a contingently exercisable put option to force the sale of 82,295,550 shares of Series A preferred stock at a price of $0.037 per share (the “Series A Put”) upon achievement of certain financial and operating metrics of the Company by a certain date.

Series Seed investors committed to purchase up to $1.0 million in convertible promissory notes (the “Notes”). The Company was not obligated to draw on any minimum guaranteed borrowings and the loan commitment was exercisable by the Company from December 7, 2009 through July 31, 2010. Alternatively, the Note would automatically convert to the Company’s Series A preferred stock upon the closing of Series A preferred stock financing at a fixed conversion price of $0.03 per share.

On March 11, 2010 and April 23, 2010, the Notes were issued with the Company receiving aggregate proceeds of $1.0 million. On May 11, 2010, the investors of the Series Seed shares exercised the Series A Call to trigger the closing of the Series A round of financing, along with the automatic conversion of the Notes into Series A preferred stock. In total, 115,502,600 shares of Series A preferred stock were issued at an average price per share of $0.035 for proceeds of $4.0 million, net of issuance costs.

Upon execution of the aforementioned Series Seed Purchase Agreement, the Series A Call and Put were deemed to be a single combined derivative liability and as such the liability was recorded at

 

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its fair value on December 7, 2009, the date of issuance. Fair value of the derivative liability was determined using the Black-Scholes method. The fair value of the derivative liability represents the value of the Series A Call only, as certain of the related performance criteria for the Series A Put were not being met and determined to be remote. Significant assumptions in the Black-Scholes method included expected volatility, the fair value of the Series A preferred stock determined based on the market approach using guideline public companies, and the option pricing method to allocate value among securities. In each subsequent accounting period from the date of issuance and through March 11, 2010, the date of exercise of the Series A Call, this derivative liability was adjusted to its fair value. The corresponding changes in fair value are recorded to the Company’s consolidated statements of operations as other expense and totaled $0.8 million for the year ended December 31, 2010.

On July 21, 2010, the Company issued 44,923,630 shares of Series B preferred stock at $0.134 per share for proceeds of $5.9 million, net of issuance costs of $0.1 million.

On August 2, 2011, the Company issued 20,378,275 Series C preferred stock at a price per share of $1.57 for proceeds of $31.9 million, net of issuance costs of $0.1 million.

On November 5, 2012, the Company issued 40,975,703 Series D preferred stock at a price per share of $2.07 for proceeds of $84.9 million, net of issuance costs of $0.1 million.

The rights and privileges for the convertible redeemable preferred stock are as follows:

Dividends—Holders of Series Seed, Series A, Series B, Series C, and Series D preferred stock are entitled to receive dividends of $0.001, $0.003, $0.011, $0.126, and $0.166 respectively, per share per annum, when and if declared by the Board of Directors. Such dividends are not cumulative. Through June 30, 2013, no dividends have been declared.

Conversion —Each share of preferred stock is convertible, at the option of the holders or may be converted as a class upon the vote of a majority of the Series Seed and Series A stockholders, voting together as a single class, a majority of Series B stockholders as a separate class, a majority of Series C stockholders as a separate class, and a majority of Series D stockholders as a separate class, into common stock at a conversion rate equal to the original issue price divided by the conversion price. The conversion price for preferred stock is the original issue price, which is subject to adjustment. Each share of Series Seed, Series A, Series B, and Series C preferred stock is convertible into one share of common stock. In connection with the May 2013 amendment of the 2009 Plan and the grant of stock options described in Note 13, the Series D preferred stock conversion price was adjusted from $2.07 to $2.05 in accordance with the company’s Certificate of Incorporation where, if the Company issues or sells shares of common stock or convertible securities in excess of the shares reserved for issuance under the Company’s 2009 Equity Incentive Plan as of the original issuance date, the Series D conversion price will be adjusted downward. As a result, each share of Series D preferred stock is convertible into 1.01 shares of common stock. Each share of preferred stock automatically converts into common stock upon the closing of an initial public offering.

Redemption—As of December 30, 2012, each share of Series B, Series C, and Series D preferred stock had redemption rights equal to the sum of the original issue price, plus 8%, per share per annum, compounded annually. The redemption feature requires a 70% vote of the aggregate preferred stock with redemption rights. Through September 25, 2013, no redemption notice has been received. Through July 12, 2012 the Series Seed and Series A preferred stock had the same redemption rights as the Series B, Series C, and Series D preferred stock. The Company amended its Certificate of Incorporation on July 13, 2012 to remove the redemption rights on the Series Seed and Series A preferred stock. These shares are no longer redeemable at the option of the holders. Accordingly, the Series Seed and Series A preferred stock were reclassified from convertible redeemable preferred stock to stockholders’ equity (deficit) within the consolidated balance sheets and the consolidated statements of convertible redeemable preferred stock and stockholders’ equity (deficit).

 

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The following table presents the accretion of the preferred stock to its redemption value recorded within the consolidated statements of convertible redeemable preferred stock and stockholders’ equity (deficit) during the periods presented:

 

     Year Ended      Six Months Ended  
     December 31,
2010
     January 1,
2012
     December 30,
2012
     July 1,
2012
     June 30,
2013
 
     (in thousands)  
                          (unaudited)  

Series Seed

   $ 52       $ 57       $ 31       $ 32       $   

Series A

     180         294         150         150           

Series B

     213         497         537         259         280   

Series C

             1,069         2,630         1,280         1,382   

Series D

                     1,027                 3,400   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total preferred stock accretion

   $ 445       $ 1,919       $ 4,375       $ 1,721       $ 5,062   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The above preferred stock accretion are considered noncash financing activities.

Liquidation Preferences—Upon the liquidation, dissolution, or winding up of the Company, whether voluntary or involuntary, holders of Series Seed, Series A, Series B, Series C, and Series D preferred stock have liquidation preferences for all assets of the Company available for distribution to its stockholders ratably in proportion to the number of shares held by them, plus all declared but unpaid dividends.

Voting Rights—Each share of preferred stock is entitled to the number of votes equal to the number of shares of common stock into which such shares of preferred stock could be converted. Voting rights are equal to the holders of common stock.

Repurchase of Convertible Preferred Stock—On November 14, 2012, in conjunction with the Series D preferred stock financing, the Company repurchased an aggregate 18,432,395 shares of Series Seed preferred stock and Series A preferred stock from an existing investor, for a total purchase price of $32.5 million. As a result, the amount paid in excess of the original proceeds of $32.1 million is considered a deemed dividend and is reflected as distributed earnings attributable to participating securities in the calculation of net loss per common share.

NOTE 7. STOCK-BASED COMPENSATION

Restricted Common Stock—On October 26, 2009, the Company signed a Restricted Stock Purchase Agreement with its founders wherein each founder purchased shares of common stock at a price of $0.0001 per share and granted the Company an option to acquire shares of common stock owned by the respective founders at a repurchase right equal to the lesser of the original price paid for each share or the fair market value on the date of repurchase of said shares. Common stock under the Restricted Stock Purchase Agreement provides for monthly vesting over four years, some of which provide for 25% vesting on the first anniversary from the date of issuance or hire date with the remainder vesting monthly over the subsequent three years. The repurchase right is exercisable on unvested shares during the 90-day period following the date a founder ceases for any reason to be a service provider to the Company. As of December 30, 2012, 175,223,459 shares have vested and 36,026,541 are expected to vest. As of June 30, 2013, 197,421,875 shares have vested and 13,828,125 are expected to vest. No amount of compensation expense has been recognized in connection with these shares, as they were deemed to have nominal value at the date of issuance.

Repurchase of Common Stock—In December 2010, two of the Company’s existing investors purchased 9,133,900 shares of common stock from one of the Company’s founders, and employee, for a price that exceeded the estimated fair market value of $0.7 million on that date. The fair value of the

 

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shares was determined using the market approach to determine the enterprise value and the option pricing method to determine the fair market value per common share. The option pricing method treats the rights of the holders of preferred and common shares as equivalent to that of call options on any value of the enterprise above certain break points of value based upon the liquidation preferences of the holders of preferred shares, as well as their rights to participation and conversion. The resulting value of the common stock can be determined by estimating the value of its portion of each of these call option rights. The option pricing method uses the Black-Scholes option pricing model to price the call option. Significant assumptions applied in the Black-Scholes option pricing model include expected volatility, expected term of the option and the risk free rate. Share-based payment awards to an employee by a related party or other holder of an economic interest are generally presumed to be share-based payment transactions for services. As a result, the Company recorded stock-based compensation expense and a corresponding capital contribution equal to the difference between the purchase price and the estimated fair market value of the shares. Such expense totaled $2.3 million and is included in SG&A expenses for the year ended December 31, 2010.

In August 2011, the Company issued 7,813,275 shares of common stock to a new investor. Simultaneously, the Company repurchased the same number shares of common stock from four of the Company’s employees, at a price that exceeded the estimated fair market value of $10.5 million on that date. The fair value of the shares was determined using the option pricing method as described in the preceding paragraph. As a result, the Company recorded stock-based compensation expense and a corresponding capital contribution equal to the difference between the repurchase price and the estimated fair market value of the shares. Such expense totaled $0.5 million and is included in SG&A expenses as of January 1, 2012.

Stock Option Plan—The Company’s 2009 Plan provides for the grant of incentive stock options, nonstatutory stock options, stock appreciation rights and restricted stock awards, which may be granted to employees, including officers, nonemployee directors and consultants. Options granted under the 2009 Plan generally provide for 25% vesting on the first anniversary from the date of grant with the remainder vesting monthly over the subsequent three years and expire 10 years from the date of grant. Under the terms of the 2009 Plan, stock options are granted with exercise prices equal to the estimated fair value of the common stock as determined by the Board of Directors at the date of grant, based upon the most recent common stock valuation. Such common stock valuations are performed by a third-party valuation specialist to determine the fair value per share of the Company’s outstanding capital stock. The 2009 Plan authorizes the issuance of 51,375,000 shares of common stock. As of December 30, 2012 and June 30, 2013, there were 14,655,404 shares and 9,709,892 shares, respectively, of common stock available for future grants under the 2009 Plan.

Stock-Based Compensation Expense—The fair value of each stock option granted is estimated on the measurement date, which is typically the grant date, using the Black-Scholes option pricing model. The assumptions used to calculate the fair value of options granted are evaluated and revised, as necessary, to reflect market conditions and the Company’s experience. Determining the fair value of stock-based awards at the grant date is affected by estimates involving inherent uncertainties, as well as assumptions regarding a number of other complex and subjective variables. These variables include the fair value of the Company’s common stock, expected stock price volatility over the expected term of the options, stock option exercise and cancellation behaviors, risk-free interest rates and expected dividends.

 

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The following table presents the effects of stock-based compensation on the consolidated statements of operations during the periods presented:

 

 

    Year Ended     Six Months Ended  
    December 31,     January 1,     December 30,     July 1,     June 30,  
    2010     2012     2012     2012     2013  
    (in thousands)  
                      (unaudited)  

Cost of sales

  $     $ 2      $ 26      $ 15      $ 27   

Marketing expenses

    2        62        142        57        132   

Selling, general and administrative expenses

    2,396        2,015        1,097        395        2,441   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stock-based compensation expense

  $ 2,398      $ 2,079      $ 1,265      $ 467      $ 2,600   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The fair value of each stock option is estimated on the grant date with the following weighted-average assumptions:

 

     Year Ended     Six Months Ended  
     December 31,     January 1,     December 30,     July 1,     June 30,  
     2010     2012     2012     2012     2013  
                       (unaudited)  

Expected term (years)

     6.16        5.69        5.98        5.96        6.78   

Expected volatility

     65.7     61.7     61.7     62.0     51.0

Expected dividend yield

                    

Risk-free interest rate

     2.3     1.6     1.0     1.0     1.2

Weighted average grant-date fair value of stock options granted

   $ 0.02      $ 0.54      $ 1.02      $ 0.97      $ 1.64   

 

  Ÿ  

Fair Value of Common Stock—Under the terms of the 2009 Plan, stock options are granted with exercise prices equal to the estimated fair value of the common stock as determined by the Board of Directors at the date of grant based upon numerous objective and subjective factors including: third-party valuations, preferred and common stock transactions with third-parties, current operating and financial performance, management estimates and future expectations.

 

  Ÿ  

Expected Term.    The expected term represents the period that the Company’s stock-based awards are expected to be outstanding. As the Company does not have sufficient historical experience for determining the expected term of the stock option awards granted, the Company has based its expected term for awards issued to employees (including members of the Company’s board of directors) on the simplified method, which represents the average period from vesting to the expiration of the stock option. For grants to nonemployees, the expected term is equal to the contractual term, which is generally ten years.

 

  Ÿ  

Expected Volatility.    As the Company has been a private company and does not have a trading history for the Company’s common stock, the expected stock price volatility for the Company’s common stock was estimated by taking the average historical price volatility for industry peers, which the Company has designated, based on daily price observations over a period equivalent to the expected term of the stock option grants. Industry peers, which the Company has designated, consist of several public companies in the industry similar in size, stage of life cycle and financial leverage. These industry peers were also utilized in the Company’s common stock valuations.

 

  Ÿ  

Expected Dividend Yield.    The Company has never declared or paid any cash dividends to common stockholders and does not presently plan to pay cash dividends in the foreseeable future. Consequently, the Company used an expected dividend yield of zero.

 

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  Ÿ  

Risk-free Interest Rate.    The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected term of the options for each option group.

The Company recognizes compensation expense on a straight-line basis over the requisite service period for each stock option, with forfeitures estimated at the date of grant based on the Company’s historical experience and future expectations.

During 2010, the Company granted an option to purchase 1,300,000 shares of common stock to a nonemployee for services provided. Such option was fully vested on the date of grant and had an exercise price of $0.06 per share, which was determined to be equal to the estimated fair market value of the underlying stock on the date of grant, as determined by the Board of Directors. The resulting stock-based compensation expense was measured at the date when the performance obligation was met, which was on the date of grant, and was immediately recognized as expense within SG&A expenses in the amount of $0.1 million.

In November 2011, the Company issued 320,510 shares of common stock to a third party in exchange for executive recruiting services. As a result, the Company recorded stock-based compensation expense and a corresponding capital contribution equal to the estimated fair market value of the shares on the date when the service obligation was met. Such expense totaled $0.3 million and is included in SG&A expenses for the year ended January 1, 2012.

During 2012 and 2011, stock options were modified in connection with terminations, which accelerated the vesting of the stock options. The Company recorded stock-based compensation expense for the incremental fair value of the modified awards. Such amount totaled $0.2 and $0.1 million, and is included in SG&A expenses for the years ended January 1, 2012 and December 30, 2012, respectively.

For the years ended December 31, 2010, January 1, 2012 and December 30, 2012, and six-month period ended June 30, 2013 the Company recognized a total of $0.1, $1.3, $1.2 and $2.6 million, respectively, in stock-based compensation expense related to stock options granted to employees. In addition, the Company recognized and capitalized $0.1, $0.2 and $0.0 million, respectively, of stock-based compensation as capitalized software costs included within property and equipment—net on the accompanying consolidated balance sheets as of January 1, 2012, December 30, 2012 and June 30, 2013.

As of December 30, 2012 and June 30, 2013, the Company had total unrecognized compensation costs related to unvested stock options of $11.0 and $52.0 million, respectively. The Company expects to recognize this cost over a weighted-average period of 6.4 years.

The following table summarizes additional information about stock options outstanding as of December 30, 2012:

 

     Outstanding      Outstanding and Vested  
            Weighted Average                
Range of Exercise Price    Options      Exercise
Price
     Remaining
Contractual
Life
(in Years)
     Options      Weighted
Average
Exercise Price
 
December 30, 2012       

$0.007—$0.06

     10,781,048       $ 0.03         7.47         7,525,068       $ 0.03   

$0.078—$0.182

     7,433,725         0.11         8.26         3,214,157         0.11   

$1.35—$1.87

     11,507,765         1.74         9.52         1,295,977         1.38   
  

 

 

          

 

 

    

Total

     29,722,538         0.71         8.46         12,035,202         0.20   
  

 

 

          

 

 

    

 

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The table summarizes stock option activity as follows:

 

    Number of
Shares
Underlying
Options
    Weighted
Average
Exercise
Price
    Weighted
Average
Remaining
Contractual
Term
(in Years)
    Total
Intrinsic
Value
 
    (in thousands, except price, shares and years)  

Outstanding at January 1, 2012

    32,803,810      $ 0.42        9.13      $ 34,914   

Granted

    9,572,090        1.82       

Exercised

    (918,038     0.08       

Cancelled

    (11,735,324     0.86       
 

 

 

       

Outstanding at December 30, 2012

    29,722,538        0.71        8.46        34,417   

Granted (unaudited)

    26,658,077        2.51       

Exercised (unaudited)

    (892,019     0.18       

Cancelled (unaudited)

    (666,313     1.23       
 

 

 

       

Outstanding at June 30, 2013 (unaudited)

    54,822,283        1.59        8.85        81,836   
 

 

 

       

Vested and expected to vest at December 30, 2012

    28,734,022        0.69        8.44        33,881   
 

 

 

       

Exercisable at December 30, 2012

    16,027,950        0.18        7.85        27,101   
 

 

 

       

Vested and expected to vest at June 30, 2013 (unaudited)

    53,746,830        1.58        8.84        80,418   
 

 

 

       

Exercisable at June 30, 2013 (unaudited)

    37,535,265        1.55        8.74        57,575   
 

 

 

       

During 2011, the Company issued 5,758,510 common shares for the exercise of stock options. Of this amount, 1,895,850 common shares were early exercised and are subject to repurchase in accordance with the provision of the 2009 Plan. The unvested portion of the early exercised shares as of December 30, 2012 and June 30, 2013, was 908,875 and 580,730 shares, respectively. No repurchases have been made by the Company.

Exerciseable shares as of December 30, 2012 and June 30, 2013 include 8,907,320 and 29,953,572 shares that are early exerciseable, respectively.

Subsequent to the issuance of the Company’s 2012 and 2011 consolidated financial statements, the Company identified an error in the classification of common shares issued which had been erroneously included in “vesting of early exercised options” on the consolidated statements of stockholders’ equity. Accordingly, such classification has been corrected in the accompanying 2012 and 2011 consolidated statements of convertible redeemable preferred stock and stockholders’ equity (deficit) by including these shares within “issuance of common stock.” Management has concluded that the correction of the error is immaterial.

NOTE 8. NET (LOSS) INCOME PER SHARE

Basic and diluted net (loss) income per common share is presented using the two-class method required for participating securities. Holders of preferred stock are entitled to receive non-cumulative dividends payable prior and in preference to any dividends on any shares of the Company’s common stock. If a dividend is paid on common stock, the holders of preferred stock are entitled to a proportionate share of any such dividend as if they were holders of common stock (on an if-converted basis). Holders of unvested restricted common stock have non-forfeitable rights to dividends, if that dividends are declared and paid. The Company considers its preferred stock and nonvested restricted common stock to be participating securities and, in accordance with the two-class method, earnings allocated to participating securities and the related number of outstanding shares of participating securities have been excluded from the computation of basic and diluted net income per common share.

 

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Under the two-class method, net income (loss) attributable to common stockholders is determined by allocating undistributed earnings between common stock and participating securities. Undistributed earnings are calculated as net income (loss) less distributed earnings, accretion of convertible preferred stock, and current period convertible preferred stock non-cumulative dividends. As holders of preferred stock and unvested restricted common stock do not have a contractual obligation to share in the losses of the Company, the net loss attributable to common stockholders for each period is not allocated between common stock and participating securities. Accordingly, outstanding stock options, unvested shares of restricted common stock and convertible preferred shares are excluded from the calculation of basic and diluted net loss per share as the effect would have been antidilutive.

The following table presents the calculation of basic and diluted net loss per common share:

 

    Year Ended     Six Months Ended  
    December 31,
2010
    January 1,
2012
    December 30,
2012
    July 1, 2012     June 30,
2013
 
    (in thousands, except per share amounts)  
                      (unaudited)  

Numerator

         

Net (loss) income

  $ (7,003   $ (11,314   $ (10,335   $ (6,162   $ 2,406   

Less: Distributed earnings attributable to participating securities

                  (32,112              

Less: Accretion of convertible redeemable preferred stock

    (445     (1,919     (4,375     (1,721     (5,062
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

  $ (7,448   $ (13,233   $ (46,822   $ (7,883   $ (2,656
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Denominator

         

Weighted average shares used to compute basic net loss per common share

    65,390,625        96,411,124        151,906,924        138,402,501        193,075,922   

Effect of potentially dilutive securities:

         

Stock options

                                  

Unvested restricted common shares

                                  

Convertible preferred shares

                                  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares used to compute diluted net loss per common share

    65,390,625        96,411,124        151,906,924        138,402,501        193,075,922   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders—basic

  $ (0.11   $ (0.14   $ (0.31   $ (0.06   $ (0.01
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to common stockholders—diluted

  $ (0.11   $ (0.14   $ (0.31   $ (0.06   $ (0.01
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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The following have been excluded from the computation of basic and diluted net loss per share attributable to common stockholders as their effect would have been antidilutive:

 

    Year Ended      Six Months Ended  
    December 31,
2010
     January 1,
2012
     December 30,
2012
     July 1,
2012
    June 30,
2013
 
                         (unaudited)  

Convertible preferred shares

    132,753,828         207,533,139         223,310,320         219,448,305        250,358,175   

Unvested restricted common stock

    148,484,375         119,386,726         65,875,100         79,177,813        25,886,976   

Outstanding stock options

    25,345,000         32,803,810         29,722,538         24,362,090        54,822,256   
 

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

    306,583,203         359,723,675         318,907,958         322,988,208        331,067,407   
 

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Unaudited Pro Forma Net (Loss) Income Per Common Share

Pro forma basic and diluted net (loss) income per common share was computed to give effect to the conversion of the preferred stock using the if-converted method into common shares as though the conversion had occurred as of the beginning of the first period presented or the original date of issuance, if later. After giving effect to the conversion of the preferred stock, only the unvested restricted common stock is considered a participating security in applying the two-class method to calculate basic and diluted net (loss) income per share. The restricted common stockholders have the same rights and privileges as our common stockholders. As the restricted common stock vests, it is no longer a participating security and is then included within the calculation of basic and diluted net (loss) income per share attributable to common stockholders.

For the year ended December 30, 2012, as the participating security does not have a contractual obligation to share in the losses of the Company, the net loss attributable to common stockholders is not allocated between the common stock and the participating security. Accordingly, outstanding stock options and unvested shares of restricted common stock are excluded from the calculation of basic and diluted net loss per share as the effect would have been antidilutive.

For the six months ended June 30, 2013, basic net income per share attributable to common stockholders is computed by dividing net income attributable to common stockholders, after allocation of undistributed earnings to participating securities, by the weighted-average number of common shares outstanding during the period, adjusted for unvested restricted common shares as a participating security. In computing diluted net income attributable to common stockholders, undistributed earnings are re-allocated to reflect the potential impact of dilutive securities. Diluted net income per share attributable to common stockholders is computed by dividing net income attributable to common stockholders by the weighted-average number of common shares outstanding, including potential dilutive common shares assuming the dilutive effect of outstanding stock options using the treasury stock method as this method is most dilutive.

For the year ended December 30, 2012 and the six months ended June 30, 2013, unvested restricted common stock amounting to 65,875,100 and 25,886,976 shares were excluded from the computation of diluted net (loss) income per common share attributable to common stockholders because their effect would have been antidilutive.

 

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Table of Contents
     Year Ended
December 30,
2012
    Six Months
Ended
June 30, 2013
 
     (in thousands, except share and
per share amounts)
 
     (unaudited)  

Numerator

    

Net (loss) income

   $ (10,335   $ 2,406   

Less: Distributed earnings attributable to participating securities

     (32,112       

Less: Undistributed earnings attributable to participating securities

            (285
  

 

 

   

 

 

 

Net (loss) income attributable to common stockholders

   $ (42,447   $ 2,121   
  

 

 

   

 

 

 

Denominator

    

Weighted-average shares used to compute basic net (loss) income per common share

     151,906,924        193,075,922   

Pro forma adjustment to reflect assumed conversion of preferred stock to occur upon consummation of the Company’s expected initial public offering

     223,310,320        250,358,175   
  

 

 

   

 

 

 

Weighted average shares used to compute basic pro forma net (loss) income per common share

     375,217,245        443,434,097   

Effect of potentially dilutive securities:

    

Stock options

            6,721,238   

Unvested restricted common shares

              

Convertible preferred shares

              
  

 

 

   

 

 

 

Weighted average shares used to compute diluted net (loss) income per common share

     375,217,245        450,155,335   
  

 

 

   

 

 

 

Net (loss) income per common share attributable to common stockholders—basic

   $ (0.11   $   
  

 

 

   

 

 

 

Net (loss) income per common share attributable to common stockholders—diluted

   $ (0.11   $   
  

 

 

   

 

 

 

NOTE 9. SEGMENT INFORMATION

The Company has two reportable segments: U.S. and U.K. The Company’s reportable segments have been identified based on how the Company’s chief operating decision maker manages the Company’s businesses, makes operating decisions, and evaluates operating performance. The Company’s chief operating decision maker is its chief executive officer. The Company evaluates the performance of its reportable segments based on net sales and loss from operations. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies in Note 1. Loss from operations represents net loss before interest income (expense), net, other income (expense), net and provision for income taxes. Management does not evaluate the performance of its reportable segments using asset measures.

U.S.—The U.S. segment consists of amounts earned from retail and services sales through the Company’s U.S.-focused sites, including sales from the sites to customers in the United States, Canada and other foreign countries fulfilled through a third-party service provider.

U.K.—The U.K. segment consists of amounts earned from retail and services sales of through the Company’s U.K.-focused sites, including sales from the sites to customers in the United Kingdom and throughout Europe.

Certain U.S. corporate-level activities are not allocated to the U.K. segment, including costs of marketing, human resources, legal, finance and technology.

 

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The Company accounts for intersegment sales in accordance with the underlying transfer pricing agreement between Zulily, Inc. and Zulily U.K. Ltd.

Information on reportable segments and reconciliation to consolidated net (loss) income before provision for income taxes is as follows:

 

    Year Ended     Six Months Ended  
    December 31,
2010
    January 1,
2012
    December 30,
2012
    July 1,
2012
    June 30,
2013
 
    (in thousands)  
                      (unaudited)  

U.S.

         

Net sales

  $ 18,376      $ 142,545      $ 326,349      $ 126,706      $ 266,166   

Operating (loss) income

    (6,207     (11,455     (6,072     (5,093     4,812   

Intersegment expense

                  (4,571     (1,265     (2,468
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total segment operating (loss) income

    (6,207     (11,455     (10,643     (6,358     2,344   

U.K.

         

Net sales

                  4,891        287        5,855   

Intersegment sales

                  4,571        1,265        2,468   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

                  9,462        1,552        8,323   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Segment operating (loss) income

  $      $ (82   $ 89      $      $ 46   

Consolidated

         

Net sales

         

Total sales for reportable segments

  $ 18,376      $ 142,545      $ 335,811      $ 128,258      $ 274,489   

Elimination of intersegment sales

                  (4,571     (1,265     (2,468
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consolidated net sales

  $ 18,376      $ 142,545      $ 331,240      $ 126,993      $ 272,021   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income before provision for income taxes

         

Total operating (loss) income for reportable segments

  $ (6,207   $ (11,537   $ (10,554   $ (6,358   $ 2,390   

Interest (expense) income, net

    (169     20        43        16        64   

Other (expense) income, net

    (627     203        176        180        (48
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income before provision for income taxes

  $ (7,003   $ (11,314   $ (10,335   $ (6,162   $ 2,406   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The Company’s assets are primarily located in the United States as of the years ended January 1, 2012 and December 30, 2012 and the six months ended June 30, 2013. Revenue from external customers for each group of similar products and services are not reported to our chief operating decision maker. The separate identification of this information for purposes of segment disclosure is impracticable, as it is not readily available and the cost to develop it would be excessive.

 

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NOTE 10. INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The approximate tax effect of the significant components of the Company’s deferred tax assets and liabilities as of January 1, 2012 and December 30, 2012 are as follows:

 

     January 1,     December 30,  
     2012     2012  
     (in thousands)  

Deferred tax assets:

    

Other assets

   $ 739      $ 2,148   

Net operating loss carryforwards

     5,850        9,359   
  

 

 

   

 

 

 

Total deferred tax assets

     6,589        11,507   

Valuation allowance

     (5,082     (8,701
  

 

 

   

 

 

 

Total deferred tax asset

     1,507        2,806   
  

 

 

   

 

 

 

Deferred tax liabilities:

    

Property and equipment

     (1,394     (2,538

Other liabilities

     (113     (268
  

 

 

   

 

 

 

Total deferred tax liability

     (1,507     (2,806
  

 

 

   

 

 

 

Net deferred tax assets

   $      $   
  

 

 

   

 

 

 

The deferred tax asset from net operating loss carryforwards of $9.4 million represents approximately $26.7 million of net operating loss carryforwards, which will begin to expire in fiscal year 2029.

Under section 382 of the Internal Revenue Code, as amended (the “Code”), the Company’s ability to utilize net operating loss carryforwards or other tax attributes, such as research tax credits, in any taxable year may be limited if it experiences an “ownership change.” A section 382 “ownership change” generally occurs if one or more stockholders or groups of stockholders who own at least 5% of the Company’s stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period or since the date of a prior ownership change, if within three years. Similar rules may apply under state tax laws.

In this regard, the Company has determined that such an ownership change occurred and that based on the timing of the ownership change and the corresponding section 382 limitation, none of its net operating losses or other tax attributes appear to expire subject to such limitation.

A valuation allowance was established for deferred income tax assets because, due to a limited operating history and the Company’s history of losses, it is more likely than not that deductible temporary differences and net operating loss carryforwards will not be realized through future taxable income. For the years ended December 30, 2012 and January 1, 2012, the valuation allowance increased by $3.6 and $3.7 million, respectively.

 

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A reconciliation of the federal statutory tax rate to the Company’s effective tax rate as follows:

 

     December 31,     January 1,     December 30,  
     2010     2012     2012  

Federal statutory rate

     (34.0 )%      (34.0 )%      (34.0 )% 

Permanent items

     0.0        0.1        (0.1

Stock compensation

     15.2        2.0        4.2   

R&D credit

     0.0        0.0        (4.6

State taxes

     0.0        (1.1     (1.0

Other

     0.0        0.0        0.4   

Valuation allowance

     18.8        33.0        35.1   
  

 

 

   

 

 

   

 

 

 

Effective tax rate

     —      —      — 
  

 

 

   

 

 

   

 

 

 

Subsequent to the issuance of the consolidated financial statements for the years ended January 1, 2012 and December 30, 2012, the Company’s management identified certain errors in the above table and as a result, for the year ended December 30, 2012, the Company included the benefit of the research and development tax credit to correctly present the income tax rate reconciliation and also rectified certain other errors in computing the items previously reported in the year ended January 1, 2012. In addition, the Company also corrected an error in the parenthetical disclosure of amount of change in valuation allowance. The corrections discussed in the previous sentences did not change the total effective tax rate previously reported for the years ended January 1, 2012 and December 30, 2012. Management has concluded that the correction of these errors are immaterial and had no impact on the amounts previously reported in the Company’s consolidated balance sheets, statements of operations, or statements of cash flows.

The Company is subject to taxation in the U.S. and various states and foreign jurisdictions. Due to the Company’s net losses, substantially all of its federal, state and foreign income tax returns since inception are still subject to audit.

For each tax position taken in the Company’s tax return the Company must determine whether it is more likely than not that the position will be sustained upon examination based on the technical merits of the position. A tax position that meets the more likely than not threshold is then measured to determine the amount of benefit to recognize within the consolidated financial statements. The Company has no uncertain tax positions taken on income tax returns as of January 1, 2012 and December 30, 2012.

NOTE 11. RELATED-PARTY TRANSACTIONS

Mark Vadon, the Chairman of the Board of Directors of the Company, is a director and owns a significant number of shares of Blue Nile, Inc. In addition, Michael Potter and W. Eric Carlborg, members of the Company’s Board of Directors are also directors of Blue Nile, Inc. an online retailer of high-quality diamonds and fine jewelry.

The Company purchased products from Blue Nile, Inc., totaling approximately $0.1 and $0.0 million for fiscal years ended January 1, 2012 and December 30, 2012, respectively. As of January 1, 2012 and December 30, 2012, the Company had $0.1 and $0.0 million recorded in accounts payable, respectively.

 

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Table of Contents

NOTE 12. ERROR CORRECTION

Subsequent to the issuance of the Company’s 2012 financial statements, the Company identified immaterial corrections in basic and diluted weighted average shares outstanding, basic and diluted net (loss) income per share attributable to common stockholders, basic and diluted net (loss) income per share attributable to common stockholders—pro forma (unaudited), additional paid-in capital and accumulated deficit. As a result, the Company has corrected its consolidated financial statements as of and for the years ended December 31, 2010, January 1, 2012, and December 30, 2012. The corrections are described below in more detail.

In December 2009, the Company issued common shares to its founders with vesting restrictions. In July 2011, one of the Company’s employees early exercised options that were also subject to vesting restrictions. The Company previously included these unvested restricted common shares in the weighted average common shares outstanding calculation. However, the calculation of basic and diluted weighted average common shares outstanding requires that any unvested restricted common shares should be excluded from the calculation.

The Company also determined that corrections are required to additional paid-in capital and accumulated deficit amounts for the years ended December 31, 2010, January 1, 2012, and December 30, 2012. The Company previously accreted the carrying value of preferred stock to the redemption amount within accumulated deficit. In the absence of retained earnings, the accretion should have been recorded within additional paid-in capital to the extent there is a sufficient balance, rather than accumulated deficit. Only after exhausting the balance of accumulated paid-in capital, should the remaining accretion have been recorded to accumulated deficit.

The Company has also corrected the deemed dividend calculation associated with the repurchase of Series Seed and Series A convertible preferred stock in 2012. The Company previously calculated the deemed dividend by subtracting the entire carrying value, including accretion, for all preferred shares from the fair value of the consideration paid to repurchase the Series Seed and Series A convertible preferred stock. The deemed dividend should have been calculated as the excess of the fair value of the consideration paid to repurchase the Series Seed and Series A convertible preferred stock over the carrying value of the repurchased Series Seed and Series A convertible preferred stock including any changes to the carrying value for accretion prior to the transfer from mezzanine equity to permanent equity in August of 2012. Additionally, the deemed dividend should have been recorded as a decrease to additional paid-in capital at the time of repurchase. As a result, net loss attributable to common stockholders, net loss attributable to common stockholders—pro forma (unaudited), additional paid-in capital and accumulated deficit have been revised for the year ended December 30, 2012.

The correction of the above items relates to the Company’s equity and has no impact on net loss (income) or the Company’s cashflows.

 

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Table of Contents

The following table presents the correction of these items from originally reported amounts for the year ended December 31, 2010:

 

     As Originally
Reported
    As Corrected  
     (in thousands, except share and
per share amounts)
 

Affected consolidated statement of operations items:

    

Basic and diluted net loss per share attributable to common stockholders

   $ (0.04   $ (0.11

Basic and diluted weighted average shares outstanding used to compute net loss per share attributable to common stockholders

     211,250,000        65,390,625   

Affected statement of convertible redeemable preferred stock and stockholders’ equity (deficit) items:

    

Additional paid-in capital balance—January 1, 2010

   $ 17      $ 13   

Accretion of convertible redeemable preferred stock

            (445

Additional paid-in capital balance—December 31, 2010

     2,418        1,969   

Accumulated deficit—January 1, 2010

     (88     (84

Accretion of convertible redeemable preferred stock

     (445       

Accumulated deficit—December 31, 2010

     (7,536     (7,087

The following table presents the correction of these items from originally reported amounts as of and for the year ended January 1, 2012:

 

     As Originally
Reported
    As Corrected  
     (in thousands, except share and
per share amounts)
 

Affected consolidated balance sheet items:

    

Additional paid-in capital

   $ 4,597      $ 2,229   

Accumulated deficit

     (20,769     (18,401

Effected consolidated statement of operations items:

    

Basic and diluted net loss per share attributable to common stockholders

     (0.06     (0.14

Basic and diluted weighted average shares outstanding used to compute net loss per share attributable to common stockholders

     214,553,998        96,411,124   

Affected statement of convertible redeemable preferred stock and stockholders’ equity (deficit) items:

    

Additional paid-in capital balance—December 31, 2010

   $ 2,418      $ 1,969   

Accretion of convertible redeemable preferred stock

            (1,919

Additional paid-in capital balance—January 1, 2012

     4,597        2,229   

Accumulated deficit—December 31, 2010

     (7,536     (7,087

Accretion of convertible redeemable preferred stock

     (1,919       

Accumulated deficit—January 1, 2012

     (20,769     (18,401

 

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Table of Contents

The following table presents the correction of these items from originally reported amounts as of and for the year ended December 30, 2012:

 

     As Originally
Reported
    As Corrected  
     (in thousands, except share and
per share amounts)
 

Affected consolidated balance sheet items:

    

Additional Paid-In Capital Balance

   $ 8,109      $   

Accumulated deficit

     (63,860     (55,751

Effected consolidated statement of operations items:

    

Net loss attributable to common stockholders

     (43,091     (46,822

Basic and diluted net loss per share attributable to common stockholders

     (0.20     (0.31

Basic and diluted weighted average shares outstanding used to compute net loss per share attributable to common stockholders

     217,782,025        151,906,924   

Net loss attributable to common stockholders—Pro forma (unaudited)

   $ (38,716   $ (42,447

Basic and diluted net loss per share attributable to common stockholders—Pro forma (unaudited)

     (0.09     (0.11

Pro forma basic and diluted weighted average shares outstanding used to compute net loss per share attributable to common stockholders—Pro forma (unaudited)

     441,092,345        375,217,245   

Affected statement of convertible redeemable preferred stock and stockholders’ equity (deficit) items:

    

Additional paid-in capital balance—January 1, 2012

   $ 4,597      $ 2,229   

Repurchase of convertible preferred stock

     (4,120     (6,557

Accretion of convertible redeemable preferred stock

            (3,304

Additional paid-in capital balance—December 30, 2012

     8,109          

Accumulated deficit—January 1, 2012

     (20,769     (18,401

Repurchase of convertible preferred stock

     (28,381     (25,943

Accretion of convertible redeemable preferred stock

     (4,375     (1,072

Accumulated deficit—December 31, 2012

     (63,860     (55,751

NOTE 13. SUBSEQUENT EVENTS

Subsequent events were evaluated from the balance sheet date of December 30, 2012 through the audited consolidated financial statements issuance date of August 8, 2013 and September 25, 2013. For the six months ended June 30, 2013, subsequent events were evaluated through September 25, 2013, the date on which the interim consolidated financial statements were issued.

On March 8, 2013, the Company entered into a lease agreement for office space in Columbus, Ohio.

On May 2, 2013, the Company entered into a lease agreement for office space in Seattle, Washington. As part of the agreement, the Company issued a security deposit in the form of an irrevocable standby letter of credit totaling $5.5 million and expires in 2024. The standby letter of credit may be drawn if certain conditions occur, including default on payments, losses incurred due to breach or termination of the agreement.

On May 16, 2013, the Board of Directors approved an increase to the number of shares reserved for issuance under the 2009 Plan from 51,375,000 shares to 72,421,252 shares. In addition, in accordance with the Company’s Certificate of Incorporation the Company’s Series D preferred stock conversion price was adjusted from $2.07 to $2.05. Each share of Series D preferred stock is convertible into 1.01 shares of common stock.

* * * * * *

 

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Table of Contents

 

 

             Shares

zulily, inc.

Class A Common Stock

 

 

 

LOGO

 

 

 

Goldman, Sachs & Co.   BofA Merrill Lynch    Citigroup
RBC Capital Markets
Allen & Company LLC
William Blair

 

 

Through and including                     , 2013 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

 

 


Table of Contents

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

 

Item 13. Other Expenses of Issuance and Distribution

The following table sets forth all expenses, other than the underwriting discounts and commissions, payable by us in connection with the sale of the Class A common stock being registered. All the amounts shown are estimates except the SEC registration fee, the FINRA filing fee and              listing fee.

 

     Amount
to be Paid
 

SEC registration fee

   $ 12,880   

FINRA filing fee

     15,500   

NASDAQ Global Select Market listing fee

     *   

Printing and engraving

     *   

Legal fees and expenses

     *   

Accounting fees and expenses

     *   

Transfer agent and registrar fees

     *   

Miscellaneous fees and expenses

     *   
  

 

 

 

Total

   $             *   
  

 

 

 

 

* To be filed by Amendment.

 

Item 14. Indemnification of Directors and Officers

Section 145 of the Delaware General Corporation Law authorizes a court to award, or a corporation’s board of directors to grant, indemnity to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities, including reimbursement for expenses incurred, arising under the Securities Act of 1933, as amended, or the Securities Act.

Our amended and restated certificate of incorporation that will be in effect upon the completion of this offering provides for indemnification of our directors, officers, employees and other agents to the maximum extent permitted by the Delaware General Corporation Law, and our amended and restated bylaws that will be in effect upon the completion of this offering provide for indemnification of our directors, officers, employees and other agents to the maximum extent permitted by the Delaware General Corporation Law.

We have entered into indemnification agreements with our directors and officers whereby we have agreed to indemnify our directors and officers to the fullest extent permitted by law, including indemnification against expenses and liabilities incurred in legal proceedings to which the director or officer was, or is threatened to be made, a party by reason of the fact that such director or officer is or was a director, officer, employee or agent of zulily, provided that such director or officer acted in good faith and in a manner that the director or officer reasonably believed to be in, or not opposed to, the best interest of zulily. At present, there is no pending litigation or proceeding involving a director or officer of zulily regarding which indemnification is sought, nor is the registrant aware of any threatened litigation that may result in claims for indemnification.

We maintain insurance policies that indemnify our directors and officers against various liabilities arising under the Securities Act and the Exchange Act of 1934, as amended, that might be incurred by any director or officer in his capacity as such.

 

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The underwriters are obligated, under certain circumstances, pursuant to the underwriting agreement to be filed as Exhibit 1.1 hereto, to indemnify us, our officers, directors and selling stockholder against liabilities under the Securities Act.

 

Item 15. Recent Sales of Unregistered Securities

Since January 1, 2010, we have made sales of the following unregistered securities:

(1) Between January 1, 2010 and August 31, 2013, we granted stock options under our 2009 Plan to purchase an aggregate of 87,715,686 shares of our Class B common stock at an exercise price ranging between $0.007 and $3.36 per share to a total of 1,164 employees, directors and consultants. Of these, stock options to purchase an aggregate of 23,610,452 have been cancelled without being exercised, 8,482,359 have been exercised for aggregate proceeds of $481,103 and 55,622,875 shares remain outstanding.

(2) Between January 1, 2010 and August 31, 2013, we issued 320,510 shares of our Class B common stock pursuant to restricted stock awards to our consultants under our 2009 Plan. The offers, sales and issuances of the securities described in this paragraph and the preceding paragraph were exempt from registration under either (a) Section 4(2) of the Securities Act in that the transactions were by an issuer not involving any public offering or under (b) under compensatory benefit plans and contracts relating to compensation as provided under Rule 701 promulgated under the Securities Act.

(3) In May 2010, we issued an aggregate of 115,502,600 shares of our Series A preferred stock to six accredited investors at a per share price of $0.03645, except as described in the section of this prospectus captioned “Certain Relationships and Related Party Transactions—Sales of Preferred Stock”, for aggregate consideration of $4,008,769. These shares were issued in reliance on Rule 506 of Regulation D promulgated under the Securities Act.

(4) In July 2010, we issued an aggregate of 44,923,630 shares of our Series B preferred stock to seven accredited investors at a per share price of $0.13356, for aggregate consideration of approximately $6,000,000. These shares were issued in reliance on Rule 506 of Regulation D promulgated under the Securities Act.

(5) In August 2011, we issued an aggregate of 20,378,275 shares of our Series C preferred stock to ten accredited investors at a per share price of $1.5703, for aggregate consideration of $32,000,005. These shares were issued in reliance on Rule 506 of Regulation D promulgated under the Securities Act.

(6) In August 2011, we issued and sold 7,813,275 shares of our Class B common stock to three accredited investor at a per share price of $1.40786, for aggregate consideration of $10,999,997. These shares were issued in reliance on Rule 506 of Regulation D promulgated under the Securities Act.

(7) In November 2012, we issued an aggregate of 40,975,703 shares of our Series D preferred stock to 17 accredited investors at a per share price of $2.0744, for aggregate consideration of $84,999,998. These shares were issued in reliance on Rule 506 of Regulation D promulgated under the Securities Act.

The recipients of the securities in each of these transactions represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were placed upon the stock certificates issued in these transactions. All recipients had adequate access, through their relationships with us, to information about us. The sales of these securities were made without any general solicitation or advertising.

 

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Item 16. Exhibits and Financial Statement Schedule

(a) Exhibits.

The following exhibits are included herein or incorporated herein by reference:

 

Exhibit

Number

  

Description of Document

  1.1*   

Form of Underwriting Agreement.

  3.1*   

Amended and Restated Certificate of Incorporation of zulily, inc., as presently in effect.

  3.2   

Second Amended and Restated Bylaws of zulily, inc., as presently in effect.

  3.3*   

Form of Amended and Restated Certificate of Incorporation of zulily, inc., to be in effect upon completion of this offering.

  3.4   

Form of Amended and Restated Bylaws of zulily, inc., to be in effect upon completion of this offering.

  4.1   

Third Amended and Restated Investor Rights Agreement, dated November 5, 2012.

  5.1*   

Opinion of Cooley LLP regarding legality.

10.1+   

zulily, inc. 2009 Equity Incentive Plan, as amended.

10.2+   

Forms of Option Agreement and Option Grant Notice for zulily, inc. 2009 Equity Incentive Plan.

10.3+*   

zulily, inc. 2013 Equity Plan, to be in effect upon completion of this offering.

10.4+*   

Forms of Option Agreement and Option Grant Notice for zulily, inc. 2013 Equity Plan.

10.5+   

Form of Indemnity Agreement entered into between zulily, inc. and each of its directors and its executive officers.

10.6+   

Employment Offer Letter by and between zulily, inc. and Marc Stolzman, dated August 16, 2012.

10.7+   

Employment Offer Letter by and between zulily, inc. and Bob Spieth, dated December 10, 2012.

10.8   

Cobalt Building Lease by and between zulily, inc. and UCM/FPI—Cobalt, LLC, dated May 18, 2011.

10.9   

Amendment No. 1 of Lease by and between zulily, inc. and UCM/FPI—Cobalt, LLC, dated October 5, 2011.

10.10   

Amendment No. 2 of Lease by and between zulily, inc. and UCM/FPI—Cobalt, LLC, dated February 8, 2012.

10.11   

Amendment No. 3 of Lease by and between zulily, inc. and UCM/FPI—Cobalt, LLC, dated June 15, 2012.

10.12   

Office Lease Agreement by and between zulily, inc. and SRI-WR Elliott Avenue LLC, dated May 2, 2013.

10.13   

Amended and Restated Lease by and between zulily, inc. and Eagle CPT, LLC, dated November 1, 2011.

10.14   

Agreement of Lease by and between zulily, inc. and KTR Ohio LLC, dated November, 2011.

 

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Exhibit

Number

  

Description of Document

10.15†   

Service Agreement by and between zulily, inc. and IntelliSource, LLC, dated September 29, 2011.

10.16†   

Contractor Agreement by and between zulily, inc. and IntelliSource, LLC, dated December 19, 2011.

21.1   

Subsidiaries of zulily, inc.

23.1   

Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm.

23.2*   

Consent of Cooley LLP (included in Exhibit 5.1).

24.1   

Power of Attorney (included in signature pages).

 

* To be filed by Amendment.
+ Indicates a management contract or compensatory plan.
Confidential treatment has been requested for portions of this exhibit. These portions have been omitted from the registration statement and submitted separately to the Securities and Exchange Commission.

(b) Financial Statement Schedules.

No financial statement schedules are provided because the information called for is not required or is shown in the consolidated financial statements or related notes.

 

Item 17. Undertakings

The undersigned Registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

The undersigned Registrant hereby undertakes that:

 

  (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective.

 

  (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Seattle, State of Washington on the 8th day of October, 2013.

 

zulily, inc.

By:

 

/s/ Darrell Cavens

  Name: Darrell Cavens
  Title: President and Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Darrell Cavens and Marc Stolzman, and each of them, as his true and lawful attorneys-in-fact and agents, each with the full power of substitution, for him and in his name, place or stead, in any and all capacities, to sign any and all amendments to this Registration Statement (including post-effective amendments), and to sign any registration statement for the same offering covered by this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, and all post-effective amendments thereto, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their, his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:

 

Signature

  

Title

 

Date

/s/ Darrell Cavens

Darrell Cavens

   President, Chief Executive Officer and Director (Principal Executive Officer)   October 8, 2013

/s/ Marc Stolzman

Marc Stolzman

  

Chief Financial Officer

(Principal Financial and Accounting Officer)

  October 8, 2013

/s/ Mark Vadon

Mark Vadon

  

Chairman of the Board

  October 8, 2013

/s/ W. Eric Carlborg

W. Eric Carlborg

  

Director

  October 8, 2013

/s/ Dan Levitan

Dan Levitan

  

Director

  October 8, 2013

 

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Table of Contents

Signature

  

Title

 

Date

/s/ Youngme Moon

Youngme Moon

  

Director

  October 8, 2013

/s/ Michael Potter

Michael Potter

  

Director

  October 8, 2013

/s/ Spencer Rascoff

Spencer Rascoff

  

Director

  October 8, 2013

 

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Table of Contents

EXHIBIT INDEX

 

Exhibit

Number

  

Description of Document

  1.1*   

Form of Underwriting Agreement.

  3.1*   

Amended and Restated Certificate of Incorporation of zulily, inc., as presently in effect.

  3.2   

Second Amended and Restated Bylaws of zulily, inc., as presently in effect.

  3.3*   

Form of Amended and Restated Certificate of Incorporation of zulily, inc., to be in effect upon completion of this offering.

  3.4   

Form of Amended and Restated Bylaws of zulily, inc., to be in effect upon completion of this offering.

  4.1   

Third Amended and Restated Investor Rights Agreement, dated November 5, 2012.

  5.1*   

Opinion of Cooley LLP regarding legality.

10.1+   

zulily, inc. 2009 Equity Incentive Plan, as amended.

10.2+   

Forms of Option Agreement and Option Grant Notice for zulily, inc. 2009 Equity Incentive Plan.

10.3+*   

zulily, inc. 2013 Equity Plan, to be in effect upon completion of this offering.

10.4+*   

Forms of Option Agreement and Option Grant Notice for zulily, inc. 2013 Equity Plan.

10.5+   

Form of Indemnity Agreement entered into between zulily, inc. and each of its directors and its executive officers.

10.6+   

Employment Offer Letter by and between zulily, inc. and Marc Stolzman, dated August 16, 2012.

10.7+   

Employment Offer Letter by and between zulily, inc. and Bob Spieth, dated December 10, 2012.

10.8   

Cobalt Building Lease by and between zulily, inc. and UCM/FPI—Cobalt, LLC, dated May 18, 2011.

10.9   

Amendment No. 1 of Lease by and between zulily, inc. and UCM/FPI—Cobalt, LLC, dated October 5, 2011.

10.10   

Amendment No. 2 of Lease by and between zulily, inc. and UCM/FPI—Cobalt, LLC, dated February 8, 2012.

10.11   

Amendment No. 3 of Lease by and between zulily, inc. and UCM/FPI—Cobalt, LLC, dated June 15, 2012.

10.12   

Office Lease Agreement by and between zulily, inc. and SRI-WR Elliott Avenue LLC, dated May 2, 2013.

10.13   

Amended and Restated Lease by and between zulily, inc. and Eagle CPT, LLC, dated November 1, 2011.

10.14   

Agreement of Lease by and between zulily, inc. and KTR Ohio LLC, dated November, 2011.

10.15†   

Service Agreement by and between zulily, inc. and IntelliSource, LLC, dated September 29, 2011.

10.16†   

Contractor Agreement by and between zulily, inc. and IntelliSource, LLC, dated December 19, 2011.


Table of Contents

Exhibit

Number

  

Description of Document

21.1   

Subsidiaries of zulily, inc.

23.1   

Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm.

23.2*   

Consent of Cooley LLP (included in Exhibit 5.1).

24.1   

Power of Attorney (included in signature pages).

 

* To be filed by Amendment.
+ Indicates a management contract or compensatory plan.
Confidential treatment has been requested for portions of this exhibit. These portions have been omitted from the registration statement and submitted separately to the Securities and Exchange Commission.

Second Amended and Restated Bylaws of the Registrant

Exhibit 3.2

SECOND AMENDED AND RESTATED BYLAWS

OF

ZULILY, INC.

(A DELAWARE CORPORATION)

EFFECTIVE: MAY 22, 2011


SECOND AMENDED AND RESTATED BYLAWS

OF

ZULILY, INC.

(A DELAWARE CORPORATION)

ARTICLE I

OFFICES

Section 1. Registered Office. The registered office of the corporation in the State of Delaware shall be in the City of Wilmington, County of New Castle.

Section 2. Other Offices. The corporation shall also have and maintain an office or principal place of business at such place as may be fixed by the Board of Directors, and may also have offices at such other places, both within and without the State of Delaware, as the Board of Directors may from time to time determine or the business of the corporation may require.

ARTICLE II

CORPORATE SEAL

Section 3. Corporate Seal. The Board of Directors may adopt a corporate seal. The corporate seal shall consist of a die bearing the name of the corporation and the inscription, “Corporate Seal-Delaware.” Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise.

ARTICLE III

STOCKHOLDERS’ MEETINGS

Section 4. Place of Meetings. Meetings of the stockholders of the corporation may be held at such place, either within or without the State of Delaware, as may be determined from time to time by the Board of Directors. The Board of Directors may, in its sole discretion, determine that the meeting shall not be held at any place, but may instead be held solely by means of remote communication as provided under the Delaware General Corporation Law (“DGCL”).

Section 5. Annual Meeting.

(a) The annual meeting of the stockholders of the corporation, for the purpose of election of directors and for such other business as may lawfully come before it, shall be held on such date and at such time as may be designated from time to time by the Board of Directors. Nominations of persons for election to the Board of Directors of the corporation and the proposal of business to be considered by the stockholders may be made at an annual meeting of


stockholders: (i) pursuant to the corporation’s notice of meeting of stockholders; (ii) by or at the direction of the Board of Directors; or (iii) by any stockholder of the corporation who was a stockholder of record at the time of giving of notice provided for in the following paragraph, who is entitled to vote at the meeting and who complied with the notice procedures set forth in Section 5.

(b) At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (iii) of Section 5(a) of these Second Amended and Restated Bylaws (the “Bylaws”), (i) the stockholder must have given timely notice thereof in writing to the Secretary of the corporation, (ii) such other business must be a proper matter for stockholder action under the DGCL, (iii) if the stockholder, or the beneficial owner on whose behalf any such proposal or nomination is made, has provided the corporation with a Solicitation Notice (as defined in this Section 5(b)), such stockholder or beneficial owner must, in the case of a proposal, have delivered a proxy statement and form of proxy to holders of at least the percentage of the corporation’s voting shares required under applicable law to carry any such proposal, or, in the case of a nomination or nominations, have delivered a proxy statement and form of proxy to holders of a percentage of the corporation’s voting shares reasonably believed by such stockholder or beneficial owner to be sufficient to elect the nominee or nominees proposed to be nominated by such stockholder, and must, in either case, have included in such materials the Solicitation Notice, and (iv) if no Solicitation Notice relating thereto has been timely provided pursuant to this section, the stockholder or beneficial owner proposing such business or nomination must not have solicited a number of proxies sufficient to have required the delivery of such a Solicitation Notice under this Section 5. To be timely, a stockholder’s notice shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the ninetieth (90th) day nor earlier than the close of business on the one hundred twentieth (120th) day prior to the first anniversary of the preceding year’s annual meeting; provided, however, that in the event that the date of the annual meeting is advanced more than thirty (30) days prior to or delayed by more than thirty (30) days after the anniversary of the preceding year’s annual meeting, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the one hundred twentieth (120th) day prior to such annual meeting and not later than the close of business on the later of the ninetieth (90th) day prior to such annual meeting or the tenth (10th) day following the day on which public announcement of the date of such meeting is first made. In no event shall the public announcement of an adjournment of an annual meeting commence a new time period for the giving of a stockholder’s notice as described above. Such stockholder’s notice shall set forth: (A) as to each person whom the stockholder proposed to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the “1934 Act”) and Rule 14a-4(d) thereunder (including such person’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (B) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (C) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the


nomination or proposal is made (i) the name and address of such stockholder, as they appear on the corporation’s books, and of such beneficial owner, (ii) the class and number of shares of the corporation which are owned beneficially and of record by such stockholder and such beneficial owner, and (iii) whether either such stockholder or beneficial owner intends to deliver a proxy statement and form of proxy to holders of, in the case of the proposal, at least the percentage of the corporation’s voting shares required under applicable law to carry the proposal or, in the case of a nomination or nominations, a sufficient number of holders of the corporation’s voting shares to elect such nominee or nominees (an affirmative statement of such intent, a “Solicitation Notice”).

(c) Notwithstanding anything in the second sentence of Section 5(b) of these Bylaws to the contrary, in the event that the number of directors to be elected to the Board of Directors of the Corporation is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by the corporation at least one hundred (100) days prior to the first anniversary of the preceding year’s annual meeting, a stockholder’s notice required by this Section 5 shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the corporation not later than the close of business on the tenth (10th) day following the day on which such public announcement is first made by the corporation.

(d) Only such persons who are nominated in accordance with the procedures set forth in this Section 5 shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 5. Except as otherwise provided by law, the Chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made, or proposed, as the case may be, in accordance with the procedures set forth in these Bylaws and, if any proposed nomination or business is not in compliance with these Bylaws, to declare that such defective proposal or nomination shall not be presented for stockholder action at the meeting and shall be disregarded.

(e) Notwithstanding the foregoing provisions of this Section 5, in order to include information with respect to a stockholder proposal in the proxy statement and form of proxy for a stockholders’ meeting, stockholders must provide notice as required by the regulations promulgated under the 1934 Act. Nothing in these Bylaws shall be deemed to affect any rights of stockholders to request inclusion of proposals in the corporation proxy statement pursuant to Rule 14a-8 under the 1934 Act.

(f) For purposes of this Section 5, “public announcement” shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the 1934 Act.

Section 6. Special Meetings.

(a) Special meetings of the stockholders of the corporation may be called, for any purpose or purposes, by (i) the Chairman of the Board of Directors, (ii) the Chief Executive


Officer, (iii) the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board of Directors for adoption) or (iv) by the holders of shares entitled to cast not less than twenty percent (20%) of the votes at the meeting, and shall be held at such place, on such date, and at such time as the Board of Directors shall fix.

(b) If a special meeting is properly called by any person or persons other than the Board of Directors, the request shall be in writing, specifying the general nature of the business proposed to be transacted, and shall be delivered personally or sent by certified or registered mail, return receipt requested, or by telegraphic or other facsimile transmission to the Chairman of the Board of Directors, the Chief Executive Officer, or the Secretary of the corporation. No business may be transacted at such special meeting otherwise than specified in such notice. The Board of Directors shall determine the time and place of such special meeting, which shall be held not less than thirty-five (35) nor more than one hundred twenty (120) days after the date of the receipt of the request. Upon determination of the time and place of the meeting, the officer receiving the request shall cause notice to be given to the stockholders entitled to vote, in accordance with the provisions of Section 7 of these Bylaws. Nothing contained in this paragraph (b) shall be construed as limiting, fixing, or affecting the time when a meeting of stockholders called by action of the Board of Directors may be held.

Section 7. Notice of Meetings. Except as otherwise provided by law, notice, given in writing or by electronic transmission, of each meeting of stockholders shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting, such notice to specify the place, if any, date and hour, in the case of special meetings, the purpose or purposes of the meeting, and the means of remote communications, if any, by which stockholders and proxyholders may be deemed to be present in person and vote at any such meeting. If mailed, notice is given when deposited in the United States mail, postage prepaid, directed to the stockholder at such stockholder’s address as it appears on the records of the corporation. Notice of the time, place, if any, and purpose of any meeting of stockholders may be waived in writing, signed by the person entitled to notice thereof or by electronic transmission by such person, either before or after such meeting, and will be waived by any stockholder by his attendance thereat in person, by remote communication, if applicable, or by proxy, except when the stockholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Any stockholder so waiving notice of such meeting shall be bound by the proceedings of any such meeting in all respects as if due notice thereof had been given.

Section 8. Quorum. At all meetings of stockholders, except where otherwise provided by statute or by the Certificate of Incorporation, or by these Bylaws, the presence, in person, by remote communication, if applicable, or by proxy duly authorized, of the holders of a majority of the outstanding shares of stock entitled to vote shall constitute a quorum for the transaction of business. In the absence of a quorum, any meeting of stockholders may be adjourned, from time to time, either by the chairman of the meeting or by vote of the holders of a majority of the shares represented thereat, but no other business shall be transacted at such meeting. The stockholders present at a duly called or convened meeting, at which a quorum is


present, may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. Except as otherwise provided by statute, or by the Certificate of Incorporation or these Bylaws, in all matters other than the election of directors, the affirmative vote of a majority of shares present in person, by remote communication, if applicable, or represented by proxy duly authorized at the meeting and entitled to vote generally on the subject matter shall be the act of the stockholders. Except as otherwise provided by statute, the Certificate of Incorporation or these Bylaws, directors shall be elected by a plurality of the votes of the shares present in person, by remote communication, if applicable, or represented by proxy duly authorized at the meeting and entitled to vote generally on the election of directors. Where a separate vote by a class or classes or series is required, except where otherwise provided by the statute or by the Certificate of Incorporation or these Bylaws, a majority of the outstanding shares of such class or classes or series, present in person, by remote communication, if applicable, or represented by proxy duly authorized, shall constitute a quorum entitled to take action with respect to that vote on that matter. Except where otherwise provided by statute or by the Certificate of Incorporation or these Bylaws, the affirmative vote of the majority (plurality, in the case of the election of directors) of shares of such class or classes or series present in person, by remote communication, if applicable, or represented by proxy at the meeting shall be the act of such class or classes or series.

Section 9. Adjournment and Notice of Adjourned Meetings. Any meeting of stockholders, whether annual or special, may be adjourned from time to time either by the chairman of the meeting or by the vote of a majority of the shares present in person, by remote communication, if applicable, or represented by proxy. When a meeting is adjourned to another time or place, if any, notice need not be given of the adjourned meeting if the time and place, if any, thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting.

Section 10. Voting Rights. For the purpose of determining those stockholders entitled to vote at any meeting of the stockholders, except as otherwise provided by law, only persons in whose names shares stand on the stock records of the corporation on the record date, as provided in Section 12 of these Bylaws, shall be entitled to vote at any meeting of stockholders. Every person entitled to vote or execute consents shall have the right to do so either in person, by remote communication, if applicable, or by an agent or agents authorized by a proxy granted in accordance with Delaware law. An agent so appointed need not be a stockholder. No proxy shall be voted after three (3) years from its date of creation unless the proxy provides for a longer period.

Section 11. Joint Owners of Stock. If shares or other securities having voting power stand of record in the names of two (2) or more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, tenants by the entirety, or otherwise, or if two (2) or more persons have the same fiduciary relationship respecting the same shares, unless the Secretary is given written notice to the contrary and is furnished with a copy of the instrument or order appointing them or creating the relationship wherein it is so provided, their acts with respect to voting shall have the following effect: (a) if only one (1) votes, his act binds all; (b) if


more than one (1) votes, the act of the majority so voting binds all; (c) if more than one (1) votes, but the vote is evenly split on any particular matter, each faction may vote the securities in question proportionally, or may apply to the Delaware Court of Chancery for relief as provided in the DGCL, Section 217(b). If the instrument filed with the Secretary shows that any such tenancy is held in unequal interests, a majority or even-split for the purpose of subsection (c) shall be a majority or even-split in interest.

Section 12. List of Stockholders. The Secretary shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at said meeting, arranged in alphabetical order, showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, on a reasonably accessible electronic network, provided that the information required to gain access to such list is provided with the notice of the meeting, or during ordinary business hours, at the principal place of business of the corporation. In the event that the corporation determines to make the list available on an electronic network, the corporation may take reasonable steps to ensure that such information is available only to stockholders of the corporation. The list shall be open to examination of any stockholder during the time of the meeting as provided by law.

Section 13. Action Without Meeting.

(a) Unless otherwise provided in the Certificate of Incorporation, any action required by statute to be taken at any annual or special meeting of the stockholders, or any action which may be taken at any annual or special meeting of the stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, or by electronic transmission setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted.

(b) Every written consent or electronic transmission shall bear the date of signature of each stockholder who signs the consent, and no written consent or electronic transmission shall be effective to take the corporate action referred to therein unless, within sixty (60) days of the earliest dated consent delivered to the corporation in the manner herein required, written consents or electronic transmissions signed by a sufficient number of stockholders to take action are delivered to the corporation by delivery to its registered office in the State of Delaware, its principal place of business or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to a corporation’s registered office shall be by hand or by certified or registered mail, return receipt requested.

(c) Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing or by electronic transmission and who, if the action had been taken at a meeting, would have been entitled to notice of the meeting if the record date for such meeting had been the date that written consents signed by a sufficient number of stockholders to take action were delivered to the corporation as provided in Section 228(c) of the DGCL. If the action which is consented to is such as would have required the filing of a certificate under any section of the


DGCL if such action had been voted on by stockholders at a meeting thereof, then the certificate filed under such section shall state, in lieu of any statement required by such section concerning any vote of stockholders, that written consent has been given in accordance with Section 228 of the DGCL.

(d) A telegram, cablegram or other electronic transmission consenting to an action to be taken and transmitted by a stockholder or proxyholder, shall be deemed to be written, signed and dated for the purposes of this section, provided that any such telegram, cablegram or other electronic transmission sets forth or is delivered with information from which the corporation can determine (i) that the telegram, cablegram or other electronic transmission was transmitted by the stockholder or proxyholder or by a person or persons authorized to act for the stockholder and (ii) the date on which such stockholder or proxyholder or authorized person or persons transmitted such telegram, cablegram or electronic transmission. The date on which such telegram, cablegram or electronic transmission is transmitted shall be deemed to be the date on which such consent was signed. No consent given by telegram, cablegram or other electronic transmission shall be deemed to have been delivered until such consent is reproduced in paper form and until such paper form shall be delivered to the corporation by delivery to its registered office in the state of Delaware, its principal place of business or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to a corporation’s registered office shall be made by hand or by certified or registered mail, return receipt requested. Notwithstanding the foregoing limitations on delivery, consents given by telegram, cablegram or other electronic transmission may be otherwise delivered to the principal place of business of the corporation or to an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded if, to the extent and in the manner provided by resolution of the board of directors of the corporation. Any copy, facsimile or other reliable reproduction of a consent in writing may be substituted or used in lieu of the original writing for any and all purposes for which the original writing could be used, provided that such copy, facsimile or other reproduction shall be a complete reproduction of the entire original writing.

Section 14. Organization.

(a) At every meeting of stockholders, the Chairman of the Board of Directors, or, if a Chairman has not been appointed or is absent, the Chief Executive Officer, or, if the Chief Executive Officer is absent, the President, or, if the President is absent, a chairman of the meeting chosen by a majority in interest of the stockholders entitled to vote, present in person or by proxy, shall act as chairman. The Secretary, or, in his absence, an Assistant Secretary directed to do so by the Chief Executive Officer or the President, shall act as secretary of the meeting.

(b) The Board of Directors of the corporation shall be entitled to make such rules or regulations for the conduct of meetings of stockholders as it shall deem necessary, appropriate or convenient. Subject to such rules and regulations of the Board of Directors, if any, the chairman of the meeting shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are necessary, appropriate or convenient for the proper conduct of the meeting, including, without limitation, establishing an agenda or order of business for the meeting, rules and procedures for


maintaining order at the meeting and the safety of those present, limitations on participation in such meeting to stockholders of record of the corporation and their duly authorized and constituted proxies and such other persons as the chairman shall permit, restrictions on entry to the meeting after the time fixed for the commencement thereof, limitations on the time allotted to questions or comments by participants and regulation of the opening and closing of the polls for balloting on matters which are to be voted on by ballot. The date and time of the opening and closing of the polls for each matter upon which the stockholders will vote at the meeting shall be announced at the meeting. Unless and to the extent determined by the Board of Directors or the chairman of the meeting, meetings of stockholders shall not be required to be held in accordance with rules of parliamentary procedure.

ARTICLE IV

DIRECTORS

Section 15. Number and Term of Office. The authorized number of directors of the corporation shall be fixed by the Board of Directors from time to time. Directors need not be stockholders unless so required by the Certificate of Incorporation. If for any cause, the directors shall not have been elected at an annual meeting, they may be elected as soon thereafter as convenient.

Section 16. Powers. The powers of the corporation shall be exercised, its business conducted and its property controlled by the Board of Directors, except as may be otherwise provided by statute or by the Certificate of Incorporation.

Section 17. Term of Directors. Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, directors shall be elected at each annual meeting of stockholders to serve until the next annual meeting of stockholders. Each director shall serve until his successor is duly elected and qualified or until his death, resignation or removal. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director.

Section 18. Vacancies. Unless otherwise provided in the Certificate of Incorporation, and subject to the rights of the holders of any series of Preferred Stock, any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other causes and any newly created directorships resulting from any increase in the number of directors shall, unless the Board of Directors determines by resolution that any such vacancies or newly created directorships shall be filled by stockholders, be filled only by the affirmative vote of a majority of the directors then in office, even though less than a quorum of the Board of Directors, or by a sole remaining director, provided, however, that whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the provisions of the Certificate of Incorporation, vacancies and newly created directorships of such class or classes or series shall, unless the Board of Directors determines by resolution that any such vacancies or newly created directorships shall be filled by stockholders, be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the director for which the vacancy was created or occurred and until


such director’s successor shall have been elected and qualified. A vacancy in the Board of Directors shall be deemed to exist under this Bylaw in the case of the death, removal or resignation of any director.

Section 19. Resignation. Any director may resign at any time by delivering his or her notice in writing or by electronic transmission to the Secretary, such resignation to specify whether it will be effective at a particular time, upon receipt by the Secretary or at the pleasure of the Board of Directors. If no such specification is made, it shall be deemed effective at the pleasure of the Board of Directors. When one or more directors shall resign from the Board of Directors, effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each Director so chosen shall hold office for the unexpired portion of the term of the Director whose place shall be vacated and until his successor shall have been duly elected and qualified.

Section 20. Removal. Subject to any limitations imposed by applicable law, the Board of Directors or any director may be removed from office at any time (i) with cause by the affirmative vote of the holders of a majority of the voting power of all then-outstanding shares of capital stock of the corporation entitled to vote generally at an election of directors or (ii) without cause by the affirmative vote of the holders of a majority of the voting power of all then-outstanding shares of capital stock of the corporation, entitled to vote generally at an election of directors.

Section 21. Meetings

(a) Regular Meetings. Unless otherwise restricted by the Certificate of Incorporation, regular meetings of the Board of Directors may be held at any time or date and at any place within or without the State of Delaware which has been designated by the Board of Directors and publicized among all directors, either orally or in writing, including a voice-messaging system or other system designated to record and communicate messages, facsimile, telegraph or telex, or by electronic mail or other electronic means. No further notice shall be required for a regular meeting of the Board of Directors.

(b) Special Meetings. Unless otherwise restricted by the Certificate of Incorporation, special meetings of the Board of Directors may be held at any time and place within or without the State of Delaware whenever called by the Chairman of the Board, the Chief Executive Officer, the President or any two of the directors.

(c) Meetings by Electronic Communications Equipment. Any member of the Board of Directors, or of any committee thereof, may participate in a meeting by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting by such means shall constitute presence in person at such meeting.

(d) Notice of Special Meetings. Notice of the time and place of all special meetings of the Board of Directors shall be orally or in writing, by telephone, including a voice messaging system or other system or technology designed to record and communicate messages,


facsimile, telegraph or telex, or by electronic mail or other electronic means, during normal business hours, at least twenty-four (24) hours before the date and time of the meeting. If notice is sent by US mail, it shall be sent by first class mail, postage prepaid at least three (3) days before the date of the meeting. Notice of any meeting may be waived in writing or by electronic transmission at any time before or after the meeting and will be waived by any director by attendance thereat, except when the director attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened.

(e) Waiver of Notice. The transaction of all business at any meeting of the Board of Directors, or any committee thereof, however called or noticed, or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present and if, either before or after the meeting, each of the directors not present who did not receive notice shall sign a written waiver of notice or shall waive notice by electronic transmission. All such waivers shall be filed with the corporate records or made a part of the minutes of the meeting.

Section 22. Quorum and Voting.

(a) Unless the Certificate of Incorporation requires a greater number, a quorum of the Board of Directors shall consist of a majority of the exact number of directors fixed from time to time by the Board of Directors in accordance with the Certificate of Incorporation; provided, however, at any meeting, whether a quorum be present or otherwise, a majority of the directors present may adjourn from time to time until the time fixed for the next regular meeting of the Board of Directors, without notice other than by announcement at the meeting.

(b) At each meeting of the Board of Directors at which a quorum is present, all questions and business shall be determined by the affirmative vote of a majority of the directors present, unless a different vote be required by law, the Certificate of Incorporation or these Bylaws.

Section 23. Action Without Meeting. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board of Directors or committee, as the case may be, consent thereto in writing or by electronic transmission, and such writing or writings or transmission or transmissions are filed with the minutes of proceedings of the Board of Directors or committee. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes are maintained in electronic form.

Section 24. Fees and Compensation. Directors shall be entitled to such compensation for their services as may be approved by the Board of Directors, including, if so approved, by resolution of the Board of Directors, a fixed sum and expenses of attendance, if any, for attendance at each regular or special meeting of the Board of Directors and at any meeting of a committee of the Board of Directors. Nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee, or otherwise and receiving compensation therefor.


Section 25. Committees.

(a) Executive Committee. The Board of Directors may appoint an Executive Committee to consist of one (1) or more members of the Board of Directors. The Executive Committee, to the extent permitted by law and provided in the resolution of the Board of Directors shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to (i) approving or adopting, or recommending to the stockholders, any action or matter expressly required by the DGCL to be submitted to stockholders for approval, or (ii) adopting, amending or repealing any bylaw of the corporation.

(b) Other Committees. The Board of Directors may, from time to time, appoint such other committees as may be permitted by law. Such other committees appointed by the Board of Directors shall consist of one (1) or more members of the Board of Directors and shall have such powers and perform such duties as may be prescribed by the resolution or resolutions creating such committees, but in no event shall any such committee have the powers denied to the Executive Committee in these Bylaws.

(c) Term. The Board of Directors, subject to any requirements of any outstanding series of Preferred Stock and the provisions of subsections (a) or (b) of this Bylaw may at any time increase or decrease the number of members of a committee or terminate the existence of a committee. The membership of a committee member shall terminate on the date of his death or voluntary resignation from the committee or from the Board of Directors. The Board of Directors may at any time for any reason remove any individual committee member and the Board of Directors may fill any committee vacancy created by death, resignation, removal or increase in the number of members of the committee. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee, and, in addition, in the absence or disqualification of any member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member.

(d) Meetings. Unless the Board of Directors shall otherwise provide, regular meetings of the Executive Committee or any other committee appointed pursuant to this Section 25 shall be held at such times and places as are determined by the Board of Directors, or by any such committee, and when notice thereof has been given to each member of such committee, no further notice of such regular meetings need be given thereafter. Special meetings of any such committee may be held at any place which has been determined from time to time by such committee, and may be called by any director who is a member of such committee, upon notice to the members of such committee of the time and place of such special meeting given in the manner provided for the giving of notice to members of the Board of Directors of the time and place of special meetings of the Board of Directors. Notice of any special meeting of any


committee may be waived in writing at any time before or after the meeting and will be waived by any director by attendance thereat, except when the director attends such special meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Unless otherwise provided by the Board of Directors in the resolutions authorizing the creation of the committee, a majority of the authorized number of members of any such committee shall constitute a quorum for the transaction of business, and the act of a majority of those present at any meeting at which a quorum is present shall be the act of such committee.

Section 26. Organization. At every meeting of the directors, the Chairman of the Board of Directors, or, if a Chairman has not been appointed or is absent, the Chief Executive Officer or President, or if the Chief Executive Officer and President are absent, the most senior Vice President, (if a director) or, in the absence of any such person, a chairman of the meeting chosen by a majority of the directors present, shall preside over the meeting. The Secretary, or in his absence, any Assistant Secretary directed to do so by the Chief Executive Officer or the President, shall act as secretary of the meeting.

ARTICLE V

OFFICERS

Section 27. Officers Designated. The officers of the corporation shall include, if and when designated by the Board of Directors, the Chief Executive Officer, the President, one or more Vice Presidents, the Secretary, the Chief Financial Officer and the Treasurer, all of whom shall be elected at the annual organizational meeting of the Board of Directors. The Board of Directors may also appoint one or more Assistant Secretaries, Assistant Treasurers and such other officers and agents with such powers and duties as it shall deem necessary. The Board of Directors may assign such additional titles to one or more of the officers as it shall deem appropriate. Any one person may hold any number of offices of the corporation at any one time unless specifically prohibited therefrom by law. The salaries and other compensation of the officers of the corporation shall be fixed by or in the manner designated by the Board of Directors.

Section 28. Tenure and Duties of Officers.

(a) General. All officers shall hold office at the pleasure of the Board of Directors and until their successors shall have been duly elected and qualified, unless sooner removed. Any officer elected or appointed by the Board of Directors may be removed at any time by the Board of Directors. If the office of any officer becomes vacant for any reason, the vacancy may be filled by the Board of Directors.

(b) Duties of Chairman of the Board of Directors. The Chairman of the Board of Directors, when present, shall preside at all meetings of the stockholders and the Board of Directors. The Chairman of the Board of Directors shall perform other duties commonly incident to the office and shall also perform such other duties and have such other powers as the Board of Directors shall designate from time to time. If there is no President, then the Chairman of the Board of Directors shall also serve as the Chief Executive Officer of the corporation and shall have the powers and duties prescribed in paragraph (c) of this Section 28.


(c) Duties of Chief Executive Officer. The Chief Executive shall preside at all meetings of the stockholders and at all meetings of the Board of Directors, unless the Chairman of the Board of Directors has been appointed and is present. The Chief Executive Officer of the corporation shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and officers of the corporation. The Chief Executive Officer shall perform other duties commonly incident to the office and shall also perform such other duties and have such other powers as the Board of Directors shall designate from time to time.

(d) Duties of President. Unless some other officer has been elected Chief Executive Officer of the corporation, the President shall be the chief executive officer of the corporation and shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and officers of the corporation. The President shall perform other duties commonly incident to the office and shall also perform such other duties and have such other powers as the Board of Directors or Chief Executive Officer shall designate from time to time.

(e) Duties of Vice Presidents. The Vice Presidents may assume and perform the duties of the President in the absence or disability of the President or whenever the office of President is vacant. The Vice Presidents shall perform other duties commonly incident to their office and shall also perform such other duties and have such other powers as the Board of Directors, the Chief Executive Officer or the President shall designate from time to time.

(f) Duties of Secretary. The Secretary shall attend all meetings of the stockholders and of the Board of Directors and shall record all acts and proceedings thereof in the minute book of the corporation. The Secretary shall give notice in conformity with these Bylaws of all meetings of the stockholders and of all meetings of the Board of Directors and any committee thereof requiring notice. The Secretary shall perform all other duties provided for in these Bylaws and other duties commonly incident to the office and shall also perform such other duties and have such other powers as the Board of Directors shall designate from time to time. The President may direct any Assistant Secretary to assume and perform the duties of the Secretary in the absence or disability of the Secretary, and each Assistant Secretary shall perform other duties commonly incident to the office and shall also perform such other duties and have such other powers as the Board of Directors, the Chief Executive Officer or the President shall designate from time to time.

(g) Duties of Chief Financial Officer. The Chief Financial Officer shall keep or cause to be kept the books of account of the corporation in a thorough and proper manner and shall render statements of the financial affairs of the corporation in such form and as often as required by the Board of Directors, the Chief Executive Officer or the President. The Chief Financial Officer, subject to the order of the Board of Directors, shall have the custody of all funds and securities of the corporation. The Chief Financial Officer shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors, the Chief Executive Officer or the President shall designate


from time to time. The Chief Executive Officer or the President may direct the Treasurer or any Assistant Treasurer to assume and perform the duties of the Chief Financial Officer in the absence or disability of the Chief Financial Officer, and each Treasurer and Assistant Treasurer shall perform other duties commonly incident to the office and shall also perform such other duties and have such other powers as the Board of Directors, the Chief Executive Officer or the President shall designate from time to time.

Section 29. Delegation of Authority. The Board of Directors may from time to time delegate the powers or duties of any officer to any other officer or agent, notwithstanding any provision hereof.

Section 30. Resignations. Any officer may resign at any time by giving notice in writing or by electronic transmission notice to the Board of Directors or to the Chief Executive Officer or the President or to the Secretary. Any such resignation shall be effective when received by the person or persons to whom such notice is given, unless a later time is specified therein, in which event the resignation shall become effective at such later time. Unless otherwise specified in such notice, the acceptance of any such resignation shall not be necessary to make it effective. Any resignation shall be without prejudice to the rights, if any, of the corporation under any contract with the resigning officer.

Section 31. Removal. Any officer may be removed from office at any time, either with or without cause, by the affirmative vote of a majority of the directors in office at the time, or by the unanimous written consent of the directors in office at the time, or by any committee or superior officers upon whom such power of removal may have been conferred by the Board of Directors.

ARTICLE VI

EXECUTION OF CORPORATE INSTRUMENTS AND VOTING

OF SECURITIES OWNED BY THE CORPORATION

Section 32. Execution of Corporate Instruments. The Board of Directors may, in its discretion, determine the method and designate the signatory officer or officers, or other person or persons, to execute on behalf of the corporation any corporate instrument or document, or to sign on behalf of the corporation the corporate name without limitation, or to enter into contracts on behalf of the corporation, except where otherwise provided by law or these Bylaws, and such execution or signature shall be binding upon the corporation.

All checks and drafts drawn on banks or other depositaries on funds to the credit of the corporation or in special accounts of the corporation shall be signed by such person or persons as the Board of Directors shall authorize so to do.

Unless authorized or ratified by the Board of Directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount.


Section 33. Voting of Securities Owned by the Corporation. All stock and other securities of other corporations owned or held by the corporation for itself, or for other parties in any capacity, shall be voted, and all proxies with respect thereto shall be executed, by the person authorized so to do by resolution of the Board of Directors, or, in the absence of such authorization, by the Chairman of the Board of Directors, the Chief Executive Officer, the President, or any Vice President.

ARTICLE VII

SHARES OF STOCK

Section 34. Form and Execution of Certificates. The shares of the corporation shall be represented by certificates, or shall be uncertificated. Certificates for the shares of stock, if any, shall be in such form as is consistent with the Certificate of Incorporation and applicable law. Every holder of stock in the corporation represented by certificate shall be entitled to have a certificate signed by or in the name of the corporation by the Chairman of the Board of Directors, or the President or any Vice President and by the Treasurer or Assistant Treasurer or the Secretary or Assistant Secretary, certifying the number of shares owned by him in the corporation. Any or all of the signatures on the certificate may be facsimiles. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued with the same effect as if he were such officer, transfer agent, or registrar at the date of issue.

Section 35. Lost Certificates. A new certificate or certificates shall be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen, or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen, or destroyed. The corporation may require, as a condition precedent to the issuance of a new certificate or certificates, the owner of such lost, stolen, or destroyed certificate or certificates, or the owner’s legal representative, to agree to indemnify the corporation in such manner as it shall require or to give the corporation a surety bond in such form and amount as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen, or destroyed.

Section 36. Transfers.

(a) Transfers of record of shares of stock of the corporation shall be made only upon its books by the holders thereof, in person or by attorney duly authorized, and, in the case of stock represented by certificate, upon the surrender of a properly endorsed certificate or certificates for a like number of shares.

(b) The corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one or more classes owned by such stockholders in any manner not prohibited by the DGCL.


Section 37. Fixing Record Dates.

(a) In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix, in advance, a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall, subject to applicable law, not be more than sixty (60) nor less than ten (10) days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting.

(b) In order that the corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than ten (10) days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. Any stockholder of record seeking to have the stockholders authorize or take corporate action by written consent shall, by written notice to the Secretary, request the Board of Directors to fix a record date. The Board of Directors shall promptly, but in all events within ten (10) days after the date on which such a request is received, adopt a resolution fixing the record date. If no record date has been fixed by the Board of Directors within ten (10) days of the date on which such a request is received, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by applicable law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation by delivery to its registered office in the State of Delaware, its principal place of business or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the corporation’s registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action.

(c) In order that the corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty (60) days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto.


Section 38. Registered Stockholders. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware.

ARTICLE VIII

OTHER SECURITIES OF THE CORPORATION

Section 39. Execution of Other Securities. All bonds, debentures and other corporate securities of the corporation, other than stock certificates (covered in Section 34), may be signed by the Chairman of the Board of Directors, the Chief Executive Officer, the President or any Vice President, or such other person as may be authorized by the Board of Directors, and the corporate seal impressed thereon or a facsimile of such seal imprinted thereon and attested by the signature of the Secretary or an Assistant Secretary, or the Chief Financial Officer or Treasurer or an Assistant Treasurer; provided, however, that where any such bond, debenture or other corporate security shall be authenticated by the manual signature, or where permissible facsimile signature, of a trustee under an indenture pursuant to which such bond, debenture or other corporate security shall be issued, the signatures of the persons signing and attesting the corporate seal on such bond, debenture or other corporate security may be the imprinted facsimile of the signatures of such persons. Interest coupons appertaining to any such bond, debenture or other corporate security, authenticated by a trustee as aforesaid, shall be signed by the Treasurer or an Assistant Treasurer of the corporation or such other person as may be authorized by the Board of Directors, or bear imprinted thereon the facsimile signature of such person. In case any officer who shall have signed or attested any bond, debenture or other corporate security, or whose facsimile signature shall appear thereon or on any such interest coupon, shall have ceased to be such officer before the bond, debenture or other corporate security so signed or attested shall have been delivered, such bond, debenture or other corporate security nevertheless may be adopted by the corporation and issued and delivered as though the person who signed the same or whose facsimile signature shall have been used thereon had not ceased to be such officer of the corporation.

ARTICLE IX

DIVIDENDS

Section 40. Declaration of Dividends. Dividends upon the capital stock of the corporation, subject to the provisions of the Certificate of Incorporation and applicable law, if any, may be declared by the Board of Directors pursuant to law at any regular or special meeting. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation and applicable law.

Section 41. Dividend Reserve. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the Board of Directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property


of the corporation, or for such other purpose as the Board of Directors shall think conducive to the interests of the corporation, and the Board of Directors may modify or abolish any such reserve in the manner in which it was created.

ARTICLE X

FISCAL YEAR

Section 42. Fiscal Year. The fiscal year of the corporation shall be fixed by resolution of the Board of Directors.

ARTICLE XI

INDEMNIFICATION

Section 43. Indemnification of Directors, Executive Officers, Other Officers, Employees and Other Agents.

(a) Directors and Officers. The corporation shall indemnify its directors and officers to the fullest extent not prohibited by the DGCL or any other applicable law; provided, however, that the corporation may modify the extent of such indemnification by individual contracts with its directors and officers; and, provided, further, that the corporation shall not be required to indemnify any director or officer in connection with any proceeding (or part thereof) initiated by such person unless (i) such indemnification is expressly required to be made by law, (ii) the proceeding was authorized by the Board of Directors of the corporation, (iii) such indemnification is provided by the corporation, in its sole discretion, pursuant to the powers vested in the corporation under the Delaware General Corporation Law or any other applicable law or (iv) such indemnification is required to be made under subsection (d).

(b) Officers, Employees and Other Agents. The corporation shall have power to indemnify its officers, employees and other agents as set forth in the DGCL or any other applicable law. The Board of Directors shall have the power to delegate the determination of whether indemnification shall be given to any such person to such officers or other persons as the Board of Directors shall determine.

(c) Expenses. The corporation shall advance to any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a director or officer, of the corporation, or is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, prior to the final disposition of the proceeding, promptly following request therefor, all expenses incurred by any director or officer in connection with such proceeding, provided, however, that, if the DGCL requires, an advancement of expenses incurred by a director or officer in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such indemnitee, including, without limitation, service to an employee benefit plan) shall be made only upon delivery to the corporation of an undertaking, by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal that such indemnitee is not entitled to be indemnified for such expenses under this Section 43 or otherwise.


Notwithstanding the foregoing, unless otherwise determined pursuant to paragraph (e) of this Bylaw, no advance shall be made by the corporation to an officer of the corporation (except by reason of the fact that such officer is or was a director of the corporation, in which event this paragraph shall not apply) in any action, suit or proceeding, whether civil, criminal, administrative or investigative, if a determination is reasonably and promptly made (i) by a majority vote of a quorum consisting of directors who were not parties to the proceeding, even if not a quorum, or (ii) by a committee of such directors designated by a majority of such directors, even though less than a quorum, or (iii) if there are no such directors, or such directors so direct, by independent legal counsel in a written opinion, that the facts known to the decision-making party at the time such determination is made demonstrate clearly and convincingly that such person acted in bad faith or in a manner that such person did not believe to be in or not opposed to the best interests of the corporation.

(d) Enforcement. Without the necessity of entering into an express contract, all rights to indemnification and advances to directors and officers under this Bylaw shall be deemed to be contractual rights and be effective to the same extent and as if provided for in a contract between the corporation and the director or officer. Any right to indemnification or advances granted by this Bylaw to a director or officer shall be enforceable by or on behalf of the person holding such right in any court of competent jurisdiction if (i) the claim for indemnification or advances is denied, in whole or in part, or (ii) no disposition of such claim is made within ninety (90) days of request therefor. The claimant in such enforcement action, if successful in whole or in part, shall be entitled to be paid also the expense of prosecuting the claim. In connection with any claim for indemnification, the corporation shall be entitled to raise as a defense to any such action that the claimant has not met the standards of conduct that make it permissible under the DGCL or any other applicable law for the corporation to indemnify the claimant for the amount claimed. In connection with any claim by an officer of the corporation (except in any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such officer is or was a director of the corporation) for advances, the corporation shall be entitled to raise as a defense as to any such action clear and convincing evidence that such person acted in bad faith or in a manner that such person did not believe to be in or not opposed to the best interests of the corporation, or with respect to any criminal action or proceeding that such person acted without reasonable cause to believe that his conduct was lawful. Neither the failure of the corporation (including its Board of Directors, independent legal counsel or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he has met the applicable standard of conduct set forth in the DGCL or any other applicable law, nor an actual determination by the corporation (including its Board of Directors, independent legal counsel or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that claimant has not met the applicable standard of conduct. In any suit brought by a director or officer to enforce a right to indemnification or to an advancement of expenses hereunder, the burden of proving that the director or officer is not entitled to be indemnified, or to such advancement of expenses, under this Article XI or otherwise shall be on the corporation.


(e) Non-Exclusivity of Rights. The rights conferred on any person by this Bylaw shall not be exclusive of any other right which such person may have or hereafter acquire under any applicable statute, provision of the Certificate of Incorporation, Bylaws, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding office. The corporation is specifically authorized to enter into individual contracts with any or all of its directors, officers, employees or agents respecting indemnification and advances, to the fullest extent not prohibited by the DGCL or any other applicable law.

(f) Survival of Rights. The rights conferred on any person by this Bylaw shall continue as to a person who has ceased to be a director, officer, employee or other agent and shall inure to the benefit of the heirs, executors and administrators of such a person.

(g) Insurance. To the fullest extent permitted by the DGCL, or any other applicable law, the corporation, upon approval by the Board of Directors, may purchase insurance on behalf of any person required or permitted to be indemnified pursuant to this Bylaw.

(h) Amendments. Any repeal or modification of this Bylaw shall only be prospective and shall not affect the rights under this Bylaw in effect at the time of the alleged occurrence of any action or omission to act that is the cause of any proceeding against any agent of the corporation.

(i) Saving Clause. If this Bylaw or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the corporation shall nevertheless indemnify each director and officer to the full extent not prohibited by any applicable portion of this Bylaw that shall not have been invalidated, or by any other applicable law. If this Section 43 shall be invalid due to the application of the indemnification provisions of another jurisdiction, then the corporation shall indemnify each director and officer to the full extent under applicable law.

(j) Certain Definitions. For the purposes of this Bylaw, the following definitions shall apply:

(1) The term “proceeding” shall be broadly construed and shall include, without limitation, the investigation, preparation, prosecution, defense, settlement, arbitration and appeal of, and the giving of testimony in, any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative.

(2) The term “expenses” shall be broadly construed and shall include, without limitation, court costs, attorneys’ fees, witness fees, fines, amounts paid in settlement or judgment and any other costs and expenses of any nature or kind incurred in connection with any proceeding.

(3) The term the “corporation” shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any


person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Bylaw with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued.

(4) References to a “director,” “executive officer,” “officer,” “employee,” or “agent” of the corporation shall include, without limitation, situations where such person is serving at the request of the corporation as, respectively, a director, executive officer, officer, employee, trustee or agent of another corporation, partnership, joint venture, trust or other enterprise.

(5) References to “other enterprises” shall include employee benefit plans; references to “fines” shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to “serving at the request of the corporation” shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner “not opposed to the best interests of the corporation” as referred to in this Bylaw.

ARTICLE XII

NOTICES

Section 44. Notices.

(a) Notice to Stockholders. Written notice to stockholders of stockholder meetings shall be given as provided in Section 7 herein. Without limiting the manner by which notice may otherwise be given effectively to stockholders under any agreement or contract with such stockholder, and except as otherwise required by law, written notice to stockholders for purposes other than stockholder meetings may be sent by United States mail or nationally recognized overnight courier, or by facsimile, telegraph or telex or by electronic mail or other electronic means.

(b) Notice to Directors. Any notice required to be given to any director may be given by the method stated in subsection (a), or as provided for in Section 21 of these Bylaws. If such notice is not delivered personally, it shall be sent to such address as such director shall have filed in writing with the Secretary, or, in the absence of such filing, to the last known post office address of such director.

(c) Affidavit of Mailing. An affidavit of mailing, executed by a duly authorized and competent employee of the corporation or its transfer agent appointed with respect to the class of stock affected or other agent, specifying the name and address or the names and addresses of the stockholder or stockholders, or director or directors, to whom any such notice or notices was or were given, and the time and method of giving the same, shall in the absence of fraud, be prima facie evidence of the facts therein contained.


(d) Methods of Notice. It shall not be necessary that the same method of giving notice be employed in respect of all recipients of notice, but one permissible method may be employed in respect of any one or more, and any other permissible method or methods may be employed in respect of any other or others.

(e) Notice to Person with Whom Communication Is Unlawful. Whenever notice is required to be given, under any provision of law or of the Certificate of Incorporation or Bylaws of the corporation, to any person with whom communication is unlawful, the giving of such notice to such person shall not be required and there shall be no duty to apply to any governmental authority or agency for a license or permit to give such notice to such person. Any action or meeting which shall be taken or held without notice to any such person with whom communication is unlawful shall have the same force and effect as if such notice had been duly given. In the event that the action taken by the corporation is such as to require the filing of a certificate under any provision of the DGCL, the certificate shall state, if such is the fact and if notice is required, that notice was given to all persons entitled to receive notice except such persons with whom communication is unlawful.

(f) Notice to Stockholders Sharing an Address. Except as otherwise prohibited under DGCL, any notice given under the provisions of DGCL, the Certificate of Incorporation or the Bylaws shall be effective if given by a single written notice to stockholders who share an address if consented to by the stockholders at that address to whom such notice is given. Such consent shall have been deemed to have been given if such stockholder fails to object in writing to the corporation within 60 days of having been given notice by the corporation of its intention to send the single notice. Any consent shall be revocable by the stockholder by written notice to the corporation.

ARTICLE XIII

AMENDMENTS

Section 45. Amendments. The Board of Directors is expressly empowered to adopt, amend or repeal Bylaws of the corporation. The stockholders shall also have power to adopt, amend or repeal the Bylaws of the corporation; provided, however, that, in addition to any vote of the holders of any class or series of stock of the corporation required by law or by the Certificate of Incorporation, such action by stockholders shall require the affirmative vote of the holders of at least a majority of the voting power of all of the then-outstanding shares of the capital stock of the corporation entitled to vote generally in the election of directors, voting together as a single class.


ARTICLE XIV

RESTRICTIONS ON TRANSFER

Section 46. Restrictions on Transfer and Right of First Refusal. No stockholder shall sell, assign, pledge, or in any manner transfer any of the shares of common stock of the corporation or any right or interest therein (excluding, however, any preferred stock of the corporation and any common stock issued upon the conversion of such preferred stock), whether voluntarily or by operation of law, or by gift or otherwise, except by a transfer which meets the requirements hereinafter set forth in this bylaw:

(a) If the stockholder desires to sell or otherwise transfer any of his shares of common stock, then the stockholder shall first give written notice thereof to the corporation. The notice shall name the proposed transferee and state the number of shares to be transferred, the proposed consideration, and all other terms and conditions of the proposed transfer.

(b) In the event that the shares of common stock are acquired (whether by original issuance by the Company or transfer of currently outstanding shares) after May 22, 2011, then such shares (“Subsequent Shares”) may only be transferred with the prior written consent of the corporation, upon duly authorized action of its Board of Directors. The corporation may withhold consent for any reason, including without limitation any transfer (i) to individuals, companies or any other form of entity identified by the corporation as a potential competitor or considered by the corporation to be unfriendly, or (ii) if such transfer increases the risk of the corporation having a class of security held of record by five hundred or more persons, as described in Section 12(g) of the 1934 Act, and Rule 12g5-1 promulgated thereunder, or otherwise requiring the corporation to register any class of securities under the 1934 Act; or (iii) if such transfer would result in the loss of any federal or state securities law exemption relied upon by the corporation in connection with the initial issuance of such shares or the issuance of any other securities; or (iv) if such transfer is facilitated in any manner by any public posting, message board, trading portal, internet site, or similar method of communication, including without limitation any trading portal or internet site intended to facilitate secondary transfers of securities; or (v) if such transfer is to be effected in a brokered transaction; or (vi) if such transfer represents a transfer of less than all of the shares then held by the stockholder and its affiliates or is to be made to more than a single transferee

(c) For up to thirty (30) days following receipt of such notice, the corporation shall have the option to purchase all of the shares specified in the notice at the price and upon the terms set forth in such notice; provided, however, that, with the consent of the stockholder, the corporation shall have the option to purchase a lesser portion of the shares specified in said notice at the price and upon the terms set forth therein. In the event of a gift, property settlement or other transfer in which the proposed transferee is not paying the full price for the shares, and that is not otherwise exempted from the provisions of this Section 46, the price shall be deemed to be the fair market value of the stock at such time as determined in good faith by the Board of Directors. In the event the corporation elects to purchase all of the shares or, with consent of the stockholder, a lesser portion of the shares, it shall give written notice to the transferring stockholder of its election and settlement for said shares shall be made as provided below in paragraph (e).


(d) The corporation may assign its rights under paragraph (c) above.

(e) In the event the corporation and/or its assignee(s) elect to acquire any of the shares of the transferring stockholder as specified in said transferring stockholder’s notice, the Secretary of the corporation shall so notify the transferring stockholder and settlement thereof shall be made in cash within thirty (30) days after the Secretary of the corporation receives said transferring stockholder’s notice; provided that if the terms of payment set forth in said transferring stockholder’s notice were other than cash against delivery, the corporation and/or its assignee(s) shall pay for said shares on the same terms and conditions set forth in said transferring stockholder’s notice.

(f) In the event the corporation and/or its assignees(s) do not elect to acquire all of the shares specified in the transferring stockholder’s notice, said transferring stockholder may, within the sixty-day period following the expiration or waiver of the option rights granted to the corporation and/or its assignees(s) herein, transfer the shares specified in said transferring stockholder’s notice which were not acquired by the corporation and/or its assignees(s) as specified in said transferring stockholder’s notice. All shares so sold by said transferring stockholder shall continue to be subject to the provisions of this bylaw in the same manner as before said transfer.

(g) Anything to the contrary contained herein notwithstanding, the following transactions shall be exempt from the provisions of this bylaw:

(1) A stockholder’s transfer of any or all shares held either during such stockholder’s lifetime or on death by will or intestacy to such stockholder’s immediate family or to any custodian or trustee for the account of such stockholder or such stockholder’s immediate family or to any limited partnership of which the stockholder, members of such stockholder’s immediate family or any trust for the account of such stockholder or such stockholder’s immediate family will be the general of limited partner(s) of such partnership. “Immediate family” as used herein shall mean spouse, lineal descendant, father, mother, brother, or sister of the stockholder making such transfer.

(2) A stockholder’s bona fide pledge or mortgage of any shares with a commercial lending institution, provided that any subsequent transfer of said shares by said institution shall be conducted in the manner set forth in this bylaw.

(3) A stockholder’s transfer of any or all of such stockholder’s shares to the corporation or to any other stockholder of the corporation.

(4) A stockholder’s transfer of any or all of such stockholder’s shares to a person who, at the time of such transfer, is an officer or director of the corporation.

(5) A corporate stockholder’s transfer of any or all of its shares pursuant to and in accordance with the terms of any merger, consolidation, reclassification of shares or capital reorganization of the corporate stockholder, or pursuant to a sale of all or substantially all of the stock or assets of a corporate stockholder.


(6) A corporate stockholder’s transfer of any or all of its shares to any or all of its stockholders.

(7) A transfer by a stockholder which is a limited or general partnership to any or all of its partners or former partners.

In any such case, the transferee, assignee, or other recipient shall receive and hold such stock subject to the provisions of this bylaw, and there shall be no further transfer of such stock except in accord with this bylaw.

(h) The provisions of this bylaw may be waived with respect to any transfer either by the corporation, upon duly authorized action of its Board of Directors, or by the stockholders, upon the express written consent of the owners of a majority of the voting power of the corporation (excluding the votes represented by those shares to be transferred by the transferring stockholder). This bylaw may be amended or repealed either by a duly authorized action of the Board of Directors or by the stockholders, upon the express written consent of the owners of a majority of the voting power of the corporation.

(i) Any sale or transfer, or purported sale or transfer, of common stock of the corporation shall be null and void unless the terms, conditions, and provisions of this bylaw are strictly observed and followed.

(j) The provisions of this bylaw shall terminate upon the date securities of the corporation are first offered to the public pursuant to a registration statement filed with, and declared effective by, the United States Securities and Exchange Commission under the Securities Act of 1933, as amended.

(k) The certificates representing shares of stock (excluding, however, any preferred stock of the corporation, any common stock issued upon the conversion of such preferred stock and the Subsequent Shares) of the corporation shall bear on their face the following legend so long as the foregoing right of first refusal remains in effect:

“THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A RIGHT OF FIRST REFUSAL OPTION IN FAVOR OF THE CORPORATION AND/OR ITS ASSIGNEE(S), AS PROVIDED IN THE BYLAWS OF THE CORPORATION.”

(l) The certificates representing the Subsequent Shares shall bear on their face the following legend so long as the foregoing restrictions on transfer and right of first refusal remains in effect:

“THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A RESTRICTION ON TRANSFER AND A RIGHT OF FIRST REFUSAL OPTION IN FAVOR OF THE CORPORATION AND/OR ITS ASSIGNEE(S), AS PROVIDED IN THE BYLAWS OF THE CORPORATION.”


ARTICLE XV

LOANS TO OFFICERS

Section 47. Loans to Officers. Except as otherwise prohibited under applicable law, the corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiaries, including any officer or employee who is a Director of the corporation or its subsidiaries, whenever, in the judgment of the Board of Directors, such loan, guarantee or assistance may reasonably be expected to benefit the corporation. The loan, guarantee or other assistance may be with or without interest and may be unsecured, or secured in such manner as the Board of Directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing in these Bylaws shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute.


Form of Amended and Restated Bylaws of the Registrant

Exhibit 3.4

AMENDED AND RESTATED BYLAWS

OF

ZULILY, INC.

(A DELAWARE CORPORATION)


AMENDED AND RESTATED BYLAWS

OF

ZULILY, INC.

(A DELAWARE CORPORATION)

ARTICLE I

OFFICES

Section 1. Registered Office. The registered office of the corporation in the State of Delaware shall be in the City of Wilmington, County of New Castle.

Section 2. Other Offices. The corporation shall also have and maintain an office or principal place of business at such place as may be fixed by the Board of Directors, and may also have offices at such other places, both within and without the State of Delaware, as the Board of Directors may from time to time determine or the business of the corporation may require.

ARTICLE II

CORPORATE SEAL

Section 3. Corporate Seal. The Board of Directors may adopt a corporate seal. If adopted, the corporate seal shall consist of a die bearing the name of the corporation and the inscription, “Corporate Seal-Delaware.” Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise.

ARTICLE III

STOCKHOLDERS’ MEETINGS

Section 4. Place of Meetings. Meetings of the stockholders of the corporation may be held at such place, either within or without the State of Delaware, as may be determined from time to time by the Board of Directors. The Board of Directors may, in its sole discretion, determine that the meeting shall not be held at any place, but may instead be held solely by means of remote communication as provided under the Delaware General Corporation Law (“DGCL”).

Section 5. Annual Meeting.

(a) The annual meeting of the stockholders of the corporation, for the purpose of election of directors and for such other business as may properly come before it, shall be held on such date and at such time as may be designated from time to time by the Board of Directors. Nominations of persons for election to the Board of Directors of the corporation and the proposal of business to be considered by the stockholders may be made at an annual meeting of


stockholders: (i) pursuant to the corporation’s notice of meeting of stockholders (with respect to business other than nominations); (ii) brought specifically by or at the direction of the Board of Directors; or (iii) by any stockholder of the corporation who was a stockholder of record at the time of giving the stockholder’s notice provided for in Section 5(b) below, who is entitled to vote at the meeting and who complied with the notice procedures set forth in Section 5. For the avoidance of doubt, clause (iii) above shall be the exclusive means for a stockholder to make nominations and submit other business (other than matters properly included in the corporation’s notice of meeting of stockholders and proxy statement under Rule 14a-8 under the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder (the “1934 Act”)) before an annual meeting of stockholders.

(b) At an annual meeting of the stockholders, only such business shall be conducted as is a proper matter for stockholder action under Delaware law and as shall have been properly brought before the meeting.

(1) For nominations for the election to the Board of Directors to be properly brought before an annual meeting by a stockholder pursuant to clause (iii) of Section 5(a), the stockholder must deliver written notice to the Secretary at the principal executive offices of the corporation on a timely basis as set forth in Section 5(b)(3) and must update and supplement such written notice on a timely basis as set forth in Section 5(c). Such stockholder’s notice shall set forth: (A) as to each nominee such stockholder proposes to nominate at the meeting: (1) the name, age, business address and residence address of such nominee, (2) the principal occupation or employment of such nominee, (3) the class and number of shares of each class of capital stock of the corporation which are owned of record and beneficially by such nominee, (4) the date or dates on which such shares were acquired and the investment intent of such acquisition and (5) such other information concerning such nominee as would be required to be disclosed in a proxy statement soliciting proxies for the election of such nominee as a director in an election contest (even if an election contest is not involved), or that is otherwise required to be disclosed pursuant to Section 14 of the 1934 Act and the rules and regulations promulgated thereunder (including such person’s written consent to being named as a nominee and to serving as a director if elected); and (B) the information required by Section 5(b)(4). The corporation may require any proposed nominee to furnish such other information as it may reasonably require to determine the eligibility of such proposed nominee to serve as an independent director of the corporation or that could be material to a reasonable stockholder’s understanding of the independence, or lack thereof, of such proposed nominee.

(2) Other than proposals sought to be included in the corporation’s proxy materials pursuant to Rule 14(a)-8 under the 1934 Act, for business other than nominations for the election to the Board of Directors to be properly brought before an annual meeting by a stockholder pursuant to clause (iii) of Section 5(a), the stockholder must deliver written notice to the Secretary at the principal executive offices of the corporation on a timely basis as set forth in Section 5(b)(3), and must update and supplement such written notice on a timely basis as set forth in Section 5(c). Such stockholder’s notice shall set forth: (A) as to each matter such stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting, and any material interest (including any anticipated benefit of such business to any Proponent (as defined below) other than solely as a result of its ownership of the corporation’s


capital stock, that is material to any Proponent individually, or to the Proponents in the aggregate) in such business of any Proponent; and (B) the information required by Section 5(b)(4).

(3) To be timely, the written notice required by Section 5(b)(1) or 5(b)(2) must be received by the Secretary at the principal executive offices of the corporation not later than the close of business on the ninetieth (90th) day nor earlier than the close of business on the one hundred twentieth (120th) day prior to the first anniversary of the preceding year’s annual meeting; provided, however, that, subject to the last sentence of this Section 5(b)(3), in the event that the date of the annual meeting is advanced more than thirty (30) days prior to or delayed by more than thirty (30) days after the anniversary of the preceding year’s annual meeting, notice by the stockholder to be timely must be so received not earlier than the close of business on the one hundred twentieth (120th) day prior to such annual meeting and not later than the close of business on the later of the ninetieth (90th) day prior to such annual meeting or the tenth (10th) day following the day on which public announcement of the date of such meeting is first made. In no event shall an adjournment or a postponement of an annual meeting for which notice has been given, or the public announcement thereof has been made, commence a new time period for the giving of a stockholder’s notice as described above.

(4) The written notice required by Section 5(b)(1) or 5(b)(2) shall also set forth, as of the date of the notice and as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (each, a “Proponent” and collectively, the “Proponents”): (A) the name and address of each Proponent, as they appear on the corporation’s books; (B) the class, series and number of shares of the corporation that are owned beneficially and of record by each Proponent; (C) a description of any agreement, arrangement or understanding (whether oral or in writing) with respect to such nomination or proposal between or among any Proponent and any of its affiliates or associates, and any others (including their names) acting in concert, or otherwise under the agreement, arrangement or understanding, with any of the foregoing; (D) a representation that the Proponents are holders of record or beneficial owners, as the case may be, of shares of the corporation entitled to vote at the meeting and intend to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice (with respect to a notice under Section 5(b)(1)) or to propose the business that is specified in the notice (with respect to a notice under Section 5(b)(2)); (E) a representation as to whether the Proponents intend to deliver a proxy statement and form of proxy to holders of a sufficient number of holders of the corporation’s voting shares to elect such nominee or nominees (with respect to a notice under Section 5(b)(1)) or to carry such proposal (with respect to a notice under Section 5(b)(2)); (F) to the extent known by any Proponent, the name and address of any other stockholder supporting the proposal on the date of such stockholder’s notice; and (G) a description of all Derivative Transactions (as defined below) by each Proponent during the previous twelve (12) month period, including the date of the transactions and the class, series and number of securities involved in, and the material economic terms of, such Derivative Transactions.

(c) A stockholder providing written notice required by Section 5(b)(1) or (ii) shall update and supplement such notice in writing, if necessary, so that the information provided or required to be provided in such notice is true and correct in all material respects as of (i) the record date for the meeting and (ii) the date that is five (5) business days prior to the meeting


and, in the event of any adjournment or postponement thereof, five (5) business days prior to such adjourned or postponed meeting. In the case of an update and supplement pursuant to clause (i) of this Section 5(c), such update and supplement shall be received by the Secretary at the principal executive offices of the corporation not later than five (5) business days after the record date for the meeting. In the case of an update and supplement pursuant to clause (ii) of this Section 5(c), such update and supplement shall be received by the Secretary at the principal executive offices of the corporation not later than two (2) business days prior to the date for the meeting, and, in the event of any adjournment or postponement thereof, two (2) business days prior to such adjourned or postponed meeting.

(d) Notwithstanding anything in Section 5(b)(3) to the contrary, in the event that the number of directors in an Expiring Class is increased and there is no public announcement of the appointment of a director to such class, or, if no appointment was made, of the vacancy in such class, made by the corporation at least ten (10) days before the last day a stockholder may deliver a notice of nomination in accordance with Section 5(b)(3), a stockholder’s notice required by this Section 5 and which complies with the requirements in Section 5(b)(1), other than the timing requirements in Section 5(b)(3), shall also be considered timely, but only with respect to nominees for any new positions in such Expiring Class created by such increase, if it shall be received by the Secretary at the principal executive offices of the corporation not later than the close of business on the tenth (10th) day following the day on which such public announcement is first made by the corporation. For purposes of this section, an “Expiring Class” shall mean a class of directors whose term shall expire at the next annual meeting of stockholders.

(e) A person shall not be eligible for election or re-election as a director unless the person is nominated either in accordance with clause (ii) of Section 5(a), or in accordance with clause (iii) of Section 5(a). Except as otherwise required by law, the chairperson of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made, or proposed, as the case may be, in accordance with the procedures set forth in these Bylaws and, if any proposed nomination or business is not in compliance with these Bylaws, or the Proponent does not act in accordance with the representations in Sections 5(b)(4)(D) and 5(b)(4)(E), to declare that such proposal or nomination shall not be presented for stockholder action at the meeting and shall be disregarded, notwithstanding that proxies in respect of such nominations or such business may have been solicited or received.

(f) Notwithstanding the foregoing provisions of this Section 5, in order to include information with respect to a stockholder proposal in the proxy statement and form of proxy for a stockholders’ meeting, a stockholder must also comply with all applicable requirements of the 1934 Act and the rules and regulations thereunder. Nothing in these Bylaws shall be deemed to affect any rights of stockholders to request inclusion of proposals in the corporation’s proxy statement pursuant to Rule 14a-8 under the 1934 Act; provided, however, that any references in these Bylaws to the 1934 Act or the rules and regulations thereunder are not intended to and shall not limit the requirements applicable to proposals and/or nominations to be considered pursuant to Section 5(a)(iii).


(g) For purposes of Sections 5 and 6,

(1) “affiliates” and “associates” shall have the meanings set forth in Rule 405 under the Securities Act of 1933, as amended (the “1933 Act”);

(2) “Derivative Transaction” means any agreement, arrangement, interest or understanding entered into by, or on behalf or for the benefit of, any Proponent or any of its affiliates or associates, whether record or beneficial: (A) the value of which is derived in whole or in part from the value of any class or series of shares or other securities of the corporation, (B) which otherwise provides any direct or indirect opportunity to gain or share in any gain derived from a change in the value of securities of the corporation, (C) the effect or intent of which is to mitigate loss, manage risk or benefit of security value or price changes, or (D) which provides the right to vote or increase or decrease the voting power of, such Proponent, or any of its affiliates or associates, with respect to any securities of the corporation, which agreement, arrangement, interest or understanding may include, without limitation, any option, warrant, debt position, note, bond, convertible security, swap, stock appreciation right, short position, profit interest, hedge, right to dividends, voting agreement, performance-related fee or arrangement to borrow or lend shares (whether or not subject to payment, settlement, exercise or conversion in any such class or series), and any proportionate interest of such Proponent in the securities of the corporation held by any general or limited partnership, or any limited liability company, of which such Proponent is, directly or indirectly, a general partner or managing member; and

(3) “public announcement” shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the 1934 Act.

Section 6. Special Meetings.

(a) Special meetings of the stockholders of the corporation may be called, for any purpose as is a proper matter for stockholder action under Delaware law, by (i) the Chairperson of the Board of Directors, (ii) the Chief Executive Officer, or (iii) the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board of Directors for adoption).

(b) The Board of Directors shall determine the time and place, if any, of such special meeting. Upon determination of the time and place, if any, of the meeting, the Secretary shall cause a notice of meeting to be given to the stockholders entitled to vote, in accordance with the provisions of Section 7. No business may be transacted at such special meeting otherwise than specified in the notice of meeting.

(c) Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected (i) by or at the direction of the Board of Directors or (ii) by any stockholder of the corporation who is a stockholder of record at the time of giving notice provided for in this paragraph, who shall be entitled to vote at the meeting and who delivers written notice to the Secretary of the corporation setting forth the information required by Section 5(b)(1). In the event the corporation calls a


special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any such stockholder of record may nominate a person or persons (as the case may be), for election to such position(s) as specified in the corporation’s notice of meeting, if written notice setting forth the information required by Section 5(b)(1) of these Bylaws shall be received by the Secretary at the principal executive offices of the corporation not later than the close of business on the later of the ninetieth (90th) day prior to such meeting or the tenth (10th) day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. The stockholder shall also update and supplement such information as required under Section 5(c). In no event shall an adjournment or a postponement of a special meeting for which notice has been given, or the public announcement thereof has been made, commence a new time period for the giving of a stockholder’s notice as described above.

(d) Notwithstanding the foregoing provisions of this Section 6, a stockholder must also comply with all applicable requirements of the 1934 Act and the rules and regulations thereunder with respect to matters set forth in this Section 6. Nothing in these Bylaws shall be deemed to affect any rights of stockholders to request inclusion of proposals in the corporation’s proxy statement pursuant to Rule 14a-8 under the 1934 Act; provided, however, that any references in these Bylaws to the 1934 Act or the rules and regulations thereunder are not intended to and shall not limit the requirements applicable to nominations for the election to the Board of Directors to be considered pursuant to Section 6(c) of these Bylaws.

Section 7. Notice of Meetings. Except as otherwise provided by law, notice, given in writing or by electronic transmission, of each meeting of stockholders shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting, such notice to specify the place, if any, date and hour, in the case of special meetings, the purpose or purposes of the meeting, and the means of remote communications, if any, by which stockholders and proxy holders may be deemed to be present in person and vote at any such meeting. If mailed, notice is given when deposited in the United States mail, postage prepaid, directed to the stockholder at such stockholder’s address as it appears on the records of the corporation. Notice of the time, place, if any, and purpose of any meeting of stockholders may be waived in writing, signed by the person entitled to notice thereof or by electronic transmission by such person, either before or after such meeting, and will be waived by any stockholder by his or her attendance thereat in person, by remote communication, if applicable, or by proxy, except when the stockholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Any stockholder so waiving notice of such meeting shall be bound by the proceedings of any such meeting in all respects as if due notice thereof had been given.

Section 8. Quorum. At all meetings of stockholders, except where otherwise provided by statute or by the Certificate of Incorporation, or by these Bylaws, the presence, in person, by remote communication, if applicable, or by proxy duly authorized, of the holders of a majority of the voting power of the outstanding shares of stock entitled to vote shall constitute a quorum for the transaction of business. In the absence of a quorum, any meeting of stockholders may be adjourned, from time to time, either by the chairperson of the meeting or by vote of the holders of a majority of voting power of the shares represented thereat, but no other business


shall be transacted at such meeting. The stockholders present at a duly called or convened meeting, at which a quorum is present, may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. Except as otherwise provided by statute or by applicable stock exchange rules, or by the Certificate of Incorporation or these Bylaws, in all matters other than the election of directors, the affirmative vote of the majority of the voting power of the shares present in person, by remote communication, if applicable, or represented by proxy duly authorized at the meeting and entitled to vote generally on the subject matter shall be the act of the stockholders. Except as otherwise provided by statute, the Certificate of Incorporation or these Bylaws, directors shall be elected by a plurality of the votes of the shares present in person, by remote communication, if applicable, or represented by proxy at the meeting and entitled to vote generally on the election of directors. Where a separate vote by a class or classes or series is required, except where otherwise provided by statute, by applicable stock exchange rules or by the Certificate of Incorporation or these Bylaws, a majority of the voting power of the outstanding shares of such class or classes or series, present in person, by remote communication, if applicable, or represented by proxy duly authorized, shall constitute a quorum entitled to take action with respect to that vote on that matter. Except where otherwise provided by statute, by applicable stock exchange rules or by the Certificate of Incorporation or these Bylaws, the affirmative vote of the majority (plurality, in the case of the election of directors) of shares of such class or classes or series present in person, by remote communication, if applicable, or represented by proxy at the meeting shall be the act of such class or classes or series.

Section 9. Adjournment and Notice of Adjourned Meetings. Any meeting of stockholders, whether annual or special, may be adjourned from time to time either by the chairperson of the meeting or by the vote of the holders of a majority of the voting power of the shares present in person, by remote communication, if applicable, or represented by proxy at the meeting. When a meeting is adjourned to another time or place, if any, notice need not be given of the adjourned meeting if the time and place, if any, thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the corporation may transact any business that might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting.

Section 10. Voting Rights. For the purpose of determining those stockholders entitled to vote at any meeting of the stockholders, except as otherwise provided by law, only persons in whose names shares stand on the stock records of the corporation on the record date, as provided in Section 12 of these Bylaws, shall be entitled to vote at any meeting of stockholders. Every person entitled to vote shall have the right to do so either in person, by remote communication, if applicable, or by an agent or agents authorized by a proxy granted in accordance with Delaware law. An agent so appointed need not be a stockholder. No proxy shall be voted after three (3) years from its date of creation unless the proxy provides for a longer period.

Section 11. Joint Owners of Stock. If shares or other securities having voting power stand of record in the names of two (2) or more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, tenants by the entirety, or otherwise, or if two (2)


or more persons have the same fiduciary relationship respecting the same shares, unless the Secretary is given written notice to the contrary and is furnished with a copy of the instrument or order appointing them or creating the relationship wherein it is so provided, their acts with respect to voting shall have the following effect: (a) if only one (1) votes, his or her act binds all; (b) if more than one (1) votes, the act of the majority so voting binds all; (c) if more than one (1) votes, but the vote is evenly split on any particular matter, each faction may vote the securities in question proportionally, or may apply to the Delaware Court of Chancery for relief as provided in the DGCL, Section 217(b). If the instrument filed with the Secretary shows that any such tenancy is held in unequal interests, a majority or even-split for the purpose of subsection (c) shall be a majority or even-split in interest.

Section 12. List of Stockholders. The Secretary shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at said meeting, arranged in alphabetical order, showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, (a) on a reasonably accessible electronic network, provided that the information required to gain access to such list is provided with the notice of the meeting, or (b) during ordinary business hours, at the principal place of business of the corporation. In the event that the corporation determines to make the list available on an electronic network, the corporation may take reasonable steps to ensure that such information is available only to stockholders of the corporation. The list shall be open to examination of any stockholder during the time of the meeting as provided by law.

Section 13. Action Without Meeting. No action shall be taken by the stockholders except at an annual or special meeting of stockholders called in accordance with these Bylaws, and no action shall be taken by the stockholders by written consent or by electronic transmission.

Section 14. Organization.

(a) At every meeting of stockholders, the Chairperson of the Board of Directors, or, if a Chairperson has not been appointed or is absent, the Chief Executive Officer, or, if the Chief Executive Officer is absent, the President, or, if the President is absent, a chairperson of the meeting chosen by a majority in interest of the stockholders entitled to vote, present in person or by proxy, shall act as chairperson. The Secretary, or, in his or her absence, an Assistant Secretary directed to do so by the Chief Executive Officer or the President, shall act as secretary of the meeting.

(b) The Board of Directors of the corporation shall be entitled to make such rules or regulations for the conduct of meetings of stockholders as it shall deem necessary, appropriate or convenient. Subject to such rules and regulations of the Board of Directors, if any, the chairperson of the meeting shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairperson, are necessary, appropriate or convenient for the proper conduct of the meeting, including, without limitation, establishing an agenda or order of business for the meeting, rules and procedures for maintaining order at the meeting and the safety of those present, limitations on participation in such meeting to stockholders of record of the corporation and their duly authorized and constituted proxies and such other persons as the chairperson shall permit, restrictions on entry to


the meeting after the time fixed for the commencement thereof, limitations on the time allotted to questions or comments by participants and regulation of the opening and closing of the polls for balloting on matters which are to be voted on by ballot. The date and time of the opening and closing of the polls for each matter upon which the stockholders will vote at the meeting shall be announced at the meeting. Unless and to the extent determined by the Board of Directors or the chairperson of the meeting, meetings of stockholders shall not be required to be held in accordance with rules of parliamentary procedure.

ARTICLE IV

DIRECTORS

Section 15. Number and Term of Office. The authorized number of directors of the corporation shall be fixed in accordance with the Certificate of Incorporation. Directors need not be stockholders unless so required by the Certificate of Incorporation. If for any cause, the directors shall not have been elected at an annual meeting, they may be elected as soon thereafter as convenient at a special meeting of the stockholders called for that purpose in the manner provided in these Bylaws.

Section 16. Powers. The business and affairs of the corporation shall be managed by or under the direction of the Board of Directors, except as may be otherwise provided by statute or by the Certificate of Incorporation.

Section 17. Classes of Directors. Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, following the closing of the initial public offering pursuant to an effective registration statement under the 1933 Act, covering the offer and sale of Common Stock of the corporation to the public (the “Initial Public Offering”), the directors shall be divided into three classes designated as Class I, Class II and Class III, respectively. The Board of Directors is authorized to assign members of the Board of Directors already in office to such classes at the time the classification becomes effective. At the first annual meeting of stockholders following the closing of the Initial Public Offering, the term of office of the Class I directors shall expire and Class I directors shall be elected for a full term of three years. At the second annual meeting of stockholders following the Initial Public Offering, the term of office of the Class II directors shall expire and Class II directors shall be elected for a full term of three years. At the third annual meeting of stockholders following the Initial Public Offering, the term of office of the Class III directors shall expire and Class III directors shall be elected for a full term of three years. At each succeeding annual meeting of stockholders, directors shall be elected for a full term of three years to succeed the directors of the class whose terms expire at such annual meeting.

Notwithstanding the foregoing provisions of this Section 17, each director shall serve until his or her successor is duly elected and qualified or until his or her earlier death, resignation or removal. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director.

Section 18. Vacancies. Unless otherwise provided in the Certificate of Incorporation, and subject to the rights of the holders of any series of Preferred Stock or as otherwise provided


by applicable law, any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other causes and any newly created directorships resulting from any increase in the number of directors shall, unless the Board of Directors determines by resolution that any such vacancies or newly created directorships shall be filled by stockholders, be filled only by the affirmative vote of a majority of the directors then in office, even though less than a quorum of the Board of Directors, or by a sole remaining director, and not by the stockholders, provided, however, that whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the provisions of the Certificate of Incorporation, vacancies and newly created directorships of such class or classes or series shall, unless the Board of Directors determines by resolution that any such vacancies or newly created directorships shall be filled by stockholders, be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected, and not by the stockholders. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the director for which the vacancy was created or occurred and until such director’s successor shall have been elected and qualified. A vacancy in the Board of Directors shall be deemed to exist under this Bylaw in the case of the death, removal or resignation of any director.

Section 19. Resignation. Any director may resign at any time by delivering his or her notice in writing or by electronic transmission to the Secretary, such resignation to specify whether it will be effective at a particular time. If no such specification is made, the Secretary, in his or her discretion, may either (a) require confirmation from the director prior to deeming the resignation effective, in which case the resignation will be deemed effective upon receipt of such confirmation, or (b) deem the resignation effective at the time of delivery of the resignation to the Secretary. When one or more directors shall resign from the Board of Directors, effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office for the unexpired portion of the term of the director whose place shall be vacated and until his successor shall have been duly elected and qualified.

Section 20. Removal.

(a) Subject to the rights of holders of any series of Preferred Stock to elect additional directors under specified circumstances, neither the Board of Directors nor any individual director may be removed without cause.

(b) Subject to any limitation imposed by applicable law, any individual director or directors may only be removed from office with cause by the affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the voting power of all then outstanding shares of capital stock of the corporation entitled to vote generally at an election of directors, voting together as a single class.

Section 21. Meetings

(a) Regular Meetings. Unless otherwise restricted by the Certificate of Incorporation, regular meetings of the Board of Directors may be held at any time or date and at


any place within or without the State of Delaware which has been designated by the Board of Directors and publicized among all directors, either orally or in writing, by telephone, including a voice-messaging system or other system designed to record and communicate messages, facsimile, telegraph or telex, or by electronic mail or other electronic means. No further notice shall be required for regular meetings of the Board of Directors.

(b) Special Meetings. Unless otherwise restricted by the Certificate of Incorporation, special meetings of the Board of Directors may be held at any time and place within or without the State of Delaware whenever called by the Chairperson of the Board, the Chief Executive Officer or a majority of the authorized number of directors.

(c) Meetings by Electronic Communications Equipment. Any member of the Board of Directors, or of any committee thereof, may participate in a meeting by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting by such means shall constitute presence in person at such meeting.

(d) Notice of Special Meetings. Notice of the time and place of all special meetings of the Board of Directors shall be orally or in writing, by telephone, including a voice messaging system or other system or technology designed to record and communicate messages, facsimile, telegraph or telex, or by electronic mail or other electronic means, during normal business hours, at least twenty-four (24) hours before the date and time of the meeting. If notice is sent by US mail, it shall be sent by first class mail, postage prepaid at least three (3) days before the date of the meeting. Notice of any meeting may be waived in writing or by electronic transmission at any time before or after the meeting and will be waived by any director by attendance thereat, except when the director attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened.

(e) Waiver of Notice. The transaction of all business at any meeting of the Board of Directors, or any committee thereof, however called or noticed, or wherever held, shall be as valid as though it had been transacted at a meeting duly held after regular call and notice, if a quorum be present and if, either before or after the meeting, each of the directors not present who did not receive notice shall sign a written waiver of notice or shall waive notice by electronic transmission. All such waivers shall be filed with the corporate records or made a part of the minutes of the meeting.

Section 22. Quorum and Voting.

(a) Unless the Certificate of Incorporation requires a greater number, and except with respect to questions related to indemnification arising under Section 45 for which a quorum shall be one-third of the exact number of directors fixed from time to time, a quorum of the Board of Directors shall consist of a majority of the exact number of directors fixed from time to time by the Board of Directors in accordance with the Certificate of Incorporation; provided, however, at any meeting whether a quorum be present or otherwise, a majority of the directors present may adjourn from time to time until the time fixed for the next regular meeting of the Board of Directors, without notice other than by announcement at the meeting.


(b) At each meeting of the Board of Directors at which a quorum is present, all questions and business shall be determined by the affirmative vote of a majority of the directors present, unless a different vote be required by law, the Certificate of Incorporation or these Bylaws.

Section 23. Action Without Meeting. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board of Directors or committee, as the case may be, consent thereto in writing or by electronic transmission, and such writing or writings or transmission or transmissions are filed with the minutes of proceedings of the Board of Directors or committee. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes are maintained in electronic form.

Section 24. Fees and Compensation. Directors shall be entitled to such compensation for their services as may be approved by the Board of Directors, including, if so approved, by resolution of the Board of Directors, a fixed sum and expenses of attendance, if any, for attendance at each regular or special meeting of the Board of Directors and at any meeting of a committee of the Board of Directors. Nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee, or otherwise and receiving compensation therefor.

Section 25. Committees.

(a) Executive Committee. The Board of Directors may appoint an Executive Committee to consist of one (1) or more members of the Board of Directors. The Executive Committee, to the extent permitted by law and provided in the resolution of the Board of Directors shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to (i) approving or adopting, or recommending to the stockholders, any action or matter (other than the election or removal of directors) expressly required by the DGCL to be submitted to stockholders for approval, or (ii) adopting, amending or repealing any bylaw of the corporation.

(b) Other Committees. The Board of Directors may, from time to time, appoint such other committees as may be permitted by law. Such other committees appointed by the Board of Directors shall consist of one (1) or more members of the Board of Directors and shall have such powers and perform such duties as may be prescribed by the resolution or resolutions creating such committees, but in no event shall any such committee have the powers denied to the Executive Committee in these Bylaws.

(c) Term. The Board of Directors, subject to any requirements of any outstanding series of Preferred Stock and the provisions of subsections (a) or (b) of this Section 25 may at any time increase or decrease the number of members of a committee or terminate the existence of a committee. The membership of a committee member shall terminate on the date of his death or voluntary resignation from the committee or from the Board of Directors. The


Board of Directors may at any time for any reason remove any individual committee member and the Board of Directors may fill any committee vacancy created by death, resignation, removal or increase in the number of members of the committee. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee, and, in addition, in the absence or disqualification of any member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member.

(d) Meetings. Unless the Board of Directors shall otherwise provide, regular meetings of the Executive Committee or any other committee appointed pursuant to this Section 25 shall be held at such times and places as are determined by the Board of Directors, or by any such committee, and when notice thereof has been given to each member of such committee, no further notice of such regular meetings need be given thereafter. Special meetings of any such committee may be held at any place which has been determined from time to time by such committee, and may be called by any director who is a member of such committee, upon notice to the members of such committee of the time and place of such special meeting given in the manner provided for the giving of notice to members of the Board of Directors of the time and place of special meetings of the Board of Directors. Notice of any special meeting of any committee may be waived in writing or by electronic transmission at any time before or after the meeting and will be waived by any director by attendance thereat, except when the director attends such special meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Unless otherwise provided by the Board of Directors in the resolutions authorizing the creation of the committee, a majority of the authorized number of members of any such committee shall constitute a quorum for the transaction of business, and the act of a majority of those present at any meeting at which a quorum is present shall be the act of such committee.

Section 26. Duties of Chairperson of the Board of Directors. The Chairperson of the Board of Directors, if appointed and when present, shall preside at all meetings of the stockholders and the Board of Directors. The Chairperson of the Board of Directors shall perform other duties commonly incident to the office and shall also perform such other duties and have such other powers, as the Board of Directors shall designate from time to time.

Section 27. Organization. At every meeting of the directors, the Chairperson of the Board of Directors, or, if a Chairperson has not been appointed or is absent, the Chief Executive Officer (if a director), or, if a Chief Executive Officer is absent, the President (if a director), or if the President is absent, the most senior Vice President (if a director), or, in the absence of any such person, a chairperson of the meeting chosen by a majority of the directors present, shall preside over the meeting. The Secretary, or in his absence, any Assistant Secretary or other officer, director or other person directed to do so by the person presiding over the meeting, shall act as secretary of the meeting.


ARTICLE V

OFFICERS

Section 28. Officers Designated. The officers of the corporation shall include, if and when designated by the Board of Directors, the Chairperson, the Chief Executive Officer, the President, one or more Vice Presidents, the Secretary, the Chief Financial Officer and the Treasurer. The Board of Directors may also appoint one or more Assistant Secretaries and Assistant Treasurers and such other officers and agents with such powers and duties as it shall deem necessary. The Board of Directors may assign such additional titles to one or more of the officers as it shall deem appropriate. Any one person may hold any number of offices of the corporation at any one time unless specifically prohibited therefrom by law. The salaries and other compensation of the officers of the corporation shall be fixed by or in the manner designated by the Board of Directors.

Section 29. Tenure and Duties of Officers.

(a) General. All officers shall hold office at the pleasure of the Board of Directors and until their successors shall have been duly elected and qualified, unless sooner removed. Any officer elected or appointed by the Board of Directors may be removed at any time by the Board of Directors. If the office of any officer becomes vacant for any reason, the vacancy may be filled by the Board of Directors.

(b) Duties of Chief Executive Officer. The Chief Executive Officer shall preside at all meetings of the stockholders and at all meetings of the Board of Directors (if a director), unless the Chairperson of the Board of Directors has been appointed and is present. Unless an officer has been appointed Chief Executive Officer of the corporation, the President shall be the chief executive officer of the corporation and shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and officers of the corporation. To the extent that a Chief Executive Officer has been appointed and no President has been appointed, all references in these Bylaws to the President shall be deemed references to the Chief Executive Officer. The Chief Executive Officer shall perform other duties commonly incident to the office and shall also perform such other duties and have such other powers, as the Board of Directors shall designate from time to time.

(c) Duties of President. The President shall preside at all meetings of the stockholders and at all meetings of the Board of Directors (if a director), unless the Chairperson of the Board of Directors, or the Chief Executive Officer has been appointed and is present. Unless another officer has been appointed Chief Executive Officer of the corporation, the President shall be the chief executive officer of the corporation and shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and officers of the corporation. The President shall perform other duties commonly incident to the office and shall also perform such other duties and have such other powers, as the Board of Directors shall designate from time to time.


(d) Duties of Vice Presidents. A Vice President may assume and perform the duties of the President in the absence or disability of the President or whenever the office of President is vacant. A Vice President shall perform other duties commonly incident to their office and shall also perform such other duties and have such other powers as the Board of Directors or the Chief Executive Officer, or, if the Chief Executive Officer has not been appointed or is absent, the President shall designate from time to time.

(e) Duties of Secretary. The Secretary shall attend all meetings of the stockholders and of the Board of Directors and shall record all acts and proceedings thereof in the minute book of the corporation. The Secretary shall give notice in conformity with these Bylaws of all meetings of the stockholders and of all meetings of the Board of Directors and any committee thereof requiring notice. The Secretary shall perform all other duties provided for in these Bylaws and other duties commonly incident to the office and shall also perform such other duties and have such other powers, as the Board of Directors shall designate from time to time. The Chief Executive Officer, or if no Chief Executive Officer is then serving, the President may direct any Assistant Secretary or other officer to assume and perform the duties of the Secretary in the absence or disability of the Secretary, and each Assistant Secretary shall perform other duties commonly incident to the office and shall also perform such other duties and have such other powers as the Board of Directors or the Chief Executive Officer, or if no Chief Executive Officer is then serving, the President shall designate from time to time.

(f) Duties of Chief Financial Officer. The Chief Financial Officer shall keep or cause to be kept the books of account of the corporation in a thorough and proper manner and shall render statements of the financial affairs of the corporation in such form and as often as required by the Board of Directors or the Chief Executive Officer, or if no Chief Executive Officer is then serving, the President. The Chief Financial Officer, subject to the order of the Board of Directors, shall have the custody of all funds and securities of the corporation. The Chief Financial Officer shall perform other duties commonly incident to the office and shall also perform such other duties and have such other powers as the Board of Directors or the Chief Executive Officer, or if no Chief Executive Officer is then serving, the President shall designate from time to time. To the extent that a Chief Financial Officer has been appointed and no Treasurer has been appointed, all references in these Bylaws to the Treasurer shall be deemed references to the Chief Financial Officer. The President may direct the Treasurer, if any, or any Assistant Treasurer, or the controller or any assistant controller to assume and perform the duties of the Chief Financial Officer in the absence or disability of the Chief Financial Officer, and each Treasurer and Assistant Treasurer and each controller and assistant controller shall perform other duties commonly incident to the office and shall also perform such other duties and have such other powers as the Board of Directors or the Chief Executive Officer, or if no Chief Executive Officer is then serving, the President shall designate from time to time.

(g) Duties of Treasurer. Unless another officer has been appointed Chief Financial Officer of the corporation, the Treasurer shall be the chief financial officer of the corporation and shall keep or cause to be kept the books of account of the corporation in a thorough and proper manner and shall render statements of the financial affairs of the corporation in such form and as often as required by the Board of Directors or the Chief Executive Officer, or if no Chief Executive Officer is then serving, the President, and, subject to the order of the Board of Directors, shall have the custody of all funds and securities of the corporation. The Treasurer shall perform other duties commonly incident to the office and shall also perform such other duties and have such other powers as the Board of Directors or the Chief Executive Officer, or if no Chief Executive Officer is then serving, the President and Chief Financial Officer (if not Treasurer) shall designate from time to time.


Section 30. Delegation of Authority. The Board of Directors may from time to time delegate the powers or duties of any officer to any other officer or agent, notwithstanding any provision hereof.

Section 31. Resignations. Any officer may resign at any time by giving notice in writing or by electronic transmission to the Board of Directors or to the Chief Executive Officer, or if no Chief Executive Officer is then serving, the President or to the Secretary. Any such resignation shall be effective when received by the person or persons to whom such notice is given, unless a later time is specified therein, in which event the resignation shall become effective at such later time. Unless otherwise specified in such notice, the acceptance of any such resignation shall not be necessary to make it effective. Any resignation shall be without prejudice to the rights, if any, of the corporation under any contract with the resigning officer.

Section 32. Removal. Any officer may be removed from office at any time, either with or without cause, by the affirmative vote of a majority of the directors in office at the time, or by the unanimous written consent of the directors in office at the time, or by any committee or by the Chief Executive Officer or by other superior officers upon whom such power of removal may have been conferred by the Board of Directors.

ARTICLE VI

EXECUTION OF CORPORATE INSTRUMENTS AND VOTING

OF SECURITIES OWNED BY THE CORPORATION

Section 33. Execution of Corporate Instruments. The Board of Directors may, in its discretion, determine the method and designate the signatory officer or officers, or other person or persons, to execute on behalf of the corporation any corporate instrument or document, or to sign on behalf of the corporation the corporate name without limitation, or to enter into contracts on behalf of the corporation, except where otherwise provided by law or these Bylaws, and such execution or signature shall be binding upon the corporation. All checks and drafts drawn on banks or other depositaries on funds to the credit of the corporation or in special accounts of the corporation shall be signed by such person or persons as the Board of Directors shall authorize so to do. Unless authorized or ratified by the Board of Directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount.

Section 34. Voting of Securities Owned by the Corporation. All stock and other securities of other corporations owned or held by the corporation for itself, or for other parties in any capacity, shall be voted, and all proxies with respect thereto shall be executed, by the person authorized so to do by resolution of the Board of Directors, or, in the absence of such authorization, by the Chairperson of the Board of Directors, the Chief Executive Officer, the President, or any Vice President.


ARTICLE VII

SHARES OF STOCK

Section 35. Form and Execution of Certificates. The shares of the corporation shall be represented by certificates, or shall be uncertificated if so provided by resolution or resolutions of the Board of Directors. Certificates for the shares of stock, if any, shall be in such form as is consistent with the Certificate of Incorporation and applicable law. Every holder of stock in the corporation represented by certificate shall be entitled to have a certificate signed by or in the name of the corporation by the Chairperson of the Board of Directors, or the President or any Vice President and by the Treasurer or Assistant Treasurer or the Secretary or Assistant Secretary, certifying the number of shares owned by him in the corporation. Any or all of the signatures on the certificate may be facsimiles. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued with the same effect as if he were such officer, transfer agent, or registrar at the date of issue.

Section 36. Lost Certificates. A new certificate or certificates shall be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen, or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen, or destroyed. The corporation may require, as a condition precedent to the issuance of a new certificate or certificates, the owner of such lost, stolen, or destroyed certificate or certificates, or the owner’s legal representative, to agree to indemnify the corporation in such manner as it shall require or to give the corporation a surety bond in such form and amount as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen, or destroyed.

Section 37. Transfers.

(a) Transfers of record of shares of stock of the corporation shall be made only upon its books by the holders thereof, in person or by attorney duly authorized, and, in the case of stock represented by certificate, upon the surrender of a properly endorsed certificate or certificates for a like number of shares.

(b) The corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one or more classes owned by such stockholders in any manner not prohibited by the DGCL.

Section 38. Fixing Record Dates.

(a) In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall, subject to applicable law, not be more than sixty (60) nor less than ten (10) days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for


determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting.

(b) In order that the corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty (60) days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto.

Section 39. Registered Stockholders. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware.

ARTICLE VIII

OTHER SECURITIES OF THE CORPORATION

Section 40. Execution of Other Securities. All bonds, debentures and other corporate securities of the corporation, other than stock certificates (covered in Section 36), may be signed by the Chairperson of the Board of Directors, the Chief Executive Officer, the President or any Vice President, or such other person as may be authorized by the Board of Directors, and the corporate seal impressed thereon or a facsimile of such seal imprinted thereon and attested by the signature of the Secretary or an Assistant Secretary, or the Chief Financial Officer or Treasurer or an Assistant Treasurer; provided, however, that where any such bond, debenture or other corporate security shall be authenticated by the manual signature, or where permissible facsimile signature, of a trustee under an indenture pursuant to which such bond, debenture or other corporate security shall be issued, the signatures of the persons signing and attesting the corporate seal on such bond, debenture or other corporate security may be the imprinted facsimile of the signatures of such persons. Interest coupons appertaining to any such bond, debenture or other corporate security, authenticated by a trustee as aforesaid, shall be signed by the Treasurer or an Assistant Treasurer of the corporation or such other person as may be authorized by the Board of Directors, or bear imprinted thereon the facsimile signature of such person. In case any officer who shall have signed or attested any bond, debenture or other corporate security, or whose facsimile signature shall appear thereon or on any such interest coupon, shall have ceased to be such officer before the bond, debenture or other corporate security so signed or attested shall have been delivered, such bond, debenture or other corporate security nevertheless may be adopted by the corporation and issued and delivered as though the person who signed the same or whose facsimile signature shall have been used thereon had not ceased to be such officer of the corporation.


ARTICLE IX

DIVIDENDS

Section 41. Declaration of Dividends. Dividends upon the capital stock of the corporation, subject to the provisions of the Certificate of Incorporation and applicable law, if any, may be declared by the Board of Directors pursuant to law at any regular or special meeting. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation and applicable law.

Section 42. Dividend Reserve. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the Board of Directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the Board of Directors shall think conducive to the interests of the corporation, and the Board of Directors may modify or abolish any such reserve in the manner in which it was created.

ARTICLE X

FISCAL YEAR

Section 43. Fiscal Year. The fiscal year of the corporation shall be fixed by resolution of the Board of Directors.

ARTICLE XI

INDEMNIFICATION

Section 44. Indemnification of Directors, Officers, Employees and Other Agents.

(a) Directors and Officers. The corporation shall indemnify its directors and officers to the fullest extent not prohibited by the DGCL or any other applicable law; provided, however, that the corporation may modify the extent of such indemnification by individual contracts with its directors and officers; and, provided, further, that the corporation shall not be required to indemnify any director or officer in connection with any proceeding (or part thereof) initiated by such person unless (i) such indemnification is expressly required to be made by law, (ii) the proceeding was authorized by the Board of Directors of the corporation, (iii) such indemnification is provided by the corporation, in its sole discretion, pursuant to the powers vested in the corporation under the DGCL or any other applicable law or (iv) such indemnification is required to be made under paragraph (d) of this Section 45.

(b) Employees and other Agents. The corporation shall have power to indemnify its employees and other agents as set forth in the DGCL or any other applicable law. The Board of Directors shall have the power to delegate the determination of whether indemnification shall be given to any such person as the Board of Directors shall determine.


(c) Expenses. The corporation shall advance to any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a director or officer, of the corporation, or is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, prior to the final disposition of the proceeding, promptly following request therefor, all expenses incurred by any director or officer in connection with such proceeding provided, however, that if the DGCL requires, an advancement of expenses incurred by a director or officer in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such indemnitee, including, without limitation, service to an employee benefit plan) shall be made only upon delivery to the corporation of an undertaking (hereinafter an “undertaking”), by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal (hereinafter a “final adjudication”) that such indemnitee is not entitled to be indemnified for such expenses under this Section 45 or otherwise. Notwithstanding the foregoing, unless otherwise determined pursuant to paragraph (e) of this Section 45, no advance shall be made by the corporation to an officer of the corporation (except by reason of the fact that such officer is or was a director of the corporation in which event this sentence shall not apply) in any action, suit or proceeding, whether civil, criminal, administrative or investigative, if a determination is reasonably and promptly made (i) by a majority vote of directors who were not parties to the proceeding, even if not a quorum, or (ii) by a committee of such directors designated by a majority vote of such directors, even though less than a quorum, or (iii) if there are no such directors, or such directors so direct, by independent legal counsel in a written opinion, that the facts known to the decision-making party at the time such determination is made demonstrate clearly and convincingly that such person acted in bad faith or in a manner that such person did not believe to be in or not opposed to the best interests of the corporation.

(d) Enforcement. Without the necessity of entering into an express contract, all rights to indemnification and advances to directors and officers under this Section 45 shall be deemed to be contractual rights and be effective to the same extent and as if provided for in a contract between the corporation and the director or officer. Any right to indemnification or advances granted by this Section 45 to a director or officer shall be enforceable by or on behalf of the person holding such right in any court of competent jurisdiction if (i) the claim for indemnification or advances is denied, in whole or in part, or (ii) no disposition of such claim is made within ninety (90) days of request therefor. To the extent permitted by law, the claimant in such enforcement action, if successful in whole or in part, shall be entitled to be paid also the expense of prosecuting the claim. In connection with any claim for indemnification, the corporation shall be entitled to raise as a defense to any such action that the claimant has not met the standards of conduct that make it permissible under the DGCL or any other applicable law for the corporation to indemnify the claimant for the amount claimed. In connection with any claim by an officer of the corporation (except in any action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such officer is or was a director of the corporation) for advances, the corporation shall be entitled to raise a defense as to any such action clear and convincing evidence that such person acted in bad faith or in a manner


that such person did not believe to be in or not opposed to the best interests of the corporation, or with respect to any criminal action or proceeding that such person acted without reasonable cause to believe that his or her conduct was lawful. Neither the failure of the corporation (including its Board of Directors, independent legal counsel or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he has met the applicable standard of conduct set forth in the DGCL or any other applicable law, nor an actual determination by the corporation (including its Board of Directors, independent legal counsel or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that claimant has not met the applicable standard of conduct. In any suit brought by a director or officer to enforce a right to indemnification or to an advancement of expenses hereunder, the burden of proving that the director or officer is not entitled to be indemnified, or to such advancement of expenses, under this Section 45 or otherwise shall be on the corporation.

(e) Non-Exclusivity of Rights. The rights conferred on any person by this Section 45 shall not be exclusive of any other right which such person may have or hereafter acquire under any applicable statute, provision of the Certificate of Incorporation, Bylaws, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding office. The corporation is specifically authorized to enter into individual contracts with any or all of its directors, officers, employees or agents respecting indemnification and advances, to the fullest extent not prohibited by the DGCL or any other applicable law.

(f) Survival of Rights. The rights conferred on any person by this Section 45 shall continue as to a person who has ceased to be a director, officer, employee or other agent and shall inure to the benefit of the heirs, executors and administrators of such a person.

(g) Insurance. To the fullest extent permitted by the DGCL or any other applicable law, the corporation, upon approval by the Board of Directors, may purchase insurance on behalf of any person required or permitted to be indemnified pursuant to this Section 45.

(h) Amendments. Any repeal or modification of this Section 45 shall only be prospective and shall not affect the rights under this Section 45 in effect at the time of the alleged occurrence of any action or omission to act that is the cause of any proceeding against any agent of the corporation.

(i) Saving Clause. If this Section 45 or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the corporation shall nevertheless indemnify each director and officer to the full extent not prohibited by any applicable portion of this Section 45 that shall not have been invalidated, or by any other applicable law. If this Section 45 shall be invalid due to the application of the indemnification provisions of another jurisdiction, then the corporation shall indemnify each director and executive officer to the full extent under any other applicable law.


(j) Certain Definitions. For the purposes of this Section 45, the following definitions shall apply:

(1) The term “proceeding” shall be broadly construed and shall include, without limitation, the investigation, preparation, prosecution, defense, settlement, arbitration and appeal of, and the giving of testimony in, any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative.

(2) The term “expenses” shall be broadly construed and shall include, without limitation, court costs, attorneys’ fees, witness fees, fines, amounts paid in settlement or judgment and any other costs and expenses of any nature or kind incurred in connection with any proceeding.

(3) The term the “corporation” shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Section 45 with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued.

(4) References to a “director,” “executive officer,” “officer,” “employee,” or “agent” of the corporation shall include, without limitation, situations where such person is serving at the request of the corporation as, respectively, a director, executive officer, officer, employee, trustee or agent of another corporation, partnership, joint venture, trust or other enterprise.

(5) References to “other enterprises” shall include employee benefit plans; references to “fines” shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to “serving at the request of the corporation” shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner “not opposed to the best interests of the corporation” as referred to in this section.

ARTICLE XII

NOTICES

Section 45. Notices.

(a) Notice to Stockholders. Written notice to stockholders of stockholder meetings shall be given as provided in Section 7 herein. Without limiting the manner by which notice may otherwise be given effectively to stockholders under any agreement or contract with such stockholder, and except as otherwise required by law, written notice to stockholders for


purposes other than stockholder meetings may be sent by United States mail or nationally recognized overnight courier, or by facsimile, telegraph or telex or by electronic mail or other electronic means.

(b) Notice to Directors. Any notice required to be given to any director may be given by the method stated in subsection (a) or as otherwise provided in these Bylaws. If such notice is not delivered personally, it shall be sent to such address as such director shall have filed in writing with the Secretary, or, in the absence of such filing, to the last known post office address of such director.

(c) Affidavit of Mailing. An affidavit of mailing, executed by a duly authorized and competent employee of the corporation or its transfer agent appointed with respect to the class of stock affected or other agent, specifying the name and address or the names and addresses of the stockholder or stockholders, or director or directors, to whom any such notice or notices was or were given, and the time and method of giving the same, shall in the absence of fraud, be prima facie evidence of the facts therein contained.

(d) Methods of Notice. It shall not be necessary that the same method of giving notice be employed in respect of all recipients of notice, but one permissible method may be employed in respect of any one or more, and any other permissible method or methods may be employed in respect of any other or others.

(e) Notice to Person with Whom Communication is Unlawful. Whenever notice is required to be given, under any provision of law or of the Certificate of Incorporation or Bylaws of the corporation, to any person with whom communication is unlawful, the giving of such notice to such person shall not be required and there shall be no duty to apply to any governmental authority or agency for a license or permit to give such notice to such person. Any action or meeting which shall be taken or held without notice to any such person with whom communication is unlawful shall have the same force and effect as if such notice had been duly given. In the event that the action taken by the corporation is such as to require the filing of a certificate under any provision of the DGCL, the certificate shall state, if such is the fact and if notice is required, that notice was given to all persons entitled to receive notice except such persons with whom communication is unlawful.

(f) Notice to Stockholders Sharing an Address. Except as otherwise prohibited under DGCL, any notice given under the provisions of DGCL, the Certificate of Incorporation or the Bylaws shall be effective if given by a single written notice to stockholders who share an address if consented to by the stockholders at that address to whom such notice is given. Such consent shall have been deemed to have been given if such stockholder fails to object in writing to the corporation within sixty (60) days of having been given notice by the corporation of its intention to send the single notice. Any consent shall be revocable by the stockholder by written notice to the corporation.


ARTICLE XIII

AMENDMENTS

Section 46. Amendments. Subject to the limitations set forth in Section 45(h) of these Bylaws or the provisions of the Certificate of Incorporation, the Board of Directors is expressly empowered to adopt, amend or repeal the Bylaws of the corporation. The stockholders also shall have power to adopt, amend or repeal the Bylaws of the corporation; provided, however, that, in addition to any vote of the holders of any class or series of stock of the corporation required by law or by the Certificate of Incorporation, such action by stockholders shall require the affirmative vote of the holders of sixty-six and two-thirds percent (66 2/3%) of the voting power of all of the then-outstanding shares of the capital stock of the corporation entitled to vote generally in the election of directors, voting together as a single class.

ARTICLE XIV

LOANS TO OFFICERS

Section 47. Loans to Officers. Except as otherwise prohibited by applicable law, the corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiaries, including any officer or employee who is a director of the corporation or its subsidiaries, whenever, in the judgment of the Board of Directors, such loan, guarantee or assistance may reasonably be expected to benefit the corporation. The loan, guarantee or other assistance may be with or without interest and may be unsecured, or secured in such manner as the Board of Directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing in these Bylaws shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute.


Third Amended and Restated Investor Rights Agreement

Exhibit 4.1

ZULILY, INC.

THIRD AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT

November 5, 2012


ZULILY, INC.

THIRD AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT

THIS THIRD AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT (the “Agreement”) is entered into as of the 5th day of November, 2012, by and among ZULILY, INC., a Delaware corporation (the “Company”), and the investors listed on Exhibit A hereto, referred to hereinafter as the “Investors” and each individually as an “Investor.”

RECITALS

WHEREAS, certain of the Investors are purchasing shares of the Company’s Series D Preferred Stock (the “Series D Stock”) (“New Investors”), pursuant to that certain Series D Preferred Stock Purchase Agreement (as may be amended from time to time, the “Purchase Agreement”) of even date herewith (the “Financing”);

WHEREAS, the obligations in the Purchase Agreement are conditioned upon the execution and delivery of this Agreement;

WHEREAS, certain of the Investors (the “Prior Investors”) are holders of the Company’s Common Stock, Series Seed Preferred Stock (the “Series Seed Stock”), Series A Preferred Stock (the “Series A Stock”), Series B Preferred Stock (the “Series B Stock”) and Series C Preferred Stock (the “Series C Stock,” the Series Seed Stock, Series A Stock, Series B Stock, Series C Stock and Series D Stock shall be referred to herein collectively as the “Preferred Stock”);

WHEREAS, the Prior Investors and the Company are parties to a Second Amended and Restated Investor Rights Agreement dated August 2, 2011, as amended to date (the “Prior Agreement”);

WHEREAS, the parties to the Prior Agreement desire to amend and restate the Prior Agreement and accept the rights and covenants hereof in lieu of their rights and covenants under the Prior Agreement; and

WHEREAS, in connection with the consummation of the Financing, the Company and the Investors have agreed to the registration rights, information rights and other rights as set forth below.

NOW, THEREFORE, in consideration of these premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

SECTION 1. GENERAL.

1.1 Amendment and Restatement of Prior Agreement. The Prior Agreement is hereby amended in its entirety and restated herein. Such amendment and restatement is effective upon the execution of this Agreement by (a) the Company and (b) the holders of at least 66 2/3% of the Registrable Securities (as defined in the Prior Agreement). Upon such execution, all

 

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provisions of, rights granted and covenants made in the Prior Agreement are hereby waived, released and superseded in their entirety and shall have no further force or effect, including, without limitation, all rights of first refusal and any notice period associated therewith otherwise applicable to the transactions contemplated by the Purchase Agreement.

1.2 Definitions. As used in this Agreement the following terms shall have the following respective meanings:

(a) “Exchange Act” means the Securities Exchange Act of 1934, as amended.

(b) “Form S-3” means such form under the Securities Act as in effect on the date hereof or any successor or similar registration form under the Securities Act subsequently adopted by the SEC which permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the SEC.

(c) “Holder” means any person owning of record Registrable Securities that have not been sold to the public or any assignee of record of such Registrable Securities in accordance with Section 2.9 hereof.

(d) “Initial Offering” means the Company’s first firm commitment underwritten public offering of its Common Stock registered under the Securities Act.

(e) Major Investor” means an Investor (with its affiliates) who owns not less than Five Million (5,000,000) shares of Registrable Securities (as adjusted for stock splits and combinations) and, solely for purposes of Section 3.1, any Investor advised by T. Rowe Price Associates, Inc. (“T. Rowe Price”) so long as such Investor owns any Registrable Securities.

(f) “Register,” “registered,” and “registration” refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of effectiveness of such registration statement or document.

(g) “Registrable Securities” means: (a) Common Stock held by Investors, (b) Common Stock of the Company issuable or issued upon conversion of the Shares and (c) any Common Stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, such above-described securities. Notwithstanding the foregoing, Registrable Securities shall not include any securities (i) sold by a person to the public either pursuant to a registration statement or Rule 144 or (ii) sold in a private transaction in which the transferor’s rights under Section 2 of this Agreement are not assigned.

(h) “Registrable Securities then outstanding” shall be the number of shares of the Company’s Common Stock that are Registrable Securities and either (a) are then issued and outstanding or (b) are issuable pursuant to then exercisable or convertible securities.

(i) “Registration Expenses” shall mean all expenses incurred by the Company in complying with Sections 2.2, 2.3 and 2.4 hereof, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel for the Company, reasonable fees and disbursements not to exceed twenty-five thousand dollars

 

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($25,000) of a single special counsel for the selling Holders (to be mutually agreed upon by the selling Holders representing a majority of the Registrable Securities to be sold by the selling Holders), blue sky fees and expenses and the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Company which shall be paid in any event by the Company).

(j) “SEC” or “Commission” means the Securities and Exchange Commission.

(k) “Securities Act” shall mean the Securities Act of 1933, as amended.

(l) “Selling Expenses” shall mean all underwriting discounts and selling commissions applicable to the sale.

(m) “Shares” shall mean the Company’s Preferred Stock held from time to time by the Investors listed on Exhibit A hereto and their permitted assigns.

(n) “Special Registration Statement” shall mean: (i) a registration statement relating to any employee benefit plan; or (ii) with respect to any corporate reorganization or transaction under Rule 145 of the Securities Act, any registration statements related to the issuance or resale of securities issued in such a transaction; or (iii) a registration related to stock issued upon conversion of debt securities.

SECTION 2. REGISTRATION; RESTRICTIONS ON TRANSFER.

2.1 Restrictions on Transfer.

(a) Each Holder agrees not to make any disposition of all or any portion of the Shares or Registrable Securities unless and until:

(i) there is then in effect a registration statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or

(ii) (A) The transferee has agreed in writing to be bound by the terms of this Agreement, (B) such Holder shall have notified the Company of the proposed disposition and shall have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and (C) if reasonably requested by the Company, such Holder shall have furnished the Company with an opinion of counsel, reasonably satisfactory to the Company, that such disposition will not require registration of such shares under the Securities Act. It is agreed that the Company will not require opinions of counsel for transactions made pursuant to Rule 144, except in unusual circumstances. After its Initial Offering, the Company will not require any transferee pursuant to Rule 144 to be bound by the terms of this Agreement if the shares so transferred do not remain Registrable Securities hereunder following such transfer.

(b) Notwithstanding the provisions of subsection (a) above, no such restriction shall apply to a transfer by a Holder that is (A) a partnership transferring to its partners or former

 

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partners in accordance with partnership interests, (B) a corporation transferring to a wholly-owned subsidiary or a parent corporation that owns all of the capital stock of the Holder, (C) a limited liability company transferring to its members or former members in accordance with their interest in the limited liability company, (D) an individual transferring to the Holder’s ancestors, descendants, siblings, spouse or spouse’s siblings or to trusts for the benefit of such persons or such Holder or to any family partnership, limited liability company or other bona fide estate or personal planning entity for the benefit of such persons or the Holder, or (E) a venture capital fund transferring to an affiliated venture capital fund; provided that in each case the transferee will agree in writing to be subject to the terms of this Agreement to the same extent as if he were an original Holder hereunder.

(c) Each certificate representing Shares or Registrable Securities shall be stamped or otherwise imprinted with legends substantially similar to the following (in addition to any legend required under applicable state securities laws):

THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE “ACT”) AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.

THE SALE, PLEDGE, HYPOTHECATION OR TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE TERMS AND CONDITIONS OF A CERTAIN INVESTOR RIGHTS AGREEMENT BY AND BETWEEN THE STOCKHOLDER AND THE COMPANY. COPIES OF SUCH AGREEMENT MAY BE OBTAINED UPON WRITTEN REQUEST TO THE SECRETARY OF THE COMPANY.

(d) The Company shall be obligated to reissue promptly unlegended certificates at the request of any Holder thereof if the Company has completed its Initial Offering and the Holder shall have obtained an opinion of counsel (which counsel may be counsel to the Company) reasonably acceptable to the Company to the effect that the securities proposed to be disposed of may lawfully be so disposed of without registration, qualification and legend, provided that the second legend listed above shall be removed only at such time as the Holder of such certificate is no longer subject to any restrictions hereunder.

(e) Any legend endorsed on an instrument pursuant to applicable state securities laws and the stop-transfer instructions with respect to such securities shall be removed upon receipt by the Company of an order of the appropriate blue sky authority authorizing such removal.

 

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2.2 Demand Registration.

(a) Subject to the conditions of this Section 2.2, if the Company shall receive a written request from the Holders of at least thirty-five percent (35%) of the Registrable Securities (the “Initiating Holders”) that the Company file a registration statement under the Securities Act covering the registration of Registrable Securities with an anticipated aggregate offering price, net of underwriting discounts and commissions, that would exceed $15,000,000, then the Company shall, within thirty (30) days of the receipt thereof, give written notice of such request to all Holders, and subject to the limitations of this Section 2.2, effect, as expeditiously as reasonably possible, the registration under the Securities Act of all Registrable Securities that all Holders request to be registered.

(b) If the Initiating Holders intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to this Section 2.2 or any request pursuant to Section 2.4 and the Company shall include such information in the written notice referred to in Section 2.2(a) or Section 2.4(a), as applicable. In such event, the right of any Holder to include its Registrable Securities in such registration shall be conditioned upon such Holder’s participation in such underwriting and the inclusion of such Holder’s Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the Holders of a majority of the Registrable Securities held by all Initiating Holders (which underwriter or underwriters shall be reasonably acceptable to the Company). Notwithstanding any other provision of this Section 2.2 or Section 2.4, if the underwriter advises the Company that marketing factors require a limitation of the number of securities to be underwritten (including Registrable Securities) then the Company shall so advise all Holders of Registrable Securities that would otherwise be underwritten pursuant hereto, and the number of shares that may be included in the underwriting shall be allocated first, to the Holders of such Registrable Securities on a pro rata basis based on the number of Registrable Securities held by all such Holders (including the Initiating Holders); second, to the Company; and third, to any other stockholder of the Company (other than a Holder) with contractual registration rights, on a pro rata basis. Any Registrable Securities excluded or withdrawn from such underwriting shall be withdrawn from the registration.

(c) The Company shall not be required to effect a registration pursuant to this Section 2.2:

(i) prior to the earlier of (A) the fifth anniversary of the date of this Agreement or (B) the expiration of the restrictions on transfer set forth in Section 2.11 following the Initial Offering;

(ii) after the Company has effected two (2) registrations pursuant to this Section 2.2, and such registrations have been declared or ordered effective;

(iii) during the period starting with the date of filing of, and ending on the date one hundred eighty (180) days following the effective date of the registration statement pertaining to the Initial Offering (or such longer period during which the transfer of securities may be restricted pursuant to Section 2.11 hereof); provided that the Company makes reasonable good faith efforts to cause such registration statement to become effective;

 

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(iv) if within thirty (30) days of receipt of a written request from Initiating Holders pursuant to Section 2.2(a), the Company gives notice to the Holders of the Company’s intention to file a registration statement for its Initial Offering within ninety (90) days;

(v) during the period starting sixty (60) days prior to the Company’s good faith estimate of the date of filing of a registration statement pertaining to a public offering (other than pursuant to a Special Registration Statement) and ending on the date one hundred twenty (120) days following the effective date of such registration;

(vi) if the Company shall furnish to Holders requesting a registration statement pursuant to this Section 2.2 a certificate signed by the Chairman of the Board stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its stockholders for such registration statement to be effected at such time, in which event the Company shall have the right to defer such filing for a period of not more than one hundred twenty (120) days after receipt of the request of the Initiating Holders; provided that such right to delay a request shall be exercised by the Company not more than once in any twelve (12) month period;

(vii) if the Initiating Holders propose to dispose of shares of Registrable Securities that may be immediately registered on Form S-3 pursuant to a request made pursuant to Section 2.4 below; or

(viii) in any particular jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance.

2.3 Piggyback Registrations. The Company shall notify all Holders of Registrable Securities in writing at least fifteen (15) days prior to the filing of any registration statement under the Securities Act for purposes of a public offering of securities of the Company (including, but not limited to, registration statements relating to secondary offerings of securities of the Company, but excluding Special Registration Statements) and will afford each such Holder an opportunity to include in such registration statement all or part of such Registrable Securities held by such Holder. Each Holder desiring to include in any such registration statement all or any part of the Registrable Securities held by it shall, within fifteen (15) days after the above-described notice from the Company, so notify the Company in writing. Such notice shall state the intended method of disposition of the Registrable Securities by such Holder. If a Holder decides not to include all of its Registrable Securities in any registration statement thereafter filed by the Company, such Holder shall nevertheless continue to have the right to include any Registrable Securities in any subsequent registration statement or registration statements as may be filed by the Company with respect to offerings of its securities, all upon the terms and conditions set forth herein.

 

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(a) Underwriting. If the registration statement of which the Company gives notice under this Section 2.3 is for an underwritten offering, the Company shall so advise the Holders of Registrable Securities. In such event, the right of any such Holder to include Registrable Securities in a registration pursuant to this Section 2.3 shall be conditioned upon such Holder’s participation in such underwriting and the inclusion of such Holder’s Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their Registrable Securities through such underwriting shall enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the Company. Notwithstanding any other provision of this Agreement, if the Company determines in good faith, in consultation with the underwriter, that marketing factors require a limitation of the number of shares to be underwritten, the number of shares that may be included in the underwriting shall be allocated, first, to the Company; second, to the Holders on a pro rata basis based on the total number of Registrable Securities held by the Holders; and third, to any stockholder of the Company (other than a Holder) on a pro rata basis; provided, however, that no such reduction shall reduce the amount of securities of the selling Holders included in the registration below twenty percent (20%) of the total amount of securities included in such registration, unless such offering is the Initial Offering and such registration does not include shares of any other selling stockholders, in which event any or all of the Registrable Securities of the Holders may be excluded in accordance with the immediately preceding clause. If any Holder disapproves of the terms of any such underwriting, such Holder may elect to withdraw therefrom by written notice to the Company and the underwriter, delivered at least ten (10) business days prior to the effective date of the registration statement. Any Registrable Securities excluded or withdrawn from such underwriting shall be excluded and withdrawn from the registration. For any Holder which is a partnership, limited liability company or corporation, the partners, retired partners, members, retired members and stockholders of such Holder, or the estates and family members of any such partners, retired partners, members and retired members and any trusts for the benefit of any of the foregoing person shall be deemed to be a single “Holder,” and any pro rata reduction with respect to such “Holder” shall be based upon the aggregate amount of shares carrying registration rights owned by all entities and individuals included in such “Holder,” as defined in this sentence.

(b) Right to Terminate Registration. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section 2.3 whether or not any Holder has elected to include securities in such registration. The Registration Expenses of such withdrawn registration shall be borne by the Company in accordance with Section 2.5 hereof.

2.4 Form S-3 Registration. In case the Company shall receive from any Holder or Holders of Registrable Securities a written request or requests that the Company effect a registration on Form S-3 (or any successor to Form S-3) or any similar short-form registration statement and any related qualification or compliance with respect to all or a part of the Registrable Securities owned by such Holder or Holders, the Company will:

(a) promptly give written notice of the proposed registration, and any related qualification or compliance, to all other Holders of Registrable Securities; and

(b) as soon as practicable, effect such registration and all such qualifications and compliances as may be so requested and as would permit or facilitate the sale and

 

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distribution of all or such portion of such Holder’s or Holders’ Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any other Holder or Holders joining in such request as are specified in a written request given within fifteen (15) days after receipt of such written notice from the Company; provided, however, that the Company shall not be obligated to effect any such registration, qualification or compliance pursuant to this Section 2.4:

(i) if Form S-3 is not available for such offering by the Holders;

(ii) if the Holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Securities and such other securities (if any) at an aggregate price to the public of less than two million dollars ($2,000,000);

(iii) if within thirty (30) days of receipt of a written request from any Holder or Holders pursuant to this Section 2.4, the Company gives notice to such Holder or Holders of the Company’s intention to make a public offering within ninety (90) days pursuant to which the Holders will have rights under Section 2.3, other than pursuant to a Special Registration Statement;

(iv) if the Company shall furnish to the Holders a certificate signed by the Chairman of the Board of Directors of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its stockholders for such Form S-3 registration to be effected at such time, in which event the Company shall have the right to defer the filing of the Form S-3 registration statement for a period of not more than ninety (90) days after receipt of the request of the Holder or Holders under this Section 2.4; provided, that such right to delay a request shall be exercised by the Company not more than once in any twelve (12) month period;

(v) if the Company has, within the twelve (12) month period preceding the date of such request, already effected two (2) registrations on Form S-3 for the Holders pursuant to this Section 2.4; or

(vi) in any particular jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance.

(c) Subject to the foregoing, the Company shall file a Form S-3 registration statement covering the Registrable Securities and other securities so requested to be registered as soon as practicable after receipt of the requests of the Holders. Registrations effected pursuant to this Section 2.4 shall not be counted as demands for registration or registrations effected pursuant to Section 2.2. All Registration Expenses incurred in connection with registrations requested pursuant to this Section 2.4 after the first two (2) registrations shall be paid by the selling Holders pro rata in proportion to the number of shares to be sold by each such Holder in any such registration.

2.5 Expenses of Registration. Except as specifically provided herein, all Registration Expenses incurred in connection with any registration, qualification or compliance

 

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pursuant to Section 2.2, 2.3 or 2.4 herein shall be borne by the Company regardless of whether any shares are registered, offered or sold by a Holder. All Selling Expenses incurred in connection with any registrations hereunder, shall be borne by the holders of the securities so registered pro rata on the basis of the number of shares so registered. The Company shall not, however, be required to pay for expenses of any registration proceeding begun pursuant to Section 2.2 or 2.4, the request of which has been subsequently withdrawn by the Initiating Holders unless (a) the withdrawal is based upon material adverse information concerning the Company of which the Initiating Holders were not aware at the time of such request or (b) the Holders of a majority of the Registrable Securities agree to deem such registration to have been effected as of the date of such withdrawal for purposes of determining whether the Company shall be obligated pursuant to Section 2.2(c)(ii) or 2.4(b)(5), as applicable, to undertake any subsequent registration, in which event such right shall be forfeited by all Holders). If the Holders are required to pay the Registration Expenses, such expenses shall be borne by the holders of securities (including Registrable Securities) requesting such registration in proportion to the number of shares for which registration was requested. If the Company is required to pay the Registration Expenses of a withdrawn offering pursuant to clause (a) above, then such registration shall not be deemed to have been effected for purposes of determining whether the Company shall be obligated pursuant to Section 2.2(c)(ii) or 2.4(b)(5), as applicable, to undertake any subsequent registration.

2.6 Obligations of the Company. Whenever required to effect the registration of any Registrable Securities, the Company shall, as expeditiously as reasonably possible:

(a) prepare and file with the SEC a registration statement with respect to such Registrable Securities and use all reasonable efforts to cause such registration statement to become effective, and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for up to ninety (90) days or, if earlier, until the Holder or Holders have completed the distribution related thereto; provided, however, that at any time, upon written notice to the participating Holders and for a period not to exceed sixty (60) days thereafter (the “Suspension Period”), the Company may delay the filing or effectiveness of any registration statement or suspend the use or effectiveness of any registration statement (and the Initiating Holders hereby agree not to offer or sell any Registrable Securities pursuant to such registration statement during the Suspension Period) if the Company reasonably believes that there is or may be in existence material nonpublic information or events involving the Company, the failure of which to be disclosed in the prospectus included in the registration statement could result in a Violation (as defined below). In the event that the Company shall exercise its right to delay or suspend the filing or effectiveness of a registration hereunder, the applicable time period during which the registration statement is to remain effective shall be extended by a period of time equal to the duration of the Suspension Period. The Company may extend the Suspension Period for an additional consecutive sixty (60) days with the consent of the holders of a majority of the Registrable Securities registered under the applicable registration statement, which consent shall not be unreasonably withheld. If so directed by the Company, all Holders registering shares under such registration statement shall (i) not offer to sell any Registrable Securities pursuant to the registration statement during the period in which the delay or suspension is in effect after receiving notice of such delay or suspension; and (ii) use their best efforts to deliver to the Company (at the Company’s expense) all copies, other than permanent file copies then in such Holders’ possession, of the prospectus

 

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relating to such Registrable Securities current at the time of receipt of such notice. Notwithstanding the foregoing, the Company shall not be required to file, cause to become effective or maintain the effectiveness of any registration statement other than a registration statement on Form S-3 that contemplates a distribution of securities on a delayed or continuous basis pursuant to Rule 415 under the Securities Act.

(b) Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement for the period set forth in subsection (a) above.

(c) Promptly notify the Holders of the effectiveness of the registration statement and furnish to the Holders such number of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them.

(d) Use its reasonable efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders; provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions.

(e) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter(s) of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement.

(f) Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. The Company will use reasonable efforts to amend or supplement such prospectus in order to cause such prospectus not to include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing.

(g) Use its reasonable efforts to furnish, on the date that such Registrable Securities are delivered to the underwriters for sale, if such securities are being sold through underwriters, (i) an opinion, dated as of such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, if any, and (ii) a letter, dated as of such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering addressed to the underwriters.

 

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2.7 Delay of Registration; Furnishing Information.

(a) No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 2.

(b) It shall be a condition precedent to the obligations of the Company to take any action pursuant to Section 2.2, 2.3 or 2.4 that the selling Holders shall furnish to the Company such information regarding themselves, the Registrable Securities held by them and the intended method of disposition of such securities as shall be required to effect the registration of their Registrable Securities.

(c) The Company shall have no obligation with respect to any registration requested pursuant to Section 2.2 or Section 2.4 if the number of shares or the anticipated aggregate offering price of the Registrable Securities to be included in the registration does not equal or exceed the number of shares or the anticipated aggregate offering price required to originally trigger the Company’s obligation to initiate such registration as specified in Section 2.2 or Section 2.4, whichever is applicable.

2.8 Indemnification. In the event any Registrable Securities are included in a registration statement under Sections 2.2, 2.3 or 2.4:

(a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, the partners, members, officers and directors of each Holder, any underwriter (as defined in the Securities Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Securities Act or the Exchange Act, against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a “Violation”) by the Company: (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement or incorporated reference therein, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities law in connection with the offering covered by such registration statement; and the Company will reimburse each such Holder, partner, member, officer, director, underwriter or controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided however, that the indemnity agreement contained in this Section 2.8(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company, which consent shall not be unreasonably withheld, nor shall

 

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the Company be liable in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by such Holder, partner, member, officer, director, underwriter or controlling person of such Holder.

(b) To the extent permitted by law, each Holder will, if Registrable Securities held by such Holder are included in the securities as to which such registration qualifications or compliance is being effected, indemnify and hold harmless the Company, each of its directors, its officers and each person, if any, who controls the Company within the meaning of the Securities Act, any underwriter and any other Holder selling securities under such registration statement or any of such other Holder’s partners, directors or officers or any person who controls such Holder, against any losses, claims, damages or liabilities (joint or several) to which the Company or any such director, officer, controlling person, underwriter or other such Holder, or partner, director, officer or controlling person of such other Holder may become subject under the Securities Act, the Exchange Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based upon any of the following statements: (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement or incorporated reference therein, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the Securities Act (collectively, a “Holder Violation”), in each case to the extent (and only to the extent) that such Holder Violation occurs in reliance upon and in conformity with written information furnished by such Holder under an instrument duly executed by such Holder and stated to be specifically for use in connection with such registration; and each such Holder will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, controlling person, underwriter or other Holder, or partner, officer, director or controlling person of such other Holder in connection with investigating or defending any such loss, claim, damage, liability or action if it is judicially determined that there was such a Holder Violation; provided, however, that the indemnity agreement contained in this Section 2.8(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent shall not be unreasonably withheld; provided further, that in no event shall any indemnity under this Section 2.8 exceed the net proceeds from the offering received by such Holder.

(c) Promptly after receipt by an indemnified party under this Section 2.8 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 2.8, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party shall have the right to retain its own counsel, with the fees and expenses thereof to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or

 

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potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action shall relieve such indemnifying party of any liability to the indemnified party under this Section 2.8 to the extent, and only to the extent, prejudicial to its ability to defend such action, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 2.8.

(d) If the indemnification provided for in this Section 2.8 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any losses, claims, damages or liabilities referred to herein, the indemnifying party, in lieu of indemnifying such indemnified party thereunder, shall to the extent permitted by applicable law contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the Violation(s) or Holder Violation(s) that resulted in such loss, claim, damage or liability, as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by a court of law by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission; provided, that in no event shall any contribution by a Holder hereunder, when combined with indemnification pursuant to 2.8(b), exceed the net proceeds from the offering received by such Holder.

(e) The obligations of the Company and Holders under this Section 2.8 shall survive completion of any offering of Registrable Securities in a registration statement and, with respect to liability arising from an offering to which this Section 2.8 would apply that is covered by a registration filed before termination of this Agreement, such termination. No indemnifying party, in the defense of any such claim or litigation, shall, except with the consent of each indemnified party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation.

2.9 Assignment of Registration Rights. The rights to cause the Company to register Registrable Securities pursuant to this Section 2 may be assigned by a Holder to a transferee or assignee of Registrable Securities (for so long as such shares remain Registrable Securities) that (a) is a subsidiary, parent, general partner, limited partner, retired partner, member or retired member, or stockholder of a Holder that is a corporation, partnership or limited liability company, (b) is a Holder’s ancestors, descendants, siblings, spouse or spouse’s siblings or a trust for the benefit of such persons or such Holder or any family partnership, limited liability company or other bona fide estate or personal planning entity for the benefit of such persons or the Holder, or (c) acquires at least Five Million (5,000,000) shares of Registrable Securities (as adjusted for stock splits and combinations) or less than 5,000,000 shares of Registrable Securities if it acquires 100% of an Investor’s Registrable Securities; provided, however, (i) the transferor shall, within ten (10) business days after such transfer, furnish to the Company written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned and (ii) such transferee shall agree to be subject to all restrictions set forth in this Agreement.

 

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2.10 Limitation on Subsequent Registration Rights. Other than as provided in Section 5.10, after the date of this Agreement, the Company shall not enter into any agreement with any holder or prospective holder of any securities of the Company that would grant such holder rights to demand the registration of shares of the Company’s capital stock, or to include such shares in a registration statement that would reduce the number of shares includable by the Holders, without the consent of the holders of at least 70% of the Registrable Securities.

2.11 “Market Stand-Off” Agreement. Each Holder hereby agrees that such Holder shall not sell, transfer, make any short sale of, grant any option for the purchase of, or enter into any hedging or similar transaction with the same economic effect as a sale, any Common Stock (or other securities) of the Company held by such Holder immediately before the effective date of the registration statement for such offering (other than those included in the registration) during the 180-day period following the effective date of the Initial Offering (or such longer period, not to exceed 34 days after the expiration of the 180-day period) as the underwriters or the Company shall request in order to facilitate compliance with NASD Rule 2711 or NYSE Member Rule 472 or any successor or similar rule or regulation); provided, that, all officers and directors of the Company and holders of at least one percent (1%) of the Company’s voting securities are bound by and have entered into similar agreements. The obligations described in this Section 2.11 shall not apply to a registration relating solely to employee benefit plans on Form S-1 or Form S-8 or similar forms that may be promulgated in the future, or a registration relating solely to a transaction on Form S-4 or similar forms that may be promulgated in the future.

2.12 Agreement to Furnish Information. Each Holder agrees to execute and deliver such other agreements as may be reasonably requested by the Company or the underwriter that are consistent with the Holder’s obligations under Section 2.11 or that are necessary to give further effect thereto. In addition, if requested by the Company or the representative of the underwriters of Common Stock (or other securities) of the Company, each Holder shall provide, within ten (10) days of such request, such information as may be required by the Company or such representative in connection with the completion of any public offering of the Company’s securities pursuant to a registration statement filed under the Securities Act. The obligations described in Section 2.11 and this Section 2.12 shall not apply to a Special Registration Statement. The Company may impose stop-transfer instructions with respect to the shares of Common Stock (or other securities) subject to the foregoing restriction until the end of said day period. Each Holder agrees that any transferee of any shares of Registrable Securities shall be bound by Sections 2.11 and 2.12. The underwriters of the Company’s stock are intended third party beneficiaries of Sections 2.11 and 2.12 and shall have the right, power and authority to enforce the provisions hereof as though they were a party hereto.

 

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2.13 Rule 144 Reporting. With a view to making available to the Holders the benefits of certain rules and regulations of the SEC which may permit the sale of the Registrable Securities to the public without registration, the Company agrees to use its best efforts to:

(a) Make and keep public information available, as those terms are understood and defined in SEC Rule 144 or any similar or analogous rule promulgated under the Securities Act, at all times after the effective date of the first registration filed by the Company for an offering of its securities to the general public;

(b) File with the SEC, in a timely manner, all reports and other documents required of the Company under the Exchange Act; and

(c) So long as a Holder owns any Registrable Securities, furnish to such Holder forthwith upon request: a written statement by the Company as to its compliance with the reporting requirements of said Rule 144 of the Securities Act, and of the Exchange Act (at any time after it has become subject to such reporting requirements); a copy of the most recent annual or quarterly report of the Company filed with the Commission; and such other reports and documents as a Holder may reasonably request in connection with availing itself of any rule or regulation of the SEC allowing it to sell any such securities without registration.

2.14 Termination of Registration Rights. The right of any Holder to request registration or inclusion of Registrable Securities in any registration pursuant to Section 2.2, Section 2.3, or Section 2.4 hereof shall terminate upon the earlier of: (i) the date five (5) years following an initial public offering that results in the conversion of all outstanding shares of Preferred Stock; or (ii) the Company has completed its Initial Offering and all Registrable Securities of the Company held by the Holder on the date hereof or issuable or issued upon conversion of the Shares held by and issuable to such Holder (and its affiliates) may be sold pursuant to Rule 144(b)(1)(i). Upon such termination, such shares shall cease to be “Registrable Securities” hereunder for all purposes.

SECTION 3. COVENANTS OF THE COMPANY.

3.1 Basic Financial Information and Reporting.

(a) The Company will maintain true books and records of account in which full and correct entries will be made of all its business transactions (and all those of any subsidiary of the Company) pursuant to a system of accounting established and administered in accordance with generally accepted accounting principles consistently applied (except as noted therein or as disclosed to the recipients thereof), and will set aside on its books all such proper accruals and reserves as shall be required under generally accepted accounting principles consistently applied.

(b) As soon as practicable after the end of each fiscal year of the Company, and in any event within one hundred twenty (120) days thereafter, the Company will furnish to each Major Investor a balance sheet of the Company, as at the end of such fiscal year, and a statement of income and a statement of cash flows of the Company, for such year, all prepared in accordance with generally accepted accounting principles consistently applied (except as noted therein or as disclosed to the recipients thereof) and setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail. Such financial statements shall be audited and accompanied by a report and opinion thereon by independent public accountants selected by the Company’s Board of Directors.

 

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(c) The Company will furnish to each Major Investor, as soon as practicable after the end of the first, second and third quarterly accounting periods in each fiscal year of the Company, and in any event within forty-five (45) days thereafter, a balance sheet of the Company as of the end of each such quarterly period, and a statement of income and a statement of cash flows of the Company for such period and for the current fiscal year to date, prepared in accordance with generally accepted accounting principles consistently applied (except as noted therein or as disclosed to the recipients thereof), with the exception that no notes need be attached to such statements and year-end audit adjustments may not have been made.

(d) The Company will furnish each Major Investor: at least thirty (30) days prior to the beginning of each fiscal year an annual budget and operating plans for such fiscal year, including a detailed marketing plan and capital expenditures budget approved by the Board (and as soon as available, any subsequent written revisions thereto); and, as soon as practicable after the end of each month, and in any event within thirty (30) days thereafter, a balance sheet of the Company as of the end of each such month, and a statement of income and a statement of cash flows of the Company for such month and for the current fiscal year to date, including a comparison to plan figures for such period, prepared in accordance with generally accepted accounting principles consistently applied (except as noted thereon), with the exception that no notes need be attached to such statements and year-end audit adjustments may not have been made.

(e) The Company will promptly furnish notice to each Major Investor of the occurrence of any corporate actions, including, without limitation, stock splits, reverse stock splits, dividends, financings and recapitalizations and such other information that may be reasonably requested by a Major Investor.

(f) If, for any period, the Company has any subsidiary whose accounts are consolidated with those of the Company, then in respect of such period the financial statements delivered pursuant to the foregoing sections shall be the consolidated and consolidating financial statements of the Company and all such consolidated subsidiaries. If, for any period, the Company has any subsidiary whose accounts are not consolidated with those of the Company, then the Company will furnish each Major Investor such information relating to the financial condition, business, prospects, or corporate affairs of such subsidiary as any Major Investor may from time to time reasonably request.

3.2 Inspection Rights. Each Major Investor shall have the right to visit and inspect any of the properties of the Company or any of its subsidiaries, and to discuss the affairs, finances and accounts of the Company or any of its subsidiaries with its officers, and to review such information as is reasonably requested all at such reasonable times and as often as may be reasonably requested; provided, however, that the Company shall not be obligated under this Section 3.2 with respect to a competitor of the Company or with respect to information which the Board of Directors determines in good faith is confidential or attorney-client privileged and should not, therefore, be disclosed.

3.3 Confidentiality of Records. Each Investor agrees to use the same degree of care as such Investor uses to protect its own confidential information to keep confidential any information furnished to such Investor pursuant to Section 3.1 and 3.2 hereof that the Company

 

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identifies as being confidential or proprietary (so long as such information is not in the public domain), except that such Investor may disclose such proprietary or confidential information (i) at such time as it enters the public domain through no fault of such Investor; (ii) that is communicated to it free of any obligation of confidentiality; (iii) that is developed by Investor or its agents independently of and without reference to any confidential information communicated by the Company; or (iv) as required by applicable law; provided, however, that an Investor may disclose confidential information, provided that such recipient is subject to similar confidentiality obligations, (i) to its attorneys, accountants, consultants, and other professionals in connection with monitoring its investment in the Company or in connection with the exercise of such Investor’s rights under this Agreement or (ii) to any affiliate, partner, limited partner, member, stockholder, or wholly owned subsidiary of such Investor in the ordinary course of business. Notwithstanding the foregoing, nothing in this Section 3.3 shall restrict the ability of any Investor that is a venture capital or other private equity firm to disclose the existence and nature of its relationship with the Company to its partners, limited partners, parent entities, affiliates, investors, employees of its affiliates or any other holders of the Company’s stock or to provide its partners, limited partners, parent entities, affiliates, investors, or employees of its affiliates with periodic reports and such other financial information about the Company prepared by such Investor in the ordinary course of its business, provided that any such recipient is subject to similar confidentiality obligations and is not a competitor of the Company.

3.4 No Use of Name. The Company agrees not to use the name of T. Rowe Price Associates, Inc. or the name of any Investor advised by T. Rowe Price Associates, Inc. in connection with any public announcement of the transactions contemplated by the Purchase Agreement and Financing or in any press release without the prior review and express written consent of T. Rowe Price Associates, Inc.; provided, however, that the foregoing shall not preclude the Company from disclosing any Investor advised by T. Rowe Price Associates, Inc. as a stockholder of the Company in connection with the Initial Offering if such disclosure (or any other disclosure) is required by the Securities Act, Exchange Act or other applicable law or regulation. The Company agrees not to use the name of Andreessen Horowitz in connection with any public announcement of the transactions contemplated by the Purchase Agreement and Financing or in any press release without the prior review and express written consent of Andreessen Horowitz, not to be unreasonably withheld; provided, however, that the foregoing shall not preclude the Company from disclosing Andreessen Horowitz as a stockholder of the Company in connection with the Initial Offering if such disclosure (or any other disclosure) is required by the Securities Act, Exchange Act or other applicable law or regulation.

3.5 Reservation of Common Stock. The Company will at all times reserve and keep available, solely for issuance and delivery upon the conversion of the Preferred Stock, all Common Stock issuable from time to time upon such conversion.

3.6 Stock Vesting and Related Equity Provisions. Unless otherwise approved by the Board of Directors, including the representatives designated by the Preferred Stock: (i) all stock options and other stock equivalents issued after the date of this Agreement to employees, directors, consultants and other service providers shall be subject to vesting as follows: (a) twenty-five percent (25%) of such stock shall vest at the end of the first year following the earlier of the date of issuance or such person’s services commencement date with the Company; and (b) seventy-five percent (75%) of such stock shall vest in equal monthly installments over

 

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the remaining three (3) years; (ii) there shall be no acceleration of vesting upon a change of control; (iii) if an employee is terminated or resigns from the Company for any reason, all unvested options will expire immediately, and the employee will have 90 days to exercise all vested options, after which time all unexercised vested options will expire; and (iv) all exercised options shall be subject to a Company right of first refusal (and the Company’s stock option plan or similar plan(s) will contain provisions implementing such requirement).

3.7 Key Man Insurance. The Company will use its best efforts to maintain in full force and effect term life insurance in the amount of two million dollars ($2,000,000) on the life of Darrell Cavens, naming the Company as beneficiary.

3.8 Director and Officer Insurance. The Company will use its best efforts to maintain in full force and effect director and officer liability insurance in the amount of two million dollars ($2,000,000).

3.9 Proprietary Information and Inventions Agreement. The Company shall require all employees and consultants to execute and deliver a Proprietary Information and Inventions Agreement substantially in a form approved by the Company’s counsel or Board of Directors.

3.10 Approval. The Company shall not without the approval of the members of the Board of Directors that are not directly financially interested in such transaction, authorize or enter into any material transaction with any director, officer or holder of more than five percent (5%) of the Company’s outstanding capital stock (on a fully-diluted, as-converted basis), other than modifications to employment or other existing compensation arrangements (including equity incentive grants pursuant to the Company’s 2009 Equity Incentive Plan) consistent with those provided to senior management and previously approved by the Board of Directors or which are otherwise approved by a compensation committee constituted under the Board of Directors.

3.11 Directors’ Liability and Indemnification. The Company’s Fifth Amended and Restated Certificate of Incorporation (as may be amended from time to time, the “Restated Certificate”) and the Company’s Bylaws shall provide (a) for elimination of the liability of director to the maximum extent permitted by law and (b) for indemnification of directors for acts on behalf of the Company to the maximum extent permitted by law. In addition, the Company shall enter into and use its best efforts to at all times maintain indemnification agreements in a form reasonably acceptable to the Investors to indemnify such directors to the maximum extent permissible under applicable law.

3.12 Reimbursement of Travel Expenses. The Company shall reimburse reasonable documented travel expenses incurred by non-employee members of the Board of Directors in connection with their physical attendance at a meeting of the Board of Directors.

3.13 Termination of Covenants. All covenants of the Company contained in Section 3 of this Agreement (other than the provisions of Section 3.3, 3.8 and 3.13) shall expire and terminate as to each Investor upon the earlier of (i) the effective date of the registration statement pertaining to an Initial Offering that results in the Preferred Stock being converted into Common Stock or (ii) upon an “Acquisition” or “Asset Transfer”, each as defined in the Restated Certificate.

 

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SECTION 4. RIGHTS OF FIRST REFUSAL.

4.1 Subsequent Offerings. Subject to applicable securities laws, each Major Investor shall have a right of first refusal to purchase its pro rata share of all Equity Securities, as defined below, that the Company may, from time to time, propose to sell and issue after the date of this Agreement, other than the Equity Securities excluded by Section 4.6 hereof. Each Major Investor’s pro rata share is equal to the ratio of (a) the number of shares of the Company’s Common Stock that are Registrable Securities issued and of which such Major Investor is deemed to be a holder immediately prior to the issuance of such Equity Securities to (b) the total number of shares of the Company’s outstanding Common Stock (including all shares of Common Stock issued or issuable upon conversion of the Shares or upon the exercise of any outstanding warrants or options) immediately prior to the issuance of the Equity Securities; provided, however that in the event that the Equity Securities offered to the Major Investors pursuant to this Section 4.1 are being issued for a price greater than $0.13356 per share (as adjusted for stock splits and combinations), then the number of shares that a Major Investor shall be deemed to be the holder of for purposes of determining such Major Investor’s pro rata share shall not include outstanding shares of Common Stock held by such Major Investor as of July 21, 2010. The term “Equity Securities” shall mean: (i) any Common Stock, Preferred Stock or other security of the Company; (ii) any security convertible into or exercisable or exchangeable for, with or without consideration, any Common Stock, Preferred Stock or other security (including any option to purchase such a convertible security); (iii) any security carrying any warrant or right to subscribe to or purchase any Common Stock, Preferred Stock or other security; or (iv) any such warrant or right.

4.2 Exercise of Rights. If the Company proposes to issue any Equity Securities, it shall give each Major Investor written notice of its intention, describing the Equity Securities, the price and the terms and conditions upon which the Company proposes to issue the same. Each Major Investor shall have fifteen (15) days from the giving of such notice to agree to purchase its pro rata share of the Equity Securities for the price and upon the terms and conditions specified in the notice by giving written notice to the Company and stating therein the quantity of Equity Securities to be purchased. Notwithstanding the foregoing, the Company shall not be required to offer or sell such Equity Securities to any Major Investor who would cause the Company to be in violation of applicable federal securities laws by virtue of such offer or sale. T. Rowe Price may apportion or allocate the right to purchase its pro rata share of Equity Securities under this Section to its advisory clients and in such proportions as it deems appropriate; provided, however if as a result of the foregoing the Company’s total number of stockholders would materially increase, then the Company’s prior approval shall be required.

4.3 Issuance of Equity Securities to Other Persons. If not all of the Major Investors elect to purchase their pro rata share of the Equity Securities, then the Company shall promptly notify in writing the Major Investors who do so elect and shall offer such Major Investors the right to acquire such unsubscribed shares on a pro rata basis. The Major Investors shall have five (5) days after receipt of such notice to notify the Company of its election to purchase all or a portion thereof of the unsubscribed shares. The Company shall have ninety

 

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(90) days thereafter to sell the Equity Securities in respect of which the Major Investor’s rights were not exercised, at a price not lower and upon general terms and conditions not materially more favorable to the purchasers thereof than specified in the Company’s notice to the Major Investors pursuant to Section 4.2 hereof. If the Company has not sold such Equity Securities within ninety (90) days of the notice provided pursuant to Section 4.2, the Company shall not thereafter issue or sell any Equity Securities, without first offering such securities to the Major Investors in the manner provided above.

4.4 Termination and Waiver of Rights of First Refusal. The rights of first refusal established by this Section 4 shall not apply to, and shall terminate upon the earlier of (i) the effective date of the registration statement pertaining to the Company’s Initial Offering or (ii) an Acquisition. Notwithstanding Section 5.5 hereof, the rights of first refusal established by this Section 4 may be amended, or any provision waived, with and only with the written consent of the Company and the Major Investors holding a majority of the Registrable Securities held by all Major Investors; provided, however, that in the event any waiver pursuant to this Section 4.4 results in a reduction in number of shares that would otherwise be allocated to the Major Investors pursuant to the right of first refusal as set forth in Section 4.1, then the allocation of the aggregate number of shares that are available for purchase by all of the Major Investors (after application of the waiver, the “Adjusted Pro Rata Shares”) with respect to each Major Investor shall be equal to such Major Investor’s pro rata share divided by the Adjusted Pro Rata Shares, in each case as calculated immediately prior to the waiver.

4.5 Assignment of Rights of First Refusal. The rights of first refusal of each Major Investor under this Section 4 may be assigned to the same parties, subject to the same restrictions as any transfer of registration rights pursuant to Section 2.9.

4.6 Excluded Securities. The rights of first refusal established by this Section 4 shall have no application to any of the following Equity Securities:

(a) Equity Securities issued upon conversion of the Preferred Stock;

(b) Equity Securities issued pursuant to the exercise of any Equity Securities outstanding as of the date hereof;

(c) Equity Securities issued upon a stock split, stock dividend or any subdivision of Equity Securities;

(d) Equity Securities issued to employees, officers or directors of, or consultants or advisors to the Company or any subsidiary pursuant to stock purchase or stock option plans or other arrangements that are approved by the Board of Directors, including the representatives designated by the Preferred Stock;

(e) Equity Securities issued pursuant to any equipment loan or leasing arrangement, real property leasing arrangement or debt financing from a bank or similar financial institution approved by the Board, including the representatives designated by the Preferred Stock;

 

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(f) Equity Securities issued for consideration other than cash pursuant to a merger, consolidation, acquisition, strategic alliance or similar business combination approved by the Board, including the representatives designated by the Preferred Stock;

(g) Equity Securities issued in connection with strategic transactions involving the Company and other entities, including (i) joint ventures, manufacturing, marketing, supply or distribution arrangements, (ii) technology transfer or development arrangements or (iii) any other arrangement involving corporate partners that are primarily for purposes other than raising capital, the terms of which are approved by the Board, including the representatives designated by the Preferred Stock;

(h) Equity Securities issued pursuant to a Qualified IPO (as defined in the Restated Certificate); and

(i) Equity Securities issued pursuant to the Purchase Agreement and upon conversion of such Equity Securities.

SECTION 5. MISCELLANEOUS.

5.1 Governing Law. This Agreement shall be governed by and construed under the laws of the State of Delaware in all respects as such laws are applied to agreements among Delaware residents entered into and to be performed entirely within Delaware, without reference to conflicts of laws or principles thereof.

5.2 Successors and Assigns. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the parties hereto and their respective successors, assigns, heirs, executors, and administrators and shall inure to the benefit of and be enforceable by each person who shall be a holder of Registrable Securities from time to time; provided, however, that prior to the receipt by the Company of adequate written notice of the transfer of any Registrable Securities specifying the full name and address of the transferee, the Company may deem and treat the person listed as the holder of such shares in its records as the absolute owner and holder of such shares for all purposes, including the payment of dividends or any redemption price.

5.3 Entire Agreement. This Agreement, the Exhibits and Schedules hereto, the Purchase Agreement and the other documents delivered pursuant thereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and no party shall be liable or bound to any other in any manner by any oral or written representations, warranties, covenants and agreements except as specifically set forth herein and therein. Each party expressly represents and warrants that it is not relying on any oral or written representations, warranties, covenants or agreements outside of this Agreement.

5.4 Severability. In the event one or more of the provisions of this Agreement should, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provisions of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein.

 

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5.5 Amendment and Waiver.

(a) Except as otherwise expressly provided, this Agreement may be amended or modified, and the obligations of the Company and the rights of the Holders under this Agreement may be waived, only upon the written consent of the Company and the holders of at least 70% of the then-outstanding Registrable Securities; provided, however, that any amendment that uniquely and adversely affects an Investor shall require the written consent of that Investor.

(b) For the purposes of determining the number of Holders or Investors entitled to vote or exercise any rights hereunder, the Company shall be entitled to rely solely on the list of record holders of its stock as maintained by or on behalf of the Company.

5.6 Delays or Omissions. It is agreed that no delay or omission to exercise any right, power, or remedy accruing to any party, upon any breach, default or noncompliance by another party under this Agreement shall impair any such right, power, or remedy, nor shall it be construed to be a waiver of any such breach, default or noncompliance, or any acquiescence therein, or of any similar breach, default or noncompliance thereafter occurring. It is further agreed that any waiver, permit, consent, or approval of any kind or character on any party’s part of any breach, default or noncompliance under the Agreement or any waiver on such party’s part of any provisions or conditions of this Agreement must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement, by law, or otherwise afforded to any party, shall be cumulative and not alternative.

5.7 Notices. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified, (b) when sent by confirmed electronic mail or facsimile if sent during normal business hours of the recipient; if not, then on the next business day, (c) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (d) one (1) business day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the party to be notified at the address as set forth on the signature pages hereof or Exhibit A hereto or at such other address or electronic mail address as such party may designate by ten (10) days advance written notice to the other parties hereto.

5.8 Attorneys’ Fees. In the event that any suit or action is instituted under or in relation to this Agreement, including without limitation to enforce any provision in this Agreement, the substantially prevailing party in such dispute shall be entitled to recover from the losing party all fees, costs and expenses of enforcing any right of such substantially prevailing party under or with respect to this Agreement, including without limitation, such reasonable fees and expenses of attorneys and accountants, which shall include, without limitation, all fees, costs and expenses of appeals.

5.9 Titles and Subtitles. The titles of the sections and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement.

 

22.


5.10 Additional Investors. Notwithstanding anything to the contrary contained herein, if the Company shall issue additional shares of its Preferred Stock pursuant to the Purchase Agreement, any purchaser of such shares of Preferred Stock shall become a party to this Agreement by executing and delivering an additional counterpart signature page to this Agreement and shall be deemed an “Investor,” a “Holder” and a party hereunder. Notwithstanding anything to the contrary contained herein, if the Company shall issue Equity Securities in accordance with Section 4.6 (e), (f) or (i) of this Agreement, any purchaser of such Equity Securities may become a party to this Agreement by executing and delivering an additional counterpart signature page to this Agreement and shall be deemed an “Investor,” a “Holder” and a party hereunder.

5.11 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument.

5.12 Aggregation of Stock. All shares of Registrable Securities held or acquired by affiliated entities or persons or persons or entities under common management or control shall be aggregated together for the purpose of determining the availability of any rights under this Agreement.

5.13 Pronouns. All pronouns contained herein, and any variations thereof, shall be deemed to refer to the masculine, feminine or neutral, singular or plural, as to the identity of the parties hereto may require.

5.14 Termination. This Agreement shall terminate and be of no further force or effect upon the earlier of (i) the closing of an Acquisition or Asset Transfer; or (ii) the date five (5) years following the Closing of the Initial Offering that results in the conversion of all outstanding shares of Preferred Stock.

[THIS SPACE INTENTIONALLY LEFT BLANK]

 

23.


IN WITNESS WHEREOF, the parties hereto have executed this THIRD AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT as of the date set forth in the first paragraph hereof.

 

COMPANY:
ZULILY, INC.
Signature:  

/s/ Darrell Cavens

  Darrell Cavens,
  Chief Executive Officer
Address:  

2200 First Avenue South

 

Seattle, WA 98134

[SIGNATURE PAGE TO THIRD AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT]


IN WITNESS WHEREOF, the parties hereto have executed this THIRD AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT as of the date set forth in the first paragraph hereof.

 

INVESTORS:

ANDREESSEN HOROWITZ FUND III, L.P.

for itself and as nominee for

Andreessen Horowitz Fund III-A, L.P.,
Andreessen Horowitz Fund III-B, L.P. and
Andreessen Horowitz Fund III-Q, L.P.
By:   AH Equity Partners III, L.L.C.
  Its general partner
By:  

/s/ Ben Horowitz

Name:  
Title:  
AH PARALLEL FUND III, L.P.
for itself and as nominee for
AH Parallel Fund III-A, L.P.,
AH Parallel Fund III-B, L.P. and
AH Parallel Fund III-Q, L.P.
By:   AH Equity Partners III (Parallel), L.L.C.
  Its general partner
By:  

/s/ Ben Horowitz

Name:  
Title:  

 

[SIGNATURE PAGE TO THIRD AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT]


IN WITNESS WHEREOF, the parties hereto have executed this THIRD AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT as of the date set forth in the first paragraph hereof.

 

INVESTORS:
MERITECH CAPITAL PARTNERS IV L.P.
By:   Meritech Capital Associates IV L.L.C.
  its General Partner
By:  

/s/ Craig Sherman

  Craig Sherman, a managing member
MERITECH CAPITAL AFFILIATES IV L.P.
By:   Meritech Capital Associates IV L.L.C.
  its General Partner
By:  

/s/ Craig Sherman

  Craig Sherman, a managing member
Address:
245 Lytton Avenue, Suite 350
Palo Alto, CA 94301

Attn: Joel Backman

phone: (650) 475-2200

fax: (650) 475-2222

 

[SIGNATURE PAGE TO THIRD AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT]


IN WITNESS WHEREOF, the parties hereto have executed this THIRD AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT as of the date set forth in the first paragraph hereof.

 

INVESTORS:

MAVERON EQUITY PARTNERS IV, L.P.,

a Delaware limited partnership:

  By:   MAVERON GENERAL PARTNER IV LLC,
    a Delaware limited liability company
By:  

/s/ Pete McCormick

Name:  

Pete McCormick

Title:   Managing Member

MAVERON IV ENTREPRENEURS’ FUND, L.P.,

a Delaware limited partnership:

  By:   MAVERON GENERAL PARTNER IV LLC,
    a Delaware limited liability company
By:  

/s/ Pete McCormick

Name:  

Pete McCormick

Title:   Managing Member

MEP ASSOCIATES IV, L.P.,

a Delaware limited partnership:

  By:   MAVERON GENERAL PARTNER IV LLC,
    a Delaware limited liability company
By:  

/s/ Pete McCormick

Name:  

Pete McCormick

Title:   Managing Member

 

[SIGNATURE PAGE TO THIRD AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT]


IN WITNESS WHEREOF, the parties hereto have executed this THIRD AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT as of the date set forth in the first paragraph hereof.

 

INVESTORS:

  T. ROWE PRICE ASSOCIATES, INC.

  Investment Adviser, for and on behalf of its

  Advisory Clients on Exhibit A

  T. Rowe Price New Horizons Fund, Inc.

  T. Rowe Price New Horizons Trust

  T. Rowe Price U.S. Equities Trust

  By:  

/s/ Henry Ellenbogen

  Name:  

Henry Ellenbogen

  Title:  

Vice President

 

[SIGNATURE PAGE TO THIRD AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT]


IN WITNESS WHEREOF, the parties hereto have executed this THIRD AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT as of the date set forth in the first paragraph hereof.

 

INVESTORS:
AUGUST CAPITAL V, L.P.
as nominee for
August Capital V, L.P.

August Capital Strategic Partners V, L.P. and

related individuals

By:   August Capital Management V, L.L.C.
  Its general partner
By:  

/s/ Steven Simonian

Name:  

Steven Simonian

Title:   Attorney-in-fact

 

[SIGNATURE PAGE TO THIRD AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT]


IN WITNESS WHEREOF, the parties hereto have executed this THIRD AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT as of the date set forth in the first paragraph hereof.

 

INVESTORS:
TRINITY VENTURES X, L.P.
TRINITY X SIDE-BY-SIDE FUND, L.P.
TRINITY X ENTREPRENEURS’ FUND, L.P.
Delaware Limited Partnerships
By:   TRINITY TVL X, LLC,
  A Delaware limited liability company
  Their General Partner
By:  

/s/ Kathleen A. Murphy

  Kathleen A. Murphy, Member
  3000 Sand Hill Road
  Building 4-160
  Menlo Park, CA 94025
  Tel. 650-854-9500
  Fax 650-854-9501
TRINITY VENTURES IX, L.P.
TRINITY IX SIDE-BY-SIDE FUND, L.P.
TRINITY IX ENTREPRENEURS’ FUND, L.P.
Delaware Limited Partnerships
By:   TRINITY TVL IX, LLC,
  A Delaware limited liability company
  Their General Partner
By:  

/s/ Kathleen A. Murphy

  Kathleen A. Murphy, Member
  3000 Sand Hill Road
  Building 4-160
  Menlo Park, CA 94025
  Tel. 650-854-9500
  Fax 650-854-9501

 

[SIGNATURE PAGE TO THIRD AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT]


IN WITNESS WHEREOF, the parties hereto have executed this THIRD AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT as of the date set forth in the first paragraph hereof.

 

INVESTORS:
  Greenspring Global Partners IV-A, L.P.
  By: Greenspring General Partner IV, L.P.
  By: Greenspring GP IV, LLC
  By:  

/s/ Eric Thompson

  Name:   Eric Thompson
  Title:   Chief Financial Officer
  Greenspring Global Partners IV-B, L.P.
  By: Greenspring General Partner IV, L.P.
  By: Greenspring GP IV, LLC
  By:  

/s/ Eric Thompson

  Name:   Eric Thompson
  Title:   Chief Financial Officer
  Greenspring Global Partners IV-C, L.P.
  By: Greenspring General Partner IV, L.P.
  By: Greenspring GP IV, LLC
  By:  

/s/ Eric Thompson

  Name:   Eric Thompson
  Title:   Chief Financial Officer
  Greenspring Crossover Ventures I, L.P.
  By: Greenspring Crossover I GP, L.P.
  By: Greenspring Crossover I GP, L.L.C.
  By:  

/s/ Eric Thompson

  Name:   Eric Thompson
  Title:   Chief Financial Officer
  Address:
  Greenspring Associates
  100 Painters Mill Road, Suite 700
  Owings Mills, MD 21117

  Fax: (410) 363-9075

  Attn: Eric Thompson

 

[SIGNATURE PAGE TO THIRD AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT]


IN WITNESS WHEREOF, the parties hereto have executed this THIRD AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT as of the date set forth in the first paragraph hereof.

 

INVESTORS:
MARK VADON
By:  

/s/ Mark Vadon

VADON HOLDINGS, LLC
By:  

/s/ Mark Vadon

Name:  

Mark Vadon

Title:  

Manager

 

[SIGNATURE PAGE TO THIRD AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT]


IN WITNESS WHEREOF, the parties hereto have executed this THIRD AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT as of the date set forth in the first paragraph hereof.

 

INVESTORS:
DIANE IRVINE
By:  

 

ERIC CARLBORG
By:  

/s/ Eric Carlborg

 

[SIGNATURE PAGE TO THIRD AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT]


IN WITNESS WHEREOF, the parties hereto have executed this THIRD AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT as of the date set forth in the first paragraph hereof.

 

INVESTORS:
GC&H INVESTMENTS, LLC
By:  

/s/ Kenneth L. Guernsey

  Kenneth L. Guernsey, Managing Member
GC&H INVESTMENTS
By:  

/s/ Kenneth L. Guernsey

  Kenneth L. Guernsey, Executive Partner

 

[SIGNATURE PAGE TO THIRD AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT]


IN WITNESS WHEREOF, the parties hereto have executed this THIRD AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT as of the date set forth in the first paragraph hereof.

 

INVESTORS:
  HOPUR LLC
  By:  

/s/ Robert P. Holding, IV

  Name:  

Robert P. Holding, IV

  Title:  

Manager

 

[SIGNATURE PAGE TO THIRD AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT]


EXHIBIT A

SCHEDULE OF INVESTORS

Andreessen Horowitz Fund III, L.P.

2865 Sand Hill Road, Suite 101

Menlo Park, CA 94025

Attn: Shawn Conway

AH Parallel Fund III, L.P.

2865 Sand Hill Road, Suite 101

Menlo Park, CA 94025

Attn: Shawn Conway

Maveron Equity Partners IV, L.P.

411 First Avenue South, Suite 600

Seattle, WA 98104

Attn: Dan Levitan

MEP Associates IV, L.P.

411 First Avenue South, Suite 600

Seattle, WA 98104

Attn: Dan Levitan

Maveron IV Entrepreneurs’ Fund, L.P.

411 First Avenue South, Suite 600

Seattle, WA 98104

Attn: Dan Levitan

Mark Vadon

Vadon Holdings, LLC

Diane Irvine

Eric Carlborg

 

A-1

SCHEDULE OF INVESTORS


August Capital V, L.P.

2480 Sand Hill Road, Suite 101

Menlo Park, CA 94025

Attn: Eric Carlborg and Katherine Blum

Trinity Ventures IX, L.P.

3000 Sand Hill Road

Building 4-160

Menlo Park, CA 94025

Attn: Kathleen A. Murphy

Trinity IX Side-By-Side Fund, L.P.

3000 Sand Hill Road

Building 4-160

Menlo Park, CA 94025

Attn: Kathleen A. Murphy

Trinity IX Entrepreneurs’ Fund, L.P.

3000 Sand Hill Road

Building 4-160

Menlo Park, CA 94025

Attn: Kathleen A. Murphy

Trinity Ventures X, L.P.

3000 Sand Hill Road

Building 4-160

Menlo Park, CA 94025

Attn: Kathleen A. Murphy

Trinity X Side-By-Side Fund, L.P.

3000 Sand Hill Road

Building 4-160

Menlo Park, CA 94025

Attn: Kathleen A. Murphy

 

SCHEDULE OF INVESTORS


Trinity X Entrepreneurs’ Fund, L.P.

3000 Sand Hill Road

Building 4-160

Menlo Park, CA 94025

Attn: Kathleen A. Murphy

Meritech Capital Partners IV L.P.

245 Lytton Avenue, Suite 350

Palo Alto, CA 94301

Attn: Joel Backman

phone: (650) 475-2200

fax: (650) 475-2222

Meritech Capital Affiliates IV L.P.

245 Lytton Avenue, Suite 350

Palo Alto, CA 94301

Attn: Joel Backman

phone: (650) 475-2200

fax: (650) 475-2222

T. ROWE PRICE NEW HORIZONS FUND, INC. (7001)

c/o T. Rowe Price Associates, Inc.

100 East Pratt Street

Baltimore, MD 21202

Attn: Andrew Baek, Vice President and Senior Legal Counsel

T. ROWE PRICE NEW HORIZONS TRUST (4679)

c/o T. Rowe Price Associates, Inc.

100 East Pratt Street

Baltimore, MD 21202

Attn: Andrew Baek, Vice President and Senior Legal Counsel

T. Rowe Price U.S. Equities Trust (7JX4)

c/o T. Rowe Price Associates, Inc.

100 East Pratt Street

Baltimore, MD 21202

Attn: Andrew Baek, Vice President and Senior Legal Counsel

Greenspring Global Partners IV-A, L.P.

100 Painters Mill Road, Suite 700

Owings Mills, MD 21117

Fax: (410) 363-9075

Attn: Eric Thompson

 

SCHEDULE OF INVESTORS


Greenspring Global Partners IV-B, L.P.

100 Painters Mill Road, Suite 700

Owings Mills, MD 21117

Fax: (410) 363-9075

Attn: Eric Thompson

Greenspring Global Partners IV-C, L.P.

100 Painters Mill Road, Suite 700

Owings Mills, MD 21117

Fax: (410) 363-9075

Attn: Eric Thompson

Greenspring Crossover Ventures I, L.P.

100 Painters Mill Road, Suite 700

Owings Mills, MD 21117

Fax: (410) 363-9075

Attn: Eric Thompson

GC&H INVESTMENTS, LLC

101 California St., 5th Floor

San Francisco, CA 94111

Attn: Jim Kindler

GC&H INVESTMENTS

101 California St., 5th Floor

San Francisco, CA 94111

Attn: Jim Kindler

HOPUR LLC

1434B Elliott Ave. West

Seattle, WA 98119

 

SCHEDULE OF INVESTORS


zulily, inc. 2009 Equity Incentive Plan

Exhibit 10.1

ZULILY, INC.

2009 EQUITY INCENTIVE PLAN

ADOPTED BY THE BOARD OF DIRECTORS: DECEMBER 3, 2009

APPROVED BY THE STOCKHOLDERS: DECEMBER 3, 2009

TERMINATION DATE: DECEMBER 2, 2019

1. GENERAL.

(a) Eligible Stock Award Recipients. The persons eligible to receive Stock Awards are Employees, Directors and Consultants.

(b) Available Stock Awards. The Plan provides for the grant of the following Stock Awards: (i) Incentive Stock Options, (ii) Nonstatutory Stock Options, (iii) Stock Appreciation Rights, (iv) Restricted Stock Awards, and (v) Restricted Stock Unit Awards.

(c) Purpose. The Company, by means of the Plan, seeks to secure and retain the services of the group of persons eligible to receive Stock Awards as set forth in Section 1(a), to provide incentives for such persons to exert maximum efforts for the success of the Company and any Affiliate, and to provide a means by which such eligible recipients may be given an opportunity to benefit from increases in value of the Common Stock through the granting of Stock Awards.

2. ADMINISTRATION.

(a) Administration by Board. The Board shall administer the Plan unless and until the Board delegates administration of the Plan to a Committee or Committees, as provided in Section 2(c).

(b) Powers of Board. The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan:

(i) To determine from time to time (A) which of the persons eligible under the Plan shall be granted Stock Awards; (B) when and how each Stock Award shall be granted; (C) what type or combination of types of Stock Award shall be granted; (D) the provisions of each Stock Award granted (which need not be identical), including the time or times when a person shall be permitted to receive cash or Common Stock pursuant to a Stock Award; (E) the number of shares of Common Stock with respect to which a Stock Award shall be granted to each such person; and (F) the Fair Market Value applicable to a Stock Award.

(ii) To construe and interpret the Plan and Stock Awards granted under it, and to establish, amend and revoke rules and regulations for administration of the Plan. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any Stock Award Agreement, in a manner and to the extent it shall deem necessary or expedient to make the Plan or Stock Award fully effective.

 

1.


(iii) To settle all controversies regarding the Plan and Stock Awards granted under it.

(iv) To accelerate the time at which a Stock Award may first be exercised or the time during which a Stock Award or any part thereof will vest in accordance with the Plan, notwithstanding the provisions in the Stock Award stating the time at which it may first be exercised or the time during which it will vest.

(v) To suspend or terminate the Plan at any time. Suspension or termination of the Plan shall not impair rights and obligations under any Stock Award granted while the Plan is in effect except with the written consent of the affected Participant.

(vi) To amend the Plan in any respect the Board deems necessary or advisable, including, without limitation, amendments relating to Incentive Stock Options and certain nonqualified deferred compensation under Section 409A of the Code and/or to bring the Plan or Stock Awards granted under the Plan into compliance therewith, subject to the limitations, if any, of applicable law. However, except as provided in Section 9(a) relating to Capitalization Adjustments, to the extent required by applicable law, stockholder approval shall be required for any amendment of the Plan that either (A) materially increases the number of shares of Common Stock available for issuance under the Plan, (B) materially expands the class of individuals eligible to receive Stock Awards under the Plan, (C) materially increases the benefits accruing to Participants under the Plan or materially reduces the price at which shares of Common Stock may be issued or purchased under the Plan, (D) materially extends the term of the Plan, or (E) expands the types of Stock Awards available for issuance under the Plan. Except as provided above, rights under any Stock Award granted before amendment of the Plan shall not be impaired by any amendment of the Plan unless (1) the Company requests the consent of the affected Participant, and (2) such Participant consents in writing.

(vii) To submit any amendment to the Plan for stockholder approval, including, but not limited to, amendments to the Plan intended to satisfy the requirements of Section 422 of the Code regarding Incentive Stock Options.

(viii) To approve forms of Stock Award Agreements for use under the Plan and to amend the terms of any one or more Stock Awards, including, but not limited to, amendments to provide terms more favorable to the Participant than previously provided in the Stock Award Agreement, subject to any specified limits in the Plan that are not subject to Board discretion; provided however, that, the rights under any Stock Award shall not be impaired by any such amendment unless (A) the Company requests the consent of the affected Participant, and (B) such Participant consents in writing. Notwithstanding the foregoing, subject to the limitations of applicable law, if any, and without the affected Participant’s consent, the Board may amend the terms of any one or more Stock Awards if necessary to maintain the qualified status of the Stock Award as an Incentive Stock Option or to bring the Stock Award into compliance with Section 409A of the Code.

 

2.


(ix) Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company and that are not in conflict with the provisions of the Plan or Stock Awards.

(x) To adopt such procedures and sub-plans as are necessary or appropriate to permit participation in the Plan by Employees, Directors or Consultants who are foreign nationals or employed outside the United States.

(xi) To effect, at any time and from time to time, with the consent of any adversely affected Participant, (A) the reduction of the exercise price (or strike price) of any outstanding Option or SAR under the Plan, (B) the cancellation of any outstanding Option or SAR under the Plan and the grant in substitution therefore of (1) a new Option or SAR under the Plan or another equity plan of the Company covering the same or a different number of shares of Common Stock, (2) a Restricted Stock Award, (3) a Restricted Stock Unit Award, (4) cash and/or (5) other valuable consideration (as determined by the Board, in its sole discretion), or (C) any other action that is treated as a repricing under generally accepted accounting principles; provided, however, that no such reduction or cancellation may be effected if it is determined, in the Company’s sole discretion, that such reduction or cancellation would result in any such outstanding Option becoming subject to the requirements of Section 409A of the Code.

(c) Delegation to Committee. The Board may delegate some or all of the administration of the Plan to a Committee or Committees. If administration of the Plan is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board that have been delegated to the Committee, including the power to delegate to a subcommittee of the Committee any of the administrative powers the Committee is authorized to exercise (and references in this Plan to the Board shall thereafter be to the Committee or subcommittee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may retain the authority to concurrently administer the Plan with the Committee and may, at any time, revest in the Board some or all of the powers previously delegated.

(d) Delegation to an Officer. The Board may delegate to one or more Officers of the Company the authority to do one or both of the following: (i) designate Officers and Employees of the Company or any of its Subsidiaries to be recipients of Options and Stock Appreciation Rights (and, to the extent permitted by applicable law, other Stock Awards) and the terms thereof, and (ii) determine the number of shares of Common Stock to be subject to such Stock Awards granted to such Officers and Employees; provided, however, that the Board resolutions regarding such delegation shall specify the total number of shares of Common Stock that may be subject to the Stock Awards granted by such Officer and that such Officer may not grant a Stock Award to himself or herself. Notwithstanding the foregoing, the Board may not delegate authority to an Officer to determine the Fair Market Value pursuant to Section 13(t) below.

(e) Effect of Board’s Decision. All determinations, interpretations and constructions made by the Board in good faith shall not be subject to review by any person and shall be final, binding and conclusive on all persons.

 

3.


(f) Arbitration. Any dispute or claim concerning any Stock Awards granted (or not granted) or any disputes or claims relating to or arising out of the Plan shall be fully, finally and exclusively resolved by binding and confidential arbitration conducted pursuant to the rules of Judicial Arbitration and Mediation Services, Inc. (“JAMS”) in King County, Washington. The Company shall pay all arbitration fees. In addition to any other relief, the arbitrator may award to the prevailing party recovery of its attorneys’ fees and costs. By accepting a Stock Award, Participants and the Company waive their respective rights to have any such disputes or claims tried by a judge or jury.

3. SHARES SUBJECT TO THE PLAN.

(a) Share Reserve. Subject to the provisions of Section 9(a) relating to Capitalization Adjustments, the aggregate number of shares of Common Stock that may be issued pursuant to Stock Awards beginning on the Effective Date shall not exceed seventy-two million four hundred twenty-one thousand two hundred fifty-two (72,421,252) shares (the “Share Reserve”). Furthermore, if a Stock Award (i) expires or otherwise terminates without having been exercised in full or (ii) is settled in cash (i.e., the holder of the Stock Award receives cash rather than stock), such expiration, termination or settlement shall not reduce (or otherwise offset) the number of shares of Common Stock that may be issued pursuant to the Plan. For clarity, the limitation in this Section 3(a) is a limitation in the number of shares of Common Stock that may be issued pursuant to the Plan. Accordingly, this Section 3(a) does not limit the granting of Stock Awards except as provided in Section 7(a).

(b) Reversion of Shares to the Share Reserve. If any shares of Common Stock issued pursuant to a Stock Award are forfeited back to the Company because of the failure to meet a contingency or condition required to vest such shares in the Participant, then the shares which are forfeited shall revert to and again become available for issuance under the Plan. Also, any shares reacquired by the Company pursuant to Section 8(g) or as consideration for the exercise of an Option shall again become available for issuance under the Plan. Notwithstanding the provisions of this Section 3(b), any such shares shall not be subsequently issued pursuant to the exercise of Incentive Stock Options.

(c) Incentive Stock Option Limit. Notwithstanding anything to the contrary in this Section 3(c), subject to the provisions of Section 9(a) relating to Capitalization Adjustments, the aggregate maximum number of shares of Common Stock that may be issued pursuant to the exercise of Incentive Stock Options shall be seventy-two million four hundred twenty-one thousand two hundred fifty-two (72,421,252) shares of Common Stock.

(d) Source of Shares. The stock issuable under the Plan shall be shares of authorized but unissued or reacquired Common Stock, including shares repurchased by the Company on the open market or otherwise.

4. ELIGIBILITY.

(a) Eligibility for Specific Stock Awards. Incentive Stock Options may be granted only to employees of the Company or a “parent corporation” or “subsidiary corporation” thereof

 

4.


(as such terms are defined in Sections 424(e) and (f) of the Code). Stock Awards other than Incentive Stock Options may be granted to Employees, Directors and Consultants; provided, however, Nonstatutory Stock Options and SARs may not be granted to Employees, Directors and Consultants who are providing Continuous Service only to any “parent” of the Company, as such term is defined in Rule 405, unless the stock underlying such Stock Awards is treated as “service recipient stock” under Section 409A of the Code because the Stock Awards are granted pursuant to a corporate transaction (such as a spin off transaction) or unless such Stock Awards comply with the distribution requirements of Section 409A of the Code.

(b) Ten Percent Stockholders. A Ten Percent Stockholder shall not be granted an Incentive Stock Option unless the exercise price of such Option is at least one hundred ten percent (110%) of the Fair Market Value on the date of grant and the Option is not exercisable after the expiration of five (5) years from the date of grant.

(c) Consultants. A Consultant shall not be eligible for the grant of a Stock Award if, at the time of grant, either the offer or the sale of the Company’s securities to such Consultant is not exempt under Rule 701 because of the nature of the services that the Consultant is providing to the Company, because the Consultant is not a natural person, or because of any other provision of Rule 701, unless the Company determines that such grant need not comply with the requirements of Rule 701 and will satisfy another exemption under the Securities Act as well as comply with the securities laws of all other relevant jurisdictions.

5. PROVISIONS RELATING TO OPTIONS AND STOCK APPRECIATION RIGHTS.

Each Option or SAR shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. All Options shall be separately designated Incentive Stock Options or Nonstatutory Stock Options at the time of grant, and, if certificates are issued, a separate certificate or certificates shall be issued for shares of Common Stock purchased on exercise of each type of Option. If an Option is not specifically designated as an Incentive Stock Option, then the Option shall be a Nonstatutory Stock Option. The provisions of separate Options or SARs need not be identical; provided, however, that each Option Agreement or Stock Appreciation Right Agreement shall conform to (through incorporation of provisions hereof by reference in the applicable Stock Award Agreement or otherwise) the substance of each of the following provisions:

(a) Term. Subject to the provisions of Section 4(b) regarding Ten Percent Stockholders, no Option or SAR shall be exercisable after the expiration of ten (10) years from the date of its grant or such shorter period specified in the Stock Award Agreement.

(b) Exercise Price. Subject to the provisions of Section 4(b) regarding Incentive Stock Options granted to Ten Percent Stockholders, the exercise price (or strike price) of each Option or SAR shall be not less than one hundred percent (100%) of the Fair Market Value of the Common Stock subject to the Option or SAR on the date the Option or SAR is granted. Notwithstanding the foregoing, an Option or SAR may be granted with an exercise price (or strike price) lower than one hundred percent (100%) of the Fair Market Value of the Common Stock subject to the Option or SAR if such Option or SAR is granted pursuant to an assumption

 

5.


of or substitution for another option or stock appreciation right pursuant to a Corporate Transaction and in a manner consistent with the provisions of Sections 409A and 424(a) of the Code (whether or not such Stock Awards are Incentive Stock Options). Each SAR will be denominated in shares of Common Stock equivalents.

(c) Consideration for Options. The purchase price of Common Stock acquired pursuant to the exercise of an Option shall be paid, to the extent permitted by applicable law and as determined by the Board in its sole discretion, by any combination of the methods of payment set forth below. The Board shall have the authority to grant Options that do not permit all of the following methods of payment (or otherwise restrict the ability to use certain methods) and to grant Options that require the consent of the Company to utilize a particular method of payment. The permitted methods of payment are as follows:

(i) by cash, check, bank draft or money order payable to the Company;

(ii) pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board that, prior to the issuance of the stock subject to the Option, results in either the receipt of cash (or check) by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to the Company from the sales proceeds;

(iii) by delivery to the Company (either by actual delivery or attestation) of shares of Common Stock;

(iv) if the Option is a Nonstatutory Stock Option, by a “net exercise” arrangement pursuant to which the Company will reduce the number of shares of Common Stock issuable upon exercise by the largest whole number of shares with a Fair Market Value that does not exceed the aggregate exercise price; provided, however, that the Company shall accept a cash or other payment from the Participant to the extent of any remaining balance of the aggregate exercise price not satisfied by such reduction in the number of whole shares to be issued; provided, further, that shares of Common Stock will no longer be subject to an Option and will not be exercisable thereafter to the extent that (A) shares issuable upon exercise are reduced to pay the exercise price pursuant to the “net exercise,” (B) shares are delivered to the Participant as a result of such exercise, and (C) shares are withheld to satisfy tax withholding obligations;

(v) according to a deferred payment or similar arrangement with the Optionholder; provided, however, that interest shall compound at least annually and shall be charged at the minimum rate of interest necessary to avoid (A) the imputation of interest income to the Company and compensation income to the Optionholder under any applicable provisions of the Code, and (B) the classification of the Option as a liability for financial accounting purposes; or

(vi) in any other form of legal consideration that may be acceptable to the Board.

(d) Exercise and Payment of a SAR. To exercise any outstanding Stock Appreciation Right, the Participant must provide written notice of exercise to the Company in

 

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compliance with the provisions of the Stock Appreciation Right Agreement evidencing such Stock Appreciation Right. The appreciation distribution payable on the exercise of a Stock Appreciation Right will be not greater than an amount equal to the excess of (A) the aggregate Fair Market Value (on the date of the exercise of the Stock Appreciation Right) of a number of shares of Common Stock equal to the number of Common Stock equivalents in which the Participant is vested under such Stock Appreciation Right, and with respect to which the Participant is exercising the Stock Appreciation Right on such date, over (B) the strike price that will be determined by the Board at the time of grant of the Stock Appreciation Right. The appreciation distribution in respect to a Stock Appreciation Right may be paid in Common Stock, in cash, in any combination of the two or in any other form of consideration, as determined by the Board and contained in the Stock Appreciation Right Agreement evidencing such Stock Appreciation Right.

(e) Transferability of Options and SARs. The Board may, in its sole discretion, impose such limitations on the transferability of Options and SARs as the Board shall determine. In the absence of such a determination by the Board to the contrary, the following restrictions on the transferability of Options and SARs shall apply:

(i) Restrictions on Transfer. An Option or SAR shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the Participant only by the Participant; provided, however, that the Board may, in its sole discretion, permit transfer of the Option or SAR to such extent as permitted by Rule 701 and in a manner consistent with applicable tax and securities laws upon the Participant’s request.

(ii) Domestic Relations Orders. Notwithstanding the foregoing, an Option or SAR may be transferred pursuant to a domestic relations order; provided, however, that if an Option is an Incentive Stock Option, such Option may be deemed to be a Nonstatutory Stock Option as a result of such transfer.

(iii) Beneficiary Designation. Notwithstanding the foregoing, the Participant may, by delivering written notice to the Company, in a form provided by or otherwise satisfactory to the Company and any broker designated by the Company to effect Option exercises, designate a third party who, in the event of the death of the Participant, shall thereafter be entitled to exercise the Option or SAR and receive the Common Stock or other consideration resulting from such exercise. In the absence of such a designation, the executor or administrator of the Participant’s estate shall be entitled to exercise the Option or SAR and receive the Common Stock or other consideration resulting from such exercise.

(f) Vesting Generally. The total number of shares of Common Stock subject to an Option or SAR may vest and therefore become exercisable in periodic installments that may or may not be equal. The Option or SAR may be subject to such other terms and conditions on the time or times when it may or may not be exercised (which may be based on the satisfaction of performance goals or other criteria) as the Board may deem appropriate. The vesting provisions of individual Options or SARs may vary. The provisions of this Section 5(f) are subject to any Option or SAR provisions governing the minimum number of shares of Common Stock as to which an Option or SAR may be exercised.

 

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(g) Termination of Continuous Service. Except as otherwise provided in the applicable Stock Award Agreement or other agreement between the Participant and the Company, in the event that a Participant’s Continuous Service terminates (other than for Cause or upon the Participant’s death or Disability), the Participant may exercise his or her Option or SAR (to the extent that the Participant was entitled to exercise such Stock Award as of the date of termination of Continuous Service) but only within such period of time ending on the earlier of (i) the date three (3) months following the termination of the Participant’s Continuous Service (or such longer or shorter period specified in the Stock Award Agreement, which period shall not be less than thirty (30) days if necessary to comply with applicable state laws unless such termination is for Cause) or (ii) the expiration of the term of the Option or SAR as set forth in the Stock Award Agreement. If, after termination of Continuous Service, the Participant does not exercise his or her Option or SAR within the time specified herein or in the Stock Award Agreement (as applicable), the Option or SAR shall terminate.

(h) Extension of Termination Date. Except as otherwise provided in the applicable Stock Award Agreement or other agreement between the Participant and the Company, if the exercise of an Option or SAR following the termination of the Participant’s Continuous Service (other than for Cause or upon the Participant’s death or Disability) would be prohibited at any time solely because the issuance of shares of Common Stock would violate the registration requirements under the Securities Act, then the Option or SAR shall terminate on the earlier of (i) the expiration of a period of three (3) months after the termination of the Participant’s Continuous Service during which the exercise of the Option or SAR would not be in violation of such registration requirements, or (ii) the expiration of the term of the Option or SAR as set forth in the Stock Award Agreement. In addition, unless otherwise provided in a Participant’s Award Agreement, if the sale of any Common Stock received upon exercise of an Option or SAR following the termination of the Participant’s Continuous Service (other than for Cause) would violate the Company’s insider trading policy, then the Option or SAR shall terminate on the earlier of (i) the expiration of a period equal to the applicable post-termination exercise period after the termination of the Participant’s Continuous Service during which the exercise of the Option or SAR would not be in violation of the Company’s insider trading policy, or (ii) the expiration of the term of the Option or SAR as set forth in the applicable Stock Award Agreement.

(i) Disability of Participant. Except as otherwise provided in the applicable Stock Award Agreement or other agreement between the Participant and the Company, in the event that a Participant’s Continuous Service terminates as a result of the Participant’s Disability, the Participant may exercise his or her Option or SAR (to the extent that the Participant was entitled to exercise such Option or SAR as of the date of termination of Continuous Service), but only within such period of time ending on the earlier of (i) the date twelve (12) months following such termination of Continuous Service (or such longer or shorter period specified in the Stock Award Agreement, which period shall not be less than six (6) months if necessary to comply with applicable state laws), or (ii) the expiration of the term of the Option or SAR as set forth in the Stock Award Agreement. If, after termination of Continuous Service, the Participant does not exercise his or her Option or SAR within the time specified herein or in the Stock Award Agreement (as applicable), the Option or SAR shall terminate.

 

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(j) Death of Participant. Except as otherwise provided in the applicable Stock Award Agreement or other agreement between the Participant and the Company, in the event that (i) a Participant’s Continuous Service terminates as a result of the Participant’s death, or (ii) the Participant dies within the period (if any) specified in the Stock Award Agreement after the termination of the Participant’s Continuous Service for a reason other than death, then the Option or SAR may be exercised (to the extent the Participant was entitled to exercise such Option or SAR as of the date of death) by the Participant’s estate, by a person who acquired the right to exercise the Option or SAR by bequest or inheritance or by a person designated to exercise the Option or SAR upon the Participant’s death, but only within the period ending on the earlier of (i) the date eighteen (18) months following the date of death (or such longer or shorter period specified in the Stock Award Agreement, which period shall not be less than six (6) months if necessary to comply with applicable state laws), or (ii) the expiration of the term of such Option or SAR as set forth in the Stock Award Agreement. If, after the Participant’s death, the Option or SAR is not exercised within the time specified herein or in the Stock Award Agreement (as applicable), the Option or SAR shall terminate.

(k) Termination for Cause. Except as explicitly provided otherwise in a Participant’s Stock Award Agreement, if a Participant’s Continuous Service is terminated for Cause, the Option or SAR shall terminate upon the termination date of such Participant’s Continuous Service, and the Participant shall be prohibited from exercising his or her Option or SAR from and after the time of such termination of Continuous Service.

(l) Non-Exempt Employees. No Option or SAR granted to an Employee who is a non-exempt employee for purposes of the Fair Labor Standards Act of 1938, as amended, shall be first exercisable for any shares of Common Stock until at least six months following the date of grant of the Option or SAR. Notwithstanding the foregoing, consistent with the provisions of the Worker Economic Opportunity Act, in the event of the Participant’s death or Disability, upon a Corporate Transaction or a Change in Control in which the vesting of such Options or SARs accelerates, or upon the Participant’s retirement (as such term may be defined in the Participant’s Stock Award Agreement or in another applicable agreement or in accordance with the Company’s then current employment policies and guidelines) any such vested Options and SARs may be exercised earlier than six months following the date of grant. The foregoing provision is intended to operate so that any income derived by a non-exempt employee in connection with the exercise or vesting of an Option or SAR will be exempt from his or her regular rate of pay.

(m) Early Exercise of Options. An Option may, but need not, include a provision whereby the Optionholder may elect at any time before the Optionholder’s Continuous Service terminates to exercise the Option as to any part or all of the shares of Common Stock subject to the Option prior to the full vesting of the Option. Subject to the “Repurchase Limitation” in Section 8(l), any unvested shares of Common Stock so purchased may be subject to a repurchase right in favor of the Company or to any other restriction the Board determines to be appropriate. Provided that the “Repurchase Limitation” in Section 8(l) is not violated, the Company shall not be required to exercise its repurchase right until at least six (6) months (or such longer or shorter period of time required to avoid classification of the Option as a liability for financial accounting purposes) have elapsed following exercise of the Option unless the Board otherwise specifically provides in the Option Agreement.

 

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(n) Right of Repurchase. Subject to the “Repurchase Limitation” in Section 8(l), the Option or SAR may include a provision whereby the Company may elect to repurchase all or any part of the vested shares of Common Stock acquired by the Participant pursuant to the exercise of the Option or SAR.

(o) Right of First Refusal. The Option or SAR may include a provision whereby the Company may elect to exercise a right of first refusal following receipt of notice from the Participant of the intent to transfer all or any part of the shares of Common Stock received upon the exercise of the Option or SAR. Such right of first refusal shall be subject to the “Repurchase Limitation” in Section 8(l). Except as expressly provided in this Section 5(o) or in the Stock Award Agreement, such right of first refusal shall otherwise comply with any applicable provisions of the Bylaws of the Company.

6. PROVISIONS OF RESTRICTED STOCK AWARDS AND RESTRICTED STOCK UNITS.

(a) Restricted Stock Awards. Each Restricted Stock Award Agreement shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. To the extent consistent with the Company’s Bylaws, at the Board’s election, shares of Common Stock may be (x) held in book entry form subject to the Company’s instructions until any restrictions relating to the Restricted Stock Award lapse; or (y) evidenced by a certificate, which certificate shall be held in such form and manner as determined by the Board. The terms and conditions of Restricted Stock Award Agreements may change from time to time, and the terms and conditions of separate Restricted Stock Award Agreements need not be identical; provided, however, that each Restricted Stock Award Agreement shall conform to (through incorporation of the provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions:

(i) Consideration. A Restricted Stock Award may be awarded in consideration for (A) cash or cash equivalents, (B) past or future services actually or to be rendered to the Company or an Affiliate, or (C) any other form of legal consideration that may be acceptable to the Board in its sole discretion and permissible under applicable law.

(ii) Vesting. Subject to the “Repurchase Limitation” in Section 8(l), shares of Common Stock awarded under the Restricted Stock Award Agreement may be subject to forfeiture to the Company in accordance with a vesting schedule to be determined by the Board.

(iii) Termination of Participant’s Continuous Service. If a Participant’s Continuous Service terminates, the Company may receive through a forfeiture condition or a repurchase right, any or all of the shares of Common Stock held by the Participant that have not vested as of the date of termination of Continuous Service under the terms of the Restricted Stock Award Agreement.

 

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(iv) Transferability. Rights to acquire shares of Common Stock under the Restricted Stock Award Agreement shall be transferable by the Participant only upon such terms and conditions as are set forth in the Restricted Stock Award Agreement, as the Board shall determine in its sole discretion, so long as Common Stock awarded under the Restricted Stock Award Agreement remains subject to the terms of the Restricted Stock Award Agreement.

(v) Dividends. A Restricted Stock Award Agreement may provide that any dividends paid on Restricted Stock will be subject to the same vesting and forfeiture restrictions as apply to the shares subject to the Restricted Stock Award to which they relate.

(b) Restricted Stock Unit Awards. Each Restricted Stock Unit Award Agreement shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The terms and conditions of Restricted Stock Unit Award Agreements may change from time to time, and the terms and conditions of separate Restricted Stock Unit Award Agreements need not be identical, provided, however, that each Restricted Stock Unit Award Agreement shall conform to (through incorporation of the provisions hereof by reference in the Agreement or otherwise) the substance of each of the following provisions:

(i) Consideration. At the time of grant of a Restricted Stock Unit Award, the Board will determine the consideration, if any, to be paid by the Participant upon delivery of each share of Common Stock subject to the Restricted Stock Unit Award. The consideration to be paid (if any) by the Participant for each share of Common Stock subject to a Restricted Stock Unit Award may be paid in any form of legal consideration that may be acceptable to the Board in its sole discretion and permissible under applicable law.

(ii) Vesting. At the time of the grant of a Restricted Stock Unit Award, the Board may impose such restrictions or conditions to the vesting of the Restricted Stock Unit Award as it, in its sole discretion, deems appropriate.

(iii) Payment. A Restricted Stock Unit Award may be settled by the delivery of shares of Common Stock, their cash equivalent, any combination thereof or in any other form of consideration, as determined by the Board and contained in the Restricted Stock Unit Award Agreement.

(iv) Additional Restrictions. At the time of the grant of a Restricted Stock Unit Award, the Board, as it deems appropriate, may impose such restrictions or conditions that delay the delivery of the shares of Common Stock (or their cash equivalent) subject to a Restricted Stock Unit Award to a time after the vesting of such Restricted Stock Unit Award.

(v) Dividend Equivalents. Dividend equivalents may be credited in respect of shares of Common Stock covered by a Restricted Stock Unit Award, as determined by the Board and contained in the Restricted Stock Unit Award Agreement. At the sole discretion of the Board, such dividend equivalents may be converted into additional shares of Common Stock covered by the Restricted Stock Unit Award in such manner as determined by the Board. Any additional shares covered by the Restricted Stock Unit Award credited by reason of such dividend equivalents will be subject to all the terms and conditions of the underlying Restricted Stock Unit Award Agreement to which they relate.

 

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(vi) Termination of Participant’s Continuous Service. Except as otherwise provided in the applicable Restricted Stock Unit Award Agreement, such portion of the Restricted Stock Unit Award that has not vested will be forfeited upon the Participant’s termination of Continuous Service.

(vii) Compliance with Section 409A of the Code. Notwithstanding anything to the contrary set forth herein, any Restricted Stock Unit Award granted under the Plan that is not exempt from the requirements of Section 409A of the Code shall contain such provisions so that such Restricted Stock Unit Award will comply with the requirements of Section 409A of the Code. Such restrictions, if any, shall be determined by the Board and contained in the Restricted Stock Unit Award Agreement evidencing such Restricted Stock Unit Award. For example, such restrictions may include, without limitation, a requirement that any Common Stock that is to be issued in a year following the year in which the Restricted Stock Unit Award vests must be issued in accordance with a fixed pre-determined schedule.

7. COVENANTS OF THE COMPANY.

(a) Availability of Shares. During the terms of the Stock Awards, the Company shall keep available at all times the number of shares of Common Stock reasonably required to satisfy such Stock Awards.

(b) Securities Law Compliance. The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to grant Stock Awards and to issue and sell shares of Common Stock upon exercise of the Stock Awards; provided, however, that this undertaking shall not require the Company to register under the Securities Act the Plan, any Stock Award or any Common Stock issued or issuable pursuant to any such Stock Award. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority that counsel for the Company deems necessary for the lawful issuance and sale of Common Stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell Common Stock upon exercise of such Stock Awards unless and until such authority is obtained. A Participant shall not be eligible for the grant of a Stock Award or the subsequent issuance of Common Stock pursuant to the Stock Award if such grant or issuance would be in violation of any applicable securities law.

(c) No Obligation to Notify. The Company shall have no duty or obligation to any Participant to advise such holder as to the time or manner of exercising such Stock Award. Furthermore, the Company shall have no duty or obligation to warn or otherwise advise such holder of a pending termination or expiration of a Stock Award or a possible period in which the Stock Award may not be exercised. The Company has no duty or obligation to minimize the tax consequences of a Stock Award to the holder of such Stock Award.

 

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8. MISCELLANEOUS.

(a) Use of Proceeds from Sales of Common Stock. Proceeds from the sale of shares of Common Stock pursuant to Stock Awards shall constitute general funds of the Company.

(b) Corporate Action Constituting Grant of Stock Awards. Corporate action constituting a grant by the Company of a Stock Award to any Participant shall be deemed completed as of the date of such corporate action, unless otherwise determined by the Board, regardless of when the instrument, certificate, or letter evidencing the Stock Award is communicated to, or actually received or accepted by, the Participant.

(c) Stockholder Rights. No Participant shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares of Common Stock subject to such Stock Award unless and until (i) such Participant has satisfied all requirements for exercise of the Stock Award pursuant to its terms, if applicable, and (ii) the issuance of the Common Stock subject to such Stock Award has been entered into the books and records of the Company.

(d) No Employment or Other Service Rights. Nothing in the Plan, any Stock Award Agreement or any other instrument executed thereunder or in connection with any Stock Award granted pursuant thereto shall confer upon any Participant any right to continue to serve the Company or an Affiliate in the capacity in effect at the time the Stock Award was granted or shall affect the right of the Company or an Affiliate to terminate (i) the employment of an Employee with or without notice and with or without cause, (ii) the service of a Consultant pursuant to the terms of such Consultant’s agreement with the Company or an Affiliate, or (iii) the service of a Director pursuant to the Bylaws of the Company or an Affiliate, and any applicable provisions of the corporate law of the state in which the Company or the Affiliate is incorporated, as the case may be.

(e) Incentive Stock Option $100,000 Limitation. To the extent that the aggregate Fair Market Value (determined at the time of grant) of Common Stock with respect to which Incentive Stock Options are exercisable for the first time by any Optionholder during any calendar year (under all plans of the Company and any Affiliates) exceeds one hundred thousand dollars ($100,000), the Options or portions thereof that exceed such limit (according to the order in which they were granted) shall be treated as Nonstatutory Stock Options, notwithstanding any contrary provision of the applicable Option Agreement(s).

(f) Investment Assurances. The Company may require a Participant, as a condition of exercising or acquiring Common Stock under any Stock Award, (i) to give written assurances satisfactory to the Company as to the Participant’s knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of exercising the Stock Award; and (ii) to give written assurances satisfactory to the Company stating that the Participant is acquiring Common Stock subject to the Stock Award for the Participant’s own account and not with any present intention of selling or otherwise

 

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distributing the Common Stock. The foregoing requirements, and any assurances given pursuant to such requirements, shall be inoperative if (x) the issuance of the shares upon the exercise or acquisition of Common Stock under the Stock Award has been registered under a then currently effective registration statement under the Securities Act, or (y) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the Common Stock.

(g) Withholding Obligations. Unless prohibited by the terms of a Stock Award Agreement, the Company may, in its sole discretion, satisfy any federal, state or local tax withholding obligation relating to a Stock Award by any of the following means or by a combination of such means: (i) causing the Participant to tender a cash payment; (ii) withholding shares of Common Stock from the shares of Common Stock issued or otherwise issuable to the Participant in connection with the Stock Award; provided, however, that no shares of Common Stock are withheld with a value exceeding the minimum amount of tax required to be withheld by law (or such lesser amount as may be necessary to avoid classification of the Stock Award as a liability for financial accounting purposes); (iii) withholding payment from any amounts otherwise payable to the Participant; (iv) withholding cash from a Stock Award settled in cash; or (v) by such other method as may be set forth in the Stock Award Agreement.

(h) Electronic Delivery. Any reference herein to a “written” agreement or document shall include any agreement or document delivered electronically or posted on the Company’s intranet.

(i) Deferrals. To the extent permitted by applicable law, the Board, in its sole discretion, may determine that the delivery of Common Stock or the payment of cash, upon the exercise, vesting or settlement of all or a portion of any Stock Award may be deferred and may establish programs and procedures for deferral elections to be made by Participants. Deferrals by Participants will be made in accordance with Section 409A of the Code. Consistent with Section 409A of the Code, the Board may provide for distributions while a Participant is still an employee or otherwise providing services to the Company. The Board is authorized to make deferrals of Stock Awards and determine when, and in what annual percentages, Participants may receive payments, including lump sum payments, following the Participant’s termination of Continuous Service, and implement such other terms and conditions consistent with the provisions of the Plan and in accordance with applicable law.

(j) Compliance with Section 409A. To the extent that the Board determines that any Stock Award granted hereunder is subject to Section 409A of the Code, the Stock Award Agreement evidencing such Stock Award shall incorporate the terms and conditions necessary to avoid the consequences specified in Section 409A(a)(1) of the Code. To the extent applicable, the Plan and Stock Award Agreements shall be interpreted in accordance with Section 409A of the Code.

 

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(k) Compliance with Exemption Provided by Rule 12h-1(f). If at the end of the Company’s most recently completed fiscal year: (i) the aggregate of the number of persons who hold outstanding compensatory employee stock options to purchase shares of Common Stock granted pursuant to the Plan or otherwise (such persons, “Optionholders”) equals or exceeds five hundred (500) and (ii) the Company’s assets exceed $10 million, then the following restrictions shall apply during any period during which the Company does not have a class of its securities registered under Section 12 of the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder (the “Exchange Act”) and is not required to file reports under Section 15(d) of the Exchange Act: (A) the Options and, prior to exercise, the shares of Common Stock acquired upon exercise of the Options may not be transferred until the Company is no longer relying on the exemption provided by Rule 12h-1(f) promulgated under the Exchange Act (“Rule 12h-1(f)”), except: (1) as permitted by Rule 701(c) promulgated under the Securities Act, (2) to a guardian upon the disability of the Optionholder, or (3) to an executor upon the death of the Optionholder (collectively, the “Permitted Transferees”); provided, however, the following transfers are permitted: (i) transfers by the Optionholder to the Company, and (ii) transfers in connection with a change of control or other acquisition involving the Company, if following such transaction, the Options no longer remain outstanding and the Company is no longer relying on the exemption provided by Rule 12h-1(f); provided further, that any Permitted Transferees may not further transfer the Options; (B) except as otherwise provided in (A) above, the Options and shares of Common Stock acquired upon exercise of the Options are restricted as to any pledge, hypothecation, or other transfer, including any short position, any “put equivalent position” as defined by Rule 16a-1(h) promulgated under the Exchange Act, or any “call equivalent position” as defined by Rule 16a-1(b) promulgated under the Exchange Act by the Optionholder prior to exercise of an Option until the Company is no longer relying on the exemption provided by Rule 12h-1(f); and (C) at any time that the Company is relying on the exemption provided by Rule 12h-1(f), the Company shall deliver to Optionholders (whether by physical or electronic delivery or written notice of the availability of the information on an internet site) the information required by Rule 701(e)(3), (4), and (5) promulgated under the Securities Act every six (6) months, including financial statements that are not more than one hundred eighty (180) days old; provided, however, that the Company may condition the delivery of such information upon the Optionholder’s agreement to maintain its confidentiality.

(l) Repurchase Limitation. The terms of any repurchase right shall be specified in the Stock Award Agreement. The repurchase price for vested shares of Common Stock shall be the Fair Market Value of the shares of Common Stock on the date of repurchase. The repurchase price for unvested shares of Common Stock shall be the lower of (i) the Fair Market Value of the shares of Common Stock on the date of repurchase or (ii) their original purchase price. However, the Company shall not exercise its repurchase right until at least six (6) months (or such longer or shorter period of time necessary to avoid classification of the Stock Award as a liability for financial accounting purposes) have elapsed following delivery of shares of Common Stock subject to the Stock Award, unless otherwise specifically provided by the Board.

 

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9. ADJUSTMENTS UPON CHANGES IN COMMON STOCK; OTHER CORPORATE EVENTS.

(a) Capitalization Adjustments. In the event of a Capitalization Adjustment, the Board shall appropriately and proportionately adjust: (i) the class(es) and maximum number of securities subject to the Plan pursuant to Section 3(a), (ii) the class(es) and maximum number of securities that may be issued pursuant to the exercise of Incentive Stock Options pursuant to Section 3(c), and (iii) the class(es) and number of securities and price per share of stock subject to outstanding Stock Awards. The Board shall make such adjustments, and its determination shall be final, binding and conclusive.

(b) Dissolution or Liquidation. Except as otherwise provided in the Stock Award Agreement, in the event of a dissolution or liquidation of the Company, all outstanding Stock Awards (other than Stock Awards consisting of vested and outstanding shares of Common Stock not subject to a forfeiture condition or the Company’s right of repurchase) shall terminate immediately prior to the completion of such dissolution or liquidation, and the shares of Common Stock subject to the Company’s repurchase rights or subject to a forfeiture condition may be repurchased or reacquired by the Company notwithstanding the fact that the holder of such Stock Award is providing Continuous Service, provided, however, that the Board may, in its sole discretion, cause some or all Stock Awards to become fully vested, exercisable and/or no longer subject to repurchase or forfeiture (to the extent such Stock Awards have not previously expired or terminated) before the dissolution or liquidation is completed but contingent on its completion.

(c) Corporate Transaction. The following provisions shall apply to Stock Awards in the event of a Corporate Transaction unless otherwise provided in the instrument evidencing the Stock Award or any other written agreement between the Company or any Affiliate and the holder of the Stock Award or unless otherwise expressly provided by the Board at the time of grant of a Stock Award. Except as otherwise stated in the Stock Award Agreement, in the event of a Corporate Transaction, then, notwithstanding any other provision of the Plan, the Board shall take one or more of the following actions with respect to Stock Awards, contingent upon the closing or completion of the Corporate Transaction:

(i) arrange for the surviving corporation or acquiring corporation (or the surviving or acquiring corporation’s parent company) to assume or continue the Stock Award or to substitute a similar stock award for the Stock Award (including, but not limited to, an award to acquire the same consideration paid to the stockholders of the Company pursuant to the Corporate Transaction);

(ii) arrange for the assignment of any reacquisition or repurchase rights held by the Company in respect of Common Stock issued pursuant to the Stock Award to the surviving corporation or acquiring corporation (or the surviving or acquiring corporation’s parent company);

(iii) accelerate the vesting of the Stock Award (and, if applicable, the time at which the Stock Award may be exercised) to a date prior to the effective time of such Corporate Transaction as the Board shall determine (or, if the Board shall not determine such a date, to the

 

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date that is five (5) days prior to the effective date of the Corporate Transaction), with such Stock Award terminating if not exercised (if applicable) at or prior to the effective time of the Corporate Transaction;

(iv) arrange for the lapse of any reacquisition or repurchase rights held by the Company with respect to the Stock Award;

(v) cancel or arrange for the cancellation of the Stock Award, to the extent not vested or not exercised prior to the effective time of the Corporate Transaction, for no consideration (subject to 8(l) above with respect to outstanding shares of Common Stock if applicable) or in exchange for such cash consideration as the Board, in its sole discretion, may consider appropriate; and

(vi) make a payment, in such form as may be determined by the Board equal to the excess, if any, of (A) the value of the property the holder of the Stock Award would have received upon the exercise of the Stock Award, over (B) any exercise price payable by such holder in connection with such exercise.

The Board need not take the same action with respect to all Stock Awards or with respect to all Participants.

(d) Change in Control. A Stock Award may be subject to additional acceleration of vesting and exercisability upon or after a Change in Control as may be provided in the Stock Award Agreement for such Stock Award or as may be provided in any other written agreement between the Company or any Affiliate and the Participant, but in the absence of such provision, no such acceleration shall occur.

10. TERMINATION OR SUSPENSION OF THE PLAN.

(a) Plan Term. The Board may suspend or terminate the Plan at any time. Unless sooner terminated by the Board pursuant to Section 2, the Plan shall automatically terminate on the day before the tenth (10th) anniversary of the earlier of (i) the date the Plan is adopted by the Board, or (ii) the date the Plan is approved by the stockholders of the Company. No Stock Awards may be granted under the Plan while the Plan is suspended or after it is terminated.

(b) No Impairment of Rights. Suspension or termination of the Plan shall not impair rights and obligations under any Stock Award granted while the Plan is in effect except with the written consent of the affected Participant.

11. EFFECTIVE DATE OF PLAN.

This Plan shall become effective on the Effective Date.

 

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12. CHOICE OF LAW.

The law of the State of Delaware shall govern all questions concerning the construction, validity and interpretation of this Plan, without regard to that state’s conflict of laws rules.

13. DEFINITIONS. As used in the Plan, the following definitions shall apply to the capitalized terms indicated below:

(a) Affiliate” means, at the time of determination, any “parent” or “majority-owned subsidiary” of the Company, as such terms are defined in Rule 405 of the Securities Act. The Board shall have the authority to determine the time or times at which “parent” or “majority-owned subsidiary” status is determined within the foregoing definition.

(b) Board” means the Board of Directors of the Company.

(c) Capitalization Adjustment” means any change that is made in, or other events that occur with respect to, the Common Stock subject to the Plan or subject to any Stock Award after the Effective Date without the receipt of consideration by the Company (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, large nonrecurring cash dividend, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure, or any similar equity restructuring transaction, as that term is used in Statement of Financial Accounting Standards No. 123 (revised). Notwithstanding the foregoing, the conversion of any convertible securities of the Company shall not be treated as a Capitalization Adjustment.

(d) Cause” shall have the meaning ascribed to such term in any written agreement between the Participant and the Company defining such term and, in the absence of such agreement, such term means with respect to a Participant, the occurrence of any of the following events: (i) such Participant’s commission of any felony or any crime involving fraud, dishonesty or moral turpitude under the laws of the United States or any state thereof; (ii) such Participant’s attempted commission of, or participation in, a fraud or act of dishonesty against the Company; (iii) such Participant’s intentional, material violation of any contract or agreement between the Participant and the Company or of any statutory duty owed to the Company; (iv) such Participant’s unauthorized use or disclosure of the Company’s confidential information or trade secrets; or (v) such Participant’s gross misconduct. The determination that a termination of the Participant’s Continuous Service is either for Cause or without Cause shall be made by the Company in its sole discretion. Any determination by the Company that the Continuous Service of a Participant was terminated with or without Cause for the purposes of outstanding Stock Awards held by such Participant shall have no effect upon any determination of the rights or obligations of the Company or such Participant for any other purpose.

(e) Change in Control” means the occurrence, in a single transaction or in a series of related transactions, of any one or more of the following events:

(i) any Exchange Act Person becomes the Owner, directly or indirectly, of securities of the Company representing more than fifty percent (50%) of the combined voting

 

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power of the Company’s then outstanding securities other than by virtue of a merger, consolidation or similar transaction. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur (A) on account of the acquisition of securities of the Company directly from the Company, (B) on account of the acquisition of securities of the Company by an investor, any affiliate thereof or any other Exchange Act Person that acquires the Company’s securities in a transaction or series of related transactions the primary purpose of which is to obtain financing for the Company through the issuance of equity securities or (C) solely because the level of Ownership held by any Exchange Act Person (the “Subject Person”) exceeds the designated percentage threshold of the outstanding voting securities as a result of a repurchase or other acquisition of voting securities by the Company reducing the number of shares outstanding, provided that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of voting securities by the Company, and after such share acquisition, the Subject Person becomes the Owner of any additional voting securities that, assuming the repurchase or other acquisition had not occurred, increases the percentage of the then outstanding voting securities Owned by the Subject Person over the designated percentage threshold, then a Change in Control shall be deemed to occur;

(ii) there is consummated a merger, consolidation or similar transaction involving (directly or indirectly) the Company and, immediately after the consummation of such merger, consolidation or similar transaction, the stockholders of the Company immediately prior thereto do not Own, directly or indirectly, either (A) outstanding voting securities representing more than fifty percent (50%) of the combined outstanding voting power of the surviving Entity in such merger, consolidation or similar transaction or (B) more than fifty percent (50%) of the combined outstanding voting power of the parent of the surviving Entity in such merger, consolidation or similar transaction, in each case in substantially the same proportions as their Ownership of the outstanding voting securities of the Company immediately prior to such transaction;

(iii) the stockholders of the Company approve or the Board approves a plan of complete dissolution or liquidation of the Company, or a complete dissolution or liquidation of the Company shall otherwise occur, except for a liquidation into a parent corporation;

(iv) there is consummated a sale, lease, exclusive license or other disposition of all or substantially all of the consolidated assets of the Company and its Subsidiaries, other than a sale, lease, license or other disposition of all or substantially all of the consolidated assets of the Company and its Subsidiaries to an Entity, more than fifty percent (50%) of the combined voting power of the voting securities of which are Owned by stockholders of the Company in substantially the same proportions as their Ownership of the outstanding voting securities of the Company immediately prior to such sale, lease, license or other disposition; or

(v) individuals who, on the date this Plan is adopted by the Board, are members of the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the members of the Board; provided, however, that if the appointment or election (or nomination for election) of any new Board member was approved or recommended by a majority vote of the members of the Incumbent Board then still in office, such new member shall, for purposes of this Plan, be considered as a member of the Incumbent Board.

 

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Notwithstanding the foregoing definition or any other provision of this Plan, (A) the term Change in Control shall not include a sale of assets, merger or other transaction effected exclusively for the purpose of changing the domicile of the Company, and (B) the definition of Change in Control (or any analogous term) in an individual written agreement between the Company or any Affiliate and the Participant shall supersede the foregoing definition with respect to Stock Awards subject to such agreement; provided, however, that if no definition of Change in Control or any analogous term is set forth in such an individual written agreement, the foregoing definition shall apply.

(f) Code” means the Internal Revenue Code of 1986, as amended, as well as any applicable regulations and guidance thereunder.

(g) Committee” means a committee of one (1) or more Directors to whom authority has been delegated by the Board in accordance with Section 2(c).

(h) Common Stock” means the common stock of the Company.

(i) Company” means Zulily, Inc., a Delaware corporation.

(j) Consultant” means any person, including an advisor, who is (i) engaged by the Company or an Affiliate to render consulting or advisory services and is compensated for such services, or (ii) serving as a member of the board of directors of an Affiliate and is compensated for such services. However, service solely as a Director, or payment of a fee for such service, shall not cause a Director to be considered a “Consultant” for purposes of the Plan.

(k) Continuous Service” means that the Participant’s service with the Company or an Affiliate, whether as an Employee, Director or Consultant, is not interrupted or terminated. A change in the capacity in which the Participant renders service to the Company or an Affiliate as an Employee, Director, or Consultant or a change in the Entity for which the Participant renders such service, provided that there is no interruption or termination of the Participant’s service with the Company or an Affiliate, shall not terminate a Participant’s Continuous Service; provided, however, if the Entity for which a Participant is rendering service ceases to qualify as an Affiliate, as determined by the Board in its sole discretion, such Participant’s Continuous Service shall be considered to have terminated on the date such Entity ceases to qualify as an Affiliate. For example, a change in status from an employee of the Company to a consultant of an Affiliate or to a Director shall not constitute an interruption of Continuous Service. To the extent permitted by law, the Board or the chief executive officer of the Company, in that party’s sole discretion, may determine whether Continuous Service shall be considered interrupted in the case of (i) any leave of absence approved by the Board or chief executive officer, including sick leave, military leave or any other personal leave, or (ii) transfers between the Company, an Affiliate, or their successors. Notwithstanding the foregoing, a leave of absence shall be treated as Continuous Service for purposes of vesting in a Stock Award only to such extent as may be provided in the Company’s leave of absence policy, in the written terms of any leave of absence agreement or policy applicable to the Participant, or as otherwise required by law.

 

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(l) Corporate Transaction” means the occurrence, in a single transaction or in a series of related transactions, of any one or more of the following events:

(i) the consummation of a sale or other disposition of all or substantially all, as determined by the Board in its sole discretion, of the consolidated assets of the Company and its Subsidiaries;

(ii) the consummation of a sale or other disposition of at least ninety percent (90%) of the outstanding securities of the Company;

(iii) the consummation of a merger, consolidation or similar transaction following which the Company is not the surviving corporation; or

(iv) the consummation of a merger, consolidation or similar transaction following which the Company is the surviving corporation but the shares of Common Stock outstanding immediately preceding the merger, consolidation or similar transaction are converted or exchanged by virtue of the merger, consolidation or similar transaction into other property, whether in the form of securities, cash or otherwise.

(m) Director” means a member of the Board.

(n) Disability” means the inability of a Participant to engage in any substantially gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve (12) months as provided in Sections 22(e)(3) and 409A(a)(2)(c)(i) of the Code and shall be determined by the Board on the basis of such medical evidence as the Board deems warranted under the circumstances.

(o) Effective Date” means the effective date of this Plan, which is the earlier of (i) the date that this Plan is first approved by the Company’s stockholders, or (ii) the date this Plan is adopted by the Board.

(p) Employee” means any person employed by the Company or an Affiliate. However, service solely as a Director, or payment of a fee for such services, shall not cause a Director to be considered an “Employee” for purposes of the Plan.

(q) Entity” means a corporation, partnership, limited liability company or other entity.

(r) Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

 

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(s) Exchange Act Person” means any natural person, Entity or “group” (within the meaning of Section 13(d) or 14(d) of the Exchange Act), except that “Exchange Act Person” shall not include (i) the Company or any Subsidiary of the Company, (ii) any employee benefit plan of the Company or any Subsidiary of the Company or any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any Subsidiary of the Company, (iii) an underwriter temporarily holding securities pursuant to a registered public offering of such securities, (iv) an Entity Owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their Ownership of stock of the Company; or (v) any natural person, Entity or “group” (within the meaning of Section 13(d) or 14(d) of the Exchange Act) that, as of the Effective Date, is the Owner, directly or indirectly, of securities of the Company representing more than fifty percent (50%) of the combined voting power of the Company’s then outstanding securities.

(t) Fair Market Value” means, as of any date, the value of the Common Stock determined by the Board in compliance with Section 409A of the Code or, in the case of an Incentive Stock Option, in compliance with Section 422 of the Code.

(u) Incentive Stock Option” means an option that qualifies as an “incentive stock option” within the meaning of Section 422 of the Code and the regulations promulgated thereunder.

(v) Nonstatutory Stock Option” means an Option that does not qualify as an Incentive Stock Option.

(w) Officer” means any person designated by the Company as an officer.

(x) Option” means an Incentive Stock Option or a Nonstatutory Stock Option to purchase shares of Common Stock granted pursuant to the Plan.

(y) Option Agreement” means a written agreement between the Company and an Optionholder evidencing the terms and conditions of an Option grant. Each Option Agreement shall be subject to the terms and conditions of the Plan.

(z) Optionholder” means a person to whom an Option is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Option.

(aa) Own,” “Owned,” “Owner,” “Ownership” A person or Entity shall be deemed to “Own,” to have “Owned,” to be the “Owner” of, or to have acquired “Ownership” of securities if such person or Entity, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares voting power, which includes the power to vote or to direct the voting, with respect to such securities.

(bb) Participant” means a person to whom a Stock Award is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Stock Award.

(cc)Plan” means this Zulily, Inc. 2009 Equity Incentive Plan.

 

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(dd) Restricted Stock Award” means an award of shares of Common Stock which is granted pursuant to the terms and conditions of Section 6(a).

(ee) Restricted Stock Award Agreement” means a written agreement between the Company and a holder of a Restricted Stock Award evidencing the terms and conditions of a Restricted Stock Award. Each Restricted Stock Award Agreement shall be subject to the terms and conditions of the Plan.

(ff) Restricted Stock Unit Award” means a right to receive shares of Common Stock which is granted pursuant to the terms and conditions of Section 6(b).

(gg) Restricted Stock Unit Award Agreement” means a written agreement between the Company and a holder of a Restricted Stock Unit Award evidencing the terms and conditions of a Restricted Stock Unit Award grant. Each Restricted Stock Unit Award Agreement shall be subject to the terms and conditions of the Plan.

(hh) Rule 405” means Rule 405 promulgated under the Securities Act.

(ii) Rule 701” means Rule 701 promulgated under the Securities Act.

(jj) Securities Act” means the Securities Act of 1933, as amended.

(kk) Stock Appreciation Right” or “SAR” means a right to receive the appreciation on Common Stock that is granted pursuant to the terms and conditions of Section 5.

(ll) Stock Appreciation Right Agreement” means a written agreement between the Company and a holder of a Stock Appreciation Right evidencing the terms and conditions of a Stock Appreciation Right grant. Each Stock Appreciation Right Agreement shall be subject to the terms and conditions of the Plan.

(mm) Stock Award” means any right to receive Common Stock granted under the Plan, including an Incentive Stock Option, a Nonstatutory Stock Option, a Restricted Stock Award, a Restricted Stock Unit Award, or a Stock Appreciation Right.

(nn) Stock Award Agreement” means a written agreement between the Company and a Participant evidencing the terms and conditions of a Stock Award grant. Each Stock Award Agreement shall be subject to the terms and conditions of the Plan.

(oo) Subsidiary” means, with respect to the Company, (i) any corporation of which more than fifty percent (50%) of the outstanding capital stock having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether, at the time, stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time, directly or indirectly, Owned by the Company, and (ii) any partnership, limited liability company or other entity in which the Company has a direct or indirect interest (whether in the form of voting or participation in profits or capital contribution) of more than fifty percent (50%).

 

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(pp) Ten Percent Stockholder” means a person who Owns (or is deemed to Own pursuant to Section 424(d) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Affiliate.

 

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Forms of Option Agreement and Option Grant Notice for zulily, inc

Exhibit 10.2

ZULILY, INC.

2009 EQUITY INCENTIVE PLAN

OPTION AGREEMENT

(INCENTIVE STOCK OPTION OR NONSTATUTORY STOCK OPTION)

Pursuant to your Stock Option Grant Notice (“Grant Notice”) and this Option Agreement, Zulily, Inc. (the “Company”) has granted you an option under its 2009 Equity Incentive Plan (the “Plan”) to purchase the number of shares of the Company’s Common Stock indicated in your Grant Notice at the exercise price indicated in your Grant Notice. Defined terms not explicitly defined in this Option Agreement but defined in the Plan shall have the same definitions as in the Plan.

The details of your option are as follows:

1. VESTING. Subject to the limitations contained herein, your option will vest as provided in your Grant Notice, provided that vesting will cease upon the termination of your Continuous Service.

2. NUMBER OF SHARES AND EXERCISE PRICE. The number of shares of Common Stock subject to your option and your exercise price per share referenced in your Grant Notice may be adjusted from time to time for Capitalization Adjustments.

3. EXERCISE RESTRICTION FOR NON-EXEMPT EMPLOYEES. In the event that you are an Employee eligible for overtime compensation under the Fair Labor Standards Act of 1938, as amended (i.e., a “Non-Exempt Employee”), you may not exercise your option until you have completed at least six (6) months of Continuous Service measured from the Date of Grant specified in your Grant Notice, notwithstanding any other provision of your option.

4. EXERCISE PRIOR TO VESTING (“EARLY EXERCISE”). If permitted in your Grant Notice (i.e., the “Exercise Schedule” indicates “Early Exercise Permitted”) and subject to the provisions of your option, you may elect at any time that is both (i) during the period of your Continuous Service and (ii) during the term of your option, to exercise all or part of your option, including the unvested portion of your option; provided, however, that:

(a) a partial exercise of your option shall be deemed to cover first vested shares of Common Stock and then the earliest vesting installment of unvested shares of Common Stock;

(b) any shares of Common Stock so purchased from installments that have not vested as of the date of exercise shall be subject to the purchase option in favor of the Company as described in the Company’s form of Early Exercise Stock Purchase Agreement;

(c) you shall enter into the Company’s form of Early Exercise Stock Purchase Agreement with a vesting schedule that will result in the same vesting as if no early exercise had occurred; and

(d) if your option is an Incentive Stock Option, then, to the extent that the aggregate Fair Market Value (determined at the time of grant) of the shares of Common Stock with respect to which your option plus all other Incentive Stock Options you hold are exercisable for the first time by you during any calendar year (under all plans of the Company and its Affiliates) exceeds one hundred thousand dollars ($100,000), your option(s) or portions thereof that exceed such limit (according to the order in which they were granted) shall be treated as Nonstatutory Stock Options.

 

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5. METHOD OF PAYMENT. Payment of the exercise price is due in full upon exercise of all or any part of your option. You may elect to make payment of the exercise price in cash or by check or in any other manner permitted by your Grant Notice, which may include one or more of the following:

(a) Provided that at the time of exercise the Common Stock is publicly traded and quoted regularly in The Wall Street Journal, pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board that, prior to the issuance of Common Stock, results in either the receipt of cash (or check) by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to the Company from the sales proceeds.

(b) Provided that at the time of exercise the Common Stock is publicly traded and quoted regularly in The Wall Street Journal, by delivery to the Company (either by actual delivery or attestation) of already-owned shares of Common Stock that are owned free and clear of any liens, claims, encumbrances or security interests, and that are valued at Fair Market Value on the date of exercise. Notwithstanding the foregoing, you may not exercise your option by tender to the Company of Common Stock to the extent such tender would violate the provisions of any law, regulation or agreement restricting the redemption of the Company’s stock.

6. WHOLE SHARES. You may exercise your option only for whole shares of Common Stock.

7. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the contrary contained herein, you may not exercise your option unless the shares of Common Stock issuable upon such exercise are then registered under the Securities Act or, if such shares of Common Stock are not then so registered, the Company has determined that such exercise and issuance would be exempt from the registration requirements of the Securities Act. The exercise of your option also must comply with other applicable laws and regulations governing your option, and you may not exercise your option if the Company determines that such exercise would not be in material compliance with such laws and regulations.

8. TERM. You may not exercise your option before the commencement or after the expiration of its term. The term of your option commences on the Date of Grant and expires upon the earliest of the following:

(a) three (3) months after the termination of your Continuous Service for any reason other than your Disability or death, provided that if during any part of such three (3) month period your option is not exercisable solely because of the condition set forth in the

 

2.


section above relating to “Securities Law Compliance,” your option shall not expire until the earlier of the Expiration Date or until it shall have been exercisable for an aggregate period of three (3) months after the termination of your Continuous Service;

(b) twelve (12) months after the termination of your Continuous Service due to your Disability;

(c) eighteen (18) months after your death if you die either during your Continuous Service or within three (3) months after your Continuous Service terminates;

(d) the Expiration Date indicated in your Grant Notice; or

(e) the day before the tenth (10th) anniversary of the Date of Grant.

If your option is an Incentive Stock Option, note that to obtain the federal income tax advantages associated with an Incentive Stock Option, the Code requires that at all times beginning on the date of grant of your option and ending on the day three (3) months before the date of your option’s exercise, you must be an employee of the Company or an Affiliate, except in the event of your death or Disability. The Company has provided for extended exercisability of your option under certain circumstances for your benefit but cannot guarantee that your option will necessarily be treated as an Incentive Stock Option if you continue to provide services to the Company or an Affiliate as a Consultant or Director after your employment terminates or if you otherwise exercise your option more than three (3) months after the date your employment with the Company or an Affiliate terminates.

9. EXERCISE.

(a) You may exercise the vested portion of your option (and the unvested portion of your option if your Grant Notice so permits) during its term by delivering a Notice of Exercise (in a form designated by the Company) together with the exercise price to the Secretary of the Company, or to such other person as the Company may designate, during regular business hours, together with such additional documents as the Company may then require.

(b) By exercising your option you agree that, as a condition to any exercise of your option, the Company may require you to enter into an arrangement providing for the payment by you to the Company of any tax withholding obligation of the Company arising by reason of (1) the exercise of your option, (2) the lapse of any substantial risk of forfeiture to which the shares of Common Stock are subject at the time of exercise, or (3) the disposition of shares of Common Stock acquired upon such exercise.

(c) If your option is an Incentive Stock Option, by exercising your option you agree that you will notify the Company in writing within fifteen (15) days after the date of any disposition of any of the shares of the Common Stock issued upon exercise of your option that occurs within two (2) years after the date of your option grant or within one (1) year after such shares of Common Stock are transferred upon exercise of your option.

(d) By exercising your option you agree that you shall not sell, dispose of, transfer, make any short sale of, grant any option for the purchase of, or enter into any hedging

 

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or similar transaction with the same economic effect as a sale, any shares of Common Stock or other securities of the Company held by you, for a period of one hundred eighty (180) days following the effective date of a registration statement of the Company filed under the Securities Act or such longer period as necessary to permit compliance with NASD Rule 2711 or NYSE Member Rule 472 and similar rules and regulations (the “Lock-Up Period”); provided, however, that nothing contained in this section shall prevent the exercise of a repurchase option, if any, in favor of the Company during the Lock-Up Period. You further agree to execute and deliver such other agreements as may be reasonably requested by the Company and/or the underwriter(s) that are consistent with the foregoing or that are necessary to give further effect thereto. In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to your shares of Common Stock until the end of such period. The underwriters of the Company’s stock are intended third party beneficiaries of this Section 9(d) and shall have the right, power and authority to enforce the provisions hereof as though they were a party hereto.

10. TRANSFERABILITY. Your option is not transferable, except by will or by the laws of descent and distribution, and is exercisable during your life only by you. Notwithstanding the foregoing, by delivering written notice to the Company, in a form satisfactory to the Company, you may designate a third party who, in the event of your death, shall thereafter be entitled to exercise your option. In addition, if permitted by the Company you may transfer your option to a trust if you are considered to be the sole beneficial owner (determined under Section 671 of the Code and applicable state law) while the option is held in the trust, provided that you and the trustee enter into a transfer and other agreements required by the Company.

11. RIGHT OF FIRST REFUSAL. Shares of Common Stock that you acquire upon exercise of your option are subject to any right of first refusal that may be described in the Company’s bylaws in effect at such time the Company elects to exercise its right; provided, however, that if your option is an Incentive Stock Option and the right of first refusal described in the Company’s bylaws in effect at the time the Company elects to exercise its right is more beneficial to you than the right of first refusal described in the Company’s bylaws on the Date of Grant, then the right of first refusal described in the Company’s bylaws on the Date of Grant shall apply. The Company’s right of first refusal shall expire on the first date upon which any security of the Company is listed (or approved for listing) upon notice of issuance on a national securities exchange or quotation system.

12. RIGHT OF REPURCHASE. To the extent provided in the Company’s bylaws in effect at such time the Company elects to exercise its right, the Company shall have the right to repurchase all or any part of the shares of Common Stock you acquire pursuant to the exercise of your option.

13. OPTION NOT A SERVICE CONTRACT. Your option is not an employment or service contract, and nothing in your option shall be deemed to create in any way whatsoever any obligation on your part to continue in the employ of the Company or an Affiliate, or of the Company or an Affiliate to continue your employment. In addition, nothing in your option shall obligate the Company or an Affiliate, their respective stockholders, Boards of Directors, Officers or Employees to continue any relationship that you might have as a Director or Consultant for the Company or an Affiliate.

 

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14. WITHHOLDING OBLIGATIONS.

(a) At the time you exercise your option, in whole or in part, or at any time thereafter as requested by the Company, you hereby authorize withholding from payroll and any other amounts payable to you, and otherwise agree to make adequate provision for (including by means of a “cashless exercise” pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board to the extent permitted by the Company), any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Company or an Affiliate, if any, which arise in connection with the exercise of your option.

(b) Upon your request and subject to approval by the Company, in its sole discretion, and compliance with any applicable legal conditions or restrictions, the Company may withhold from fully vested shares of Common Stock otherwise issuable to you upon the exercise of your option a number of whole shares of Common Stock having a Fair Market Value, determined by the Company as of the date of exercise, not in excess of the minimum amount of tax required to be withheld by law (or such lower amount as may be necessary to avoid classification of your option as a liability for financial accounting purposes). If the date of determination of any tax withholding obligation is deferred to a date later than the date of exercise of your option, share withholding pursuant to the preceding sentence shall not be permitted unless you make a proper and timely election under Section 83(b) of the Code, covering the aggregate number of shares of Common Stock acquired upon such exercise with respect to which such determination is otherwise deferred, to accelerate the determination of such tax withholding obligation to the date of exercise of your option. Notwithstanding the filing of such election, shares of Common Stock shall be withheld solely from fully vested shares of Common Stock determined as of the date of exercise of your option that are otherwise issuable to you upon such exercise. Any adverse consequences to you arising in connection with such share withholding procedure shall be your sole responsibility.

(c) You may not exercise your option unless the tax withholding obligations of the Company and/or any Affiliate are satisfied. Accordingly, you may not be able to exercise your option when desired even though your option is vested, and the Company shall have no obligation to issue a certificate for such shares of Common Stock or release such shares of Common Stock from any escrow provided for herein unless such obligations are satisfied.

15. TAX CONSEQUENCES. You hereby agree that the Company does not have a duty to design or administer the Plan or its other compensation programs in a manner that minimizes your tax liabilities. You shall not make any claim against the Company, or any of its Officers, Directors, Employees or Affiliates related to tax liabilities arising from your option or your other compensation. In particular, you acknowledge that this option is exempt from Section 409A of the Code only if the exercise price per share specified in the Grant Notice is at least equal to the “fair market value” per share of the Common Stock on the Date of Grant and there is no other impermissible deferral of compensation associated with the option. Because the Common Stock is not traded on an established securities market, the Fair Market Value is determined by the Board, perhaps in consultation with an independent valuation firm retained by the Company. You acknowledge that there is no guarantee that the Internal Revenue Service will agree with the valuation as determined by the Board, and you shall not make any claim against the Company, or any of its Officers, Directors, Employees or Affiliates in the event that the Internal Revenue Service asserts that the valuation determined by the Board is less than the “fair market value” as subsequently determined by the Internal Revenue Service.

 

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16. NOTICES. Any notices provided for in your option or the Plan shall be given in writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by mail by the Company to you, five (5) days after deposit in the United States mail, postage prepaid, addressed to you at the last address you provided to the Company.

17. GOVERNING PLAN DOCUMENT. Your option is subject to all the provisions of the Plan, the provisions of which are hereby made a part of your option, and is further subject to all interpretations, amendments, rules and regulations, which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of your option and those of the Plan, the provisions of the Plan shall control.

 

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ZULILY, INC.

STOCK OPTION GRANT NOTICE

(2009 EQUITY INCENTIVE PLAN)

Zulily, Inc. (the “Company”), pursuant to its 2009 Equity Incentive Plan (the “Plan”), hereby grants to Optionholder an option to purchase the number of shares of the Company’s Common Stock set forth below. This option is subject to all of the terms and conditions as set forth herein and in the Option Agreement, the Plan, and the Notice of Exercise, all of which are attached hereto and incorporated herein in their entirety.

 

Optionholder:

  

 

  

Optionholder Address:

  

 

  

Date of Grant:

  

 

  

Type of Grant:

  

 

  

Vesting Commencement Date:

  

 

  

Number of Shares Subject to Option:        

  

 

  

Exercise Price (Per Share):

  

 

  

Total Exercise Price:

  

 

  

Expiration Date:

  

 

  

 

Exercise Schedule:    ¨    Same as Vesting Schedule    ¨    Early Exercise Permitted
Vesting Schedule:            
Payment:    By one or a combination of the following items (described in the Option Agreement):
   ¨    By cash or check
   ¨    Pursuant to a Regulation T Program if the Shares are publicly traded
   ¨    By delivery of already-owned shares if the Shares are publicly traded
   ¨    By net exercise

Additional Terms/Acknowledgements: The undersigned Optionholder acknowledges receipt of, and understands and agrees to, this Stock Option Grant Notice, the Option Agreement and the Plan. Optionholder further acknowledges that as of the Date of Grant, this Stock Option Grant Notice, the Option Agreement, and the Plan set forth the entire understanding between Optionholder and the Company regarding the acquisition of stock in the Company and supersede all prior oral and written agreements on that subject with the exception of (i) options previously granted and delivered to Optionholder under the Plan, and (ii) the following agreements only:

 

OTHER AGREEMENTS:          

 

 
 

 

 

 

ZULILY, INC.     OPTIONHOLDER:
By:  

 

   

 

  Signature     Signature
Title:  

 

    Date:  

 

Date:  

 

     

ATTACHMENTS: Option Agreement, 2009 Equity Incentive Plan and Notice of Exercise

 

1.


ATTACHMENT I

OPTION AGREEMENT


ATTACHMENT II

2009 EQUITY INCENTIVE PLAN


ATTACHMENT III

NOTICE OF EXERCISE


Form of Indemnity Agreement

Exhibit 10.5

INDEMNITY AGREEMENT

THIS INDEMNITY AGREEMENT (the “Agreement”) is made and entered into as of             , 2013, between Zulily, Inc., a Delaware corporation (the “Company”), and              (“Indemnitee”).

RECITALS

A. Highly competent persons have become more reluctant to serve corporations as directors or officers or in other capacities unless they are provided with adequate protection through insurance or adequate indemnification against inordinate risks of claims and actions against them arising out of their service to and activities on behalf of the corporation;

B. Although the furnishing of liability insurance to protect persons serving the Company and its subsidiaries from certain liabilities has been a customary and widespread practice among United States-based corporations and other business enterprises, the Company believes that, given current market conditions and trends, such insurance may be available to it in the future only at higher premiums and with more exclusions. At the same time, directors, officers, and other persons in service to corporations or business enterprises are being increasingly subjected to expensive and time-consuming litigation relating to, among other things, matters that traditionally would have been brought only against the Company or business enterprise itself. The By-laws and Certificate of Incorporation of the Company require indemnification of the officers and directors of the Company. Indemnitee may also be entitled to indemnification pursuant to the General Corporation Law of the State of Delaware (“DGCL”). The By-laws and Certificate of Incorporation and the DGCL expressly provide that the indemnification provisions set forth therein are not exclusive, and thereby contemplate that contracts may be entered into between the Company and members of the Board, officers and other persons with respect to indemnification;

C. The uncertainties relating to liability insurance and to indemnification have increased the difficulty of attracting and retaining such persons;

D. The Board has determined that the increased difficulty in attracting and retaining such persons is detrimental to the best interests of the Company’s stockholders and that the Company should act to assure such persons that there will be increased certainty of such protection in the future;

E. It is reasonable, prudent and necessary for the Company contractually to obligate itself to indemnify, and to advance expenses on behalf of, such persons to the fullest extent permitted by applicable law so that they will serve or continue to serve the Company free from undue concern that they will not be so indemnified;

F. This Agreement is a supplement to and in furtherance of the By-laws and Certificate of Incorporation of the Company and any resolutions adopted pursuant thereto, and shall not be deemed a substitute therefor, nor to diminish or abrogate any rights of Indemnitee thereunder; and


G. Indemnitee does not regard the protection available under the Company’s By-laws and Certificate of Incorporation and insurance as adequate in the present circumstances, and may not be willing to serve as an officer or director without adequate protection, and the Company desires Indemnitee to serve in such capacity. Indemnitee is willing to serve, continue to serve and to take on additional service for or on behalf of the Company on the condition that he be so indemnified; and

H. Indemnitee may have certain rights to indemnification and/or insurance provided by other entities and/or organizations which Indemnitee and such other entities and/or organizations intend to be secondary to the primary obligation of the Company to indemnify Indemnitee as provided herein, with the Company’s acknowledgement and agreement to the foregoing being a material condition to Indemnitee’s willingness to serve on the Board.

I. This Agreement supersedes and replaces in its entirety any previous Indemnification Agreement entered into between the Company and the Indemnitee.

NOW, THEREFORE, in consideration of Indemnitee’s agreement to serve as an officer or a director from and after the date hereof, the parties hereto agree as follows:

1. Indemnity of Indemnitee. The Company hereby agrees to hold harmless and indemnify Indemnitee to the fullest extent permitted by law, as such may be amended from time to time. In furtherance of the foregoing indemnification, and without limiting the generality thereof:

(a) Proceedings Other Than Proceedings by or in the Right of the Company. Indemnitee shall be entitled to the rights of indemnification provided in this Section l(a) if, by reason of his Corporate Status (as hereinafter defined), the Indemnitee is, or is threatened to be made, a party to or participant in any Proceeding (as hereinafter defined) other than a Proceeding by or in the right of the Company. Pursuant to this Section 1(a), Indemnitee shall be indemnified against all Expenses (as hereinafter defined), judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by him, or on his behalf, in connection with such Proceeding or any claim, issue or matter therein, if the Indemnitee acted in good faith and in a manner the Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, and with respect to any criminal Proceeding, had no reasonable cause to believe the Indemnitee’s conduct was unlawful.

(b) Proceedings by or in the Right of the Company. Indemnitee shall be entitled to the rights of indemnification provided in this Section 1(b) if, by reason of his Corporate Status, the Indemnitee is, or is threatened to be made, a party to or participant in any Proceeding brought by or in the right of the Company. Pursuant to this Section 1(b), Indemnitee shall be indemnified against all Expenses actually and reasonably incurred by the Indemnitee, or on the Indemnitee’s behalf, in connection with such Proceeding if the Indemnitee acted in good faith and in a manner the Indemnitee reasonably believed to be in or not opposed to the best interests of the Company; provided, however, if applicable law so provides, no indemnification against such Expenses shall be made in respect of any claim, issue or matter in such Proceeding as to which Indemnitee shall have been adjudged to be liable to the Company unless and to the extent that the Court of Chancery of the State of Delaware shall determine that such indemnification may be made.

 

2.


(c) Indemnification for Expenses of a Party Who is Wholly or Partly Successful. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of his Corporate Status, a party to and is successful, on the merits or otherwise, in any Proceeding, he shall be indemnified to the maximum extent permitted by law, as such may be amended from time to time, against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith. If Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Company shall indemnify Indemnitee against all Expenses actually and reasonably incurred by him or on his behalf in connection with each successfully resolved claim, issue or matter. For purposes of this Section and without limitation, the termination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter.

2. Additional Indemnity. In addition to, and without regard to any limitations on, the indemnification provided for in Section 1 of this Agreement, the Company shall and hereby does indemnify and hold harmless Indemnitee against all Expenses, judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by him or on his behalf if, by reason of his Corporate Status, he is, or is threatened to be made, a party to or participant in any Proceeding (including a Proceeding by or in the right of the Company), including, without limitation, all liability arising out of the negligence or active or passive wrongdoing of Indemnitee. The only limitation that shall exist upon the Company’s obligations pursuant to this Agreement shall be that the Company shall not be obligated to make any payment to Indemnitee that is finally determined (under the procedures, and subject to the presumptions, set forth in Sections 6 and 7 hereof) to be unlawful.

3. Contribution.

(a) Whether or not the indemnification provided in Sections 1 and 2 hereof is available, in respect of any threatened, pending or completed action, suit or proceeding in which the Company is jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), the Company shall pay, in the first instance, the entire amount of any judgment or settlement of such action, suit or proceeding without requiring Indemnitee to contribute to such payment and the Company hereby waives and relinquishes any right of contribution it may have against Indemnitee. The Company shall not enter into any settlement of any action, suit or proceeding in which the Company is jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding) unless such settlement provides for a full and final release of all claims asserted against Indemnitee.

(b) Without diminishing or impairing the obligations of the Company set forth in the preceding subparagraph, if, for any reason, Indemnitee shall elect or be required to pay all or any portion of any judgment or settlement in any threatened, pending or completed action, suit or proceeding in which the Company is jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), the Company shall contribute to the amount of Expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred and paid or payable by Indemnitee in proportion to the relative benefits received by the Company and all officers, directors or employees of the Company, other than Indemnitee, who are jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), on the one hand,

 

3.


and Indemnitee, on the other hand, from the transaction from which such action, suit or proceeding arose; provided, however, that the proportion determined on the basis of relative benefit may, to the extent necessary to conform to law, be further adjusted by reference to the relative fault of the Company and all officers, directors or employees of the Company other than Indemnitee who are jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), on the one hand, and Indemnitee, on the other hand, in connection with the events that resulted in such expenses, judgments, fines or settlement amounts, as well as any other equitable considerations which the Law may require to be considered. The relative fault of the Company and all officers, directors or employees of the Company, other than Indemnitee, who are jointly liable with Indemnitee (or would be if joined in such action, suit or proceeding), on the one hand, and Indemnitee, on the other hand, shall be determined by reference to, among other things, the degree to which their actions were motivated by intent to gain personal profit or advantage, the degree to which their liability is primary or secondary and the degree to which their conduct is active or passive.

(c) The Company hereby agrees to fully indemnify and hold Indemnitee harmless from any claims of contribution which may be brought by officers, directors or employees of the Company, other than Indemnitee, who may be jointly liable with Indemnitee.

(d) To the fullest extent permissible under applicable law, if the indemnification provided for in this Agreement is unavailable to Indemnitee for any reason whatsoever, the Company, in lieu of indemnifying Indemnitee, shall contribute to the amount incurred by Indemnitee, whether for judgments, fines, penalties, excise taxes, amounts paid or to be paid in settlement and/or for Expenses, in connection with any claim relating to an indemnifiable event under this Agreement, in such proportion as is deemed fair and reasonable in light of all of the circumstances of such Proceeding in order to reflect (i) the relative benefits received by the Company and Indemnitee as a result of the event(s) and/or transaction(s) giving cause to such Proceeding; and/or (ii) the relative fault of the Company (and its directors, officers, employees and agents) and Indemnitee in connection with such event(s) and/or transaction(s).

4. Indemnification for Expenses of a Witness. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of his Corporate Status, a witness, or is made (or asked to) respond to discovery requests, in any Proceeding to which Indemnitee is not a party, he shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith.

5. Advancement of Expenses. Notwithstanding any other provision of this Agreement, the Company shall advance all Expenses incurred by or on behalf of Indemnitee in connection with any Proceeding by reason of Indemnitee’s Corporate Status within thirty (30) days after the receipt by the Company of a statement or statements from Indemnitee requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements shall reasonably evidence the Expenses incurred by Indemnitee and shall include or be preceded or accompanied by a written undertaking by or on behalf of Indemnitee to repay any Expenses advanced if it shall ultimately be determined that Indemnitee is not entitled to be indemnified against such Expenses. Any advances and undertakings to repay pursuant to this Section 5 shall be unsecured and interest free.

 

4.


6. Procedures and Presumptions for Determination of Entitlement to Indemnification. It is the intent of this Agreement to secure for Indemnitee rights of indemnity that are as favorable as may be permitted under the DGCL and public policy of the State of Delaware. Accordingly, the parties agree that the following procedures and presumptions shall apply in the event of any question as to whether Indemnitee is entitled to indemnification under this Agreement:

(a) To obtain indemnification under this Agreement, Indemnitee shall submit to the Company a written request, including therein or therewith such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification. The Secretary of the Company shall, promptly upon receipt of such a request for indemnification, advise the Board in writing that Indemnitee has requested indemnification. Notwithstanding the foregoing, any failure of Indemnitee to provide such a request to the Company, or to provide such a request in a timely fashion, shall not relieve the Company of any liability that it may have to Indemnitee unless, and to the extent that, such failure actually and materially prejudices the interests of the Company.

(b) Upon written request by Indemnitee for indemnification pursuant to the first sentence of Section 6(a) hereof, a determination with respect to Indemnitee’s entitlement thereto shall be made in the specific case by one of the following four methods, which shall be at the election of the Board: (i) unless a Change in Control has occurred: (1) by a majority vote of the Disinterested Directors, even though less than a quorum, (2) by a committee of Disinterested Directors designated by a majority vote of the Disinterested Directors, even though less than a quorum, (3) if there are no Disinterested Directors or if the Disinterested Directors so direct, by Independent Counsel in a written opinion to the Board, a copy of which shall be delivered to the Indemnitee, or (4) if so directed by the Board, by the stockholders of the Company; and (ii) if a Change in Control has occurred, then by Independent Counsel in a written opinion to the Board, a copy of which shall be delivered to the Indemnitee. For purposes hereof, Disinterested Directors are those members of the Board who are not parties to the action, suit or proceeding in respect of which indemnification is sought by Indemnitee.

(c) If the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 6(b) hereof, the Independent Counsel shall be selected as provided in this Section 6(c). The Independent Counsel shall be selected by the Board. Indemnitee may, within 10 days after such written notice of selection shall have been given, deliver to the Company a written objection to such selection; provided, however, that such objection may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements of “Independent Counsel” as defined in Section 13 of this Agreement, and the objection shall set forth with particularity the factual basis of such assertion. Absent a proper and timely objection, the person so selected shall act as Independent Counsel. If a written objection is made and substantiated, the Independent Counsel selected may not serve as Independent Counsel unless and until such objection is withdrawn or a court has determined that such objection is without merit. If, within 20 days after submission by Indemnitee of a written request for indemnification pursuant to Section 6(a) hereof, no Independent Counsel shall have been selected and not objected to, either the Company or Indemnitee may petition the Court of Chancery of the State of Delaware or other court of competent jurisdiction for resolution of any

 

5.


objection which shall have been made by the Indemnitee to the Company’s selection of Independent Counsel and/or for the appointment as Independent Counsel of a person selected by the court or by such other person as the court shall designate, and the person with respect to whom all objections are so resolved or the person so appointed shall act as Independent Counsel under Section 6(b) hereof. The Company shall pay any and all reasonable fees and expenses of Independent Counsel incurred by such Independent Counsel in connection with acting pursuant to Section 6(b) hereof, and the Company shall pay all reasonable fees and expenses incident to the procedures of this Section 6(c), regardless of the manner in which such Independent Counsel was selected or appointed.

(d) In making a determination with respect to entitlement to indemnification hereunder, the person or persons or entity making such determination shall presume that Indemnitee is entitled to indemnification under this Agreement. Anyone seeking to overcome this presumption shall have the burden of proof and the burden of persuasion by clear and convincing evidence. Neither the failure of the Company (including by its Board or Independent Counsel) to have made a determination prior to the commencement of any action pursuant to this Agreement that indemnification is proper in the circumstances because Indemnitee has met the applicable standard of conduct, nor an actual determination by the Company (including by its Board or Independent Counsel) that Indemnitee has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that Indemnitee has not met the applicable standard of conduct.

(e) Indemnitee shall be deemed to have acted in good faith if Indemnitee’s action is based on the records or books of account of the Enterprise, including financial statements, or on information supplied to Indemnitee by the officers of the Enterprise (as hereinafter defined) in the course of their duties, or on the advice of legal counsel for the Enterprise or on information or records given or reports made to the Enterprise by an independent certified public accountant or by an appraiser or other expert selected with reasonable care by the Enterprise. In addition, the knowledge and/or actions, or failure to act, of any director, officer, agent or employee of the Enterprise shall not be imputed to Indemnitee for purposes of determining the right to indemnification under this Agreement. Whether or not the foregoing provisions of this Section 6(e) are satisfied, it shall in any event be presumed that Indemnitee has at all times acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company. Anyone seeking to overcome this presumption shall have the burden of proof and the burden of persuasion by clear and convincing evidence.

(f) If the person, persons or entity empowered or selected under Section 6 to determine whether Indemnitee is entitled to indemnification shall not have made a determination within sixty (60) days after receipt by the Company of the request therefor, the requisite determination of entitlement to indemnification shall be deemed to have been made and Indemnitee shall be entitled to such indemnification absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee’s statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law; provided, however, that such 60-day period may be extended for a reasonable time, not to exceed an additional thirty (30) days, if the person, persons or entity making such determination with respect to entitlement to indemnification in good faith requires such additional time to obtain or evaluate documentation and/or information

 

6.


relating thereto; and provided, further, that the foregoing provisions of this Section 6(f) shall not apply if the determination of entitlement to indemnification is to be made by the stockholders pursuant to Section 6(b) of this Agreement and if (A) within fifteen (15) days after receipt by the Company of the request for such determination, the Board or the Disinterested Directors, if appropriate, resolve to submit such determination to the stockholders for their consideration at an annual meeting thereof to be held within seventy-five (75) days after such receipt and such determination is made thereat, or (B) a special meeting of stockholders is called within fifteen (15) days after such receipt for the purpose of making such determination, such meeting is held for such purpose within sixty (60) days after having been so called and such determination is made thereat.

(g) Indemnitee shall cooperate with the person, persons or entity making such determination with respect to Indemnitee’s entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary to such determination. Any Independent Counsel, member of the Board or stockholder of the Company shall act reasonably and in good faith in making a determination regarding the Indemnitee’s entitlement to indemnification under this Agreement. Any costs or expenses (including attorneys’ fees and disbursements) incurred by Indemnitee in so cooperating with the person, persons or entity making such determination shall be borne by the Company (irrespective of the determination as to Indemnitee’s entitlement to indemnification) and the Company hereby indemnifies and agrees to hold Indemnitee harmless therefrom.

(h) The Company acknowledges that a settlement or other disposition short of final judgment may be successful if it permits a party to avoid expense, delay, distraction, disruption and uncertainty. In the event that any action, claim or proceeding to which Indemnitee is a party is resolved in any manner other than by adverse judgment against Indemnitee (including, without limitation, settlement of such action, claim or proceeding with or without payment of money or other consideration) it shall be presumed that Indemnitee has been successful on the merits or otherwise in such action, suit or proceeding. Anyone seeking to overcome this presumption shall have the burden of proof and the burden of persuasion by clear and convincing evidence.

(i) The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this Agreement) of itself adversely affect the right of Indemnitee to indemnification or create a presumption that Indemnitee did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Company or, with respect to any criminal Proceeding, that Indemnitee had reasonable cause to believe that his conduct was unlawful.

7. Remedies of Indemnitee.

(a) In the event that (i) a determination is made pursuant to Section 6 of this Agreement that Indemnitee is not entitled to indemnification under this Agreement, (ii) advancement of Expenses is not timely made pursuant to Section 5 of this Agreement, (iii) no determination of entitlement to indemnification is made pursuant to Section 6(b) of this

 

7.


Agreement within 90 days after receipt by the Company of the request for indemnification, (iv) payment of indemnification is not made pursuant to this Agreement within ten (10) days after receipt by the Company of a written request therefor or (v) payment of indemnification is not made within ten (10) days after a determination has been made that Indemnitee is entitled to indemnification or such determination is deemed to have been made pursuant to Section 6 of this Agreement, Indemnitee shall be entitled to an adjudication in an appropriate court of the State of Delaware, or in any other court of competent jurisdiction, of Indemnitee’s entitlement to such indemnification. Indemnitee shall commence such proceeding seeking an adjudication within 180 days following the date on which Indemnitee first has the right to commence such proceeding pursuant to this Section 7(a). The Company shall not oppose Indemnitee’s right to seek any such adjudication.

(b) In the event that a determination shall have been made pursuant to Section 6(b) of this Agreement that Indemnitee is not entitled to indemnification, any judicial proceeding commenced pursuant to this Section 7 shall be conducted in all respects as a de novo trial on the merits, and Indemnitee shall not be prejudiced by reason of the adverse determination under Section 6(b).

(c) If a determination shall have been made pursuant to Section 6(b) of this Agreement that Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding commenced pursuant to this Section 7, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee’s misstatement not materially misleading in connection with the application for indemnification, or (ii) a prohibition of such indemnification under applicable law.

(d) In the event that Indemnitee, pursuant to this Section 7, seeks a judicial adjudication of his rights under, or to recover damages for breach of, this Agreement, or to recover under any directors’ and officers’ liability insurance policies maintained by the Company, the Company shall pay on his behalf, in advance, any and all expenses (of the types described in the definition of Expenses in Section 13 of this Agreement) actually and reasonably incurred by him in such judicial adjudication, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, advancement of expenses or insurance recovery.

(e) The Company shall be precluded from asserting in any judicial proceeding commenced pursuant to this Section 7 that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court that the Company is bound by all the provisions of this Agreement. The Company shall indemnify Indemnitee against any and all Expenses and, if requested by Indemnitee, shall (within ten (10) days after receipt by the Company of a written request therefore) advance, to the extent not prohibited by law, such expenses to Indemnitee, which are incurred by Indemnitee in connection with any action brought by Indemnitee for indemnification or advance of Expenses from the Company under this Agreement or under any directors’ and officers’ liability insurance policies maintained by the Company, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, advancement of Expenses or insurance recovery, as the case may be.

 

8.


(f) Notwithstanding anything in this Agreement to the contrary, no determination as to entitlement to indemnification under this Agreement shall be required to be made prior to the final disposition of the Proceeding.

8. Non-Exclusivity; Survival of Rights; Insurance; Primacy of Indemnification; Subrogation.

(a) The rights of indemnification as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the Certificate of Incorporation, the By-laws, any agreement, a vote of stockholders, a resolution of Board or otherwise. No amendment, alteration or repeal of this Agreement or of any provision hereof shall limit or restrict any right of Indemnitee under this Agreement in respect of any action taken or omitted by such Indemnitee in his Corporate Status prior to such amendment, alteration or repeal. To the extent that a change in the DGCL, whether by statute or judicial decision, permits greater indemnification than would be afforded currently under the Certificate of Incorporation, By-laws and this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change. No right or remedy herein conferred is intended to be exclusive of any other right or remedy, and every other right and remedy shall be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other right or remedy.

(b) To the extent that the Company maintains an insurance policy or policies providing liability insurance for directors, officers, employees, or agents or fiduciaries of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise that such person serves at the request of the Company, Indemnitee shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage available for any director, officer, employee, agent or fiduciary under such policy or policies. If, at the time of the receipt of a notice of a claim pursuant to the terms hereof, the Company has director and officer liability insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies.

(c) The Company hereby acknowledges that Indemnitee has or may have in the future certain rights to indemnification, advancement of expenses and/or insurance provided by other entities and/or organizations (collectively, the “Secondary Indemnitors”). The Company hereby agrees (i) that it is the indemnitor of first resort (i.e., its obligations to Indemnitee are primary and any obligation of the Secondary Indemnitors to advance expenses or to provide indemnification for the same expenses or liabilities incurred by Indemnitee are secondary), (ii) that it shall be required to advance the full amount of expenses incurred by Indemnitee and shall be liable for the full amount of all Expenses, judgments, penalties, fines and amounts paid in settlement to the extent legally permitted and as required by the terms of this Agreement and the Certificate of Incorporation or Bylaws of the Company (or any other agreement between the Company and Indemnitee), without regard to any rights Indemnitee may

 

9.


have against the Secondary Indemnitors, and, (iii) that it irrevocably waives, relinquishes and releases the Secondary Indemnitors from any and all claims against the Secondary Indemnitors for contribution, subrogation or any other recovery of any kind in respect thereof. The Company further agrees that no advancement or payment by the Secondary Indemnitors on behalf of Indemnitee with respect to any claim for which Indemnitee has sought indemnification from the Company shall affect the foregoing and the Secondary Indemnitors shall have a right of contribution and/or be subrogated to the extent of such advancement or payment to all of the rights of recovery of Indemnitee against the Company. The Company and Indemnitee agree that the Secondary Indemnitors are express third party beneficiaries of the terms of this Section 8(c).

(d) Except as provided in paragraph (c) above, in the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee (other than against the Secondary Indemnitors), who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights.

(e) Except as provided in paragraph (c) above, the Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder if and to the extent that Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise.

(f) Except as provided in paragraph (c) above, the Company’s obligation to indemnify or advance Expenses hereunder to Indemnitee who is or was serving at the request of the Company as a director, officer, employee or agent of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise shall be reduced by any amount Indemnitee has actually received as indemnification or advancement of expenses from such other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise.

9. Exception to Right of Indemnification. Notwithstanding any provision in this Agreement, the Company shall not be obligated under this Agreement to make any indemnity in connection with any claim made against Indemnitee:

(a) for which payment has actually been made to or on behalf of Indemnitee under any insurance policy or other indemnity provision, except with respect to any excess beyond the amount paid under any insurance policy or other indemnity provision, provided, that the foregoing shall not affect the rights of Indemnitee or the Secondary Indemnitors set forth in Section 8(c) above;

(b) for an accounting of profits made from the purchase and sale (or sale and purchase) by Indemnitee of securities of the Company within the meaning of Section 16(b) of the Exchange Act, or similar provisions of state statutory law or common law;

(c) in connection with any Proceeding (or any part of any Proceeding) initiated by Indemnitee, including any Proceeding (or any part of any Proceeding) initiated by Indemnitee against the Company or its directors, officers, employees or other indemnitees, unless (i) the Board authorized the Proceeding (or any part of any Proceeding) prior to its initiation or (ii) the Company provides the indemnification, in its sole discretion, pursuant to the powers vested in the Company under applicable law;

 

10.


(d) with respect to remuneration paid to Indemnitee if it is determined by final judgment or other final adjudication that such remuneration was in violation of law (and, in this respect, both the Company and Indemnitee have been advised that the Securities and Exchange Commission believes that indemnification for liabilities arising under the federal securities laws is against public policy and is, therefore, unenforceable and that claims for indemnification should be submitted to appropriate courts for adjudication, as indicated in the last paragraph of this Section 9 below);

(e) a final judgment or other final adjudication is made that Indemnitee’s conduct was in bad faith, knowingly fraudulent or deliberately dishonest or constituted willful misconduct (but only to the extent of such specific determination);

(f) in connection with any claim for reimbursement of the Company by Indemnitee of any bonus or other incentive-based or equity-based compensation or of any profits realized by Indemnitee from the sale of securities of the Company, as required in each case under the Exchange Act (including any such reimbursements that arise from an accounting restatement of the Company pursuant to Section 304 of the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”), or the payment to the Company of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 306 of the Sarbanes-Oxley Act), if Indemnitee is held liable therefor (including pursuant to any settlement); or

(g) on account of conduct that is established by a final judgment as constituting a breach of Indemnitee’s duty of loyalty to the Company or resulting in any personal profit or advantage to which Indemnitee is not legally entitled.

For purposes of this Section 9, a final judgment or other adjudication may be reached in either the underlying proceeding or action in connection with which indemnification is sought or a separate proceeding or action to establish rights and liabilities under this Agreement.

Any provision herein to the contrary notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement to indemnify Indemnitee or otherwise act in violation of any undertaking appearing in and required by the rules and regulations promulgated under the Securities Act, or in any registration statement filed with the SEC under the Securities Act. Indemnitee acknowledges that paragraph (h) of Item 512 of Regulation S-K currently generally requires the Company to undertake in connection with any registration statement filed under the Securities Act to submit the issue of the enforceability of Indemnitee’s rights under this Agreement in connection with any liability under the Securities Act on public policy grounds to a court of appropriate jurisdiction and to be governed by any final adjudication of such issue. Indemnitee specifically agrees that any such undertaking shall supersede the provisions of this Agreement and to be bound by any such undertaking.

10. Duration of Agreement. All agreements and obligations of the Company contained herein shall continue during the period Indemnitee is an officer or director of the Company (or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise) and shall

 

11.


continue thereafter so long as Indemnitee shall be subject to any Proceeding (or any proceeding commenced under Section 7 hereof) by reason of his Corporate Status, whether or not he is acting or serving in any such capacity at the time any liability or expense is incurred for which indemnification can be provided under this Agreement. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Company), assigns, spouses, heirs, executors and personal and legal representatives.

11. Security. To the extent requested by Indemnitee and approved by the Board, the Company may at any time and from time to time provide security to Indemnitee for the Company’s obligations hereunder through an irrevocable bank line of credit, funded trust or other collateral. Any such security, once provided to Indemnitee, may not be revoked or released without the prior written consent of the Indemnitee.

12. Enforcement.

(a) The Company expressly confirms and agrees that it has entered into this Agreement and assumes the obligations imposed on it hereby in order to induce Indemnitee to serve as an officer or director of the Company, and the Company acknowledges that Indemnitee is relying upon this Agreement in serving as an officer or director of the Company.

(b) This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral, written and implied, between the parties hereto with respect to the subject matter hereof.

13. Definitions. For purposes of this Agreement:

(a) “Beneficial Owner” shall have the meaning given to such term in Rule 13d-3 under the Exchange Act; provided, however, that Beneficial Owner shall exclude any Person otherwise becoming a Beneficial Owner by reason of the stockholders of the Company approving a merger of the Company with another entity.

(b) “Board” means the Board of Directors of the Company.

(c) “Change in Control” means the earliest to occur after the date of this Agreement of any of the following events:

(i) Acquisition of Stock by Third Party. Any Person is or becomes the Beneficial Owner (as defined above), directly or indirectly, of securities of the Company representing twenty five percent (25%) or more of the combined voting power of the Company’s then outstanding securities (excluding any changes in the voting power solely resulting from any conversion of Class B Common Stock into Class A Common Stock);

 

12.


(ii) Change in Board. During any period of two (2) consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in clause (i), (ii) or (iv) of this definition of Change in control) whose election by the Board or nomination for election by the Company’s stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a least a majority of the members of the Board;

(iii) Corporate Transactions. The effective date of a merger or consolidation of the Company with any other entity, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 51% of the combined voting power of the voting securities of the surviving entity outstanding immediately after such merger or consolidation and with the power to elect at least a majority of the Board or other governing body of such surviving entity;

(iv) Liquidation. The approval by the stockholders of the Company of a complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets; and

(v) Other Events. There occurs any other event of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or a response to any similar item on any similar schedule or form) promulgated under the Exchange Act, whether or not the Company is then subject to such reporting requirement.

(d) “Corporate Status” describes the status of a person who is or was a director, officer, employee, agent or fiduciary of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise that such person is or was serving at the express written request of the Company.

(e) “Disinterested Director” means a director of the Company who is not and was not a party to the Proceeding in respect of which indemnification is sought by Indemnitee.

(f) “Enterprise” shall mean the Company and any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise that Indemnitee is or was serving at the express written request of the Company as a director, officer, employee, agent or fiduciary.

(g) “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.

 

13.


(h) “Expenses” shall include all reasonable attorneys’ fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, participating, or being or preparing to be a witness in a Proceeding, or responding to, or objecting to, a request to provide discovery in any Proceeding. Expenses also shall include Expenses incurred in connection with any appeal resulting from any Proceeding and any federal, state, local or foreign taxes imposed on the Indemnitee as a result of the actual or deemed receipt of any payments under this Agreement, including without limitation the premium, security for, and other costs relating to any cost bond, supersede as bond, or other appeal bond or its equivalent. Expenses, however, shall not include amounts paid in settlement by Indemnitee or the amount of judgments or fines against Indemnitee.

(i) “Independent Counsel” means a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither presently is, nor in the past five years has been, retained to represent: (i) the Company or Indemnitee in any matter material to either such party (other than with respect to matters concerning Indemnitee under this Agreement, or of other indemnitees under similar indemnification agreements), or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term “Independent Counsel” shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee’s rights under this Agreement. The Company agrees to pay the reasonable fees of the Independent Counsel referred to above and to fully indemnify such counsel against any and all Expenses, claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto.

(j) “Person” for purposes of the definition of Beneficial Owner and Change in Control set forth above, shall have the meaning as set forth in Sections 13(d) and 14(d) of the Exchange Act; provided, however, that Person shall exclude (i) the Company, (ii) any trustee or other fiduciary holding securities under an employee benefit plan of the Company, and (iii) any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company.

(k) “Proceeding” includes any threatened, pending or completed action, suit, arbitration, alternate dispute resolution mechanism, investigation, inquiry, administrative hearing or any other actual, threatened or completed proceeding, whether brought by or in the right of the Company or otherwise and whether civil, criminal, administrative or investigative, in which Indemnitee was, is or will be involved as a party or otherwise, by reason of the fact that Indemnitee is or was an officer or director of the Company, by reason of any action taken by him or of any inaction on his part while acting as an officer or director of the Company, or by reason of the fact that he is or was serving at the request of the Company as a director, officer, employee, agent or fiduciary of another corporation, partnership, joint venture, trust or other Enterprise; in each case whether or not he is acting or serving in any such capacity at the time any liability or expense is incurred for which indemnification can be provided under this Agreement; including one pending on or before the date of this Agreement, but excluding one initiated by an Indemnitee pursuant to Section 7 of this Agreement to enforce his rights under this Agreement.

 

14.


(l) “Securities Act” shall mean the Securities Act of 1933, as amended.

14. Severability. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. Without limiting the generality of the foregoing, this Agreement is intended to confer upon Indemnitee indemnification rights to the fullest extent permitted by applicable laws. In the event any provision hereof conflicts with any applicable law, such provision shall be deemed modified, consistent with the aforementioned intent, to the extent necessary to resolve such conflict.

15. Modification and Waiver. No supplement, modification, termination or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver.

16. Notice By Indemnitee. Indemnitee agrees promptly to notify the Company in writing upon being served with or otherwise receiving any summons, citation, subpoena, complaint, indictment, information or other document relating to any Proceeding or matter which may be subject to indemnification covered hereunder. The failure to so notify the Company shall not relieve the Company of any obligation which it may have to Indemnitee under this Agreement or otherwise unless and only to the extent that such failure or delay materially prejudices the Company.

17. Notices. All notices and other communications given or made pursuant to this Agreement shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified, (b) when sent by confirmed electronic mail or facsimile if sent during normal business hours of the recipient, and if not so confirmed, then on the next business day, (c) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (d) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent:

(a) To Indemnitee at the address set forth below Indemnitee signature hereto.

(b) To the Company at:

Zulily, Inc.

2200 First Avenue South

Seattle, WA 98134

Attention: Chief Executive Officer

or to such other address as may have been furnished to Indemnitee by the Company or to the Company by Indemnitee, as the case may be.

 

15.


18. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same Agreement. This Agreement may also be executed and delivered by facsimile signature and in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

19. Headings. The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof.

20. Governing Law and Consent to Jurisdiction. This Agreement and the legal relations among the parties shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware, without regard to its conflict of laws rules. The Company and Indemnitee hereby irrevocably and unconditionally (i) agree that any action or proceeding arising out of or in connection with this Agreement shall be brought only in the Chancery Court of the State of Delaware (the “Delaware Court”), and not in any other state or federal court in the United States of America or any court in any other country, (ii) consent to submit to the exclusive jurisdiction of the Delaware Court for purposes of any action or proceeding arising out of or in connection with this Agreement, (iii) appoint, to the extent such party is not otherwise subject to service of process in the State of Delaware, irrevocably Corporation Service Company as its agent in the State of Delaware as such party’s agent for acceptance of legal process in connection with any such action or proceeding against such party with the same legal force and validity as if served upon such party personally within the State of Delaware, (iv) waive any objection to the laying of venue of any such action or proceeding in the Delaware Court, and (v) waive, and agree not to plead or to make, any claim that any such action or proceeding brought in the Delaware Court has been brought in an improper or inconvenient forum.

SIGNATURE PAGE TO FOLLOW

 

16.


IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and as of the day and year first above written.

 

COMPANY
By:  

 

Name:   Darrell Cavens
Title:   Chief Executive Officer
INDEMNITEE

 

Name:  
Address:  

 

 

 

 

 

17.


Employment Offer Letter by and between the Company and Marc Stolzman

Exhibit 10.6

August 16, 2012

Marc Stolzman

[Address]

Dear Marc:

Zulily, Inc. (the “Company”) is pleased to offer you the position of CFO, reporting to Darrell Cavens, CEO. This offer is to work at our facility located in Seattle, WA.

Your salary will be $25,000.00, per month, which is equivalent to $300,000.00, on an annualized basis, less payroll deductions and withholdings. You will be paid semi-monthly and you will be eligible for standard Company benefits. Medical and insurance benefits become effective the first of the month following your date of full time employment.

In addition, you will be eligible for an annual bonus of up to 30% of your base salary based on metrics to be established following the commencement of your employment.

You will also be paid $125,000.00, within the first month as a sign-on bonus, this amount is a taxable benefit. If you voluntarily choose to resign within the first year, you will reimburse the Company for this payment.

The Company, shall grant you an option to purchase 2,892,440 shares (the “Option”) of the Company’s Common Stock under the Company’s 2009 Equity Incentive Plan (the “Plan”), at fair market value as determined by the Board of Directors of the Company (the “Board”) as of the date of grant. The Option will be subject to the terms and conditions of the Plan and your grant agreement, which you will be required to execute. Your grant agreement will include a four-year vesting schedule, under which 25 percent of your shares will vest after twelve months from Board approval, with the remaining shares vesting monthly thereafter, until either your Option is fully vested or your employment ends, whichever occurs first.

In the event that there is a Change in Control (as defined in the Plan) of the Company, and either (i) the surviving entity does not assume, continue or substitute for your options or (ii) any of the following occurs in connection with or at any time within 12 months following such Change in Control: (A) your employment is terminated by the Company or the surviving entity, as applicable, without “Cause” (as defined in the Plan); or (B) you terminate your employment for Good Reason (as defined below), then the vesting of any stock options held by you at the time of such event shall automatically be accelerated by 100% of the number of shares subject to the option so that all such shares are vested and exercisable as of the date of such termination.


Page 2

 

For purposes of this letter, “Good Reason” means (i) any material reduction in your base pay; (ii) the assignment to you of any duties or any other action by the Company that results in a material diminution in your authority, duties, or responsibilities as set forth in this offer letter with the Company (provided that your position as an officer of a subsidiary or division of an acquiring entity following a Change in Control shall not be considered a diminution under this subsection); or (iii) relocation of your principal place of employment to a place greater than fifty (50) miles from your then current principal place of employment. Notwithstanding the foregoing, Good Reason shall not exist unless you (i) provide written notice of any condition described in (i)-(iii) above within ninety (90) days of the initial existence of the condition; (ii) provide an opportunity for the Company to cure such condition within thirty (30) days of such notice; and, (iii) if the Company fails to reasonably cure such condition within such cure period, you terminate your relationship with the Company as an employee within thirty (30) days following the termination of such cure period.

As an employee, you will be expected to abide by Company rules, policies and procedures. As a condition of employment, you must sign and comply with the attached Confidential Information and Inventions Agreement which prohibits unauthorized use or disclosure of Company proprietary information, among other obligations. Of course, the Company may change your position, duties, and work location from time to time in its discretion.

You may terminate your employment with the Company at any time and for any reason whatsoever simply by notifying the Company. Likewise, the Company may terminate your employment at any time, with or without Cause or advance notice; provided, however, if the Company terminates your employment without Cause and provided you sign and do not revoke a general release of claims with respect to the Company and related parties within 30 days of such employment termination, you shall receive continued payment of your base salary for a period of twelve (12) months following the termination date, commencing on the payroll period following the effective date of the general release. Your employment at-will status can only be modified in a written agreement signed by you and by an officer of the Company.

This letter, together with your Confidential Information and Inventions Agreement, forms the complete and exclusive statement of your employment agreement with the Company. It supersedes any other agreements or promises made to you by anyone, whether oral or written. Changes in your employment terms, other than those changes expressly reserved to the Company’s discretion in this letter, require a written modification signed by an officer of the Company. If this offer letter and the Confidential Information and Inventions Agreement conflict, the offer letter will govern.

Please sign and date this letter, and the enclosed Confidential Information and Inventions Agreement and return them to Jordan Day, Recruiting, by August 17, 2012, if you wish to accept employment at the Company under the terms described above. If you accept our offer, we would like you to start on or before September 17, 2012.

Your start is contingent upon successful completion of a background check. On your first day of employment, you are required to bring documents necessary to complete the I-9 Verification of eligibility to work in the United States.


Page 3

 

We look forward to you joining zulily and to the contributions we know you will bring to your new team and the company.

 

Sincerely,

/s/ Darrell Cavens

Darrell Cavens
CEO

Attachment: Confidential Information and Inventions Agreement

 

Accepted:

/s/ Marc Stolzman

Marc Stolzman

8/2-/12

Date

Employment Offer Letter by and between the Company and Bob Spieth

Exhibit 10.7

December 10, 2012 (amended)

Bob Spieth

[Address]

Dear Bob:

Zulily, Inc. (the “Company”) is pleased to offer you the position of Chief Operating Officer, reporting to Darrell Cavens, CEO. This offer is to work at our facility located in Washington.

Your salary will be $25,000.00 per month, which is equivalent to $300,000.00 on an annualized basis, less payroll deductions and withholdings. You will be paid semi-monthly and you will be eligible for standard Company benefits. Medical and insurance benefits become effective the first of the month following your date of full time employment. You will also be eligible for our executive bonus program with an annual target bonus of 30% of base salary.

Zulily would like to help make the transition to your new location as smooth as possible. Zulily will provide a budget up to $50,000, to be managed by our relocation vendor, which may be used towards qualified relocation expenses. Your relocation manager will arrange services through preferred providers and direct bill as many services as possible. Any expenses exceeding the budget amount will be your responsibility. Some relocation benefits, whether paid directly to you or to vendor on your behalf, are considered taxable by the IRS and may be subject to tax withholding. Your relocation manager will discuss this impact with you.

Relocation expenses are provided with the requirement that your employment term exceeds twelve (12) months. If your employment is terminated or you choose to leave the company prior to completion of this twelve month term, you will be required to reimburse the full amount of expenses (whether paid directly to you or to a vendor on your behalf) as well as any additional taxes and administrative fees associated with your relocation back to Zulily.

Subject to approval by the Board of Directors (the “Board”) of the Company, the Company shall grant you an option to purchase 2,415,000 shares (the “Option”) of the Company’s Common Stock under the Company’s 2009 Stock Plan (the “Plan”), at fair market value as determined by the Board as of the date of grant. The Option will be subject to the terms and conditions of the Plan and your grant agreement, which you will be required to execute. Your grant agreement will include a four-year vesting schedule, under which 25 percent of your shares will vest after twelve months from Board approval, with the remaining shares vesting monthly thereafter, until either your Option is fully vested, your employment, or any consulting relationship, as described herein, ends, whichever occurs first. As an employee, you will be expected to abide by Company rules, policies and procedures. As a condition of employment, you must sign and comply with the attached Confidential Information and Inventions Agreement which prohibits unauthorized use or disclosure of Company proprietary information, among other obligations. Of course, the Company may change your position, duties, and work location from time to time in its discretion.


Page 2

 

You may terminate your employment with the Company at any time and for any reason whatsoever simply by notifying the Company. Likewise, the Company may terminate your employment at any time, with or without Cause (as defined in the Plan) or advance notice. Should the Company choose to terminate your employment without Cause prior to the first anniversary of the Board approval of your Option grant, you agree to provide consulting services to the Company through the first anniversary of the Board approval of your Option grant. Any such consulting services will terminate on the 15th month after Board approval of your Option grant, unless otherwise agreed in writing by you and an officer of the Company. You will be paid $25,000.00 per month, less payroll deductions and withholdings, and will be eligible for medical and insurance benefits during any period in which such consulting services are rendered. Your employment at-will status can only be modified in a written agreement signed by you and by an officer of the Company.

As an employee, you will be expected to abide by Company rules, policies and procedures. As a condition of employment, you must sign and comply with the attached Confidential Information and Inventions Agreement which prohibits unauthorized use or disclosure of Company proprietary information, among other obligations. Of course, the Company may change your position, duties, and work location from time to time in its discretion.

This letter, together with your Confidential Information and Inventions Agreement, forms the complete and exclusive statement of your employment agreement with the Company. It supersedes any other agreements or promises made to you by anyone, whether oral or written. Changes in your employment terms, other than those changes expressly reserved to the Company’s discretion in this letter, require a written modification signed by an officer of the Company.

Please sign and date this letter, and the enclosed Confidential Information and Inventions Agreement and return them to Barbara Thompson, Recruiting, by Dec 15th, 2012, if you wish to accept employment at the Company under the terms described above. If you accept our offer, we would like you to start on as soon as is reasonable but not later 3 months from the date of signed agreement.

Your start is contingent upon successful completion of a background check. On your first day of employment, you are required to bring documents necessary to complete the I-9 Verification of eligibility to work in the United States.

We look forward to you joining zulily and to the contributions we know you will bring to your new team and the company.

 

Sincerely,

/s/ Darrell Cavens

Darrell Cavens - Chief Executive Officer


Page 3

 

Attachment: Confidential Information and Inventions Agreement

 

Accepted:

/s/ Bob Spieth

Bob Spieth

9.18.2013

Date

Cobalt Building Lease by and between the Company and UCM/FPI - Cobalt, LLC

Exhibit 10.8

COBALT BUILDING LEASE

This lease is entered into by and between the landlord and tenant specified in the Basic Lease Information (hereinafter “Landlord” and “Tenant” respectively).

BASIC LEASE INFORMATION

 

Date:    May 18, 2011
Landlord:    UCM/FPI — COBALT, LLC, a Delaware limited liability company
Tenant:    ZULILY, INC., a Delaware corporation
Building:    All land and improvements situated at 2200 First Avenue South, Seattle, Washington and commonly known as the Cobalt Building
Approximate Rentable Area of the Building:    Approximately 106,973 square feet
Estimated Rentable Area of Premises:    Approximately 87,823 rentable square feet; provided, however, Landlord shall not deliver possession of the approximately 4,985 rentable square feet on the second floor of the Building commonly known as Suite 210 (the “Kinetix Space”) currently leased to Kinetix Living Corporation (“Kinetix”) until September 1, 2012.
Tenant’s Percentage Share:    82.10% (but 77.55% prior to the date the Kinetix Space is delivered to Tenant)
Base Year    2010 for Expenses (other than Taxes); 2011 for Taxes
Term Commencement Date:    July 1, 2011
Term Expiration Date:    June 30, 2014

 

i.


Base Rent:   

Period

        Monthly
Base Rent
         Rent/Sq. Foot  
   7/1/11 — 9/30/11       $ 46,361.58      $ 19.00   
   10/1/11 — 1/31/12       $ 92,411.25      $ 19.00   
   2/1/12 — 6/30/12       $ 131,160.17         $ 19.00   
   7/1/12 — 8/30/12       $ 136,337.54         $ 19.75   
   9/1/12 — 6/30/13       $ 144,542.02         $ 19.75   
   7/1/13 — 6/30/14       $ 150,030.96         $ 20.50   

 

  

*   Monthly Base Rent for the period from 7/1/11 through 9/30/11 has been calculated based on a square footage of 29,281 rentable square feet and Monthly Base Rent for the period from 10/1/11 through 1/31/12 has been calculated based on a square footage of 58,365 rentable square feet. Tenant shall use Tenant’s best efforts to obtain an immediate release of Tenant’s obligation to pay rent with respect to Tenant’s existing lease in Occidental Mall (the “Occidental Mall Lease”). If at any time prior to 1/31/12 Tenant is able to obtain a release of Tenant’s obligation to pay rent under the Occidental Mall Lease with respect to any square footage leased under the Occidental Mall Lease: (i) Tenant shall immediately notify Landlord of the date from which Tenant is released from its obligation to pay rent under the Occidental Mall Lease with respect to such square footage, and (ii) from and after the date Tenant is released from its obligation to pay rent under the Occidental Mall Lease with respect to such square footage, the square footage of space that Tenant shall pay Monthly Base Rent on shall be increased by the square footage of space that Tenant has been released from its obligation to pay rent under the Occidental Mall Lease.

Advance Rent:    $46,361.58 applicable to month 1.
Security Deposit:    $150,030.96
Use:    General office use, including, without limitation, uses related to online marketing and sales.
Tenant’s Address for Notices:   

2200 First Avenue South

Seattle, WA 98134

Attn:                     

Tenant’s Address Prior to Occupancy:   

308 Occidental Avenue South, Suite 300

Seattle, WA 98104

Telephone: (877) 779-5614

Facsimile: (206) 724-0534

Rent Payment Address:   

The Cobalt Building

c/o Felton Properties, Inc.

1750 112th Avenue NE, Suite C234

Bellevue, Washington 98004

 

ii.


Landlord’s Address for Notices:   

UCM/FPI-Cobalt, LLC

520 SW Sixth Avenue

Portland, OR 97204

With a copy to:   

Bradley S. Miller

Ball Janik LLP

101 SW Main Street, Suite 1100

Portland, OR 97204

Telephone; (503) 228-2525

Facsimile: (503) 295-1058

Landlord’s Broker:    Colliers International
Tenant’s Broker:    Washington Partners Corporate Real Estate

In the event of any conflict between this Basic Lease Information and the other terms of this Lease, the other terms of this Lease shall control.

 

iii.


  1. Premises

1.1 Premises. Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord, for the term and subject to the agreements, conditions and provisions contained in the Basic Lease Information and hereinafter set forth, those certain premises shown cross hatched on Exhibit A attached hereto (the “Premises”), which Premises are located in the building specified in the Basic Lease Information (the “Building”). Except only for any improvements which Landlord has expressly agreed herein to construct and install in the Premises pursuant to the Work Letter attached as Exhibit B (“Landlord’s Work”) and as otherwise set forth herein, the Premises are leased “AS IS” and in the condition existing at the time of execution of this Lease. Landlord has made no representation or warranty regarding the Premises (and no broker, property manager or other agent of Landlord has made any such representation or warranty, nor has authority to do so). Notwithstanding the foregoing or anything else to the contrary contained in this Lease, Landlord represents that on the date the possession of the Premises is delivered to Tenant: (i) Landlord has no notice that the Premises is in not in compliance with any applicable laws, including, the Americans With Disabilities Act, and (ii) that all load bearing walls, foundations, roof and other structural elements of the Premises and the plumbing, electrical systems, fire sprinkler systems, lighting, air conditioning and heating systems and all other Building systems serving the Premises will be in good condition and repair; provided, that if any such Building system requires repair within the first thirty (30) days following the Term Commencement Date (the “Landlord Repair Period”) and the reason for which such repair is necessary is not due to an act or omission of Tenant or Tenant’s agents, employees, contractors or invitees, Landlord shall pay for the cost of such repairs at Landlord’s sole cost and expense so long as Tenant notifies Landlord of the need for such repairs prior to the expiration of the Landlord Repair Period. The Rentable Area of the Premises and of the Building specified in the Basic Lease Information are approximations that Landlord and Tenant have stipulated as the Rentable Area of the Premises and Building, respectively, and shall not be subject to adjustment by either Landlord or Tenant during the Term (as may be extended). Tenant is satisfied with such approximations and with the size of the Premises; no claim may be made based upon inaccuracy of such figures.

1.2 Common Areas. “Common Areas” shall mean the driveways, parking areas, walkways, sidewalk areas, landscaping, service areas, the areas on individual floors in the Building devoted to corridors, fire vestibules, elevators, lobbies, electric and telephone closets, restrooms, loading dock and other similar facilities for the benefit of tenants and invitees and shall also mean those areas of the Building devoted to mechanical and service rooms servicing the Building. Landlord shall have the right from time to time to designate, relocate and limit the use of particular areas or portions of the Common Areas, without limiting Tenant’s access to the Premises (except on a temporary basis for necessary repairs or maintenance). Landlord shall not be subject to any liability nor shall Tenant be entitled to any compensation or abatement of rent arising out of the making of such changes or alterations. Landlord shall also have the right to limit or control access to the Building by third parties other than Tenant, its employees, customers and patrons.

1.3 Parking. Landlord will provide Tenant with thirty (30) unreserved parking stalls in the adjacent surface lot. Landlord shall not charge Tenant for the cost of parking during the period commencing on July 1, 2011 and ending on March 31, 2012. From and after April 1, 2012, Tenant shall pay Landlord at Landlord’s then current rates for the use of such parking stalls. Landlord’s current monthly rate per parking stall for the surface lot is $90/parking stall.

1.4 Right of First Offer. If at any time during the Term of the Lease, the space on the first floor of the Building that is currently leased by Starbucks is vacated and the Starbucks lease for such space is terminated, and so long as Tenant is not in default of this Lease, Landlord shall notify Tenant of the availability of such space. Tenant shall have the right to lease such space in its “as is condition” on the same terms as set forth in this Lease, including Base Rent and Term Expiration Date. Tenant shall have five (5) business days after receipt of Landlord’s availability notice to notify Landlord, in writing, that it will lease such available space. Such right of first offer is a one (1) time only right. If Tenant fails to notify Landlord that will lease such space within such five (5) business day period, Landlord shall be free to lease such space any time during the term of this Lease free and clear of any rights of Tenant. The right of first offer contained herein shall not apply to any renewal or extension of an existing lease (even if such lease does not contain an automatic extension right) and the right to expand the Premises is personal to Zulily, Inc. (and its Permitted Transferee) and is not transferable, except in connection with a Permitted Transfer; in the event of any assignment or subletting, other than a Permitted Transfer, the right to expand the Premises shall automatically terminate and be null and void.

 

1.


  2. Term

2.1 Term. The term of this Lease (the “Term”) shall commence on June 1, 2011 (the “Term Commencement Date”). Tenant’s obligation to pay rent and its other obligations hereunder shall commence upon the Term Commencement Date. Unless sooner terminated as hereinafter provided, the Term shall end on the “Term Expiration Date” specified in the Basic Lease Information.

2.2 Early Access. Tenant shall have the right to occupy the Premises upon the mutual execution of this Lease. Such early access to the Premises by Tenant shall be solely for the purpose of installing Tenant’s information technology services infrastructure, furniture and fixtures, and in all instances shall be subject to the following conditions: (i) prior to Tenant’s entry into the Premises, Tenant provides Landlord with proof that Tenant has the insurance that Tenant is required to maintain under this Lease, (ii) prior to Tenant’s entry into the Premises, Tenant provides Landlord with such evidence as reasonably required that Tenant has received all required governmental approvals to enter the Premises, (iii) prior to Tenant’s entry into the Premises, Tenant provides Landlord with contractor’s licenses, insurance and bonds for all contractors entering the Premises in connection with any work to be performed on by Tenant in the Premises, and (iv) Landlord shall have the right to terminate or suspend Tenant’s early access at any time that Landlord determines that such early access interferes with the performance of any work that Landlord is required to perform under this Lease in connection with the delivery of the Premises to Tenant.

2.3 Option to Extend. Landlord hereby grants Tenant the right to extend the term of the Lease for one (1) additional period of seven (7) years (such extended period is hereinafter referred to as the “Extended Term”) on the same terms and conditions contained in the Lease, except that (i) Base Rent for the Extended Term shall be as set forth hereinbelow, (ii) no additional options to extend shall apply following the expiration of the Extended Term, and (iii) Landlord shall have no obligation to make any improvements to the Premises or contribute any amounts therefor. Written notice of Tenant’s exercise of its option to extend (“Option to Extend”) the Term of this Lease for the Extended Term must be given to Landlord no more than fifteen (15) months and no less than twelve (12) months prior to the date the Term of the Lease would otherwise expire. If Tenant is in default under this Lease, Tenant shall have no right to extend the Term of this Lease until such default is cured within the cure period set forth in this Lease for such default, if any; provided, that the period of time within which said Option to Extend may be exercised shall not be extended or enlarged by reason of Tenant’s inability to exercise said Option to Extend because of a default. In the event Tenant validly exercises its Option to Extend the Term of this Lease as herein provided, Base Rent shall be adjusted as of the commencement date of the Extended Term as follows (but in no event shall it be less than the Base Rent for the month immediately prior to the commencement of the Extended Term):

(a) Not later than six (6) months prior to the commencement of an Extended Term, Landlord shall provide Tenant with Landlord’s determination of the fair market Base Rent for such Extended Term, including periodic increases as dictated by the current market (“Landlord’s Determination of Base Rent for Extended Term”). Tenant shall provide notice to Landlord within ten (10) days after receipt of such notice from Landlord as to whether Tenant accepts Landlord’s Determination of Base Rent for Extended Term. In the event Tenant does not agree to Landlord’s Determination of Base Rent for Extended Term, Landlord and Tenant shall attempt to agree upon Base Rent for the Premises for the Extended Term, such rent to be the fair market rental value of the Premises for the Extended Term, as defined in Subsection (c) below. If the parties are unable to agree upon the Base Rent for the Extended Term by the date three (3) months prior to the commencement of the Extended Term, then within ten (10) days thereafter each party, at its own cost and by giving notice to the other party, shall appoint a real estate appraiser with at least five (5) years full-time commercial real estate appraisal experience in the area in which the Premises are located to appraise and set Base Rent for the Extended Term. If a party does not appoint an appraiser within ten (10) days after the other party has given notice of the name of its appraiser, the single appraiser appointed shall be the sole appraiser and shall set Base Rent for the Extended Term. If each party shall have so appointed an appraiser, the two appraisers shall meet promptly and attempt to set the Base Rent for the Extended Term. If the two appraisers are unable to agree within thirty (30) days after the second appraiser has been appointed, they shall attempt to select a third appraiser meeting the qualifications herein stated within ten (10) days after the last day the two appraisers are given to set Base Rent. If the two appraisers are unable to agree on the third appraiser within such ten (10) day period, either of the parties to this Lease, by giving five (5) days notice to the other party, may apply to the then presiding judge of the King County Superior Court for the selection of a third

 

2.


appraiser meeting the qualifications stated in this paragraph. Each of the parties shall bear one-half (1/2) of the cost of appointing the third appraiser and of paying the third appraiser’s fee. The third appraiser, however selected, shall be a person who has not previously acted in any capacity for either party.

(b) The fair market Base Rent shall be fixed by the three appraisers in accordance with the following procedures. Each party appointed appraiser shall state, in writing, such appraiser’s determination of the fair market Base Rent supported by the reasons therefor and shall make counterpart copies for the other party appointed appraiser and the neutral appraiser. The party appointed appraisers shall arrange for a simultaneous exchange of their proposed fair market Base Rent determinations. The role of the neutral appraiser shall be to select whichever of the two proposed determinations of fair market Base Rent most closely approximates the neutral appraiser’s own determination of fair market Base Rent. The neutral appraiser shall have no right to propose a middle ground or any modification of either of the two proposed determinations of fair market Base Rent. The determination of fair market Base Rent the neutral appraiser chooses as that most closely approximating the neutral appraiser’s determination of the fair market Base Rent shall constitute the decision of the appraisers and shall be final and binding upon the parties. The appraisers shall have no power to modify the provisions of this Lease.

(c) For purposes of the appraisal, the term “-fair market Base Rent-” shall mean the price that a ready and willing tenant would pay, as of the Extended Term commencement date, as a base rent to a ready and willing landlord of premises comparable to the Premises, in terms of size, quality and comparable term, in their then-improved state, in the Seattle, Washington market, if such premises were exposed for lease on the open market for a reasonable period of time; including any rent increases over the Extended Term. In no event shall there be deducted from such fair market rental the value of any concessions, including without limitation, tenant improvements, commission and/or “down time.”

(d) The neutral appraiser’s decision shall be made not later than thirty (30) days after the submission by the appraisers of their proposals with respect to the fair market Base Rent. The parties have included these time limits in order to expedite the proceeding, but they are not jurisdictional, and the neutral appraiser may for good cause allow reasonable extensions or delays, which shall not affect the validity of the award. Absent fraud, collusion or willful misconduct by the neutral appraiser, the award shall be final, and judgment may be entered in any court having jurisdiction thereof. The right to extend the Lease hereby granted is personal to Zulily, Inc. (and its Permitted Transferee) and is not transferable, except in connection with a Permitted Transfer; in the event of any assignment or sublease, other than a Permitted Transfer, the right to extend the Lease shall automatically terminate and shall thereafter be null and void.

2.4 Option to Terminate. So long as Tenant has not been in default of this Lease, Tenant shall have the right to terminate this Lease as of August 31, 2013. To exercise such termination right, Tenant must deliver to Landlord a written termination notice no later than December 1, 2012, which notice to be effective must be accompanied by a termination fee equal to Landlord’s unamortized leasing commissions. Since Tenant’s broker has agreed to initially be paid a commission only on the period of this Lease through August 31, 2013 with any remaining balance to be paid at the end of the term of this Lease, the only unamortized leasing commission as of August 31, 2013 will be the one payable with respect to Landlord’s broker and the amount of such unamortized commission as of August 31, 2013 will be $33,737.00. The right to terminate this Lease hereby granted is personal to Zulily, Inc. (and its Permitted Transferee) and is not transferable, except in connection with a Permitted Transfer; in the event of any assignment or sublease, other than a Permitted Transfer, the right to terminate this Lease shall automatically terminate and shall thereafter be null and void.

 

  3. Rent

3.1 Base Rent. Tenant shall pay to Landlord Annual Base Rent in the amount specified in the Basic Lease Information (subject to adjustment as provided in Article 4), payable in equal monthly installments in advance, beginning on the Term Commencement Date and on the first day of each calendar month thereafter during the Term in the sum specified in the Basic Lease Information (the “Monthly Base Rent”). All sums to be paid by Tenant to Landlord hereunder shall be deemed rent. All payments required to be made by Tenant under this Lease shall be made without any setoff, deduction or counterclaim whatsoever and shall be made payable to and delivered to Landlord at the rent payment address set forth in the Basic Lease Information or such other place as Landlord may designate.

 

3.


3.2 Partial Months. If the Term Commencement Date is a day other than the first day of a calendar month or if the Term expires or is terminated on a day other than the last day of a calendar month, then the Monthly Base Rent for the first and last fractional months of the Term shall be prorated on the basis of a thirty (30) day month.

3.3 Advance Rent. Upon execution of this Lease, Tenant shall pay to Landlord the sum specified in the Basic Lease Information as “Advance Rent.” The Advance Rent shall be applied to Tenant’s obligation to pay Monthly Base Rent for the first month or months in which Monthly Base Rent is due.

 

  4. Expenses

4.1 Expenses. Commencing on the January 1, 2012 and in addition to the Monthly Base Rent payable under this Lease, Tenant shall also pay Tenant’s Percentage Share of all “Expenses” as defined in Section 4.1(a), paid or incurred by Landlord in excess of Expenses for the Base Year. The Base Year for all Expenses other than Taxes is 2010; the Base Year for Taxes is 2011. Notwithstanding the above, if during any calendar year of the Term the occupancy of the Building is less than one hundred percent (100%), then Landlord shall, in Landlord’s reasonable business judgment, make an appropriate adjustment of the variable components of Expenses to determine the amount of Expenses that would have been incurred had the Building been one hundred percent (100%) occupied during that calendar year. This adjusted amount shall be deemed the amount of Expenses for that calendar year. For purposes hereof, “variable components” shall include only those Expenses that are affected by variations in occupancy levels. Landlord may, at or after the start of any calendar year notify Tenant of the amount which Landlord estimates will be Tenant’s monthly share of Expenses for such calendar year, and the amount thereof shall be added to the Monthly Base Rent payments required to be made by Tenant in such year. A Statement (the “Statement”) of the Expenses payable by Tenant for each year shall be given to Tenant within a reasonable period of time after the end of each calendar year. If Tenant’s share of any Expenses as shown on such Statement is greater or less than the total amounts actually paid by Tenant as estimated Expenses during the year covered by such Statement, then within fifteen (15) days after receipt of the Statement, Tenant shall pay in cash any sums owed Landlord or, if applicable, Tenant shall receive a credit against any Expenses next accruing for any sum owed Tenant. For purposes of this Lease, “Tenant’s Percentage Share” means the percentage as set forth in the Basic Lease Information and obtained by dividing the Rentable Area of the Premises by the aggregate Rentable Area of all premises available for lease, whether leased or not, in the Building as applicable with respect to any specific Expense, subject to adjustment in the event of changes in Rentable Area of the Building or Premises. Notwithstanding the above, Landlord shall have the right, but not the obligation, to equitably adjust Tenant’s Percentage Share of any specific Expense so as to render such expense payable proportionately by those tenants benefited by the same or otherwise in order to appropriately allocate such Expense to cover the area covered by such Expense.

(a) So long as Tenant is not in default of this Lease, Tenant shall have the right, upon thirty (30) days written request, to review Landlord’s records concerning Operating Expenses for the immediately prior calendar year, which request must be delivered within sixty (60) days after the date Landlord’s annual statement of Operating Expenses is delivered to Tenant (and if Tenant fails to object in writing to specific Operating Expenses within sixty (60) days after the date Landlord’s annual statement of Operating Expenses is delivered to Tenant, Tenant shall be deemed to have approved the same and to have waived the right to object to such calculations); provided, however, Tenant shall have no right to review the Operating Expenses more than one time during a calendar year. Such review shall occur during regular business hours at the site Landlord maintains such records. Should Tenant choose to hire independent auditors, such auditors shall be paid on an hourly or lump sum basis, not on contingency of any potential refund. If Tenant questions any Operating Expenses, Landlord shall provide reasonably satisfactory evidence of the validity of Landlord’s calculation (which evidence may be in summary statement (as opposed to the original invoice)) or adjust the item. Disputes which cannot be resolved after a reasonable period of good faith negotiations between the parties shall be resolved by a nationally recognized accounting firm selected by Landlord (the “CPA”), which CPA shall not then be employed by Landlord or Tenant. If such audit discloses that Tenant has overpaid Tenant’s share of Operating Expenses, Landlord shall give Tenant credit on Operating Expenses with respect to such amount, or if the Lease is at the end of the Term, refund such amount to Tenant. Tenant shall pay all costs and expenses of the audit by the CPA. Tenant hereby agrees to keep the results of any such audit confidential except that Tenant may disclose such information to its accountants, legal advisors or as otherwise required by law, and to require Tenant’s auditor and its employees and each of their respective attorneys and advisors likewise to keep the results of such audit in strictest confidence.

 

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(b) “Expenses” as used herein shall include all costs, charges and expenses of every kind, nature and description incurred from time to time in the course of ownership, management, operation, repair, replacement and maintenance of the Building and adjacent common areas, including, without limitation:

(i) Reasonable wages, salaries and other compensation and benefits for employees, independent contractors and agents of Landlord pertaining to the Building.

(ii) All maintenance, replacement and repair costs relating to the areas with or around the Building, including, without limitation, snow and ice removal, Building heating, ventilating and air conditioning systems, fire monitoring systems, security systems, sidewalks, landscaping, service areas, driveways, parking areas (including, without limitation, repairing, restriping, monitoring and resurfacing parking areas), walkways, building exteriors (including painting), roof, signs and directories, repairing and cleaning the Building, window cleaning, rubbish removal, exterminating, elevator, plumbing, electrical and mechanical equipment and the costs of purchasing or renting mechanical equipment, supplies, tools, materials and uniforms.

(iii) Premiums and other charges for insurance (including costs of claims adjustments) maintained by Landlord.

(iv) Costs of providing electricity, water, gas, steam, sewer and other utility services.

(v) License, permit and inspection fees.

(vi) All “Taxes” pertaining to the Building. “Taxes” as used herein shall include all taxes, general and special assessments and charges (including costs and expenses of contesting the amount or validity thereof) levied upon or with respect to the Building, the land on which the Building is situated, or any personal property of Landlord used in connection with the ownership, management, operation, repair and maintenance of the Building and any other tax, fee or other excise, however described, that may be levied or assessed as a substitute for, or as an addition to (in whole or in part) any other property taxes, whether or not now customary or in the contemplation of the parties on the date of this Lease. Taxes shall not include State or Federal net income, documentary transfer, gift, estate or inheritance taxes. Landlord may pay Taxes in installments if permitted by the taxing jurisdiction.

(vii) Fees for management services and costs incidental thereto, whether provided by an independent management company, Landlord, or an affiliate of Landlord; provided, that such fees shall not exceed 4% of gross rents payable by Tenant under this Lease.

(viii) The costs of any capital improvement, equipment or device installed or paid for by Landlord: (i) which is required or desired for health and safety of tenants and occupants, (ii) to conform with any laws, rules, regulations or requirements of any governmental or quasi-governmental authority having jurisdiction, or (iii) to effect a labor saving, energy saving or other economy. The cost of any capital improvement, equipment, or device, together with interest, covered only by item (iii) above shall be amortized over the lesser of: (A) ten (10) years; (B) the “pay back period;” or (C) the useful life of such capital improvement, equipment or device (as determined by Landlord). Interest on the unamortized balance shall be 10% or such higher rate as may have been paid by Landlord on borrowed funds. The “pay back period” shall be the period within which the anticipated savings from the use of such capital improvement, equipment or device, as determined by Landlord, will equal the cost of the subject capital improvement, equipment or device.

(ix) Depreciation or amortization of the costs of materials, tools, supplies and equipment purchased by Landlord to enable Landlord to supply services which Landlord might otherwise contract for with a third party where such depreciation and amortization would otherwise have been included in the charge for such third party’s services.

 

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(x) Compliance with air, water and noise quality and/or control statutes, laws, codes, rules and regulations including, without limitation, statutes, laws, codes, rules and regulations relating to toxic substances or hazardous wastes.

(c) Expenses shall not include:

(i) Leasing commissions, attorneys’ fees, costs, and disbursements and other expenses incurred in connection with negotiations or disputes with tenants, other occupants, or prospective tenants or other occupants, or legal fees incurred in connection with this Lease.

(ii) Expenses incurred in construction of tenant improvements or otherwise in improving or decorating space for tenants or other occupants of vacant space.

(iii) Landlord’s costs of electricity and other services sold or provided to tenants in the Building for which Landlord is reimbursed as a separate additional charge over and above the basic rent or escalation payment payable under the lease with such tenant.

(iv) Depreciation of the Building.

(v) Amounts paid to subsidiaries or other affiliates of Landlord (i.e., persons or companies controlled by, under common control with, or which control, Landlord) for services in or to the Building, the land on which it is situated or the Premises (or any portion of any of the foregoing) to the extent only that the cost of such services materially exceeds the competitive cost of such services were they not so rendered by a subsidiary or other affiliate of Landlord.

(vi) Payments of principal, interest, late fees, prepayment fees or other charges on any debt secured by a mortgage or mortgages covering the Building, or rental payments under any ground or underlying lease or leases (except to the extent allocable to the payment of real property taxes).

(vii) Landlord’s general administrative overhead expenses for services not specifically performed for the Building, or salaries of any officer or employee of Landlord (or any subsidiary or affiliate of Landlord) above the level of building manager.

(viii) Any compensation paid to clerks, attendants, or other persons in commercial concessions operated by Landlord at a profit, excluding concierge services.

(ix) Advertising and promotional expenditures.

(x) Any costs, fines, or penalties incurred due to violations by Landlord of any governmental rule or authority.

(xi) Costs and expenses of the original design and construction of the Building.

(xii) Costs of Landlord’s charitable or political contributions, or of fine art maintained at the Building.

(xiii) Costs incurred in the sale or refinancing of the Building.

(xiv) Costs incurred to remove, study, test, remediate or otherwise related to the presence of hazardous or toxic substances or materials in or about the Premises or Building, which (A) existed prior to the Term Commencement Date, (B) originated from any separately demised tenant space within the Building other than the Premises or outside of the Premises or Building, or (C) were brought upon, kept, used, stored, handled, treated, generated in, or released or disposed of from, the Premises or Building by Landlord or any employee, agent or contractor of Landlord.

 

6.


4.2 Additional Taxes. In addition to the Monthly Base Rent and other charges to be paid by Tenant hereunder, Tenant shall reimburse Landlord upon demand for any and all taxes, surcharges, levies, assessments, fees and charges payable by Landlord upon, measured by or reasonably attributable to the cost or value of Tenant’s equipment, furniture, fixtures and other personal property located in the Premises.

4.3 Additional Services. Landlord shall have the right, but not the obligation, to provide any additional services that may be required by Tenant, including, without limitation, locksmithing, lamp replacement, additional janitorial services and maintenance; provided that Tenant, as Additional Rent, shall pay Landlord within in ten (10) days after billing therefor, the sum of all costs for such services plus an administrative fee.

 

  5. Security Deposit

Tenant has deposited with Landlord the sum specified in the Basic Lease Information as the “Deposit.” The Deposit shall be held by Landlord as security for the faithful performance by Tenant of all of the provisions of this Lease to be performed or observed by Tenant. If Tenant fails to pay rent or other charges due hereunder, or otherwise defaults with respect to any provision of this Lease, then Landlord may, without waiver of default or of any other right or remedy, use, apply or retain all or any portion of the Deposit for the payment of any rent or other charge in default, or for the payment of any other sum to which Landlord may become obligated by reason of Tenant’s default, or to compensate Landlord for any loss or damage which Landlord may suffer thereby. If Landlord so uses or applies all or any portion of the Deposit, Tenant shall within ten (10) days after demand therefor deposit cash with Landlord in an amount sufficient to restore the Deposit to the full amount thereof and Tenant’s failure to do so shall be a material breach of this Lease. If Tenant performs all of Tenant’s obligations hereunder, the Deposit, or so much thereof as has not theretofore been applied by Landlord, shall be returned, without payment of interest or other increment for its use, to Tenant (or, at Landlord’s option, to the last assignee, if any, of Tenant’s interest hereunder) at the expiration of the Term, and after Tenant has vacated the Premises.

 

  6. Use

6.1 General. The Premises shall be used only for the purposes specified in the Basic Lease Information. Tenant shall not do or permit anything to be done in or about the Premises which will in any way obstruct or interfere with the rights of other tenants or occupants of the Building or injure or annoy them, nor shall Tenant cause, maintain or permit any nuisance in, on, or about the Premises. Tenant shall not commit or suffer the commission of any waste in, on, or about the Premises.

6.2 Compliance With Laws. Tenant shall, at its sole cost and expense, promptly comply with all laws, statutes, ordinances, and governmental rules, regulations, and requirements now in force or which may hereafter be in force relating to or affecting the condition, use, or occupancy of the Premises, excluding structural changes which are required but which are not related to or affected by Tenant’s use, alterations or improvements.

6.3 Hazardous Substances. Tenant shall not cause or permit the escape, disposal or release of any biologically or chemically active or other hazardous substances or materials (a “Release”) except to use in the ordinary course of Tenant’s business, and then only janitorial materials of the kind and in the amount normally present in a typical office space and only after written notice is given to Landlord of the identity of such substances or materials. Without limitation, hazardous substances and materials shall include those described in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. Section 9601 et seq., the Resource Conservation and Recovery Act, as amended 42 U.S.C. Section 6901 et seq., any applicable state or local laws and the regulations adopted under these acts. Tenant shall indemnify, protect, defend and hold harmless Landlord and its Building manager, its and their agents and employees for, from and against any and all clean-up costs and expenses, losses, damages (including, without limitation, consequential damages), claims, or liability for any damage to any property or injury, illness or death of any person from any Release on the Premises or elsewhere if caused by Tenant or persons acting under Tenant. Tenant shall not be responsible for, and the indemnification and hold harmless obligations of Tenant set forth in this Lease shall not apply to: (i) hazardous or toxic substances or materials in the Premises or Building that existed therein prior to the Term Commencement Date, (ii) the presence of any hazardous or toxic substances or materials in the Premises or Building that migrated from outside thereof so long as not caused by Tenant or Tenant’s agents, employees, contractors or invitees, or (iii) hazardous or toxic substances or materials present in the Premises or Building as a result of an act by Landlord or

 

7.


any of Landlord’s partners, directors, officers, agents, employees or contractors. Landlord shall defend, indemnify, and hold harmless Tenant and any of Tenant’s partners, directors, officers, agents and employees with respect to the presence of hazardous or toxic substances or materials in the Premises or Building in violation of applicable laws where such hazardous or toxic substances or materials are present in the Premises or Building: (a) prior to the Term Commencement Date, (b) to the extent as a result of migration from outside the Premises or Building so long as not caused by Tenant or Tenant’s agents, employees, contractors or invitees, or (c) to the extent as a result of an act by Landlord or any of Landlord’s partners, directors, officers, agents, employees or contractors. The covenants contained herein shall survive the expiration or earlier termination of the Lease.

 

  7. Services and Utilities

7.1 General.

(a) Landlord shall operate or cause the operation of the heating, ventilating and air-conditioning (“HVAC”) system serving the Premises during ordinary business hours of Monday through Friday from 7:00 am to 6:00 pm and from 8 am to noon on Saturdays, holidays excepted (“Ordinary Business Hours”) at such temperatures and in such amounts as Landlord determines are reasonably required for the comfortable occupancy of the Premises. During other than Ordinary Business Hours, if Tenant so requests, Landlord shall provide HVAC service to the Premises at Tenant’s sole cost and expense in an amount equal to Landlord’s then scheduled hourly charge of supplying HVAC to the Premises. Landlord shall have the right, at any time during the term of this Lease, to install meters or submeters with respect to any utility services, including, without limitation, to measure after hours HVAC usage. In areas of the Premises that are served by supplemental cooling, Tenant will only be charged the metered rate. For all other areas, after hours HVAC charges shall not exceed the after hour charges typically charged by landlords of buildings in Seattle, Washington that own buildings similar to the Building.

(b) Tenant shall promptly pay when due all charges for utility services used in the Premises that are not provided by Landlord as part of this full service lease (in other words, Tenant shall pay for utilities other than water, sewer and electricity) and for all other services required for Tenant’s use of the Premises. Tenant shall apply to the applicable utility company or municipality for all required utility services; provided, however, if Landlord has not installed any meter or sub-meter to the Premises by the Term Commencement Date, Tenant shall pay Landlord upon demand for the cost of any utilities provided to Tenant by Landlord. Tenant shall also be responsible for and shall pay Landlord any additional costs (including, without limitation, the additional energy consumption costs and the costs of installation of additional HVAC equipment) incurred because of the failure of the HVAC system to perform its function due to: (i) changes from the original approved configuration of the Premises, (ii) use by Tenant of heat-generating machinery or equipment, (iii) failure of Tenant to keep all HVAC vents within the Premises free of obstruction, or (iv) from failure to keep curtains and other window coverings closed during those periods required by rules and regulations promulgated by Landlord. All sums due from Tenant under the provisions of this Subsection shall be considered rent and shall be due and payable not later than ten (10) days after receipt of Landlord’s invoice.

(c) In no event shall Landlord be liable for any claim arising from criminal activity or the acts of third parties, including any claim based upon any assertion that: (a) Landlord failed to provide security services or sufficient security services, or (b) the existence of security services at the Building creates an implied obligation to provide effective security or other obligation.

(d) Tenant shall have access to the Premises twenty-four (24) hours per day, every day of the year via existing key card readers at the entrance to the Building.

7.2 Interruption of Access, Use or Services. Landlord shall not be liable for any failure to provide access to the Premises, to assure the beneficial use of the Premises or to furnish any services or utilities when such failure is caused by natural occurrences, riots, civil disturbances, insurrection, war, court order, public enemy, accidents, breakage, strikes, lockouts, other labor disputes, the inability to obtain an adequate supply of fuel, gas, steam, water, electricity, labor or other supplies, or by any other condition beyond Landlord’s reasonable control, and Tenant shall not be entitled to any damages resulting from such failure. Notwithstanding anything to the contrary contained in this paragraph, if an interruption or cessation of utilities results from the gross negligence

 

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or willful misconduct of Landlord and the Premises are not useable by Tenant for the conduct of Tenant’s business as a result thereof and Tenant does not in fact use the Premises for five (5) consecutive business days for any purpose, then as Tenant’s sole remedy commencing on the sixth (6th) consecutive business day, Base Rent and applicable Additional Rent shall be abated until the earlier to occur of the cessation of such interruption or the date Tenant resumes use of the Premises.

7.3 Emergency Generator. Tenant may install an emergency energy generator (the “Generator”) in a location mutually acceptable to Landlord and Tenant, which installation shall be made in accordance with applicable laws. Tenant shall have the right to install an electrical grounding system for the Generator (the “Electrical Grounding System”) in accordance with applicable law and after obtaining Landlord’s prior written consent to the plans and specifications therefor, which consent shall not be unreasonably withheld or delayed. Tenant shall bear the sole cost and expense of locating and installing the Generator and the Electrical Grounding System and shall reimburse Landlord upon demand for all costs and expenses incurred by Landlord in accommodating Tenant’s location and use. Tenant may test the Generator once per week at a mutually agreed upon time between Landlord and Tenant. If Tenant desires to use Landlord’s existing generator at the Building, Tenant shall be responsible for all. costs in connection with the maintenance, repair arid usage of such generator. Landlord makes no representation or warranty regarding the condition of such generator.

 

  8. Alterations

8.1 General. Tenant shall neither make nor cause to be made any alterations, additions or improvements (collectively, “Alterations”) in, on or to any portion of the Building or the Common Areas outside of the interior of the Premises. Except for initial construction of tenant improvements pursuant to such a work letter, Tenant shall not make or suffer to be made any Alterations in, on or to the Premises or any part thereof without the prior written consent of Landlord, which consent will not be unreasonably withheld, conditioned or delayed; provided, however, Landlord may withhold its consent in its sole discretion if any proposed Alterations will affect the structure or exterior of the Building or its electrical, plumbing, HVAC, mechanical or life safety systems. When applying for any such consent, Tenant shall famish complete plans and specifications for the desired Alterations. Notwithstanding the foregoing, Landlord’s consent shall not be required for any Alterations where the cost thereof is less than Five Thousand Dollars ($5,000.00) and such Alterations will not affect the structural, mechanical, electrical, plumbing or life safety systems of the Building. If Landlord consents to the making of any Alterations, the same shall be made using the services of a contractor who has previously been approved in writing by Landlord to work in the Building. For Alterations affecting the Building’s structural, electrical, mechanical, plumbing or life safety systems, Tenant must use those approved contractors and/or subcontractors and suppliers designated by Landlord. Any construction, alteration, maintenance, repair, replacement, installation, removal or decoration undertaken by Tenant in connection with the Premises shall be completed in accordance with the plans and specifications approved by Landlord, shall be carried out in a good, workmanlike and prompt manner, shall comply with all applicable laws, and shall be subject to supervision by Landlord or its employees, agents or contractors; as-built plans and specifications shall be provided by Tenant to Landlord upon completion of work. If the Alterations which Tenant causes to be constructed result in Landlord being required to make any alterations and/or improvements to other portions of the Building in order to comply with any applicable laws, then Tenant shall reimburse Landlord upon demand for all costs and expenses incurred by Landlord in making such alterations and/or improvements. Any Alterations made by Tenant shall remain on and be surrendered with the Premises upon the expiration or sooner termination of the Term, except Tenant shall upon demand by Landlord at the expiration of this Lease or the termination of this Lease or of the right of possession of Tenant, at Tenant’s sole cost and expense, forthwith and with all due diligence remove all or any portion of any Alterations made by Tenant (except for any initial tenant improvements made by Tenant in connection with Tenant’s move-in to the Premises that are approved by Landlord in writing) which are designated by Landlord to be removed and repair and restore the Premises to their original condition, reasonable wear and tear excepted. Notwithstanding the foregoing, if prior to the making of an Alteration Tenant requests Landlord then inform Tenant if Landlord will later require the removal of such Alteration and Landlord notifies Tenant that Landlord will not require the later removal of such Alteration, Tenant shall have no obligation to remove such Alteration at the expiration or sooner termination of this Lease.

8.2 Notice. Tenant shall give Landlord at least fifteen (15) days prior written notice of commencement of any work of construction, alteration, maintenance, repair or replacement in order to enable Landlord to post and record notices of nonresponsibility. Tenant shall keep the Premises, Common Areas, Building

 

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and the real property upon which the Building is situated free from any liens arising out of any work performed, materials furnished or obligations incurred by Tenant. Within ten (10) days after completion of any Alterations, Tenant shall deliver to Landlord fully executed lien waivers and releases from each contractor and subcontractor performing work in the Building and all material supplies and others granted lien rights by Washington law.

 

  9. Repairs

Tenant shall take good care of the Premises and shall make all other repairs to all improvements and Building systems exclusively serving the Premises in order to preserve the Premises in good working order and condition, including, without limitation, any dedicated HVAC system exclusively serving the Premises. Tenant shall repair any and all damage to the Premises and the Building that shall have been caused by the acts or omissions of Tenant or its agents, employees or contractors. Landlord shall maintain the Building in reasonable order and repair throughout the term of this Lease; provided, however, that Landlord shall not be liable for any failure to make any repairs or to perform any maintenance unless Landlord fails to commence actions to cure such failure within thirty (30) days after written notice of the need for such repairs or maintenance is given to Landlord by Tenant.

 

  10. Assignment and Subletting

10.1 No Assignment or Subletting Without Consent. Tenant shall not, without the prior written consent of Landlord, which consent shall not be unreasonably withheld, conditioned or delayed: (a) assign, mortgage, pledge, encumber or otherwise transfer this Lease, the term or estate hereby granted, or any interest hereunder; or (b) permit the Premises or any part thereof to be utilized by anyone other than Tenant. Any assignment, mortgage, pledge, encumbrance, transfer or sublease without Landlord’s consent shall be void and, at Landlord’s election, shall constitute a default. Except as set forth in Section 10.6 below, if Tenant is a corporation, any dissolution, merger, consolidation or other reorganization of Tenant, or the sale or other transfer in the aggregate during the Term of a controlling percentage of the capital stock of Tenant or the sale of fifty percent (50%) or more of the value of the assets of Tenant, shall be deemed a voluntary assignment of this Lease by Tenant. The phrase “controlling percentage” shall mean the ownership of, and the right to vote, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of Tenant’s capital stock issued, outstanding, and entitled to vote for the election of directors. The preceding two sentences shall not apply to corporations, the stock of which is traded through an exchange or over the counter.

10.2 Notice and Procedure. If at any time or from time to time during the Term, Tenant desires to assign this Lease with respect to, or to sublet, all or any part of the Premises, then at least thirty (30) days, but not more than one hundred twenty (120) days, prior to the date when Tenant desires the assignment or subletting to be effective (the “Transfer Date”), Tenant shall give Landlord a notice (the “Notice”) which shall include the signed sublease or assignment (but for Landlord’s consent), and shall set forth the name, address and business of the proposed assignee or subtenant, information (including financial statements and references) concerning the character of the proposed assignee or subtenant, a detailed description of the space proposed to be assigned or sublet, which must be a single, self-contained unit (the “Space”), any rights of the proposed assignee or subtenant to use Tenant’s improvements and the like, the Transfer Date, and the fixed rent and/or other consideration and all other material terms and conditions of the proposed assignment or subletting, all in such detail as Landlord may reasonably require. If Landlord requests additional detail, the Notice shall not be deemed to have been received until Landlord receives such additional detail. Landlord shall have the option, exercisable by giving notice to Tenant at any time within twenty (20) days after Landlord’s receipt of the Notice: (a) in the case of an assignment or sublease, to terminate this Lease as to the Space, in which event Tenant shall be relieved of all further obligations hereunder with respect thereto as of the Transfer Date; or (b) in the case of a sublease, terminate this Lease as to the Space. No failure of Landlord to exercise either option with respect to the Space shall be deemed to be Landlord’s consent to the assignment or subletting of all or any portion of the Space.

10.3 Consent Not to be Unreasonably Withheld. Without limiting the other instances in which it may be reasonable for Landlord to withhold its consent to an assignment or sublease, it shall be reasonable for Landlord to withhold its consent if any of the following conditions are not satisfied: (a) the proposed transferee shall not be an existing tenant or occupant of the Building or a person or entity with whom Landlord is then dealing, or with whom Landlord has had any dealings within the previous six (6) months, with respect to the leasing of space in the Building so long as Landlord can accommodate the proposed need with available space in the Building; (b)

 

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any ground lessor or mortgagee whose consent to such transfer is required must consent thereto; and (c) any proposed subletting would not result in more than five (5) subleases of portions of the Premises being in effect at any one time during the Term (and in any event, Landlord shall have the right to condition Landlord’s approval of any such sublease on the sublet Space being mechanically engineered for such subtenant’s use of such Space).

10.4 Assignments and Subleases. Provided Landlord has consented to such assignment or subletting, the following conditions shall apply to such assignment or sublease: (a) at the time of the transfer, there is no Event of Default under this Lease; (b) the assignment or sublease shall be on the same terms set forth in the Notice given to Landlord; (c) no assignment or sublease shall be valid and no assignee or sublessee shall take possession of the Space until an executed counterpart of the assignment or sublease has been delivered to Landlord; (d) any assignee shall have assumed in writing the obligations of Tenant under the Lease with respect to the Space and any subtenant shall have agreed in writing to comply with all applicable terms and conditions of this Lease; (e) Tenant shall have executed an agreement reaffirming its liability, acknowledging that any further transfer requires Landlord’s prior written consent, and containing such other provisions as Landlord may require; and (f) fifty percent (50%) of any sums or other economic consideration received by Tenant as a result of such assignment or subletting (after deducting reasonable leasing commissions, reasonable attorneys fees and rental or other payments received which are attributable to the amortization of the cost of tenant improvements made to the Space by Tenant, at Tenant’s cost) whether denominated rent or otherwise, which exceed, in the aggregate, the total sums which Tenant is obligated to pay Landlord under this Lease (prorated as to any sublease to reflect obligations allocable to that portion of the Premises subject to such sublease) shall be payable to Landlord as additional rent (being the charges specifically set forth in Section 4, and all other amounts and charges payable by Tenant under any provision of this Lease) under this Lease, without affecting or reducing any other obligation of Tenant hereunder.

10.5 Continuing Liability of Tenant. Regardless of Landlord’s consent, no subletting or assignment shall release Tenant’s obligation or alter the primary liability of Tenant to pay the rent and to perform all other obligations to be performed by Tenant hereunder. The acceptance of rent by Landlord from any other person shall not be deemed to be a waiver by Landlord of any provision hereof. Consent to one assignment or subletting shall not be deemed consent to any subsequent assignment or subletting. If any assignee of Tenant or any successor of Tenant defaults in the performance of any of the terms hereof, Landlord may proceed directly against Tenant without the necessity of exhausting remedies against such assignee or successor. Landlord may consent to subsequent assignments of this Lease or amendments or modifications to this Lease with assignees of Tenant, and such action shall not relieve Tenant of its liability under this Lease; provided, however, Landlord shall commercially reasonably efforts to notify Tenant of such assignments, amendments or modifications of this Lease. If Tenant assigns this Lease, or sublets all or a portion of the Premises, or requests the consent of Landlord to any assignment or subletting, or if Tenant requests the consent of Landlord for any act that Tenant proposes to do, then Tenant shall pay Landlord’s reasonable attorneys’ fees incurred in connection therewith along with any other reasonable consultants’ fees incurred in connection therewith (for example, an engineer’s fees as a result of a sublease of a portion of the Premises that requires portions of the Premises are to be mechanically engineered to accommodate such sublease).

10.6 Assignments/Subleases Not Requiring Landlord’s Consent. Notwithstanding anything to the contrary in this Section 10 and so long as Tenant provides Landlord with not less than fifteen (15) days prior written notice, no prior written consent of Landlord shall be required for any assignment or sublease with any of the following (each, a “Permitted Transfer”): (i) a corporation into or with which Tenant is merged or consolidated or with an entity to which all or substantially all of Tenant’s assets are transferred, provided (x) such merger, consolidation or transfer of assets is for a valid business purpose and not principally for the purpose of transferring the leasehold estate created hereby, and (y) the assignee or successor entity has a net worth (determined in accordance with generally accepted accounting principles consistently applied) at least equal to or in excess of the net worth of Tenant immediately prior to such merger, consolidation or transfer and Landlord has been provided with reasonable proof thereof prior to such transaction or (ii) any entity which is a parent, subsidiary or affiliate of Tenant. As used herein, the term “affiliate” means an entity controlled by, controlling or under common control with Tenant. For the purposes of this Section 10, “control” means direct ownership of not less than 51% of the voting control of such entity. Landlord shall have no right to terminate this Lease in connection with, and shall have no right to any sums or other economic consideration resulting from, any Permitted Transfer.

 

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  11. Indemnification

11.1 Waiver of Liability. Tenant hereby waives all causes of action and claims against Landlord with respect to or arising out of any death or any bodily injury of any nature or any loss or damage or injury to any property outside or within the Premises belonging to Tenant or its employees, agents, customers, licensees, invitees, guests or any other person except to the extent any such death or bodily injury is caused solely by the gross negligence or willful misconduct of Landlord or its employees or agents. In addition, Landlord shall not be liable for any loss or damage for which the Tenant is required to insure, nor for any loss or damage resulting from any construction, alterations or repair. For purposes of this Section 11, the term “Landlord” means and includes: (i) Landlord, (ii) the property manager, and (iii) the owners, partners, officers, agents, trustees of Landlord and/or the property manager, and (iv) employees of any of the foregoing.

11.2 Indemnity. Tenant shall indemnify, defend and hold Landlord (as defined in Section 11.1) harmless for, from and against any and all causes of action, losses, damages, claims, or liability: (a) occurring in the Premises, or any part thereof, arising at any time and from any cause whatsoever, except to the extent of the gross negligence or willful misconduct of Landlord; and/or (b) occurring in, on, or about any part of the Building other than the Premises, to the extent such damage, injury, illness or death is caused by the negligence or willful misconduct of Tenant, its agents, servants, partners, officers, employees, invitees or licensees. Landlord shall indemnify, defend, and hold Tenant harmless for, from and against any and all causes of action, losses, damages, claims, or liability occurring in the Premises, on, or about any part of the Building to the extent such damage, injury, illness or death is caused by the gross negligence or willful misconduct of the Landlord, its agents, servants, partners, officers or employees. The provisions of this Section shall survive the expiration or termination of this Lease or of Tenant’s right of possession with respect to any claim, loss, damage, liability or cause of action accruing or occurring prior to such expiration termination.

11.3 Limitation of Liability. The liability of Landlord for Landlord’s obligations under this Lease shall not exceed and shall be limited to Landlord’s interest in the Building and Tenant shall not look to the property or assets of any of the Protected Parties nor to any other asset of Landlord in seeking either to enforce Landlord’s obligations under this Lease or to satisfy a judgment for Landlord’s failure to perform such obligations. In no event shall Landlord ever be liable under this Lease for any consequential damages, punitive damages, special damages or any similar type of damages.

 

  12. Insurance

12.1 Liability Insurance. Tenant, at its cost, shall maintain commercial general liability insurance, including contractual liability coverage, with a minimum combined single limit of bodily injury, personal injury and property damage coverage of Three Million Dollars ($3,000,000.00), insuring against all liability arising out of or in connection with Tenant’s use or occupancy of the Premises. Such insurance shall name Landlord, its partners, lenders and property managers as additional insureds, shall specifically include the liability assumed under this Lease by Tenant (provided, however, that the amount of such insurance shall not be construed to limit the liability of Tenant hereunder), and shall provide that it is primary insurance and not “excess over” or contributory with any other valid, existing and applicable insurance in force for or on behalf of Landlord. The policy shall not eliminate cross-liability and shall contain a severability of interest clause. Not more frequently than once each year, if, in the opinion of Landlord’s lender or of the insurance consultant retained by Landlord, the amount of public liability and property damage insurance coverage at -that time is not adequate, Tenant shall increase the insurance coverage as required by either Landlord’s lender or Landlord’s insurance consultant.

12.2 Tenant’s Property Insurance. Tenant, at its cost, shall maintain on all of its personal property, tenant improvements (whether constructed by Landlord or Tenant), and Alterations, in, on, or about the Premises, a policy of “Broad Form” insurance, to the extent of at least full replacement value without any deduction for depreciation. Tenant shall use the proceeds from any such policy for the replacement of such personal property or the restoration of such tenant improvements or Alterations. The “full replacement value” of the improvements to be insured under this Article shall be determined by the company issuing the insurance policy at the time the policy is initially obtained. Tenant, at its cost, shall maintain such other insurance as Landlord may reasonably require from time to time.

 

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12.3 Insurance Criteria. All the insurance required under this Lease shall: (a) be issued by insurance companies authorized to do business in the State of Washington, with a financial rating of at least an AXI status as rated in the most recent edition of Best’s Insurance Reports; (b) be issued as a primary policy; and (c) contain an endorsement requiring thirty (30) days’ written notice from the insurance company to both parties and to Landlord’s lender before cancellation or change in the coverage, scope, or amount of any policy. Each policy, and a certificate of the policy, together with evidence of payment of premiums, shall be deposited with Landlord at the commencement of the term, and on renewal of the policy not less than twenty (20) days before expiration of the term of the policy.

 

  13. Destruction or Damage

In the event of a fire or other casualty in the Premises, Tenant shall immediately give notice thereof to Landlord. The following provisions shall apply to fire, earthquake, act of God, the elements or other casualty occurring in the Premises and/or the Building: (a) if the damage is to improvements to the Premises that Tenant is required to insure pursuant to Section 12.2 of the Lease, Tenant, at its cost, shall promptly repair such damage; (b) if: (i) Subsection 13(a) does not apply, (ii) the damage is limited solely to the Premises, and (iii) Landlord determines that the Premises can be made tenantable with all damage substantially repaired within nine (9) months from the date of damage or destruction, then Landlord shall be obligated to repair and restore the Premises and shall proceed diligently to do so; provided, however, that Landlord shall have no obligation to repair or restore the Premises except to the extent that Landlord realizes insurance proceeds, if any, sufficient for such purposes and for all other restoration and repair purposes; (c) if a portion of the Building outside the boundaries of the Premises are damaged or destroyed (whether or not the Premises are also damaged or destroyed) and Landlord determines that the Premises and the Building can both be made tenantable with all damage substantially repaired within nine (9) months from the date of damage or destruction, and provided that sufficient insurance proceeds are available to Landlord to complete all repair and restoration obligations, then Landlord shall be obligated to repair and restore the Building and Premises; (d) if more than fifty percent (50%) of the Building is damaged and restoration is not required to be undertaken pursuant to Subsections 13(a), 13(b), or 13(c), Landlord shall notify Tenant within sixty (60) days after the date of such damage or destruction and either Tenant or Landlord may terminate this Lease within thirty (30) days after the date of such notice, (e) during any period when Tenant’s use of the Premises is significantly affected by damage or destruction, rent shall abate proportionately, as reasonably determined by Landlord, until such time as the Premises are made tenantable, and no portion of the rent so abated shall be subject to subsequent recapture; provided that there shall be no such abatement except to the extent that the amount thereof is compensated for and recoverable from the proceeds of rental abatement or business interruption insurance maintained by Landlord with respect to this Lease, the Premises or the Building, and (f) the proceeds from any insurance paid by reason of damage to or destruction of the Building or any part thereof, insured by Landlord, shall belong to and be paid to Landlord subject to the rights of any beneficiary of any deed of trust that constitutes an encumbrance. If Landlord undertakes restoration pursuant to Subsection 13(d) or 13(e), the proceeds from any property insurance maintained by Tenant covering the Premises shall be paid to Landlord. Landlord shall apply such insurance proceeds to the repair and restoration of Tenant’s Alterations and improvements in the Premises.

 

  14. Eminent Domain

14.1 Taking of Premises. If all or any part of the Premises is taken by any public or quasi public authority as a result of the exercise of the power of eminent domain, this Lease shall terminate as to the part so taken as of the date of taking, and, in the case of a partial taking, either Landlord or Tenant shall have the right to terminate this Lease as to the balance of the Premises by written notice to the other within thirty (30) days after the date of such taking, provided, however, that a condition to the exercise by Tenant of such right to terminate shall be that the portion of the Premises taken shall, in Landlord’s judgment, be of such extent and nature as substantially to handicap, impede and impair Tenant’s use of the balance of the Premises. If a material part of the Building is condemned or taken or if substantial alteration or reconstruction of the Building shall, in Landlord’s opinion, be necessary or desirable as a result of any condemnation or taking, Landlord may terminate this Lease by written notice to Tenant within thirty (30) days after the date of taking. Notwithstanding any of the provisions hereof to the contrary, if all of the Premises shall be temporarily condemned or taken for governmental occupancy for a period of more than one year, this Lease shall terminate as of the date of taking and Landlord shall be entitled to any and all compensation, damages, income, rent and awards in connection therewith.

 

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14.2 Condemnation Award. Landlord shall be entitled to any and all compensation, damages, income, rent, awards, and any interest therein whatsoever which may be paid or made in connection with any taking, and Tenant shall have no claim against Landlord for the value of any unexpired term of this Lease or otherwise and no right to participate in any condemnation proceedings. Notwithstanding the foregoing, Tenant shall be entitled to independently pursue a separate award in a separate proceeding for Tenant’s costs of relocation, personal property or trade fixtures, and loss of goodwill directly associated with the taking if, but only if, such separate award does not diminish Landlord’s award. In the event of a partial taking of the Premises which does not result in a termination of this Lease, the Monthly Base Rent thereafter to be paid shall be equitably reduced by Landlord.

 

  15. Waiver of Subrogation

Notwithstanding anything to the contrary contained in this Lease, Landlord and Tenant hereby mutually agree that in the event either Landlord or Tenant sustains a loss by reason of fire or any other event or casualty and such party is then covered (or is required by the terms of this Lease to be covered) in whole or in part by insurance with respect to such loss, then the party sustaining the loss agrees that, to the extent (but only to the extent) such party is compensated for such loss by its insurance (or to the extent the insurance required to be carried under this Lease by such party would have compensated the party for such loss), the party sustaining the loss shall have no right of recovery against the other party or its owners, agents or employees and waives any right of subrogation which might otherwise exist in or accrue to any third party.

 

  16. Rules and Regulations

Tenant shall faithfully observe and comply with the Rules and Regulations of the Building (a copy of which is attached as Exhibit D) and, after notice thereof, all reasonable modifications thereof and additions thereto from time to time promulgated in writing by Landlord, all of which are hereby incorporated herein by this reference. Landlord shall not be responsible to Tenant for the nonperformance by any other tenant or occupant of the Building of any of the Rules and Regulations.

 

  17. Entry by Landlord

Landlord may enter the Premises at reasonable hours and upon reasonable notice (but at any time without notice in an emergency) to: (a) inspect the same; (b) exhibit the same to prospective purchasers, lenders or tenants (provided, Landlord may only exhibit the space to prospective tenants during the last twelve (12) months of the term of this Lease; provided, further, if Tenant exercises Tenant’s right to terminate this Lease under Section 2.4, Landlord may immediately thereafter exhibit the space to prospective tenants); (c) determine whether Tenant is complying with all of its obligations hereunder; (d) supply any service to be provided by Landlord to Tenant hereunder or to any other tenant of the Building; (e) post notices of nonresponsibility; and (f) make repairs required of Landlord under the terms hereof or make repairs to any adjoining space or utility services or make repairs, alterations or improvements to any other portion of the Building; provided, however, that all such work shall be done so as to avoid unnecessary unreasonable interference to Tenant if reasonably possible. Tenant hereby waives any claim for damages or termination for any injury or inconvenience to or interference with Tenant’s business, any loss of occupancy or quiet enjoyment of the Premises, and any other loss occasioned by such entry.

 

  18. Default

18.1 Events of Default. In addition to any other event specified in this Lease as an event of default, the occurrence of any one or more of the following events (“Events of Default”) shall constitute a breach of this Lease by Tenant: (a) failure by Tenant to pay any Rent as the same becomes due and payable or the failure by Tenant to pay any other sum more than ten (10) days after notice of such failure to pay; or (b) failure by Tenant to perform or observe any other obligations of Tenant hereunder if such failure continues for more than fifteen (15) days after notice thereof from Landlord, unless such default cannot reasonably be cured within such fifteen (15) day period and Tenant shall within such period commence with due diligence and dispatch the curing of such default, and, having so commenced, shall thereafter prosecute or complete with due diligence and dispatch the curing of such default.

 

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18.2 Landlord’s Remedies. If an Event of Default occurs, Landlord, at any time thereafter, may pursue any rights or remedies, in such order as Landlord may choose, including collection or damages and all equitable remedies. In addition to any other right or remedy for an Event of Default, Landlord may:

(a) Terminate this Lease, in which event Tenant shall immediately surrender the Premises to Landlord, and if Tenant fails so to do, Landlord may, without prejudice to any other remedy which Landlord may have for possession or arrearages in rent, enter upon and take possession of the Premises and expel or remove Tenant and any other person who may be occupying such Premises or any part of the Premises, in accordance with applicable laws, without being liable for prosecution or any claim of damages therefor, and Tenant agrees to pay to Landlord on demand the amount of all loss and damage which Landlord may suffer by reason of such termination, whether through inability to relet the Premises on satisfactory terms or otherwise. Landlord’s right to any and all damages and remedies shall survive termination of this Lease.

(b) Enter upon and take possession of the Premises and expel or remove Tenant and any other person who may be occupying the Premises or any part of the Premises, in accordance with applicable laws, without being liable for prosecution or any claim for damages, and relet the Premises for such terms ending before, on or after the expiration date of the Term, at such rentals and upon such other conditions (including concessions and prior occupancy periods) as Landlord in its sole discretion may determine, and receive the rent for such reletting; and Tenant agrees to pay to Landlord on demand any deficiency that may arise by reason of such reletting together with all costs incurred by Landlord in connection with such reletting. Landlord shall have no obligation to relet the Premises in advance of any other available space owned by Landlord.

(c) Landlord shall have the right to recover unpaid rent and all damages caused by Tenant’s default, including, without limitation, attorneys’ fees. Damages shall include, without limitation: all accrued but unpaid rentals; damages attributable to the remaining Term equal to the monthly rent reserved in this Lease, plus an estimated amount of additional rent as determined by Landlord for the balance of the Term at the time of award, discounted to the time of award at the rate of seven percent (7%) per annum; all legal expenses and other related costs incurred by Landlord following Tenants default; all costs incurred by Landlord in restoring the Premises to good order and condition, or in remodeling, renovating or otherwise preparing the Premises for reletting; all costs, including without limitation any brokerage commissions; plus interest on all such expenditures at the rate of fifteen percent (15%) per annum from the date of expenditure until fully repaid (the “Default Rate of Interest”).

(d) Landlord may sue periodically to recover damages during the period corresponding to the remainder of the Term, and no action for damages shall bar a later action for damages subsequently accruing.

(e) Pursuit of any of the foregoing remedies shall not preclude Landlord from pursuit of any of the other remedies provided in this Lease or any other remedies provided by law or at equity, such remedies being cumulative and nonexclusive, nor shall pursuit of any remedy in this Lease provided constitute a forfeiture or waiver of any rent due to Landlord under this Lease or of any damages accruing to Landlord by reason of the violation of any of the terms, provisions, conditions, and covenants contained in this Lease. No act or thing done by Landlord or its agents shall be deemed a termination of this Lease or an acceptance of the surrender of the Premises, and no agreement to terminate this Lease or accept a surrender of the Premises shall be valid unless in writing signed by Landlord.

18.3 Late Charges. If any installment of Monthly Base Rent or Expenses due from Tenant is not received by Landlord when due, Tenant shall pay to Landlord on demand an additional sum equal to five percent (5%) per month of the overdue amount as a late charge. The parties agree that this late charge represents a fair and reasonable estimate of the costs that Landlord will incur by reason of such late payment by Tenant. Acceptance of any late charge shall not constitute a waiver of Tenant’s default with respect to the overdue amount, or prevent Landlord from exercising any of the other rights and remedies available to Landlord.

18.4 Landlord’s Right to Perform. If Tenant shall fail to pay any sum of money, other than Monthly Base Rent, required to be paid by it hereunder or shall fail to cure any default and such failure shall continue for three (3) days after expiration of the applicable cure period, then Landlord may, but shall not be

 

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obligated so to do, and without waiving any default or any other right or remedy, make any such payment or perform any such act on Tenants part. All sums so paid by Landlord and all costs incurred by Landlord in taking such action shall be deemed additional rent hereunder and shall be paid to Landlord on demand, and Landlord shall have (in addition to all other rights and remedies of Landlord) the same rights and remedies in the event of the non-payment thereof by Tenant as in the case of default by Tenant in the payment of rent.

 

  19. Holding Over

If Tenant remains in possession after the expiration or sooner termination of this Lease, all of the terms, covenants and agreements hereof shall continue to apply and bind Tenant so long as Tenant remains in possession insofar as the same are applicable, except that if Tenant remains in possession (regardless of whether Landlord accepts rent payments in a lesser amount during such holdover period), the Monthly Base Rent shall be 150% of the Monthly Base Rent payable for the last month of the Term, prorated on a daily basis for each day that Tenant remains in possession, and Tenant shall indemnify Landlord against any and all claims, losses and liabilities for damages resulting from failure to surrender possession, including, without limitation, any claims made by any succeeding tenant.

 

  20. Subordination

This Lease shall be subject and subordinated at all times to: (a) all ground or underlying leases which may hereafter be executed affecting the Building, and (b) the lien of all mortgages and deeds of trust in any amount or amounts whatsoever now or hereafter placed on or against the Building, on or against Landlord’s interest or estate therein, and on or against all such ground or underlying leases, all without the necessity of having further instruments executed on the part of Tenant to effectuate such subordination. Landlord, at no cost to Landlord, shall request and use commercially reasonable efforts to obtain a non-disturbance agreement for the benefit of Tenant from any existing or future ground lessor or mortgagee. Notwithstanding anything to the contrary set forth above, any beneficiary under any deed of trust may at any time subordinate its deed of trust to this Lease without any need to obtain Tenant’s consent, by execution of a written document subordinating such deed of trust to the Lease to the extent set forth in such document and thereupon the Lease shall be deemed prior to such deed of trust to the extent set forth in such document without regard to their respective dates of execution, delivery and/or recording.

 

  21. Surrender of Premises

At the end of the Term or upon sooner termination of this Lease, Tenant shall peaceably deliver up to Landlord possession of the Premises, together with all improvements, alterations or additions upon or belonging to the same, by whomsoever made, in the same condition as received, or first installed, reasonable wear and tear excepted. Tenant may, upon the termination of this Lease, remove all movable partitions of less than full height from floor to ceiling, as well as counters and other trade fixtures installed by Tenant at Tenant’s cost, repairing any damage caused by such removal. Tenant shall, upon the termination of this Lease, remove all telecommunications, computer or data cabling installed by or for Tenant, repairing any damage caused by such removal, unless otherwise directed by Landlord in writing. Property not so removed shall be deemed abandoned by Tenant and title to the same shall thereupon pass to Landlord. Subject to the terms of Section 8.1, upon the timely demand by Landlord, unless otherwise agreed to in writing by Landlord, Tenant, at its cost, shall remove any or all permanent improvements or additions to the Premises installed by Tenant and all movable partitions, counters, and other trade fixtures which may be left by Tenant and repair any damage resulting from such removal.

 

  22. Estoppel Certificate

At any time and from time to time, within fifteen (15) days of written request by Landlord, Tenant shall execute, acknowledge and deliver to Landlord a certificate certifying: (a) that Tenant has accepted the Premises (or, if Tenant has not done so, that Tenant has not accepted the Premises, and specifying the reasons therefor); (b) the commencement and expiration dates of this Lease; (c) whether there are then existing any defaults by Landlord in the performance of its obligations under this Lease (and, if so, specifying the same); (d) that this Lease is unmodified and in full force and effect (or, if there have been modifications, that this Lease is in full force and effect, as modified, and stating the date and nature of each modification); (e) the date, if any, to which rent and other sums payable hereunder have been paid; (f) that no notice has been received by Tenant of any default which has not

 

16.


been cured, except as to defaults specified in the certificate; and (g) such other matters as may be reasonably requested by Landlord. Any such certificate may be relied upon by any prospective purchaser, mortgagee or beneficiary under any deed of trust affecting the Building or any part thereof and/or any other party named as a beneficiary of such certificate.

 

  23. Miscellaneous

23.1 Time of Essence. Time is of the essence of this Lease and of all provisions hereof.

23.2 Successors. All the terms, covenants, and conditions hereof shall be binding upon and inure to the benefit of the heirs, executors, administrators, successors, and assigns of the parties hereto, provided that nothing in this Section shall be deemed to permit any assignment, subletting, occupancy or use by Tenant contrary to the provision of Article 10.

23.3 Attorneys’ Fees. In the event of litigation with respect to this Lease, the prevailing party shall be entitled to recover, in addition to all other sums and relief, its reasonable costs and attorneys’ fees incurred at and in preparation for arbitration, trial, appeal and review, such sum to be set by the arbitrator or court before which the matter is heard. This provision shall also apply to any litigation or other proceeding in bankruptcy court, including litigation or other proceedings in bankruptcy court involving matters unique to bankruptcy law.

23.4 Waiver. The failure of Landlord to exercise its rights in connection with any breach or violation of any term, covenant or condition herein contained shall not be deemed to be a waiver of such term, covenant or condition or any subsequent breach of the same or any other term, covenant or condition herein contained. The subsequent acceptance of rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease other than the failure of Tenant to pay the particular rent so accepted, regardless of Landlord’s knowledge of such preceding breach at the time of acceptance of such rent.

23.5 Sale by Landlord. A sale or conveyance by Landlord of the Building shall operate to release Landlord from any future liability upon any of the agreements, obligations, covenants or conditions, express or implied, herein contained in favor of Tenant, and Tenant agrees to look solely to the responsibility of the successor in interest of Landlord in and to this Lease for all such future liability provided that: (a) Landlord has delivered the Security Deposit to such successor, and (b) such successor has assumed all of the obligations of Landlord accruing out of events occurring from and after the date of such sale or conveyance. This Lease shall not be affected by any such sale, however, and Tenant agrees to attorn to the purchaser or assignee, such attornment to be effective and self-operative without the execution of any further instruments by any of the parties to this Lease.

23.6 Notices. All notices and demands which may or are required to be given by either party to the other hereunder shall be in writing and shall be deemed to have been fully given when: (a) deposited in the United States mail, certified or registered, postage prepaid, or (b) delivered to a reputable and reliable courier, and, in either event, addressed as follows: prior to the date on which Tenant accepts possession of the Premises, at Tenants address prior to occupancy set out in the Basic Lease Information, and thereafter to Tenant at the Premises or at the address for Tenant set out in the Basic Lease Information, or to such other place as Tenant may from time to time designate in a notice to Landlord; and to Landlord at the addresses specified in the Basic Lease Information, or to such other place as Landlord may from time to time designate in a notice to Tenant.

23.7 Governing Law. This Lease shall be construed and enforced in accordance with the laws of the State of Washington.

23.8 Entire Agreement. The terms of this Lease are intended by the parties as a final expression of their agreement with respect to such terms as are included in this Lease and may not be contradicted by evidence of any prior or contemporaneous agreement. The parties further intend that this Lease constitutes the complete and exclusive statement of its terms and that no extrinsic evidence whatsoever may be introduced in any judicial proceedings, if any, involving this Lease.

 

17.


23.9 Invalidity. If any provision of this Lease or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such provision to persons or circumstances other than those as to which it is invalid or unenforceable, shall not be affected thereby, and each provision of this Lease shall be valid and be enforced to the full extent permitted by law.

23.10 Authority. If Tenant is a corporation, limited liability company, partnership, or other entity, Tenant does hereby covenant and warrant that Tenant is a duly authorized and existing entity, that Tenant has and is qualified to do business in Washington, that Tenant has full right and authority to enter into this Lease, and that each and both of the persons signing on behalf of Tenant are authorized to do so. Upon Landlord’s request, Tenant shall provide Landlord with evidence reasonably satisfactory to Landlord confirming the foregoing covenants and warranties.

23.11 Brokers. Tenant represents that it has not incurred an obligation to any broker in connection with this Lease, other than Landlord’s broker and Tenant’s broker listed in the Basic Lease Information, and Tenant shall indemnify, protect, defend and hold Landlord harmless for, from and against any and all liability, loss, damage, expense, claim, action, demand, suit or obligation arising out of or relating to a breach by Tenant of this representation.

23.12 Amendments. This Lease may not be altered, changed, or amended except by an instrument signed by both parties hereto.

23.13 Limitation on Remedies. Tenant shall not be entitled to, and Tenant hereby waives any right it may have to make any claim for, monetary damages (nor shall Tenant claim any money damages by way of set off, counterclaim or defense) based upon any claim or assertion by Tenant that Landlord has unreasonably withheld, conditioned or delayed any consent or approval under this Lease. Tenant’s sole remedy for any actual or alleged unreasonableness of withholding, conditioning or delaying any consent or approval shall be an action or proceeding to enforce any provision hereof, or for specific performance, injunction or declaratory relief, Tenant hereby waiving any rights of damages or termination.

23.14 Survival. The obligations and liabilities of Tenant which are incurred or accrue prior to the expiration of this Lease or the termination of this Lease or of Tenant’s right of possession shall survive such expiration or termination, as shall all provisions by which Tenant is to provide defense and indemnity to Landlord, all provisions waiving or limiting the liability of Landlord, and all attorneys’ fees provisions.

23.15 Accord and Satisfaction. No payment by Tenant or receipt by Landlord of a lesser amount than any payment of rent or additional rent herein stipulated shall be deemed to be other than on account of the earliest stipulated rent or additional rent then due and payable.

23.16 Signage. Landlord shall provide Tenant with Building standard tenant identification signage on the Building directory in the lobby and at the entry to the Premises. Subject to obtaining all required approvals from the City of Seattle and the prior written approval of Landlord, Tenant shall have the right to install a sign on the exterior of the Building. Tenant shall pay for all costs of installing and maintaining such signage and, at the expiration or sooner termination of this Lease, Landlord shall have the right, to be exercised in Landlord’s sole discretion, to require Tenant, at Tenant’s sole cost and expense, to remove such sign and repair all damage caused by such removal. Landlord shall pay for all costs for removing any exterior signage from the Building that exists prior to execution of this Lease. So long as Tenant occupies at least 51% of the rentable square footage of the Building, the name of the Building shall be “The Zulily Building.”

23.17 USA Patriot Act and Anti-Terrorism Laws.

(a) Tenant represents and warrants to, and covenants with, Landlord that neither Tenant nor any of its respective constituent owners or affiliates currently are, or shall be at any time during the Term hereof, in violation of any laws relating to terrorism or money laundering (collectively, the “Anti-Terrorism Laws”), including without limitation, Executive Order No. 13224 on Terrorist Financing, effective September 24, 2001, and relating to Blocking Property and Prohibiting Transactions With Persons Who Commit, Threaten to Commit, or Support Terrorism (the “Executive Order”) and/or the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (Public Law 107-56) (the “USA Patriot Act”).

 

18.


(b) Tenant covenants with Landlord that neither Tenant nor any of its respective constituent owners or affiliates is or shall be during the Term hereof a “Prohibited Person,” which is defined as follows: (i) a person or entity that is listed in the Annex to, or is otherwise subject to, the provisions of the Executive Order; (ii) a person or entity owned or controlled by, or acting for or on behalf of, any person or entity that is listed in the Annex to, or is otherwise subject to the provisions of the Executive Order; (iii) a person or entity with whom Landlord is prohibited from dealing with or otherwise engaging in any transaction by any Anti-Terrorism Law, including without limitation the Executive Order and the USA Patriot Act; (iv) a person or entity who commits, threatens or conspires to commit or support “terrorism” as defined in Section 3(d) of the Executive Order; (v) a person or entity that is named as a “specially designated national and blocked person” on the then-most current list published by the U.S. Treasury Department Office of Foreign Assets Control at its official website, http://www.treas.gov/offices/eotffc/ofac/sdn/tllsdn.pdf, or at any replacement website or other replacement official publication of such list; and (vi) a person or entity who is affiliated with a person or entity listed in items (i) through (v), above.

(c) At any time and from time-to-time during the Term, Tenant shall deliver to Landlord, within ten (10) days after receipt of a written request therefor, a written certification or such other evidence reasonably acceptable to Landlord evidencing and confirming Tenant’s compliance with this Section.

IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease in quadruplicate on the dates set forth below and this Lease shall be effective as of the latter of such dates.

 

TENANT:     LANDLORD:
ZULILY, INC., a Delaware corporation     UCM/FPI-Cobalt, LLC, a Delaware limited liability company
        By:   UCM/FPI-Cobalt Holding, LLC, a Delaware limited liability company
        Its:   Sole Member
By:  

/s/ Darrell Cavens

    By:  

/s/ Matt Felton

Its:  

CEO

    Its:  

Authorized Signatory

Date:  

5-13-11

    Date:  

5/18/11

 

19.


STATE OF WASHINGTON

   )   
   )    ss.

County of King

   )   

I certify that I know or have satisfactory evidence that Matt Felton is the person who appeared before me, and said person acknowledged that he/she signed this instrument, on oath stated the he/she was authorized to execute the instrument and acknowledged it as the member of UCM/FPI-Cobalt to be the free and voluntary act of such party for the uses and purposes mentioned in the instrument.

Date: 5/18/11.

 

[SEAL]    

/s/ Jenny Tsukuno

   

Jenny Tsukuno

   

Title

 
   

My appointment expires

 

5/9/14

 

STATE OF WASHINGTON

   )   
   )    ss.

County of King

   )   

I certify that I know or have satisfactory evidence that Darrel Cavens is the person who appeared before me, and said person acknowledged that he/she signed this instrument, on oath stated the he/she was authorized to execute the instrument and acknowledged it as the CEO of Zulily, Inc. to be the free and voluntary act of such party for the uses and purposes mentioned in the instrument.

Date: May 13, 2011.

 

[SEAL]    

/s/ Allison C. Dermer

   

Allison C. Dermer

    Title  
    My appointment expires  

12-1-2013


EXHIBIT A

SITE PLAN


 

LOGO


EXHIBIT B

WORK LETTER

Landlord shall have no obligation to make any improvements to the Premises or provide Tenant with any improvement allowance, it being understand that Landlord is delivering the Premises to Tenant in its “as is” condition; provided, however, Landlord shall delivery possession of the Premises to Tenant with all building systems serving the Premises in good working order and with the Premises “broom clean”.

 

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EXHIBIT C

ACKNOWLEDGMENT OF TERM

COMMENCEMENT DATE

 

To:  

 

       Date:   

July 1, 2011

 

 

         
 

 

         

 

  Re: Lease dated May 13 2011, between VCM/FPI,

Landlord, and Zulily, Inc., Tenant,

concerning Suite 900, 300 in the 2200 1st Ave Building.

Ladies and Gentlemen:

In accordance with the above-referenced lease (the “Lease), we wish to advise you and/or confirm the following information:

1 The Premises have been accepted by Tenant as being substantially complete in accordance with the Lease and there is no deficiency in construction.

2. Tenant has possession of the Premises and acknowledges that, pursuant to the provisions of the Lease, the Term Commencement Date is             , 201   and the Term Expiration Date is             , 20     .

3. In accordance with the Lease, Annual Base Rent commenced to accrue on                     , 201  .

AGREED AND ACCEPTED:

 

LANDLORD:       TENANT:  

/s/ Matthew Felton

  , a    

Zulily, Inc.

  , a

UCM/FPI-Colbalt Holding, LLC a Delaware limited liability company

   

Delaware Corporation

By:  

Matthew Felton

    By:  

/s/ Michael Vernon

Its:  

Authorized Signatory

    Its:  

Chief Financial Officer

Date:  

8/8/11

    Date:  

July 1, 2011

 

1.


EXHIBIT D

RULES AND REGULATIONS

1. The driveways, parking lots, sidewalks, halls, passages, exits, vestibules, entrances, public areas, elevators and stairways of the Building shall not be obstructed by any Tenants or used by them for any purpose other than ingress to and egress from their respective Premises. No Tenant and no employee or invitee of any Tenant shall go upon the roof of the Building. If the Premises are situated on the ground floor with direct access to the street, then Tenant shall, at Tenant’s expense, keep the sidewalks and curbs directly in front of the Premises clean and free from din, refuse and other obstructions.

2. No sign, placard, picture, name, advertisement or notice visible from the exterior of any Tenant’s Premises shall be inscribed, painted, affixed or otherwise displayed by any Tenant on any part of the Building without the prior written consent of Landlord. Landlord shall place Tenant’s name on the directory in the lobby of the Building and on the individual floor directory, if available. Landlord reserves the right to restrict the amount of directory space utilized by Tenant. Tenant shall not have the right to have additional names placed on the directory without Landlord’s prior written consent. If such consent is given, the addition of such names shall be at Tenant’s expense.

3. The Premises shall not be used for lodging or sleeping. No cooking shall be done or permitted by any Tenant on the Premises, except the use by the Tenant of Underwriter’s Laboratory approved microwave oven or equipment for brewing coffee, tea, hot chocolate and other similar beverages which shall be permitted, provided that the power required by such equipment shall not exceed that amount which can be provided by a 30-amp circuit and that such use is in accordance with all applicable federal, state and city laws, codes, ordinances, rules and regulations. Repair and maintenance of garbage disposals, dishwashers, icemakers and other similar equipment shall be at Tenant’s expense. If the Premises or any part of the Building become infested with vermin as a result of Tenant’s use, Tenant shall reimburse Landlord for the expense of extermination.

4. No Tenant shall employ any person or persons other than the janitor of Landlord for the purpose of cleaning the Premises, unless otherwise agreed to by Landlord in writing. Except with the written consent of Landlord, no person or persons other than those approved by Landlord shall be permitted to enter the Building for the purpose of cleaning the same.

5. No Tenant shall use or keep in the Premises or the Building any kerosene, gasoline or flammable or combustible fluid or material other than limited quantities thereof reasonably necessary for the operation or maintenance of office equipment; or without Landlord’s prior written approval, use any method of heating or air conditioning, including, without limitation, portable floor heaters and fans, other than that supplied by Landlord. No Tenant shall use or keep or permit to be used or kept any hazardous or toxic materials or any foul or noxious gas or substance in the Premises or permit or suffer the Premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Building by reason of noise, odors, vibrations, or interfere in any way with other tenants or those having business therein.

6. Any Tenant and its employees, agents or associates or other persons entering or leaving the Building after ordinary business hours may be required to sign the building register. The security officer in charge reserves the right, on behalf of the Landlord, to refuse to admit Tenant or any of Tenant’s employees, agents, or associates or any other person to the Building after ordinary business hours without prior notification from the Tenant or other satisfactory identification demonstrating such person’s right to access to the Building. Each Tenant shall be responsible for all persons for whom it requests after-hours access and shall be liable to Landlord for all acts of such persons. Landlord shall, in no case, be liable for damages for any error with regard to the admission to or exclusion from the Building of any person. In the case of invasion, mob, riot, public excitement or other circumstances rendering such action advisable in Landlord’s opinion, Landlord reserves the right to prevent access to the Building during the continuance of the same by such action as Landlord may deem appropriate including closing doors. Landlord also reserves the right to exclude or expel from the Building any person who, in Landlord’s judgment, is intoxicated or under the influence of liquor or drugs or who is in violation of any of the Rules and Regulations of the Building.

 

1.


7. No curtains, draperies, blinds, shutters, shades, screens or other coverings hangings or decorations shall be attached to, hung or placed in, or used in connection with any window of the Building without the prior written consent of Landlord, which consent shall not be unreasonably withheld. No files, cabinets, boxes, containers or similar items shall be placed in, against or adjacent to any window of the Building so as to be visible from the outside of the Building. Tenant shall cooperate fully with Landlord in obtaining maximum effectiveness of the cooling system of the Building by closing draperies and other window coverings when the sun’s rays fall upon windows of the Premises. Tenant shall not obstruct, alter or in any way impair the efficient operation of Landlord’s heating, ventilating, air conditioning, electrical, fire safety or lighting systems, nor shall Tenant tamper with or change the setting of any thermostat or temperature control valves in the Building other than room thermostats installed for Tenant’s use. Landlord reserves the right to install solar film on the windows of the Building to aid the efficiency of the HVAC system and to reduce energy costs. Tenant shall not remove solar film from any window. Tenant shall also cooperate with Landlord to comply with any governmental energy-saving rules, laws or regulations. No bottles, parcels or other articles may be placed in the halls or in any other part of the Building, nor shall any article be thrown out of the doors or windows of the Premises.

8. Each Tenant shall see that the doors of its Premises are closed and locked, that all water faucets, water apparatus, equipment, lights and other utilities are shut off before Tenant or Tenant’s employees leave the Premises, so as to prevent waste or damage; and for any default or carelessness in this regard, Tenant shall make good all injuries sustained by other Tenants or occupants of the Building or by Landlord. On multiple tenancy floors all Tenants shall keep the doors to the Building corridors closed at all times except for ingress and egress.

9. The lavatory rooms, toilets, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which they were constructed; no foreign substance of any kind whatsoever shall be thrown therein and the expense of any breakage, stoppage or damage resulting from the violation of this rule shall be home by the Tenant who, or whose employees or invitees, shall have caused it.

10. No Tenant shall install any radio or television antenna, loud speaker or other device on the roof or the exterior walls of the Building without the prior written consent of Landlord. No awnings, air conditioning units or other projections shall be attached to the outside walls or windowsills of the Building or otherwise project from the Building, without prior written consent of Landlord.

11. Each Tenant shall store all its trash and garbage within its Premises. No material shall be placed in the trash boxes or receptacles if such material is of such nature that it may not be disposed of in the ordinary and customary manner of removing and disposing of trash and garbage in the city where the Building is located without being in violation of any law or ordinance governing such disposal. All garbage and refuse disposal shall be made only through entry ways and elevators provided for such purposes and at such times as Landlord shall designate.

12. Each Tenant shall participate in any recycling program for the Building.

13. Canvassing, peddling, soliciting and distribution of handbills or any other written materials in the Building are prohibited and each Tenant shall cooperate to prevent the same.

14. Tenant and its authorized representative and invitees shall not make or permit any noise in the Building that is annoying, unpleasant or distasteful, interfering in any way with other tenants or those having business with them.

15. Tenant shall not mark, drive nails, screw or drill into the partitions, woodwork or plaster or in any way deface the Premises or any part thereof, except to install normal wall hangings. Tenant shall repair any damage resulting from non-compliance with this rule.

16. Landlord shall direct licensed electricians as to where and how telephone and electrical wires are to be introduced. No cutting or boring for wires shall be allowed without Landlord’s consent. The location of telephones, call boxes and office equipment affixed to the Premises shall be subject to Landlord’s approval. Neither Tenant, its subtenants, assignees, agents, employees nor contractors shall have access to or make any changes, alterations, additions, improvements, repairs or replacements (collectively, “work”) to the telephone closets,


telephone lines or any other communications facilities or equipment (collectively, the “telephone lines”) within the Building without the prior written authorization of Landlord, which authorization may be withheld in Landlord’s sole discretion. All contractors designated by Tenant to perform work on the telephone lines shall be licensed and shall be subject to Landlord’s prior written approval, which approval may be withheld by Landlord in its sole discretion. Contractors performing work shall be required to provide evidence of insurance coverage satisfactory to Landlord, including, without limitation naming Landlord as an additional insured on all liability policies. Any costs, expenses and liabilities incurred by Landlord as a result of Tenant or Tenant’s contractor performing work on the telephone lines shall be included in Tenant’s indemnification obligations under the Lease.

17. Tenant shall not lay linoleum tile, carpet or any other floor covering to the floor of the Premises, except as approved by Landlord.

18. Tenant shall comply with all safety, fire protection and evacuation procedures and regulations established by Landlord or any governmental agency.

19. Tenant assumes any and all responsibility for protecting its Premises from theft, robbery and pilferage, which includes keeping doors and other means of entry to the Premises closed and locked when the Premises are unattended.

20. Neither Tenant nor its employees shall park their vehicles in any parking area designated by Landlord as areas for parking by visitors to the Building. Neither Tenant nor its employees shall leave vehicles in the Building parking areas overnight nor park any vehicles other than automobiles, motorcycles, motor driven or non-motor driven bicycles or four-wheeled trucks in the Building parking areas. Landlord may, in its sole discretion, designate separate areas for bicycles and motorcycles. Landlord may establish additional Rules and Regulations that apply to the parking areas.

21. There shall be no smoking in the Building. Smoking shall mean carrying or holding of a lighted pipe, cigar or cigarette of any kind, or any other lighted smoking equipment or the lighting thereof or emitting or exhaling the smoke of a pipe, cigar or cigarette of any kind. Each Tenant shall cooperate to enforce this prohibition, including giving notice of such to its employees.

22. Landlord may waive any one or more of these Rules and Regulations for the benefit of any particular tenant or tenants, but no such waiver by Landlord shall be construed as a waiver of such Rules and Regulations in favor of any other tenant or tenants, nor prevent Landlord from thereafter enforcing any such rules and regulations against any or all of the tenants of the Building.

23. These Rules and Regulations are in addition to, and shall not be construed to in any way modify or amend, in whole or in part, the terms, covenants, agreements and conditions of any lease of Premises in the Building.

24. Landlord reserves the right to make such other reasonable Rules and Regulations as, in its judgment, may from time to time be needed for the safety, care and cleanliness of the Building, and for the preservation if the order therein.

25. Landlord shall not be responsible to Tenant or to any other person for the non-observance or violation of these Rules and Regulations by any other tenant or other person. Tenant shall be deemed to have read these rules and to have agreed to abide by them as a condition to its occupancy of the space leased.

26. The “Ordinary Business Hours” of the Building shall be 7:00 a.m. to 6:00 p.m. Monday through Friday and from 8:00 am to noon on Saturdays, holidays expected.


EXHIBIT E

LEGAL DESCRIPTION


(Legal Description of Property)

LOTS 1, 2, 3 AND 4 IN BLOCK 317 OF SEATTLE TIDE LANDS;

SITUATE IN THE CITY OF SEATTLE, COUNTY OF KING, STATE OF WASHINGTON.


Amendment No. 1 of Lease by and between the Company and UCM/FPI - Cobalt, LLC

Exhibit 10.9

FIRST AMENDMENT

This First Amendment (the “Amendment”) is made as of this 5th day of October, 2011 by and between UCM/FPI – COBALT, LLC, a Delaware limited liability company (“Landlord”), and ZULILY, INC. a Delaware corporation (“Tenant”).

RECITALS

A. Landlord and Tenant are parties to that certain lease dated May 18, 2011 (the “Master Lease”) for space in the office building located at 2200 First Avenue South, Seattle, Washington commonly known as the Cobalt Building.

B. The term of the Lease expires on June 30, 2014.

C. Tenant has secured a partial release of Tenant’s obligation to pay rent with respect to Tenant’s lease in Occidental Mall. The agreement below fully satisfies Tenant’s obligations as outlined in the asterisked paragraph in the Base Rent section of the Basic Lease Information in the Master Lease.

AGREEMENT

In consideration of the mutual covenants and conditions contained herein and for other good and valuable consideration, Landlord and Tenant agree as follows:

 

  1. Amendment of Lease.

A. Base Rent. Beginning November 1, 2011 through January 31, 2012, Tenant shall be charged rent on an additional 13,501 rentable square feet increasing the total rentable square footage that rent is calculated on to 71,866 rentable square feet during this time period. Consequently, Tenant’s Base Rent from November 1, 2011 through January 31, 2012 shall be increased by $21,376.58 to $113,787.83 per month. Beginning February 1, 2012, Tenant’s Base Rent shall be as scheduled in the Master Lease.

 

  2. Representations.

A. Due Authorization. Each party represents and warrants to the other that it has full power and authority to enter into this Amendment without the consent of any other person or entity;

B. No Assignment. Tenant represents and warrants to Landlord that Tenant has not assigned the Lease, or sublet the Premises;

C. No Default. Tenant represents and warrants to Landlord that Tenant is not in default under the Lease; and

D. Binding Effect. Tenant represents and warrants to Landlord that the Lease is binding on Tenant and is in full force and effect, and Tenant does not have any defenses to the enforcement of the Lease.

E. Real Estate Brokers. Washington Partners represents the Tenant (“Tenant’s Broker”). Each party represents and warrants to the other that other than Tenant’s Broker, there is no real estate broker or agent who is or may be entitled to any commission or finder’s fee in connection with the representation of such party in this Amendment and each party shall indemnify and hold the other

 

1.


harmless from and against any and all claims, demands, losses, liabilities, lawsuits, judgments, costs and expenses (including without limitation, attorneys’ fees and costs) with respect to any leasing commission or equivalent compensation alleged to be owing on account of such party’s discussions, negotiations and/or dealings with any real estate broker or agent other than Tenant’s Broker. No fee shall be due Tenant’s Broker with regard to this lease Amendment.

 

  3. General Provisions

A. Attorneys’ Fees. If a suit or an action is instituted in connection with any dispute arising out of this Amendment or the Lease or to enforce any rights hereunder or thereunder, the prevailing party shall be entitled to recover such amount as the court may adjudge reasonable as attorneys’ and paralegals’ fees incurred in connection with the preparation for and the participation in any legal proceedings (including, without limitation, any arbitration proceedings or court proceedings, whether at trial or on any appeal or review), in addition to all other costs or damages allowed.

B. Execution in Counterparts. This Amendment may be executed in counterparts and when each party has signed and delivered at least one such executed counterpart to the other party at the party’s address set forth above, then each such counterpart shall be deemed an original, and, when taken together with the other signed counterpart, shall constitute one agreement which shall be binding upon and effective as to all signatory parties.

C. Binding Effect. The provisions of this Amendment shall be binding upon and inure to the benefit of the parties and their respective successors and assigns and no amendment to this Amendment shall be binding upon the parties unless in the form of a written document executed by each party hereto.

D. Integration. This Amendment contains the entire agreement and understanding of the parties with respect to the matters described herein, and supersedes all prior and contemporaneous agreements between them with respect to such matters.

 

2.


IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment as of the date first above written.

 

  Landlord:   UMC/FPI – COBALT, LLC, a Delaware limited liability company
      By:   UCM/FPI – Cobalt, LLC, a Delaware limited liability company
      Its:   Sole Member
        By:  

/s/ Matt Felton

        Its:  

Authorized Signatory

        Date:  

10/20/2011

  Tenant:   ZULILY, INC. a Delaware corporation
    By:  

/s/ Michael Vernon

    Its:  

CFO

    Date:  

10/5/11

 

3.


Amendment No. 2 of Lease by and between the Company and UCM/FPI - Cobalt, LLC

Exhibit 10.10

AMENDMENT NO. 2 OF LEASE

This Amendment No. 2 of Lease (the “Amendment”) is made as of this 8th day of February, 2012 by and between UCM/FPI – COBALT, LLC, a Delaware limited liability company (“Landlord”), and ZULILY, INC. a Delaware corporation (“Tenant”).

RECITALS

A. Landlord and Tenant entered into that certain lease dated as of May 18, 2011, as amended by that certain First Amendment dated October 5, 2011 (the “Lease”), for space in the building commonly known as the Cobalt Building (the “Building”) located at 2200 First Avenue South, Seattle, Washington containing approximately 87,823 rentable square, as more particularly described in the Lease (the “Premises”); provided, however, approximately 4,985 rentable square feet on the second floor of the Building commonly known as Suite 210 is leased to Tenant pursuant to the Lease but that possession of such space (referred to in the Lease as the “Kinetix Space”) is not contemplated to be delivered to Tenant until September 1, 2012.

B. Landlord and Tenant desire to amend the Lease in accordance with the terms and conditions set forth in this Amendment. Capitalized terms used in this Amendment shall have the meanings given to them in the Lease, except as provided in this Amendment.

AGREEMENT

In consideration of the mutual covenants and conditions contained herein and for other good and valuable consideration, Landlord and Tenant agree as follows:

1. Amendment of Lease.

A. Expansion Space. Effective February 1, 2012, the Premises shall be expanded to include the remaining space in the Building not currently leased by Tenant, which space contains approximately 18,692 rentable square feet and is more particularly described in attached Exhibit “A” (the “Expansion Space”). The Expansion Space shall be delivered to Tenant in its “as is” condition and Landlord shall have no obligation to make any improvements to the Expansion Space or provide Tenant with any improvement allowance.

B. Tenant’s Percentage Share. Effective February 1, 2012, Tenant’s Percentage Share shall be 95.53. On the date the Kinetix Space is delivered to Tenant, Tenant’s Percentage Share shall be 100%. Effective July 1, 2012, the total rentable square footage of the Building shall be deemed to be 106,515 rentable square feet. This is less than the amount set forth in the original Lease because Landlord is not charging Tenant rent for certain storage space in the Building.

C. Monthly Base Rent. From and after July 1, 2012, Tenant shall pay Monthly Base Rent as follows:

 

Period

   Monthly
Base Rent
 

7/1/12 - /30/12

   $ 169,827.37   

9/1/12 - 6/30/13

   $ 178,031.85   

7/1/13 - 6/30/14

   $ 184,689.04   

 

1.


D. Security Deposit. Concurrently with the execution of this Amendment, Tenant shall deposit with Landlord an amount equal to $34,658.08 to increase the amount of the Security Deposit to $184,689.04 from $150,030.96.

E. Parking. Tenant currently leases thirty (30) unreserved parking stalls in the adjacent surface Jot and Tenant is obligated to commence the payment of rent with respect to such thirty (30) unreserved parking stalls in the adjacent surface lot on April 1, 2012 at a rate of $90 per parking stall per month. Tenant currently leases on a month to month basis thirty-three (33) parking stalls in the garage of the Building at a rate of $125 per parking stall per month. Commencing on July 1, 2012, Tenant shall be obligated to lease all of the thirty-eight (38) parking stalls in the garage and all thirty (30) unreserved parking stalls in the adjacent surface lot through the expiration date of the Lease, whether or not Tenant uses all such parking stalls. Landlord shall have the right to increase the monthly parking fee for all parking stalls by no more than five percent (5%) on each January 1, commencing on January 1, 2013.

F. Option Rights. Tenant’s option to extend the term of the Lease in Section 2.3 of the Lease shall remain in full force and effect but all other option rights contained in the Lease, including, without limitation, the option to terminate the Lease in Section 2.4 of the Lease and the option to expand the Premises in Section 1.4 of the Lease, are hereby deleted and are of no force and effect.

G. Tenant Financial Statements. If Landlord desires to finance, refinance, or sell the Building or if Tenant’s financials are required by Landlord’s lender for any loan approvals, Tenant shall deliver to such lender or purchaser designated by Landlord such financial statements of Tenant as may be reasonably required by such lender or purchaser, including but not limited to Tenant’s income and expense statement and balance sheet for the current year to date and the immediately preceding fiscal year. All such financial statements shall be received by Landlord and such lender or purchaser in confidence and shall be used only for the purposes herein set forth.

H. Real Estate Brokers. Each party represents and warrants to the other that there is no real estate broker or agent who is or may be entitled to any commission or finder’s fee in connection with the representation of such party in this Amendment other than Clay Nielson of Washington Partners representing Tenant and David Gurry and Dan Dahl of Colliers representing Landlord (each of whose commission shall be paid by Landlord pursuant to a separate written agreement). Each party shall indemnify and hold the other harmless from and against any and all claims, demands, losses, liabilities, lawsuits, judgments, costs and expenses (including without limitation, attorneys’ fees and costs) with respect to any leasing commission or equivalent compensation alleged to be owing on account of such party’s discussions, negotiations and/or dealings with any real estate broker or agent (other than Clay Nielson of Washington Partners representing Tenant and David Gurry and Dan Dahl of Colliers representing Landlord whose commission shall be paid by Landlord pursuant to a separate written agreement).

2. Tenant Representations. Tenant represents and warrants that:

A. Due Authorization. Tenant has full power and authority to enter into this Amendment without the consent of any other person or entity;

 

2.


B. No Assignment. Tenant has not assigned the Lease, or sublet the Premises;

C. No Default. Tenant is not in default of the Lease and Tenant acknowledges that Landlord is not in default of the Lease; and

D. Binding Effect. The Lease is binding on Tenant and is in full force and effect, and Tenant has no defenses to the enforcement of the Lease.

3. General Provisions

A. Attorneys’ Fees. If a suit or an action is instituted in connection with any dispute arising out of this Amendment or the Lease or to enforce any rights hereunder or thereunder, the prevailing party shall be entitled to recover such amount as the court may adjudge reasonable as attorneys’ and paralegals’ fees incurred in connection with the preparation for and the participation in any legal proceedings (including, without limitation, any arbitration proceedings or court proceedings, whether at trial or on any appeal or review), in addition to all other costs or damages allowed.

B. Execution in Counterparts. This Amendment may be executed in counterparts and when each party has signed and delivered at least one such executed counterpart to the other party at the party’s address set forth above, then each such counterpart shall be deemed an original, and, when taken together with the other signed counterpart, shall constitute one agreement which shall be binding upon and effective as to all signatory parties.

C. Effect of Amendment. The Lease is unmodified except as expressly set forth in this Amendment. Except for the modifications to the Lease set forth in this Amendment, the Lease remains in full force and effect. To the extent any provision of the Lease conflicts with or is in any way inconsistent with this Amendment, the Lease is deemed to conform to the terms and provisions of this Amendment.

D. Binding Effect. The provisions of this Amendment shall be binding upon and inure to the benefit of the parties and their respective successors and assigns and no amendment to this Amendment shall be binding upon the parties unless in the form of a writing executed by each party hereto.

E. Integration. This Amendment contains the entire agreement and understanding of the parties with respect to the matters described herein, and supersedes all prior and contemporaneous agreements between them with respect to such matters.

F. Submission. The submission of this Amendment for examination and negotiation does not constitute an offer to execute this Amendment by Landlord. This Amendment shall become effective and binding only upon execution and delivery hereof by Landlord and Tenant. No act or omission of any officer, employee or agent of Landlord and Tenant shall alter, change or modify any of the provisions hereof.

IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment as of the date first above written.

 

3.


TENANT:     LANDLORD:
ZULILY, INC., a Delaware corporation     UCM/FPI-Cobalt, LLC, a Delaware limited liability company
        By:   UCM/FPI-Cobalt Holding, LLC, a Delaware limited liability company
        Its:   Sole Member
By:  

/s/ Darrell Cavens

    By:  

/s/ Matthew Felton

Its:  

CEO

    Its:  

Member

Date:  

Feb 8/ 2012

    Date:  

2/8/12

 

4.


STATE OF WASHINGTON        )   
   )ss.       
County of King       )

I certify that Darrell Cavens appeared personally before me and that I know or have satisfactory evidence that he/she signed this instrument, on oath stated that he/she was authorized to execute this instrument and acknowledged it as the CEO of Zulily, Inc., to be the free and voluntary act of such party for the uses and purposes mentioned in this instrument.

DATED this 3rd day of Feb, 2012.

 

[SEAL]    

/s/ Marcia G. Cardona

    Notary Public in and for the State of Washington
    My Commission Expires:  

6-6-2015

 

STATE OF OREGON        )   
   )ss.       
County of Multnomah    )   

I certify that Matthew Felton appeared personally before me and that I know or have satisfactory evidence that he/she signed this instrument, on oath stated that he/she was authorized to execute this instrument and acknowledged it as the Member of UCM/FPI-Cobalt Holding, LLC, to be the free and voluntary act of such party for the uses and purposes mentioned in this instrument.

DATED this 8th day of February, 2012.

 

[SEAL]    

/s/ Natsumi K Shakhman

    Notary Public in and for the State of Oregon
    My Commission Expires:  

9/22/12


EXHIBIT A

EXPANSION SPACE


LOGO

 


Amendment No. 3 of Lease by and between the Company and UCM/FPI - Cobalt, LLC

Exhibit 10.11

AMENDMENT NO. 3 OF LEASE

This Amendment No. 3 of Lease (the “Amendment”) is made as of this day of June 15, 2012 by and between UCM/FPI - COBALT, LLC, a Delaware limited liability company (“Landlord”), and ZULILY, INC., a Delaware corporation (“Tenant”).

RECITALS

A. Landlord and Tenant entered into that certain lease dated as of May 18, 2011, as amended by that certain First Amendment dated October 5, 2011 and by that Amendment No. 2 of Lease dated January 2012 (the “Lease”), for space in the building commonly known as the Cobalt Building (the “Building”) located at 2200 First Avenue South, Seattle, Washington containing approximately 106,515 rentable square, as more particularly described in the Lease (the “Premises”).

B. Landlord and Tenant desire to amend the Lease to include in the Premises approximately 3,198 square feet of storage space in the location depicted on the attached Exhibit A (the “Storage Space”) in accordance with the terms and conditions set forth in this Amendment. Capitalized terms used in this Amendment shall have the meanings given to them in the Lease, except as provided in this Amendment.

AGREEMENT

In consideration of the mutual covenants and conditions contained herein and for other good and valuable consideration, Landlord and Tenant agree as follows:

1. Amendment of Lease.

A. Storage Space. Effective 7/1, 2012 (the “Storage Space Commencement Date”), the Premises shall be expanded to include the Storage Space. The Storage Space shall be delivered to Tenant in its “as is” condition and Landlord shall have no obligation to make any improvements to the Storage Space or provide Tenant with any improvement allowance.

B. Monthly Gross Rent. From and after the Storage Space Commencement Date, Tenant shall pay monthly gross rent for the Storage Space in the amount of $2,265.25 per month.

C. Right to Terminate: Tenant may terminate storage space by providing six (6) months written notice prior to termination.

D. Real Estate Brokers. Each party represents and warrants to the other that there is no real estate broker or agent who is or may be entitled to any commission or finder’s fee in connection with the representation of such party in this Amendment. Each party shall indemnify and hold the other harmless from and against any and all claims, demands, losses, liabilities, lawsuits, judgments, costs and expenses (including without limitation, attorneys’ fees and costs) with respect to any leasing commission or equivalent compensation alleged to be owing on account of such party’s discussions, negotiations and/or dealings with any real estate broker or agent.

2. Tenant Representations. Tenant represents and warrants that:

A. Due Authorization. Tenant has full power and authority to enter into this Amendment without the consent of any other person or entity;


B. No Assignment. Tenant has not assigned the Lease, or sublet the Premises;

C. No Default. Tenant is not in default of the Lease and Tenant acknowledges that Landlord is not in default of the Lease; and

D. Binding Effect. The Lease is binding on Tenant and is in full force and effect, and Tenant has no defenses to the enforcement of the Lease.

3. General Provisions

A. Attorneys’ Fees. If a suit or an action is instituted in connection with any dispute arising out of this Amendment or the Lease or to enforce any rights hereunder or thereunder, the prevailing party shall be entitled to recover such amount as the court may adjudge reasonable as attorneys’ and paralegals’ fees incurred in connection with the preparation for and the participation in any legal proceedings (including, without limitation, any arbitration proceedings or court proceedings, whether at trial or on any appeal or review), in addition to all other costs or damages allowed.

B. Execution in Counterparts. This Amendment may be executed in counterparts and when each party has signed and delivered at least one such executed counterpart to the other party at the party’s address set forth above, then each such counterpart shall be deemed an original, and, when taken together with the other signed counterpart, shall constitute one agreement which shall be binding upon and effective as to all signatory parties.

C. Effect of Amendment. The Lease is unmodified except as expressly set forth in this Amendment. Except for the modifications to the Lease set forth in this Amendment, the Lease remains in full force and effect. To the extent any provision of the Lease conflicts with or is in any way inconsistent with this Amendment, the Lease is deemed to conform to the terms and provisions of this Amendment.

D. Binding Effect. The provisions of this Amendment shall be binding upon and inure to the benefit of the parties and their respective successors and assigns and no amendment to this Amendment shall be binding upon the parties unless in the form of a writing executed by each party hereto.

E. Integration. This Amendment contains the entire agreement and understanding of the parties with respect to the matters described herein, and supersedes all prior and contemporaneous agreements between them with respect to such matters.

F. Submission. The submission of this Amendment for examination and negotiation does not constitute an offer to execute this Amendment by Landlord. This Amendment shall become effective and binding only upon execution and delivery hereof by Landlord and Tenant. No act or omission of any officer, employee or agent of Landlord and Tenant shall alter, change or modify any of the provisions hereof.


IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment as of the date first above written.

 

TENANT:     LANDLORD:
ZULILY, INC., a Delaware corporation     UCM/FPI-Cobalt, LLC, a Delaware limited liability company
        By:   UCM/FPI-Cobalt Holding, LLC, a Delaware limited liability company
        Its:   Sole Member
By:  

/s/ Angelina Merola

    By:  

/s/ Matthew Felton

Its:  

VP Finance

    Its:  

Member

Date:  

July 1, 2012

    Date:  

7/25/12

 

STATE OF WASHINGTON    )
   )ss.
County of King    )

I certify that Angelina Merola appeared personally before me and that I know or have satisfactory evidence that he/she signed this instrument, on oath stated that he/she was authorized to execute this instrument and acknowledged it as the                      of                     , to be the free and voluntary act of such party for the uses and purposes mentioned in this instrument.

DATED this 2 day of July, 2012.

 

[SEAL]       

/s/ Marcia G. Cardona

       Notary Public in and for the State of Washington
       My Commission Expires:  

June 6, 2015

 

STATE OF WASHINGTON    )
   )ss.
County of King    )

I certify that Matthew Felton appeared personally before me and that I know or have satisfactory evidence that he/she signed this instrument, on oath stated that he/she was authorized to execute this instrument and acknowledged it as the Member of UCM/FPI-Cobalt Holding, LLC, to be the free and voluntary act of such party for the uses and purposes mentioned in this instrument.

DATED this 25th day of July, 2012.

 

[SEAL]      

/s/ Natsumi K Shakhman

      Notary Public in and for the State of Oregon
      My Commission Expires:  

9/22/12


EXHIBIT A

STORAGE SPACE


 

LOGO


Office Lease Agreement by and between the Company and SRI-WR Elliott Avenue LLC

Exhibit 10.12

2601 ELLIOTT AVENUE

SEATTLE, WASHINGTON

OFFICE LEASE AGREEMENT

BETWEEN

SRI-WR ELLIOTT AVENUE LLC, a Delaware limited liability company

(“LANDLORD”)

AND

ZULILY, INC., a Delaware corporation

(“TENANT”)

Dated as of: May 2, 2013


TABLE OF CONTENTS

 

1.

  Basic Lease Information.      1   

2.

  Lease Grant.      3   

3.

  Adjustment of Commencement Date; Possession.      3   

4.

  Rent.      4   

5.

  Compliance with Laws; Use.      4   

6.

  Security Deposit.      5   

7.

  Building Services.      6   

8.

  Leasehold Improvements.      7   

9.

  Repairs and Alterations.      8   

10.

  Entry by Landlord.      9   

11.

  Assignment and Subletting.      9   

12.

  Liens.      11   

13.

  Indemnity and Waiver of Claims.      11   

14.

  Insurance.      11   

15.

  Subrogation.      12   

16.

  Casualty Damage.      12   

17.

  Condemnation.      13   

18.

  Events of Default.      13   

19.

  Remedies.      14   

20.

  Limitation of Liability.      15   

21.

  Deleted.      16   

22.

  Holding Over.      16   

23.

  Subordination to Mortgages; Estoppel Certificate.      16   

24.

  Notice.      17   

25.

  Surrender of Premises.      17   

26.    

  Miscellaneous.      17   

SCHEDULES AND EXHIBITS:

 

SCHEDULE 1: BASE RENT SCHEDULE
EXHIBIT A: DELINEATION OF THE PREMISES
EXHIBIT A-1: LEGAL DESCRIPTION OF THE LAND
EXHIBIT B: EXPENSES AND TAXES
EXHIBIT C: WORK LETTER
EXHIBIT D: COMMENCEMENT LETTER
EXHIBIT E: BUILDING RULES AND REGULATIONS
EXHIBIT E-1: DOG RULES AND REGULATIONS
EXHIBIT F: ADDITIONAL PROVISIONS
EXHIBIT G: FORM OF LETTER OF CREDIT
EXHIBIT H: APPRAISAL PROCEDURE
EXHIBIT I: DELINEATION OF STAGING PREMISES
EXHIBIT J: LOCATION OF BACK-UP GENERATOR


OFFICE LEASE AGREEMENT

THIS OFFICE LEASE AGREEMENT (this “Lease”) is made and entered into as of May 2, 2013, by and between SRI-WR ELLIOTT AVENUE LLC, a Delaware limited liability company (“Landlord”) and ZULILY, INC., a Delaware corporation (“Tenant”). The schedules, exhibits and other attachments listed in the preceding Table of Contents are incorporated into and made a part of this Lease.

 

1. Basic Lease Information.

 

  1.01 Building” shall mean the building located at 2601 Elliott Avenue, Seattle, Washington. “Rentable Square Footage of the Building” is approximately 339,799 square feet.

 

  1.02 Premises” shall mean the areas shown on Exhibit A to this Lease. The Premises is located on the floors of the Building set forth in the below table (the “Premises Table”). If the Premises include one or more floors in their entirety, all corridors and restroom facilities located on such full floor(s) shall be considered part of the Premises. The Premises is composed of four (4) “Increments”, as set forth in the Premises Table. The “Rentable Square Footage of the Premises” and each Increment thereof is approximately as set forth in the Premises Table. Prior to the Rent Commencement Date for Increment 1, Landlord shall cause its architect to measure the square footage of the Common Areas in accordance with the then current ANSI/BOMA Z 65.1-2010 standard. Using the results of such measurement and the new load factors resulting therefrom, Landlord shall prepare an amendment to this Lease (the “Adjustment Amendment”) to reflect the changes in the Rentable Square Footage of the Building and the Rentable Square footage of the Premises from the amounts set forth in this Lease. The Adjustment Amendment shall also modify any amounts under this Lease that are calculated on the basis of the Rentable Square Footage of the Building or the Rentable Square Footage of the Premises, including Base Rent, Tenant’s Pro Rata Share, the Allowance, and the Termination Fee; provided, however, that in no event shall the amount of the Letter of Credit or the amount of the scheduled reductions thereto be modified as a result of such adjustment. Tenant shall execute and return the Adjustment Amendment to Landlord within 15 days after Tenant’s receipt of same.

 

Increment

   Commencement
Date
   Rent
Commencement
Date
   Floor(s)    Rentable
Square
Footage
     Cumulative
Rentable
Square
Footage
 

1

   9/15/13    1/15/14    1 North      42,620      
         2 North      42,109         84,729   

2

   1/15/14    5/15/14    Ground      58,073         142,802   

3

   10/1/14    1/1/15    3 North      37,206         180,008   

4

   1/1/16    4/1/16    4 North      37,008      
         1 South      19,060         236,076   

 

  1.03 Base Rent”: As set forth on Schedule 1 attached hereto.

 

  1.04 Tenant’s Pro Rata Share”:

 

Increment

   Floor(s)    Tenant’s Pro
Rata Share
    Cumulative
Tenant’s Pro
Rata Share
 

1

   1 North      12.54  
   2 North      12.40     24.94

2

   Ground      17.09     42.03

3

   3 North      10.95     52.97

4

   4 North      10.89  
   1 South      5.61     69.48


  1.05 Intentionally Deleted.

 

  1.06 Term”: The term of this Lease shall commence as to each Increment on the date Landlord delivers such Increment to Tenant. The date the Lease Term so commences as to each Increment is referred to herein as the “Commencement Date” for such Increment. The term of this Lease shall end as to all Increments on the date (the “Termination Date”) that is the last day of the one hundred twentieth (120th) full calendar month after the Rent Commencement Date as to Increment 1. Where reference is made in this Lease to the “Commencement Date” without also making reference to a particular Increment, it shall be deemed to refer to the Commencement Date of Increment 1. In the event that Tenant shall exercise any renewal option pursuant to this Lease, from and after the date of such exercise “Term” shall include the applicable renewal period.

 

  1.07 Allowance(s): As set forth in the Work Letter (the “Work Letter”) attached to this Lease as Exhibit C.

 

  1.08 Letter of Credit”: $5,500,000.00, subject to reduction as provided in Section 6.

 

  1.09 Guarantor(s)”: None.

 

  1.10 Broker(s)”: Jones Lang LaSalle (“Landlord’s Broker”), representing Landlord, and Washington Partners, Inc. (“Tenant’s Broker”), representing Tenant.

 

  1.11 Permitted Use”: General office purposes, including meeting rooms, conference rooms, training rooms, computer rooms and ancillary kitchenette areas (the “Primary Use”), and the following ancillary purposes (collectively, the “Ancillary Uses”): cafeteria primarily for Tenant’s employees, call center, photography, photographic set creation, and other media studios (which shall not include broadcast facilities) in connection with Tenant’s business, including, but subject to the Rules and Regulations attached hereto as Exhibit E-1, photography of domestic household pets such as dogs, cats, chickens, and rabbits, and periodic invitation only sample sales.

 

  1.12 Notice Address(es)”:

 

Landlord:

  

Tenant:

SRI-WR ELLIOTT AVENUE LLC

c/o Shorenstein Company LLC

235 Montgomery Street

16th Floor

San Francisco, California 94104

Attn: Corporate Secretary

 

With a copy to:

 

SRI-WR ELLIOTT AVENUE LLC

c/o Wright Runstad Associates

Limited Partnership

1201 Third Avenue; Suite 2700

Seattle, Washington 98101

  

Prior to the Commencement Date:

 

ZULILY, INC.

2200 First Avenue South,

Seattle WA 98104

Attn: LEGAL

 

From and after the Commencement Date:

 

To Tenant at the Premises

Attn: LEGAL/Facilities

A copy of any notices to Landlord shall be sent to such address as Landlord shall specify from time to time by notice to Tenant.

 

  1.13 Business Day(s)” are Monday through Friday of each week, exclusive of New Year’s Day, Martin Luther King Jr. Day, Presidents Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day (“Holidays”). Landlord may designate additional Holidays that are commonly recognized by other office buildings in the area where the Building is located. “Building Service Hours” are 7:00 A.M. to 6:00 P.M. on Business Days and 8:00 A.M. to 1:00 P.M. on Saturdays.

 

  1.14 Landlord’s Work” means the work that Landlord is obligated to perform in the Premises or the Building pursuant to the Work Letter.

 

  1.15 Property” means the Building, the garage serving the Building (the “Garage”), and the other improvements, if any, serving the Building, and the parcel(s) of land on which they are located (the “Land”). A legal description of the Land is attached as Exhibit A-1.

 

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2. Lease Grant.

The Premises are hereby leased to Tenant from Landlord, together with the right to use any portions of the Property that are designated by Landlord for the common use of tenants and others (the “Common Areas”).

 

3. Adjustment of Commencement Date; Possession.

Except as expressly provided in this Lease, including the Work Letter, the Premises are accepted by Tenant in “as is” condition and configuration without any representations or warranties by Landlord, and Landlord shall not be required to make or pay for any alterations, additions or improvements in or to the Premises or the Building to prepare the same for Tenant’s occupancy. By taking possession of the Premises, Tenant agrees that the Premises are in good order and satisfactory condition, but the foregoing shall not relieve Landlord from its obligation to perform any work or improvements as expressly provided in this Lease, including the Landlord’s Work pursuant to the Work Letter, nor shall the foregoing relieve Landlord from liability pursuant to any express representations and warranties provided in this Lease, including Section 5 below. Landlord shall not be liable for a failure to deliver possession of any Increment of the Premises or any other space to Tenant on the scheduled commencement date with respect thereto due to the holdover or unlawful possession of such space by another party or any other reason beyond Landlord’s reasonable control, provided, however, Landlord shall use reasonable efforts to obtain possession of any such space and deliver the same to Tenant as soon as reasonably possible thereafter. Without limitation, if the holdover or unlawful possession of any Increment by any party shall preclude Landlord from delivering such Increment to Tenant on the scheduled commencement date with respect thereto, Landlord shall initiate and diligently pursue such legal proceedings as Landlord deems reasonably required to regain possession of such Increment from such party. In such event, the Commencement Date for the applicable Increment of the Premises or the commencement date for such other space, as applicable, shall be postponed until the date Landlord delivers possession of such space to Tenant free from occupancy by any party, and the Rent Commencement Date applicable to such Increment shall be adjusted as set forth in Section 4.02 below. Except as otherwise provided in this Lease, Tenant shall not be permitted to take possession of or enter any Increment of the Premises prior to the Commencement Date applicable thereto without Landlord’s permission. If Tenant takes possession of or enters any Increment before the applicable Commencement Date, Tenant shall be subject to the terms and conditions of this Lease; provided, however, except for the cost of services requested by Tenant (e.g. after hours HVAC service), Tenant shall not be required to pay Rent for any entry or possession before the Commencement Date during which Tenant, with Landlord’s approval, has entered, or is in possession of, such Increment for the sole purpose of performing improvements or installing furniture, equipment or other personal property.

Notwithstanding the foregoing, if Landlord fails to deliver possession of any Increment to Tenant within thirty (30) days after the scheduled Commencement Date with respect thereto as set forth in Section 1.02 above, as Tenant’s sole and exclusive remedy by reason thereof, whether at law or in equity, Tenant shall be entitled to a credit in the amount of one (1) day of the Base Rent applicable to such Increment for each day after such scheduled Commencement Date up to and including the day possession of such Increment is delivered to Tenant. Such daily credit shall be in addition to the postponement of the Rent Commencement Date applicable to such Increment pursuant to Section 4.02 below, and shall be applied against (and in the same daily amount as) the Base Rent otherwise first due and payable after the Rent Commencement Date for such Increment, until fully utilized. The provisions of this paragraph shall not apply to the extent Landlord’s failure to deliver possession of any Increment to Tenant is due to Limited Force Majeure. “Limited Force Majeure” shall mean Force Majeure as defined in Section 7 below, excluding holdover or unlawful possession of any Increment by any party.

Tenant acknowledges that a portion of the Premises (the “RN Space”) is currently leased (the “RN Lease”) to RealNetworks, Inc., a Washington corporation (“RN”). Landlord represents and warrants to Tenant that concurrently with the execution and delivery of this Lease by Landlord and Tenant, Landlord and RN have executed and delivered an amendment to the RN Lease providing for termination of the RN Lease as respects the RN Space (and RN’s vacation and surrender of the RN Space) effective on or prior to the applicable Commencement Date set forth in Section 1.02 above for the corresponding portion of the Premises.

 

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4. Rent.

4.01 Tenant shall pay Landlord, without any setoff or deduction, unless expressly set forth in this Lease, all Base Rent and Additional Rent due for the Term (collectively referred to as “Rent”). “Additional Rent” means all sums (exclusive of Base Rent) that Tenant is required to pay Landlord under this Lease. Commencing on the respective Rent Commencement Date, Base Rent and recurring monthly charges of Additional Rent shall be due and payable in advance on the first day of each calendar month without notice or demand. All other items of Rent shall be due and payable by Tenant on or before 30 days after billing by Landlord. Rent shall be made payable to the entity, and sent to the address, Landlord designates and shall be made by good and sufficient check or by other means acceptable to Landlord. If Tenant does not pay any Rent when due hereunder, Tenant shall pay Landlord an administration fee in the amount of $250.00, provided that Tenant shall be entitled to a grace period of up to 5 days for the first 2 late payments of Rent in a calendar year. In addition, past due Rent shall accrue interest at 12% per annum if not paid within five (5) days of the due date, and Tenant shall pay Landlord a reasonable fee for any checks returned by Tenant’s bank for any reason. Landlord’s acceptance of less than the correct amount of Rent shall be considered a payment on account of the oldest obligation due from Tenant hereunder, then to any current Rent then due hereunder, notwithstanding any statement to the contrary contained on or accompanying any such payment from Tenant. Rent for any partial month during the Term shall be prorated. No endorsement or statement on a check or letter accompanying payment shall be considered an accord and satisfaction. Tenant’s covenant to pay Rent is independent of every other covenant in this Lease.

4.02 If the Commencement Date with respect to any Increment shall be delayed beyond the respective Commencement Date applicable thereto as set forth in the Premises Table in Section 1.02 above, as Tenant’s sole other remedy in addition to the remedy in the second paragraph of Section 3 above, the Rent Commencement Date applicable to such Increment shall be delayed by a corresponding number of days.

4.03 Tenant shall pay Tenant’s Pro Rata Share of Taxes and Expenses, and personal property taxes on Tenant’s Property, in accordance with Exhibit B of this Lease.

 

5. Compliance with Laws; Use.

The Premises shall be used for the Permitted Use and for no other use whatsoever. Tenant shall comply with all statutes, codes, ordinances, orders, rules and regulations of any municipal or governmental entity whether in effect now or later, including the Americans with Disabilities Act (“Law(s)”), regarding the operation of Tenant’s business and the use, condition, configuration and occupancy of the Premises. In addition, Tenant shall, at its sole cost and expense, promptly comply with any Laws that relate to the “Base Building” (defined below), but only to the extent such obligations are triggered by Tenant’s use of the Premises, other than for the Primary Use in a normal and customary manner, or Alterations or improvements in the Premises, including the Initial Alterations, performed or requested by Tenant. “Base Building” shall include the structural portions of the Building, the public restrooms (i.e., excluding any restrooms located within the Premises), and the Building’s mechanical, electrical, plumbing and fire/life safety systems, and equipment located in the internal core of the Building on the floor or floors on which the Premises are located. Tenant shall promptly provide Landlord with copies of any notices it receives regarding an alleged violation of Law. Tenant shall not exceed the density limit for the Premises under applicable Laws, nor shall Tenant’s density in the Premises be such as would require any compliance work to the Base Building or any portions of the Building outside of the Premises. Tenant shall comply with the rules and regulations of the Building attached as Exhibit E and such other reasonable rules and regulations adopted by Landlord from time to time upon at least ten (10) days’ prior notice to Tenant (collectively, the “Building Rules”), including rules and regulations for the performance of Alterations (defined in Section 9.03). In the case of any conflict or inconsistency between the Building Rules and the balance of this Lease, the balance of this Lease shall control.

Except for those matters that are the responsibility of Tenant pursuant to the preceding paragraph, Landlord shall be responsible for causing, as of the Commencement Date and for the balance of the Term, (i) the Base Building to comply with all Laws required for Tenant to use and occupy the Premises for the Primary Use in a normal and customary manner, and (ii) the common areas of the Building that are reasonably anticipated to be in Tenant’s path of travel to the Premises, to comply with Title Ill of the Americans with Disabilities Act to the extent required for Tenant to use the Premises for the Primary Use in a normal and customary manner. In addition, Landlord represents and warrants to Tenant that, as of the Commencement Date of each Increment, there will be no Hazardous Materials (as defined in the Building Rules) in such Increment in violation of applicable Laws as in effect and interpreted as of such Commencement Date.

 

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6. Letter of Credit.

As security for the performance by Tenant of Tenant’s obligations hereunder, Tenant shall cause to be delivered to Landlord concurrently with the execution of this Lease by Tenant, an original irrevocable standby letter of credit (the ‘Letter of Credit”) in the amount specified in Section 1.08 above, naming Landlord as beneficiary, which Landlord may draw upon, without prejudice to any other remedy provided in this Lease or by Law, to the extent necessary to cure any Default (as defined in Section 18 below) or to satisfy any losses, costs or damages for which Tenant is liable under Section 19 below by reason of such Default. Any such draw on the Letter of Credit shall not constitute a waiver of any other rights of Landlord with respect to such Default. The Letter of Credit shall be issued by a major commercial bank reasonably acceptable to Landlord, with a Seattle, Washington, or San Francisco, California, service and claim point for the Letter of Credit (or, if Citibank is the approved issuer, a Tampa, Florida service and claim point), have an expiration date not earlier than the sixtieth (60th) day after the Termination Date (or, in the alternative, have a term of not less than one (1) year and be automatically renewable for an additional one (1) year period unless notice of non-renewal is given by the issuer to Landlord not later than sixty (60) days prior to the expiration thereof) and shall provide that Landlord may make partial and multiple draws thereunder, up to the face amount thereof. In addition, the Letter of Credit shall provide that, in the event of Landlord’s assignment or other transfer of its interest in this Lease, the Letter of Credit shall be freely transferable by Landlord, without charge and without recourse, to the assignee or transferee of such interest and the bank shall confirm the same to Landlord and such assignee or transferee. The Letter of Credit shall provide for payment to Landlord upon the issuer’s receipt of a sight draft from Landlord together with Landlord’s certificate certifying that Landlord is entitled to such payment pursuant to the provisions of this Lease, and with no other conditions, shall be in substantially the form attached hereto as Exhibit G (or such other form approved by Landlord), and otherwise be in form and content reasonably satisfactory to Landlord. If the Letter of Credit has an expiration date earlier than the Termination Date, then throughout the term hereof (including any renewal or extension of the term) Tenant shall provide evidence of renewal of the Letter of Credit to Landlord at least sixty (60) days prior to the date the Letter of Credit expires. If Landlord draws on the Letter of Credit pursuant to the terms hereof, Tenant shall within five (5) Business Days after demand replenish the Letter of Credit or provide Landlord with an additional letter of credit conforming to the requirement of this Section 6 so that the amount available to Landlord from the Letter of Credit(s) provided hereunder is the amount specified in Section 1.08 above. Tenant’s failure to deliver any replacement, additional or extension of the Letter of Credit, or evidence of renewal of the Letter of Credit, within the time specified under this Lease, where such failure shall continue for five (5) Business Days after notice thereof from Landlord to Tenant, shall entitle Landlord to draw upon the Letter of Credit then in effect and, at Landlord’s election, constitute a Default under this Lease. If Landlord liquidates the Letter of Credit as provided in the preceding sentence, Landlord shall hold the funds received from the Letter of Credit as a security deposit for Tenant’s performance under this Lease. Landlord may from time to time and without prejudice to any other remedy provided in this Lease or by Law, use all or a portion of the security deposit to the extent necessary to cure any Default (as defined in Section 18 below) or to satisfy any losses, costs or damages for which Tenant is liable under Section 19 below by reason of such Default. If Landlord uses any portion of the security deposit, Tenant, within five (5) Business Days after demand, shall restore the security deposit to the amount then required hereunder. Landlord shall not be required to segregate such security deposit from its other funds and no interest shall accrue or be payable to Tenant with respect thereto. No Mortgagee (as defined in Section 23 below), nor any purchaser at any judicial or private foreclosure sale of the Property or any portion thereof, shall be responsible to Tenant for such Letter of Credit or security deposit unless and only to the extent such Mortgagee or purchaser shall have actually received the same. Landlord shall return the Letter of Credit or the unapplied portion of the security deposit, as applicable, to Tenant within 45 days after the later to occur of the Termination Date or the date Tenant surrenders the Premises to Landlord in compliance with Section 25; provided, however, that in no event shall any such return be construed as an admission by Landlord that Tenant has performed all of its covenants and obligations hereunder. Tenant acknowledges that, without limitation of the foregoing, upon a Default, Landlord may use all or any part of the Letter of Credit, the security deposit, or the proceeds therefrom to the extent necessary to compensate Landlord for damages resulting from termination of this Lease and the tenancy created hereunder as more particularly set forth in Section 19 below, and Tenant hereby unconditionally and irrevocably waives the benefits and protections of any Law providing otherwise.

The Letter of Credit shall reduce in amount on June 1, 2019 and on each subsequent June 1st through and including June 1, 2022, by the amount of One Million Dollars

 

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($1,000,000.00) on each such date, and by the amount of One Million Five Hundred Thousand Dollars ($1,500,000.00) on June 1, 2023 (each such date, a “Reduction Date”); provided, however, that if (i) on or prior to any Reduction Date, a Default, or default that subsequently matures into a Default, by Tenant shall have occurred and be continuing, or (ii) on the Reduction Date Tenant shall not be in compliance with the Financial Condition Test (as defined below), then the Letter of Credit amount shall not reduce on such date, the reduction that would otherwise have occurred on such date shall not occur at any time (even if the conditions to such reduction are thereafter met), and the Letter of Credit shall not thereafter reduce until the next Reduction Date (provided that all conditions to such reduction have been met). If the Letter of Credit amount is reduced pursuant to the foregoing, Landlord shall cooperate with Tenant to amend or replace the Letter of Credit so as to be in the as-reduced amount. In no event shall any such reduction be construed as an admission by Landlord that Tenant has performed all of its covenants and obligations hereunder. The “Financial Condition Test” means that for the four (4) consecutive calendar quarters ending sixty (60) days preceding the applicable Reduction Date Tenant has achieved positive cash flow from net operating and investing activities, as set forth in the statement of cash flow determined in accordance with generally accepted accounting principles consistently applied (“GAAP”), or, in the alternative, as of the date that is thirty (30) days prior to the applicable Reduction Date (and continuing through the applicable Reduction Date) Tenant has a minimum investment grade rating from Moody’s Investor Services of Baa3 or from Standard and Poors of BBB-. At least thirty (30) days prior to the applicable Reduction Date, Tenant shall deliver to Landlord audited financial statements for the immediately preceding calendar year prepared in accordance with GAAP and other reasonable evidence of Tenant’s compliance with the Financial Condition Test, failing which the Letter of Credit amount shall not reduce on the applicable Reduction Date.

Notwithstanding references above to Landlord’s rights and remedies by reason of a “Default”, in the case of a breach or default by Tenant under this Lease where there exist circumstances under which Landlord is enjoined or otherwise prevented by operation of law from giving to Tenant a written notice which would be necessary for such failure of performance to constitute a “Default” under this Lease, Landlord shall be entitled to all rights and remedies set forth above in this Section 6 as if such breach or default were a “Default”.

 

7. Building Services.

7.01 Landlord shall furnish Tenant with the following services: (a) water for use in the Base Building lavatories and plumbing fixtures located within the Premises as of the date of this Lease; (b) customary heat and air conditioning in season during Building Service Hours, although (i) Tenant shall have the right to receive HVAC service during hours other than Building Service Hours by paying Landlord’s then standard charge for additional HVAC service and providing such prior notice as is reasonably specified by Landlord, and (ii) if Tenant is permitted to connect any supplemental HVAC units to the Building’s condenser water loop or chilled water line, such permission shall be conditioned upon Landlord having adequate excess capacity from time to time and such connection and use shall be subject to Landlord’s reasonable approval and reasonable restrictions imposed by Landlord, and Landlord shall have the right to charge Tenant a connection fee and/or a monthly usage fee, as reasonably determined by Landlord; (c) standard janitorial service on Business Days; (d) elevator service, non-exclusive use of the common loading dock(s) of the Building, and exclusive use of the loading dock on the north side of the ground floor of the Building created by Landlord as part of Landlord’s Work pursuant to the Work Letter which Tenant can use 24 hours per day/7 days per week, subject to the terms of this Lease and such protective services or monitoring systems, if any, as Landlord may reasonably impose, including, without limitation, sign-in procedures and/or presentation of identification cards; (e) electricity in accordance with the terms and conditions in Section 7.02; (f) access to the Building and the Premises for Tenant and its employees 24 hours per day/7 days per week, subject to the terms of this Lease and such protective services or monitoring systems, if any, as Landlord may reasonably impose, including, without limitation, sign-in procedures and/or presentation of identification cards; and (g) such other services as Landlord reasonably determines are necessary or appropriate for the Property. If Landlord, at Tenant’s request, provides any services which are not Landlord’s express obligation under this Lease, including, without limitation, any repairs which are Tenant’s responsibility pursuant to Section 9 below, Tenant shall pay Landlord, or such other party designated by Landlord, the reasonable cost of providing such service.

7.02 The electric current supplied to the Premises (other than electricity utilized to furnish base Building HVAC service to the Premises) shall be measured by one or more submeters installed and maintained by Landlord at Landlord’s cost and expense (which cost and expense shall be included in Expenses under Section 2.01 of Exhibit B); provided, however, that any submeter installed to measure electrical consumption of any supplemental HVAC equipment or other supplemental equipment installed by Tenant shall be installed and

 

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maintained at Tenant’s sole cost and expense. Within thirty (30) days after Landlord’s demand from time to time, Tenant shall pay Landlord the cost of all electric current supplied to the Premises (at the average electrical rate per kilowatt hour paid by Landlord to the utility company), as measured by such submeters, other than the cost of electricity utilized to furnish base Building HVAC service to the Premises. Without the consent of Landlord, Tenant’s use of electrical service shall not exceed five (5) watts demand load per rentable square foot of the Premises. Landlord shall install the submeters required of it pursuant to the foregoing for each Increment prior to the respective Rent Commencement Date of such Increment. Pending Landlord’s installation of submeters as aforesaid, Landlord shall have the right to measure Tenant’s electrical usage by other commonly accepted methods, including check meters, and Tenant shall pay Landlord for electricity furnished to the Premises on the basis thereof.

7.03 Landlord’s failure to furnish, or any interruption, diminishment or termination of services due to the application of Laws, the failure of any equipment, the performance of maintenance, repairs, improvements or alterations, utility interruptions or the occurrence of an event of Force Majeure (defined below) (collectively a “Service Failure”) shall not render Landlord liable to Tenant, constitute a constructive eviction of Tenant, give rise to an abatement of Rent, nor relieve Tenant from the obligation to fulfill any covenant or agreement. However, if the Premises, or a material portion of the Premises, are made unusable for the reasonable operation of Tenant’s business for a period in excess of 5 consecutive Business Days as a result of a Service Failure that is reasonably within the control of Landlord to correct, and provided that such Service Failure is not caused by Tenant or any Tenant Related Parties, then Tenant, as its sole remedy, shall be entitled to receive an abatement of Rent payable hereunder during the period beginning on the 6th consecutive Business Day of the Service Failure and ending on the day the service has been restored. If the entire Premises have not been rendered unusable for the reasonable operation of Tenant’s business by the Service Failure, the amount of abatement shall be equitably prorated. As used in this Lease, “Force Majeure” means strikes, lockouts, labor disputes, acts of God, fire, earthquake, flood or other casualty, shortages of labor or materials, war, terrorist acts, pandemics, civil disturbances and other causes (other than financial inability) beyond the reasonable control of the performing party.

 

8. Leasehold Improvements.

All improvements in and to the Premises, including the Initial Alterations (as defined in the Work Letter) and any other Alterations (defined in Section 9.03) (collectively, “Leasehold Improvements”) shall remain upon the Premises at the end of the Term without compensation to Tenant, provided that Tenant, at its expense, shall remove any Cable (defined in Section 9.01 below). In addition, Landlord, by written notice to Tenant at least 30 days prior to the Termination Date, may require Tenant, at Tenant’s expense, to remove any Alterations (including any Initial Alterations) that, in Landlord’s reasonable judgment, are of a nature that would require removal and repair costs that are materially in excess of the removal and repair costs associated with standard office improvements (the Cable and such other items collectively are referred to as “Required Removables”). Required Removables shall include, without limitation, internal stairways, elevators, raised floors, personal baths and showers, vaults, rolling file systems and structural alterations and modifications. The Required Removables shall be removed by Tenant before the Termination Date. Tenant shall repair damage caused by the installation or removal of Required Removables. If Tenant fails to perform its obligations in a timely manner, Landlord may perform such work at Tenant’s expense. Tenant, at the time it requests approval for a proposed Alteration, including any Initial Alterations, may request in writing that Landlord advise Tenant whether the Alteration, including any Initial Alterations, or any portion thereof, is a Required Removable. Within 10 days after receipt of Tenant’s request, Landlord shall advise Tenant in writing as to which portions of the Alterations or Initial Alterations identified by Tenant are Required Removables.

Notwithstanding anything to the contrary contained above or elsewhere in this Lease, Landlord agrees that (i) none of the Initial Alterations shown on the Preliminary Plan (as hereinafter defined) constitute Required Removables, (ii) if Tenant installs a cafeteria (including related kitchen facilities) anywhere in the Premises as part of the Initial Alterations, such cafeteria shall not constitute a Required Removable. Tenant acknowledges that Landlord’s agreement that the elevator shown on the Preliminary Plan does not constitute a Required Removable is based on the particular location of the elevator as shown on the Preliminary Plan. If Tenant proposes a change in the location of the elevator, Landlord reserves its right to designate it as a Requirement Removable. As used herein, the “Preliminary Plan” means the preliminary plan dated March 26, 2013, prepared by Marvin Yamaguchi AIA, captioned “Test Fit Study for Zulily”.

 

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9. Repairs and Alterations.

9.01 Tenant, at its sole cost and expense, shall perform all maintenance and repairs to the Premises that are not Landlord’s express responsibility under this Lease, and keep the Premises in good repair and working order, reasonable wear and tear excepted. Tenant’s repair and maintenance obligations include, without limitation, repairs to: (a) floor covering; (b) interior partitions; (c) doors; (d) the interior side of demising walls; (e) Alterations (described in Section 9.03); (f) supplemental air conditioning units, kitchens, cafeterias, including hot water heaters and other equipment in connection therewith, plumbing, and similar facilities exclusively serving Tenant, whether such items are installed by Tenant or are currently existing in the Premises; and (g) electronic, fiber, phone and data cabling and related equipment that is installed by or for the exclusive benefit of Tenant (collectively, “Cable”). All repairs and other work performed by Tenant or its contractors, including that involving Cable, shall be subject to the terms of Section 9.03 below. If Tenant fails to make any repairs to the Premises for more than 15 Business Days after notice from Landlord (or, in the case of an emergency, such notice, if any, as shall be practicable given the exigency of the circumstances), Landlord may make the repairs, and, within 30 days after demand, Tenant shall pay the reasonable cost of the repairs, together with an administrative charge in an amount equal to 10% of the cost of the repairs.

9.02 Landlord shall keep and maintain in good repair and working order and perform maintenance upon the: (a) structural elements of the Building; (b) mechanical (including HVAC), electrical, plumbing and fire/life safety systems serving the Building and the Premises, except those special or supplemental systems (including HVAC systems), and equipment used in connection therewith, and non-Building standard lighting and electrical wiring, installed specifically for Tenant or any other tenants; (c) Common Areas; (d) roof of the Building; (e) exterior windows and doors of the Building; and (f) elevators serving the Building (excluding any elevators installed by Tenant to serve the Premises exclusively). Landlord shall promptly make repairs for which Landlord is responsible.

9.03 Tenant shall not make alterations, repairs, additions or improvements or install any Cable (collectively referred to as “Alterations”, which term shall include the Initial Alterations pursuant to the Work Letter) without first obtaining the written consent of Landlord in each instance, which consent shall not be unreasonably withheld or delayed. However, Landlord’s consent shall not be required for any Alteration that satisfies all of the following criteria (a “Cosmetic Alteration”): (a) is of a cosmetic nature such as painting, wallpapering, hanging pictures and installing carpeting; (b) is not visible from the exterior of the Premises or Building; (c) will not affect the Base Building (defined in Section 5); and (d) does not require work to be performed inside the walls or above the ceiling of the Premises. Except as expressly set forth below, Cosmetic Alterations shall be subject to all the other provisions of this Section 9.03. Prior to starting work, Tenant shall furnish Landlord with plans and specifications (which shall be in CAD format if requested by Landlord), except, as respects Cosmetic Alterations Tenant need only furnish Landlord with a reasonably detailed description of the work; names of contractors reasonably acceptable to Landlord (provided that Landlord may designate specific contractors with respect to Base Building and vertical Cable, as may be described more fully below); required permits and approvals; evidence of contractor’s and subcontractor’s insurance in amounts reasonably required by Landlord and naming Landlord and the managing agent for the Building (or any successor(s)) as additional insureds; and, except as respects Cosmetic Alterations, any security for performance in amounts reasonably required by Landlord. Landlord may designate specific contractors with respect to oversight, installation, repair, connection to, and removal of vertical Cable. All Cable shall be clearly marked with adhesive plastic labels (or plastic tags attached to such Cable with wire) to show Tenant’s name, suite number, and the purpose of such Cable (i) every 6 feet outside the Premises (specifically including, but not limited to, the electrical room risers and any Common Areas), and (ii) at the termination point(s) of such Cable. Changes to the plans and specifications must also be submitted to Landlord for its approval. Alterations shall be constructed in a good and workmanlike manner using materials of a quality reasonably approved by Landlord, and Tenant shall ensure that no Alteration impairs any Building system or Landlord’s ability to perform its obligations hereunder. Tenant shall reimburse Landlord for any reasonable sums paid by Landlord for third party examination of Tenant’s plans for non-Cosmetic Alterations. In addition, Tenant shall pay Landlord a fee for Landlord’s oversight and coordination of any non-Cosmetic Alterations equal to 10% of the total hard costs of the non-Cosmetic Alterations (and for purposes of calculating the fee, such cost shall exclude architectural, engineering and permit fees). Upon completion, Tenant shall furnish “as-built” plans (in CAD format, if requested by Landlord) for non-Cosmetic Alterations, completion affidavits and full and final waivers of lien. Landlord’s approval of an Alteration shall not be deemed a representation by Landlord that the Alteration complies with Law.

 

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10. Entry by Landlord.

Landlord may enter the Premises to inspect, show or clean the Premises or to perform or facilitate the performance of repairs, alterations or additions to the Premises or any portion of the Building, except that Landlord’s entry to the Premises to show the same to prospective tenants shall only be during the final two (2) years of the Term. Except in emergencies or to provide Building services, Landlord shall provide Tenant with reasonable prior verbal notice of entry and shall use reasonable efforts to minimize any interference with Tenant’s use of the Premises. If reasonably necessary, Landlord may temporarily close all or a portion of the Premises to perform repairs, alterations and additions. However, except in emergencies, Landlord will not close the Premises if the work can reasonably be completed on weekends and after Building Service Hours. Entry by Landlord shall not constitute a constructive eviction or entitle Tenant to an abatement or reduction of Rent except as provided in Section 7.03.

 

11. Assignment and Subletting.

11.01 Except in connection with a Business Transfer (defined in Section 11.04), Tenant shall not assign, sublease, transfer or encumber any interest in this Lease or allow any third party to use any portion of the Premises (collectively or individually, a “Transfer”) without the prior written consent of Landlord, which consent shall not be unreasonably withheld, conditioned or delayed if Landlord does not exercise its recapture rights under Section 11.02. Without limitation, it is agreed that Landlord’s consent shall not be considered unreasonably withheld if the proposed transferee is a governmental entity or an occupant of the Building, or if the proposed transferee, whether or not an occupant of the Building, is a party with whom Landlord has entered into a letter of intent (or similar document) or exchanged an offer and counteroffer or a draft lease, within the preceding six (6) month period regarding the leasing of space within the Building. Any Transfer in violation of this Section shall, at Landlord’s option, be deemed a Default by Tenant as described in Section 18, and shall be voidable by Landlord. In no event shall any Transfer, including a Business Transfer, release or relieve Tenant from any obligation under this Lease, and Tenant shall remain primarily liable for the performance of the tenant’s obligations under this Lease, as amended from time to time.

For purposes of this Lease, each of the following events shall be deemed a Transfer: (i) the issuance of equity interests (whether stock, partnership interests or otherwise) in Tenant or any subtenant or assignee, or any entity Controlling any of them, to any person or group of related persons, in a single transaction or a series of related or unrelated transactions, such that, following such issuance, such person or group shall have Control (as defined below) of Tenant or any subtenant or assignee; (ii) a transfer of Control of Tenant or any subtenant or assignee, or any entity Controlling any of them, in a single transaction or a series of related or unrelated transactions (including, without limitation, by consolidation, merger, acquisition or reorganization), except that the transfer of outstanding capital stock or other listed equity interests by persons or parties other than “insiders” within the meaning of the Securities Exchange Act of 1934, as amended, through the “over-the-counter” market or any recognized national or international securities exchange, shall not be included in determining whether Control has been transferred; or (iii) a change or conversion in the form of entity of Tenant, any subtenant or assignee, or any entity Controlling any of them, which has the effect of limiting the liability of any of the partners, members or other owners of such entity beyond the liability limitations, if any, that previously existed. “Control” shall mean direct or indirect ownership of 50% or more of all of the voting stock of a corporation or 50% or more of the legal or equitable interest in any other business entity, or the power to direct the operations of any entity (by equity ownership, contract or otherwise).

11.02 Tenant shall provide Landlord with financial statements for the proposed transferee (or, in the case of a change of ownership or Control, for the proposed new Controlling entity(ies)), a fully executed copy of the proposed assignment, sublease or other Transfer documentation and such other information as Landlord may reasonably request. Within 30 days after receipt of the required information and documentation, Landlord shall either: (a) consent to the Transfer by execution of a consent agreement in a form reasonably designated by Landlord; (b) reasonably refuse to consent to the Transfer in writing, setting for Landlord’s reasons for refusal; or (c) in the event of an assignment of this Lease or subletting of any portion of the Premises for a sublease term which would expire during the final one (1) year of the remaining Term (excluding unexercised options in favor of Tenant, and assuming any renewal or extension options in favor of the subtenant will be exercised), recapture the portion of the Premises that Tenant is proposing to Transfer. If Landlord exercises its right to recapture, this Lease shall automatically be amended (or terminated if the entire Premises is being assigned or sublet) to delete the applicable portion of the Premises effective on the proposed effective date of the Transfer, although Landlord may require Tenant to execute a reasonable amendment or other document reflecting such reduction or termination. Regardless of whether Landlord

 

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consents to a requested Transfer, Tenant shall pay Landlord a review fee of $1,000.00 for Landlord’s internal review of any requested Transfer, and Tenant shall also reimburse Landlord for Landlord’s reasonable attorneys’ fees and costs in connection with any requested Transfer. Notwithstanding anything to the contrary herein, Landlord shall not be required to process any request for Landlord’s consent to a Transfer until Tenant has paid to Landlord the foregoing fee and the amount of Landlord’s reasonable estimate of the foregoing attorneys’ fees and costs and all other direct and indirect costs and expenses of Landlord and its agents arising from the assignee or subtenant taking occupancy. Notwithstanding the foregoing, if Tenant requests Landlord’s consent to a concession or other agreement between Tenant and a third party providing for such party’s operation of a cafeteria within the Premises primarily for employees of Tenant, Landlord’s foregoing recapture right shall not apply thereto.

11.03 Tenant shall pay Landlord 50% of all rent and other consideration which Tenant receives as a result of a Transfer that is in excess of the Rent payable to Landlord for the portion of the Premises and Term covered by the Transfer. Tenant shall pay Landlord for Landlord’s share of the excess within 30 days after Tenant’s receipt of the excess. In determining the excess due Landlord, Tenant may deduct from the excess, on a straight-line amortized basis over the term of the Transfer, all reasonable and customary expenses directly incurred by Tenant attributable to the Transfer. If Tenant is in Default, Landlord may require that all sublease payments be made directly to Landlord, in which case Tenant shall receive a credit against Rent in the amount of Tenant’s share of payments received by Landlord.

11.04 Notwithstanding the above, Tenant may assign this Lease to a successor to Tenant (a “Successor”) by merger, consolidation or the purchase of substantially all of Tenant’s assets (including by means of a purchase of substantially all of Tenant’s stock or other equity interests), or assign this Lease or sublet all or a portion of the Premises to an Affiliate (defined below), without the consent of Landlord and without being subject to Landlord’s recapture right pursuant to Section 11.02 above, provided that all of the following conditions are satisfied (a “Business Transfer”): (a) Tenant must not be in Default; (b) Tenant must give Landlord written notice at least 15 Business Days before such Transfer, together with a copy of the assignment or sublease agreement, as applicable; (c) if such Transfer is an assignment of this Lease (including to a Successor), or a sublease of all or substantially of the Premises, then the Credit Requirement (defined below) must be satisfied; and (d) in the case of an assignment to a Successor, the essential purpose of such assignment is to transfer an active, ongoing business with substantial assets in addition to this Lease, and in the case of any Transfer, the Transfer is for legitimate business purposes and is not a subterfuge by Tenant to avoid its obligations under this Lease or the restrictions on assignment and subletting contained herein. Tenant’s notice to Landlord shall include information and documentation evidencing the Business Transfer and showing that each of the above conditions has been satisfied. If requested by Landlord, Tenant’s Successor or Affiliate, as the case may be, shall sign and deliver to Landlord a commercially reasonable form of assumption agreement and/or waiver and acknowledgement form. Tenant shall pay Landlord a review fee of $1,000.00 for Landlord’s internal review of any requested Business Transfer, and Tenant shall also reimburse Landlord for Landlord’s reasonable attorneys’ fees and costs in connection with any requested Business Transfer. Notwithstanding anything to the contrary herein, Landlord shall not be required to process any Business Transfer until Tenant has paid to Landlord the foregoing fee and the amount of Landlord’s estimate of the foregoing attorneys’ fees and costs and all other direct and indirect costs and expenses of Landlord and its agents arising from the assignee or subtenant taking occupancy. “Affiliate” shall mean an entity controlled by, controlling or under common control with Tenant (control being defined for such purposes as ownership of at least 50% of the equity interests in, and the power to direct the management of, the relevant entity). The “Credit Requirement” shall be deemed satisfied if, as of the date immediately preceding the date of the Transfer, the financial strength of the Successor or Affiliate, as the case may be, is not less than Tenant’s net worth as of the date of this Lease or as of the date immediately prior to the Transfer (or series of transactions of which the same is a part), whichever is greater. Landlord agrees to execute a reasonable confidentiality agreement within ten (10) Business Days after Tenant’s written request in connection with Tenant’s disclosure to Landlord of the non-public terms of a Business Transfer or any non-public financial information in connection therewith.

11.05 Notwithstanding anything to the contrary contained in this Section 11, neither Tenant nor any other person having a right to possess, use, or occupy (for convenience, collectively referred to in this subsection as “Use”) the Premises shall enter into any lease, sublease, license, concession or other agreement for Use of all or any portion of the Premises which provides for rental or other payment for such Use based, in whole or in part, on the net income or profits derived by any person that leases, possesses, uses, or occupies all or any portion of the Premises (other than an amount based on a fixed percentage or percentages of receipts or sales), and any such purported lease, sublease, license, concession or other agreement shall be absolutely void and ineffective as a transfer of any right or interest in the Use of all or any part of the Premises.

 

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12. Liens.

Tenant shall not permit mechanics’ or other liens to be placed upon the Property, Premises or Tenant’s leasehold interest in connection with any work or service done or purportedly done by or for the benefit of Tenant or its transferees. Tenant shall give Landlord notice at least 15 days prior to the commencement of any work in the Premises to afford Landlord the opportunity, where applicable, to post and record notices of non-responsibility. Tenant, within 10 Business Days of notice from Landlord, shall fully discharge any lien by settlement, by bonding or by insuring over the lien in the manner prescribed by the applicable lien Law and, if Tenant fails to do so, Tenant shall be deemed in Default under this Lease and, in addition to any other remedies available to Landlord as a result of such Default by Tenant, Landlord, at its option, may bond, insure over or otherwise discharge the lien. Tenant shall reimburse Landlord for any amount paid by Landlord, including, without limitation, reasonable attorneys’ fees.

 

13. Indemnity and Waiver of Claims.

Except to the extent caused by the negligence or willful misconduct of Landlord or any Landlord Related Parties (defined below), Tenant shall indemnify, defend and hold Landlord and Landlord Related Parties harmless against and from all liabilities, obligations, damages, penalties, claims, actions, costs, charges and expenses, including, without limitation, reasonable attorneys’ fees and other professional fees (if and to the extent permitted by Law) (collectively referred to as “Losses”), which may be imposed upon, incurred by or asserted against Landlord or any of the Landlord Related Parties by any third party to the extent arising out of or in connection with any damage or injury occurring in the Premises or any negligent acts or omissions or willful misconduct (including violations of Law) of Tenant, the Tenant Related Parties (as defined in Section 16.01 below) or any of Tenant’s transferees, contractors or licensees. Tenant hereby waives all claims against and releases Landlord and its trustees, members, principals, beneficiaries, partners, officers, directors, employees, Mortgagees (defined in Section 23) and agents (the “Landlord Related Parties”) from all claims for any injury to or death of persons, damage to property or business loss in any manner related to (a) Force Majeure, (b) acts of third parties, (c) the bursting or leaking of any tank, water closet, drain or other pipe, or (d) the inadequacy or failure of any security or protective services, personnel or equipment. Except to the extent caused by the negligence or willful misconduct of Tenant or any Tenant Related Parties, Landlord shall indemnify, defend and hold Tenant and Tenant Related Parties harmless against and from all Losses which may be imposed upon, incurred by or asserted against Tenant or any of the Tenant Related Parties by any third party to the extent arising out of or in connection with the negligent acts or omissions or willful misconduct (including violations of Law) of Landlord or the Landlord Related Parties.

 

14. Insurance.

14.01 Tenant shall maintain the following insurance (“Tenant’s Insurance”): (a) Commercial General Liability Insurance applicable to the Premises and its appurtenances providing, on an occurrence basis, a minimum combined single limit of $2,000,000.00; (b) Property and Income Coverage Insurance written on an All Risk or Special Cause of Loss Form, including earthquake sprinkler leakage, at replacement cost value and with a replacement cost endorsement covering all of Tenant’s business and trade fixtures, equipment, movable partitions, furniture, merchandise and other personal property within the Premises (“Tenant’s Property”) and the Initial Alterations and any other Alterations performed by or for the benefit of Tenant; (c) Workers’ Compensation Insurance in amounts required by Law; and (d) Employers Liability Coverage of at least $1,000,000.00 per occurrence. Any company writing Tenant’s Insurance shall have an A.M. Best rating of not less than A-VIII. All Commercial General Liability Insurance policies shall name as additional insureds Landlord (or its successors and assignees), the managing agent for the Building (or any successor), and their respective members, principals, beneficiaries, partners, officers, directors, employees, and agents, and other designees of Landlord and its successors as the interest of such designees shall appear. In addition, Landlord shall be named as a loss payee with respect to Tenant’s Property Insurance on the Initial Alterations and any other Alterations. All policies of Tenant’s Insurance shall contain endorsements that the insurer(s) shall give Landlord and its designees at least 30 days’ advance written notice of any cancellation, termination, material change or lapse of insurance. Tenant shall provide Landlord with a certificate of insurance evidencing Tenant’s Insurance prior to the earlier to occur of the Commencement Date or the date Tenant is provided with possession of the Premises, and thereafter as necessary to assure that Landlord always has current certificates evidencing Tenant’s Insurance.

 

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14.02 Landlord shall maintain at least the following insurance coverage (“Landlord’s Insurance”), the premiums of which will be included in Expenses: (1) Commercial General Liability insurance applicable to the Property, Building and Common Areas providing, on an occurrence basis, a minimum combined single limit of at least $2,000,000.00; (2) All Risk Property Insurance on the Building at replacement cost value; (3) Worker’s Compensation insurance as required by the state in which the Building is located and in amounts as may be required by applicable statute; and (4) Employers Liability Coverage of at least $1,000,000.00 per occurrence.

 

15. Subrogation.

Landlord and Tenant hereby waive and shall cause their respective insurance carriers to waive any and all rights of recovery, claims, actions or causes of action against the other for any loss or damage with respect to Tenant’s Property, Alterations, Leasehold Improvements, the Building, the Premises, or any contents thereof, including rights, claims, actions and causes of action based on negligence, which loss or damage is (or would have been, had the insurance required by this Lease been carried) covered by insurance. For the purposes of this waiver, any deductible with respect to a party’s insurance shall be deemed covered by and recoverable by such party under valid and collectable policies of insurance.

 

16. Casualty Damage.

16.01 If all or any portion of the Premises becomes unusable for the reasonable operation of Tenant’s business or inaccessible by fire or other casualty to the Premises or the Common Areas (collectively a “Casualty”), Landlord, with reasonable promptness, but not later than sixty (60) days after the date of the Casualty, shall cause a licensed general contractor selected by Landlord to provide Landlord with a reasonable written estimate of the amount of time required, using standard working methods, to substantially complete the repair and restoration of the Premises and any Common Areas necessary to provide access to the Premises (“Completion Estimate”). Landlord shall promptly forward a copy of the Completion Estimate to Tenant. If the Completion Estimate indicates that the Premises or any Common Areas necessary to provide access to the Premises cannot be made usable for the reasonable operation of Tenant’s business within one hundred eighty (180) days from the date of the damage, then Landlord shall have the right to terminate this Lease upon written notice to Tenant within ten (10) Business Days after Tenant’s receipt of the Completion Estimate. If the Completion Estimate indicates that the Premises or any Common Areas necessary to provide access to the Premises cannot be made usable for the reasonable operation of Tenant’s business within one (1) year from the date of the damage, then Tenant shall have the right to terminate this Lease upon written notice to Landlord within ten (10) Business Days after Tenant’s receipt of the Completion Estimate; except that if the damage occurs during the final two (2) years of the Term, a period of one hundred eighty (180) days, rather than one (1) year, shall apply. Tenant, however, shall not have the right to terminate this Lease if the Casualty was caused by the gross negligence or willful misconduct of Tenant or any Tenant Related Parties. As used herein “Tenant Related Parties” means Tenant’s trustees, members, principals, beneficiaries, partners, officers, directors, employees and agents. In addition, Landlord, by notice to Tenant within sixty (60) days after the date of the Casualty, shall have the right to terminate this Lease if: (1) the Premises have been materially damaged and there is less than two (2) years of the Term remaining on the date of the Casualty, except that Landlord shall not have the right to terminate this Lease pursuant to this clause (1) if Tenant shall exercise any unexercised renewal option prior by notice to Landlord within thirty (30) days of the Casualty; (2) any Mortgagee requires that the insurance proceeds be applied to the payment of the mortgage debt; (3) a material uninsured loss to the Building or Premises occurs; or (4) a fire or other casualty occurs to portions of the Building other than the Premises or the Common Areas necessary to provide access to the Premises, and as a result thereof Landlord intends to substantially reconstruct (or demolish) the Building or a material portion thereof. A Casualty to the Garage (as defined in Exhibit F attached hereto) shall not entitle either party to terminate this Lease, and unless this Lease is terminated pursuant to the provisions of this Section 16, Landlord shall restore the Garage together with, and subject to the same terms and conditions as, Landlord’s restoration of the Common Areas as set forth herein and below.

16.02 If this Lease is not terminated, Landlord shall promptly and diligently to completion, subject to reasonable delays for insurance adjustment or other matters beyond Landlord’s reasonable control, restore the Premises and Common Areas. Such restoration shall be to substantially the same condition that existed prior to the Casualty, except for modifications required by Law or any other modifications to the Common Areas deemed desirable by Landlord. Upon notice from Landlord, Tenant shall assign or endorse over to Landlord (or to any party designated by Landlord) all property insurance proceeds payable to Tenant under Tenant’s Insurance with respect to the Initial Alterations and other Alterations, if any; provided if

 

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the estimated cost to repair the Initial Alterations and other Alterations, if any, exceeds the amount of insurance proceeds received by Landlord from Tenant’s insurance carrier, the excess cost of such repairs shall be paid by Tenant to Landlord prior to Landlord’s commencement of repairs. Within 15 days of demand, Tenant shall also pay Landlord for any additional excess costs that are determined during the performance of the repairs to the Initial Alterations and other Alterations, if any. Landlord shall coordinate restoration of the Initial Alterations and other Alterations, if any, with Tenant, and Landlord shall not unreasonably withhold or delay its approval of any modifications thereto requested by Tenant. In no event shall Landlord be required to spend more for the restoration of the Premises and Common Areas than the proceeds received by Landlord, whether insurance proceeds or proceeds from Tenant. Landlord shall not be liable for any inconvenience to Tenant, or injury to Tenant’s business resulting in any way from the Casualty or the repair thereof. Provided that the Casualty was not caused by the gross negligence or willful misconduct of Tenant or any Tenant Related Parties, during any period of time that all or a material portion of the Premises is rendered unusable or inaccessible for Tenant’s reasonable operation of its business as a result of such Casualty, the Rent shall abate for the portion of the Premises that is rendered unusable for the reasonable operation of Tenant’s business or inaccessible and not used by Tenant for any purpose.

 

17. Condemnation.

Either party may terminate this Lease if any material part of the Premises is taken or condemned for any public or quasi-public use under Law, by eminent domain or private purchase in lieu thereof (a “Taking”). Landlord shall also have the right to terminate this Lease if there is a Taking of any material portion of the Building or Property which would have a material adverse effect on Landlord’s ability to profitably operate the remainder of the Building; provided, however, that Landlord agrees to exercise such right in a nondiscriminatory fashion among leases affecting the Building. Consideration of the following factors in arriving at its decision shall not be deemed discriminatory: Length of term remaining on the Lease, time needed to repair and restore, costs of repair and restoration not covered by condemnation proceeds, Landlord’s plans to repair and restore Common Areas serving the Premises, Landlord’s plans for repair and restoration of the Building, and other relevant factors of Landlord’s decision as long as they are applied to Tenant in the same manner as other tenants. The terminating party shall provide written notice of termination to the other party within 45 days after it first receives notice of the Taking. The termination shall be effective as of the effective date of any order granting possession to, or vesting legal title in, the condemning authority. If this Lease is not terminated, Base Rent and Tenant’s Pro Rata Share shall be appropriately adjusted to account for any reduction in the square footage of the Building or Premises. All compensation awarded for a Taking shall be the property of Landlord. The right to receive compensation or proceeds are expressly waived by Tenant, provided, however, Tenant may file a separate claim for Tenant’s Property and Tenant’s reasonable relocation expenses, provided the filing of the claim does not diminish the amount of Landlord’s award. If only a part of the Premises is subject to a Taking and this Lease is not terminated, Landlord, with reasonable diligence, will restore the remaining portion of the Premises as nearly as practicable to the condition immediately prior to the Taking. Notwithstanding the foregoing, in the event of a temporary Taking of 90 days or less ending prior to the Termination Date, this Lease shall remain in full force and effect and Tenant shall continue to pay all Rent and to perform all of its obligations under this Lease; provided, however, that Tenant shall be entitled to the compensation awarded for the Taking up to the amount of Rent payable by Tenant hereunder, and the balance of such compensation awarded for the Taking shall be the Property of Landlord.

 

18. Events of Default.

In addition to any other default specifically described in this Lease, each of the following occurrences shall be a “Default”: (a) Tenant’s failure to pay any portion of Rent when due, if the failure continues for 3 Business Days after written notice to Tenant (“Monetary Default”), except that Landlord shall only be required to give two (2) such notices in any calendar year with respect to Tenant’s failure to pay any monthly Base Rent when due, and after such two (2) notices are given any failure by Tenant in such calendar year to pay monthly Base Rent when due hereunder shall itself constitute a Monetary Default, without the requirement of notice from Landlord of such failure; (b) Tenant’s failure (other than a Monetary Default) to comply with any term, provision, condition or covenant of this Lease, if the failure is not cured within 30 days after written notice to Tenant, provided, however, if Tenant’s failure to comply cannot reasonably be cured within 30 days, Tenant shall be allowed additional time as is reasonably necessary to cure the failure so long as Tenant begins the cure within 30 days and diligently pursues the cure to completion; except that such thirty (30) day period shall be shortened as set forth in Landlord’s written notice to Tenant as Landlord reasonably determines is necessary (and as Landlord describes in such notice) if waiting for such thirty (30) day period to expire

 

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would materially jeopardize the health, safety or quiet enjoyment of the Building by its tenants and occupants or cause further material damage or loss to Landlord or the Property or result in any violation (or continuance of any violation) of any Law or any Mortgage; (c) Tenant permits a Transfer without Landlord’s required approval or otherwise in violation of Section 11 of this Lease; (d) Tenant or any Guarantor becomes insolvent, makes a transfer in fraud of creditors, makes an assignment for the benefit of creditors, admits in writing its inability to pay its debts when due or forfeits or loses its right to conduct business; (e) the leasehold estate is taken by process or operation of Law; (f) Tenant abandons the Premises; provided, however that Tenant’s mere vacating of the Premises shall not constitute a Default so long as Tenant continues to pay Base Rent and all Additional Rent and maintains the insurance coverage required pursuant to Section 14 of this Lease, and Tenant otherwise continues to perform its obligations under this Lease, and so long as Tenant provides Landlord with written notice of an alternate address for notices to Tenant under this Lease (other than the Premises) if such vacancy exceeds thirty (30) consecutive days; (g) Tenant fails to deliver, within the period described in Section 23 below, any subordination agreement, estoppel certificate or financial statements requested by Landlord pursuant to Section 23 below, and such failure continues for five (5) Business Days after Landlord’s notice thereof to Tenant; or (h) Tenant is in monetary default beyond any notice and cure period under any other lease or agreement with Landlord at the Building or Property. All notices sent under this Section shall be in satisfaction of, and not in addition to, notice required by Law.

 

19. Remedies.

19.01 Upon Default, Landlord shall have the right to pursue any one or more of the following remedies:

(a) Terminate this Lease, in which case Tenant shall immediately surrender the Premises to Landlord. If Tenant fails to surrender the Premises, Landlord, in compliance with Law, may enter upon and take possession of the Premises and remove Tenant, Tenant’s Property and any party occupying the Premises. Tenant shall pay Landlord, on demand, all past due Rent (together with interest thereon as set forth in Section 4.01 above) and other losses and damages Landlord suffers as a result of Tenant’s Default, including, without limitation, all Costs of Reletting (defined below) and any deficiency that may arise from reletting or the failure to relet the Premises. “Costs of Reletting” shall include all reasonable costs and expenses incurred by Landlord in reletting or attempting to relet the Premises, including, without limitation, legal fees, brokerage commissions, the cost of alterations and the value of other concessions or allowances granted to a new tenant.

(b) Terminate Tenant’s right to possession of the Premises and, in compliance with Law, remove Tenant, Tenant’s Property and any parties occupying the Premises. Landlord may (but shall not be obligated to) relet all or any part of the Premises, without notice to Tenant, for such period of time and on such terms and conditions (which may include market concessions, free rent and work allowances) as Landlord in its reasonable discretion shall determine. Landlord may collect and receive all rents and other income from the reletting. Tenant shall pay Landlord on demand all past due Rent, all Costs of Reletting and any deficiency arising from the reletting or failure to relet the Premises. The re-entry or taking of possession of the Premises shall not be construed as an election by Landlord to terminate this Lease.

19.02 In lieu of calculating damages under Section 19.01, Landlord may elect to receive as damages the sum of (a) all Rent accrued through the date of termination of this Lease or Tenant’s right to possession, and (b) an amount equal to the total Rent that Tenant would have been required to pay for the remainder of the Term discounted to present value at the Prime Rate (defined below) then in effect, minus the then present fair rental value of the Premises for the remainder of the Term, similarly discounted, after deducting all anticipated Costs of Reletting. “Prime Rate” shall be the per annum interest rate publicly announced as its prime or base rate by a federally insured bank selected by Landlord in the state in which the Building is located.

19.03 If Tenant is in Default of any of its non-monetary obligations under this Lease, Landlord shall have the right to perform such obligations. Tenant shall reimburse Landlord for the reasonable cost of such performance upon demand together with an administrative charge equal to ten percent (10%) of the cost of the work performed by Landlord. The repossession or re-entering of all or any part of the Premises shall not relieve Tenant of its liabilities and obligations under this Lease. No right or remedy of Landlord shall be exclusive of any other right or remedy. Each right and remedy shall be cumulative and in addition to any other right and remedy now or subsequently available to Landlord at Law or in equity.

 

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19.04 Notwithstanding anything to the contrary set forth in this Section 19 or elsewhere in this Lease, in no event shall Tenant be liable to Landlord for any indirect or consequential damages, except for (i) consequential damages in connection with the loss of a prospective tenant of the Premises or any portion thereof, or damages incurred by Landlord due to its late delivery of the Premises or any portion thereof, to a successor tenant of the Premises or any portion thereof, as a result of Tenant’s failure to timely surrender the Premises or any portion thereof to Landlord as provided in Section 22 below after expiration of the fifteen (15) Business Day grace period set forth therein, (ii) damages caused to Landlord by the loss of a sale or financing due to Tenant’s failure to timely deliver any subordination agreement, estoppel certificate or financial statements as provided in Section 23 below, in each case where such failure shall continue after the five (5) Business Day notice and cure period set forth in Section 18 above. In no event shall lost rent, Costs of Reletting or other damages of Landlord expressly provided for above in this Section 19 be deemed indirect or consequential damages.

 

20. Limitation of Liability; Landlord’s Default; Tenant’s Self Help.

NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS LEASE, (i) THE LIABILITY OF LANDLORD (AND OF ANY SUCCESSOR LANDLORD) SHALL BE LIMITED TO THE LESSER OF (A) THE INTEREST OF LANDLORD IN THE PROPERTY, OR (B) THE EQUITY INTEREST LANDLORD WOULD HAVE IN THE PROPERTY IF THE PROPERTY WERE ENCUMBERED BY THIRD PARTY DEBT IN AN AMOUNT EQUAL TO SIXTY PERCENT (60%) OF THE VALUE OF THE PROPERTY, (ii) TENANT SHALL LOOK SOLELY TO LANDLORD’S INTEREST IN THE PROPERTY FOR THE RECOVERY OF ANY JUDGMENT OR AWARD AGAINST LANDLORD OR ANY LANDLORD RELATED PARTY, AND (iii) NEITHER LANDLORD NOR ANY LANDLORD RELATED PARTY SHALL BE PERSONALLY LIABLE FOR ANY JUDGMENT OR DEFICIENCY, AND IN NO EVENT SHALL LANDLORD OR ANY LANDLORD RELATED PARTY BE LIABLE TO TENANT FOR ANY LOST PROFIT, DAMAGE TO OR LOSS OF BUSINESS OR ANY FORM OF SPECIAL, INDIRECT OR CONSEQUENTIAL DAMAGE. BEFORE FILING SUIT FOR AN ALLEGED DEFAULT BY LANDLORD, TENANT SHALL GIVE LANDLORD AND THE MORTGAGEE(S) WHOM TENANT HAS BEEN NOTIFIED HOLD MORTGAGES (DEFINED IN SECTION 23 BELOW), NOTICE AND REASONABLE TIME TO CURE THE ALLEGED DEFAULT. WHEREVER IN THIS LEASE TENANT (A) RELEASES LANDLORD FROM ANY CLAIM OR LIABILITY, (B) WAIVES OR LIMITS ANY RIGHT OF TENANT TO ASSERT ANY CLAIM AGAINST LANDLORD OR TO SEEK RECOURSE AGAINST ANY PROPERTY OF LANDLORD OR (C) AGREES TO INDEMNIFY LANDLORD AGAINST ANY MATTERS, THE RELEVANT RELEASE, WAIVER, LIMITATION OR INDEMNITY SHALL RUN IN FAVOR OF AND APPLY TO LANDLORD AND THE LANDLORD RELATED PARTIES.

Landlord shall be in default under this Lease only if (i) Landlord fails to perform any of its obligations hereunder and said failure continues for a period of 30 days after written notice thereof from Tenant to Landlord; provided, however, if Landlord’s failure cannot reasonably be cured within 30 days, Landlord shall be allowed additional time as is reasonably necessary to cure the failure so long as Landlord begins the cure within 30 days and diligently pursues the cure to completion, and (ii) each Mortgagee of whose identity Tenant has been notified in writing shall have failed to cure such default within 30 days (or such longer period of time as may be specified in any written agreement between Tenant and Mortgagee regarding such matter) after receipt of written notice from Tenant of Landlord’s failure to cure within the time periods provided above or, if in order for such Mortgagee to cure such failure it requires possession of the Premises, such Mortgagee fails cure such failure for a period of 30 days (or such longer period of time as may be specified in any written agreement between Tenant and Mortgagee regarding such matter) after it obtains possession of the Premises, provided, however, if Landlord’s failure cannot reasonably be cured within such 30 day period, such Mortgagee shall be allowed additional time as is reasonably necessary to cure the failure so long as it begins the cure within 30 days after obtaining possession of the Premises and diligently pursues the cure to completion.

If Landlord fails to perform any of its obligations under this Lease where such failure is not due to Force Majeure, and as a result thereof (i) a material portion of the Premises becomes inaccessible or unusable for the reasonable operation of Tenant’s business, or (ii) a significant risk of personal injury or material property damage has occurred and is continuing (each of the foregoing, a “Landlord Performance Failure”), Tenant may, but shall not be obliged to, and without waiving any default of Landlord or releasing Landlord from any obligations to Tenant hereunder, give Landlord written notice specifying the nature of such failure to perform and requesting performance. If Landlord fails to cure such failure of performance within fifteen (15) days after receipt of Tenant’s notice, or if such failure cannot by its nature be cured within such fifteen (15) day period, fails to commence such cure within such fifteen (15) day period and thereafter diligently prosecute such cure to completion, and such failure is not due to Force

 

15


Majeure, and such failure continues for five (5) Business Days after Landlord’s receipt of a second written notice from Tenant expressly stating Tenant’s intention to exercise its rights under this paragraph, and regardless of whether such failure has ripened into a default by Landlord pursuant to the preceding paragraph, then Tenant may perform any such obligation on Landlord’s behalf provided (i) such obligation may be performed entirely within the Premises and shall not affect in any way the Base Building or any part of the Building other than the Premises, (ii) if such obligation is in the nature of Alterations, the work qualifies as a Cosmetic Alteration, and (iii) performance by Tenant of such obligation does not involve any Hazardous Materials. All necessary incidental costs in connection with the performance by Tenant of such obligation of Landlord shall be payable by Landlord within thirty (30) days after receipt of Tenant’s written demand therefor, together with documentation reasonably supporting such costs. In no event may Tenant offset any amounts owing by Landlord to Tenant under this paragraph or any other provisions of this Lease against any Base Rent or Additional Rent payable by Tenant to Landlord pursuant to this Lease. Notwithstanding the foregoing, in the case of any Landlord Performance Failure that gives rise to an emergency in the Premises that would materially jeopardize the health or safety of the Premises by Tenant, or cause further material damage or loss to Tenant or Tenant’s property, periods of two (2) Business Days and one (1) Business Day, respectively, shall be substituted for the aforesaid fifteen (15) day and five (5) Business Day periods, respectively.

 

21. Deleted.

 

22. Holding Over.

If Tenant fails to surrender all or any part of the Premises at the termination of this Lease, occupancy of the Premises after termination shall be that of a tenancy at sufferance. Tenant’s occupancy shall be subject to all the terms and provisions of this Lease, and Tenant shall pay an amount (on a per month basis without reduction for partial months during the holdover) equal to 150% of the sum of the Base Rent and Additional Rent due for the period immediately preceding the holdover. No holdover by Tenant or payment by Tenant after the termination of this Lease shall be construed to extend the Term or prevent Landlord from immediate recovery of possession of the Premises by summary proceedings or otherwise. If Landlord is unable to deliver possession of the Premises to a new tenant or to perform improvements for a new tenant as a result of Tenant’s holdover and Tenant fails to vacate the Premises within 15 Business Days after notice from Landlord, Tenant shall be liable for all damages that Landlord suffers from the holdover.

 

23. Subordination to Mortgages; Estoppel Certificate.

Tenant accepts this Lease subject and subordinate to any mortgage(s), deed(s) of trust, ground lease(s) or other lien(s) now or subsequently arising upon the Premises, the Building or the Property, and to renewals, modifications, refinancings and extensions thereof (collectively referred to as a “Mortgage”). The party having the benefit of a Mortgage shall be referred to as a “Mortgagee”. This clause shall be self-operative, but within ten (10) Business Days after receipt of a written request from a Mortgagee, Tenant shall execute a commercially reasonable subordination agreement in favor of the Mortgagee. As an alternative, a Mortgagee shall have the right at any time to subordinate its Mortgage to this Lease. Upon request, Tenant, without charge, shall attorn to any successor to Landlord’s interest in this Lease. Tenant shall, within ten (10) Business Days after receipt of a written request from Landlord, execute and deliver a commercially reasonable estoppel certificate to those parties as are reasonably requested by Landlord (including a Mortgagee or prospective purchaser). Without limitation, such estoppel certificate may include a certification as to the status of this Lease, the existence of any defaults and the amount of Rent that is due and payable. In addition, Tenant shall, within ten (10) Business Days after receipt of a written request from Landlord (not more than once each calendar year unless in connection with a sale or financing of the Property) or any Mortgagee, deliver to Landlord or such Mortgagee financial statements for Tenant and any Guarantor, provided that Landlord or such Mortgagee, as the case may be, shall execute and deliver to Tenant a commercially reasonable confidentiality agreement with respect to any such financial statements that are not publicly available.

Concurrently with the execution and delivery of this Lease by Landlord and Tenant, Tenant has received from the Mortgagee under the Mortgage existing as of the date of this Lease a written “non-disturbance agreement” in favor of Tenant in commercially reasonable form providing that if Tenant is not in default under this Lease beyond any applicable grace period, such party will recognize this Lease and Tenant’s rights hereunder and will not disturb Tenant’s possession hereunder, and if this Lease is by operation of law terminated in a foreclosure, that a new lease will be entered into on the same terms as this Lease for the remaining term hereof. Notwithstanding anything to the contrary in the preceding paragraph,

 

16


Tenant’s receipt of a written “non-disturbance agreement” in favor of Tenant as described above from the Mortgagee under any Mortgage created after the date of this Lease shall be a condition of the subordination of this Lease thereto. Tenant shall reimburse Landlord for any fees charged by any Mortgagee for a non-disturbance agreement in favor of Tenant as described above within thirty (30) days after demand.

 

24. Notice.

All demands, approvals, consents or notices (collectively referred to as a “notice”) shall be in writing (except where verbal notice is expressly permitted hereunder) and delivered by hand or sent by registered, express, or certified mail, with return receipt requested or with delivery confirmation requested from the U.S. postal service, or sent by overnight or same day courier service at the party’s respective Notice Address(es) set forth in Section 1; provided, however, notices sent by Landlord regarding general Building operational matters (excluding any scheduled closure of the Building or the Garage or scheduled interruption in services) may be posted in the Building mailroom or the general Building newsletter or sent via e-mail to the e-mail address provided by Tenant to Landlord for such purpose. In addition, if the Building is closed (whether due to emergency, governmental order or any other reason), then any notice address at the Building shall not be deemed a required notice address during such closure, and, unless Tenant has provided an alternative valid notice address to Landlord for use during such closure, any notices sent during such closure may be sent via e-mail or in any other practical manner reasonably designed to ensure receipt by the intended recipient. Each notice shall be deemed to have been received on the earlier to occur of actual delivery or the date on which delivery is refused, or, if Tenant has vacated the Premises or any other Notice Address of Tenant without providing a new Notice Address, 3 days after notice is deposited in the U.S. mail or with a courier service in the manner described above. Either party may, at any time, change its Notice Address (other than to a post office box address) by giving the other party written notice of the new address.

 

25. Surrender of Premises.

At the termination of this Lease or Tenant’s right of possession, Tenant shall remove Tenant’s Property from the Premises, and quit and surrender the Premises to Landlord, broom clean, and in good repair and working order, ordinary wear and tear and damage which Landlord is obligated to repair hereunder (including damage by Casualty which Landlord is obligated to repair pursuant to Section 16) excepted. If Tenant fails to remove any of Tenant’s Property, or to restore the Premises to the required condition, within two (2) Business Days after termination of this Lease or Tenant’s right to possession, Landlord, at Tenant’s sole cost and expense, shall be entitled (but not obligated) to remove and store Tenant’s Property and/or perform such restoration of the Premises. Landlord shall not be responsible for the value, preservation or safekeeping of Tenant’s Property. Tenant shall pay Landlord, upon demand, the reasonable expenses and storage charges incurred. If Tenant fails to remove Tenant’s Property from the Premises or storage, within 30 days after notice, Landlord may deem all or any part of Tenant’s Property to be abandoned and, at Landlord’s option, title to Tenant’s Property shall vest in Landlord or Landlord may dispose of Tenant’s Property in any manner Landlord deems appropriate.

 

26. Miscellaneous.

26.01 This Lease shall be interpreted and enforced in accordance with the Laws of the state or commonwealth in which the Building is located and Landlord and Tenant hereby irrevocably consent to the jurisdiction and proper venue of such state or commonwealth. If any term or provision of this Lease shall to any extent be void or unenforceable, the remainder of this Lease shall not be affected. If there is more than one Tenant or if Tenant is comprised of more than one party or entity, the obligations imposed upon Tenant shall be joint and several obligations of all the parties and entities, and requests or demands from any one person or entity comprising Tenant shall be deemed to have been made by all such persons or entities. Notices to any one person or entity shall be deemed to have been given to all persons and entities. Each party represents and warrants to the other, and agrees, that each individual executing this Lease on behalf of such party is authorized to do so on behalf of such party and that the entity(ies) or individual(s) constituting such party (and, in Tenant’s case, Guarantor) or which may own or control such party (and, in Tenant’s case, Guarantor) or which may be owned or controlled by such party (and, in Tenant’s case, Guarantor) are not and at no time will be (i) in violation of any Laws relating to terrorism or money laundering, or (ii) among the individuals or entities identified on any list compiled pursuant to Executive Order 13224 for the purpose of identifying suspected terrorists or on the most current list published by the U.S. Treasury Department Office of Foreign Assets Control at its official website, http://www.treasury.gov/resource-center/sanctions/Proqrams/Documents/Terror.pdf or any replacement website or other replacement official publication of such list.

 

17


26.02 If Landlord retains an attorney or institutes legal proceedings due to Tenant’s failure to pay Rent when due, then Tenant shall be required to pay Additional Rent in an amount equal to the reasonable attorneys’ fees and costs actually incurred by Landlord in connection therewith. Notwithstanding the foregoing, in any action or proceeding between Landlord and Tenant, including any appellate or alternative dispute resolution proceeding, the prevailing party shall be entitled to recover from the non-prevailing party all of its costs and expenses in connection therewith, including, but not limited to, reasonable attorneys’ fees actually incurred. No failure by either party to declare a default immediately upon its occurrence, nor any delay by either party in taking action for a default, nor Landlord’s acceptance of Rent with knowledge of a default by Tenant, shall constitute a waiver of the default, nor shall it constitute an estoppel. IF ANY ACTION OR PROCEEDING BETWEEN LANDLORD AND TENANT TO ENFORCE THE PROVISIONS OF THIS LEASE (INCLUDING AN ACTION OR PROCEEDING BETWEEN LANDLORD AND THE TRUSTEE OR DEBTOR IN POSSESSION WHILE TENANT IS A DEBTOR IN A PROCEEDING UNDER ANY BANKRUPTCY LAW) PROCEEDS TO TRIAL, TO THE FULLEST EXTENT PERMITTED BY LAW LANDLORD AND TENANT HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY IN SUCH TRIAL.

26.03 If it is determined that Landlord failed to deliver in writing its consent or approval where it was required to do so under this Lease, unless it is also determined that Landlord acted in bad faith in so failing Tenant’s sole remedy will be an order of specific performance or mandatory injunction of the Landlord’s agreement to give its consent or approval. The review and/or approval by Landlord of any item shall not impose upon Landlord any liability for accuracy or sufficiency of any such item or the quality or suitability of such item for its intended use. Any such review or approval is for the sole purpose of protecting Landlord’s interest in the Property, and neither Tenant nor any Tenant Related Parties nor any person or entity claiming by, through or under Tenant, nor any other third party, shall have any rights hereunder by virtue of such review and/or approval by Landlord.

26.04 Landlord shall have the right to transfer and assign, in whole or in part, all of its rights and obligations under this Lease and in the Building and Property. Upon transfer, Landlord shall be released from any obligations hereunder arising after the date of such transfer, and Tenant agrees to look solely to the successor in interest of Landlord for the performance of such obligations, provided that any successor pursuant to a voluntary, third party transfer (but not as part of an involuntary transfer resulting from a foreclosure or deed in lieu thereof, except as otherwise provided in any applicable non-disturbance agreement) shall have assumed Landlord’s obligations under this Lease.

26.05 Landlord has delivered a copy of this Lease to Tenant for Tenant’s review only and the delivery of it does not constitute an offer to Tenant or an option. Tenant represents that it has dealt directly with and only with the Broker(s) (described in Section 1.10) as broker(s) in connection with this Lease. Landlord and Tenant acknowledge that Landlord’s Broker represents only Landlord in connection with the negotiation and execution of this Lease, and that Tenant’s Broker represents only Tenant in connection with the negotiation and execution of this Lease. Landlord and Tenant each confirms that prior oral and/or written disclosure of agency has been provided to such party, as required by RCW 18.86.030(1)(g). Tenant shall indemnify and hold Landlord and the Landlord Related Parties harmless from all claims of any other brokers claiming to have represented Tenant in connection with this Lease. Landlord shall indemnify and hold Tenant and the Tenant Related Parties harmless from all claims of any brokers claiming to have represented Landlord in connection with this Lease. Any assistance rendered by Landlord’s Broker or any agent or employee of Landlord in connection with this Lease or any subsequent amendment or modification or any other document related hereto has been or will be made as an accommodation to Tenant solely in furtherance of consummating the transaction on behalf of Landlord, and not as agent for Tenant. Each of Landlord and Tenant, by its execution of this Lease, acknowledges and agrees that it has timely received a pamphlet on the law of real estate agency as required under RCW 18.86.030(1)(f). Landlord shall pay any commissions or other fees due to Landlord’s Broker and Tenant’s Broker by reason of Tenant entering into this Lease pursuant to the terms of separate agreement(s) executed by Landlord.

26.06 Time is of the essence with respect to Tenant’s exercise of any expansion, renewal or extension rights granted to Tenant. The expiration of the Term, whether by lapse of time, termination or otherwise, shall not relieve either party of any obligations which accrued prior to or which may continue to accrue after the expiration or termination of this Lease.

 

18


26.07 Tenant may peacefully have, hold and enjoy the Premises, subject to the terms of this Lease, provided Tenant is not in Default. This covenant shall be binding upon Landlord and its successors only during its or their respective periods of ownership of the Building.

26.08 This Lease does not grant any rights to light or air over or about the Building. Landlord excepts and reserves exclusively to itself any and all rights not specifically granted to Tenant under this Lease. Landlord reserves the right to make changes to the Property, Building and Common Areas as Landlord deems appropriate. Except in emergencies (in which case Landlord shall provide such notice, if any, as shall be practicable given the exigency of the circumstances), Landlord shall provide Tenant with reasonable prior notice of any such changes which shall materially affect Tenant’s access to the Premises or interfere with Tenant’s use of the Premises, and in exercising such right Landlord shall use reasonable efforts to minimize any interference with Tenant’s access to and use of the Premises. This Lease constitutes the entire agreement between the parties and supersedes all prior agreements and understandings related to the Premises, including all lease proposals, letters of intent and other documents. Neither party is relying upon any warranty, statement or representation not contained in this Lease. This Lease may be modified only by a written agreement signed by an authorized representative of Landlord and Tenant.

[Signature Page Follows]

 

19


Landlord and Tenant have executed this Lease as of the day and year first above written.

 

LANDLORD:
SRI-WR ELLIOTT AVENUE LLC, a Delaware limited liability company
By:  

/s/ Walter R. Ingram

Name:  

Walter R. Ingram

Title:  

Executive Vice President & CFO

TENANT:
ZULILY, INC., a Delaware corporation
By:  

/s/ Darrell Cavens

Name:  

Darrell Cavens

Title:  

CEO

Tenant’s Tax ID Number (SSN or FEIN):
  27-1202150

 

20


LANDLORD ACKNOWLEDGMENT

LIMITED LIABILITY COMPANY

 

STATE OF WASHINGTON    )   
   )    ss.
COUNTY OF King     )      

On this the 2nd day of May, 2013, before me a Notary Public duly authorized in and for the said County in the State aforesaid to take acknowledgments personally appeared Walter Ingram known to me to be EVP & CFO of SRI-WR ELLIOTT AVENUE LLC, one of the parties described in the foregoing instrument, and acknowledged that as such officer, being authorized so to do, (s)he executed the foregoing instrument on behalf of said limited liability company as a free and voluntary act, and as the free and voluntary act of said limited liability company, for the uses and purposes therein set forth.

IN WITNESS WHEREOF, I hereunto set my hand and official seal.

 

[SEAL]      Notary Public
    

/s/ Amanda Smith

     Printed Name
    

Amanda Smith

 

Residing at:  

Seattle

  
My Commission Expires:  

February 17, 2014

  

TENANT ACKNOWLEDGMENT

Corporation

 

STATE OF Washington    )   
   )    ss.
COUNTY OF King     )      

On this the 1st day of May, 2013, before me a Notary Public duly authorized in and for the said County in the State aforesaid to take acknowledgments personally appeared Darrell Cavens known to me to be CEO of Zulily, Inc., one of the parties described in the foregoing instrument, and acknowledged that as such officer, being authorized so to do, (s)he executed the foregoing instrument on behalf of said corporation as a free and voluntary act, and as the free and voluntary act of said corporation, for the uses and purposes therein set forth.

IN WITNESS WHEREOF, I hereunto set my hand and official seal.

 

[SEAL]     Notary Public
   

/s/ Marcia G. Cardona

    Printed Name
   

Marcia G. Cardona

 

Residing at:  

Covington

  
My Commission Expires:  

June 6, 2015

  


SCHEDULE I

BASE RENT

INCREMENT 1

 

PERIOD

   BASE RENT
PER ANNUM (RSF)
     MONTHLY BASE RENT  

*Rent Commencement Date - 6/30/14

   $ 0.00       $ 0.00   

7/1/14 - 1/30/15

   $ 23.50       $

 

165,927.63

(based on 84,729 rsf

  

2/1/15 - 1/30/16

   $ 24.50       $ 172,988.38   

2/1/16 - 1/30/17

   $ 25.50       $ 180,049.13   

2/1/17 - 1/30/18

   $ 26.50       $ 187,109.88   

2/1/18 - 1/30/19

   $ 27.50       $ 194,170.63   

2/1/19 - 1/30/20

   $ 28.50       $ 201,231.38   

2/1/20 - 1/30/21

   $ 29.50       $ 208,292.13   

2/1/21 - 1/30/22

   $ 30.50       $ 215,352.88   

2/1/22 - 1/30/23

   $ 31.50       $ 222,413.63   

2/1/23 - Termination Date

   $ 32.50       $ 229,474.38   

 

* During the period from the Increment 1 Rent Commencement Date through June 30, 2014, no Base Rent shall be payable for Increment 1, notwithstanding that Increment 1 consists of 84,729 rentable square feet.

INCREMENT 2

 

PERIOD

   BASE RENT
PER ANNUM (RSF)
     MONTHLY BASE RENT  

Rent Commencement Date - 6/30/14

   $ 23.50       $

 

30,222.96

(based on 15,433 rsf

  

*7/1/14 - 1/30/15

   $ 23.50       $

 

113,726.29

(based on 58,073 rsf

  

2/1/15 - 1/30/16

   $ 24.50       $ 118,565.71   

2/1/16 - 1/30/17

   $ 25.50       $ 123,405.13   

2/1/17 - 1/30/18

   $ 26.50       $ 128,244.54   

2/1/18 - 1/30/19

   $ 27.50       $ 133,083.96   

2/1/19 - 1/30/20

   $ 28.50       $ 137,923.38   

2/1/20 - 1/30/21

   $ 29.50       $ 142,762.79   

2/1/21 - 1/30/22

   $ 30.50       $ 147,602.21   

2/1/22 - 1/30/23

   $ 31.50       $ 152,441.63   

2/1/23 - Termination Date

   $ 32.50       $ 157,281.04   

 

* During the period from the Increment 2 Rent Commencement Date through June 30, 2014, Base Rent shall be payable for Increment 2 based on 15,433 rentable square feet, notwithstanding that Increment 2 consists of 58,073 rentable square feet.


INCREMENT 3

 

PERIOD

   BASE RENT
PER ANNUM  (RSF)
     MONTHLY BASE RENT  

Rent Commencement Date - 1/30/16

   $ 24.50       $ 75,962.25   

2/1/16 - 1/30/17

   $ 25.50       $ 79,062.75   

2/1/17 - 1/30/18

   $ 26.50       $ 82,163.25   

2/1/18 - 1/30/19

   $ 27.50       $ 85,263.75   

2/1/19 - 1/30/20

   $ 28.50       $ 88,364.25   

2/1/20 - 1/30/21

   $ 29.50       $ 91,464.75   

2/1/21 - 1/30/22

   $ 30.50       $ 94,565.25   

2/1/22 - 1/30/23

   $ 31.50       $ 97,665.75   

2/1/23 - Termination Date

   $ 32.50       $ 100,766.25   

INCREMENT 4

 

PERIOD

   BASE RENT
PER ANNUM (RSF)
     MONTHLY BASE RENT  

Rent Commencement Date - 1/30/17

   $ 25.50       $ 119,144.50   

2/1/17 - 1/30/18

   $ 26.50       $ 123,816.83   

2/1/18 - 1/30/19

   $ 27.50       $ 128,489.19   

2/1/19 - 1/30/20

   $ 28.50       $ 133,161.50   

2/1/20 - 1/30/21

   $ 29.50       $ 137,833.83   

2/1/21 - 1/30/22

   $ 30.50       $ 142,506.17   

2/1/22 - 1/30/23

   $ 31.50       $ 147,178.50   

2/1/23 - Termination Date

   $ 32.50       $ 151,850.83   

 

2


EXHIBIT A

OUTLINE AND LOCATION OF PREMISES

This Exhibit is attached to and made a part of the Office Lease Agreement by and between SRI-WR ELLIOTT AVENUE LLC, a Delaware limited liability company (“Landlord”), and ZULILY, INC., a Delaware corporation (“Tenant”), for space in the Building located at 2601 Elliott Avenue, Seattle, Washington.


 

LOGO


 

LOGO


 

LOGO


 

LOGO


 

LOGO


 

LOGO


EXHIBIT A-1

LEGAL DESCRIPTION OF THE LAND

This Exhibit is attached to and made a part of the Lease by and between SRI-WR ELLIOTT AVENUE LLC, a Delaware limited liability company (“Landlord”), and ZULILY, INC., a Delaware corporation (“Tenant”), for space in the Building located at 2601 Elliott Avenue, Seattle, Washington.

THE LAND REFERRED TO HEREIN IS SITUATED IN THE STATE OF WASHINGTON, COUNTY OF KING, AND IS DESCRIBED AS FOLLOWS:

BLOCKS 7 AND 12 OF THE PORTION OF THE TOWN OF SEATTLE, AS LAID OUT ON THE LAND CLAIM OF WILLIAM H. BELL AND THE NORTHWESTERN EXTREMITY OF THE CLAIM OF A.A. DENNY (COMMONLY KNOWN AS BELL AND DENNY’S ADDITION TO THE CITY OF SEATTLE), AS PER PLAT RECORDED IN VOLUME 1 OF PLATS, PAGE 29,•RECORDS OF KING COUNTY;

EXCEPT THAT PORTION THEREOF LYING WITHIN SUPPLEMENTAL PLAT OF SEATTLE TIDE LANDS;

TOGETHER WITH BLOCKS 169B AND 169C OF THE SUPPLEMENTAL PLAT OF SEATTLE TIDE LANDS, AS SHOWN ON THE OFFICIAL MAPS OF SEATTLE TIDE LANDS ON FILE IN THE OFFICE OF THE COMMISSIONER OF PUBLIC LANDS AT OLYMPIA, WASHINGTON;

AND TOGETHER WITH THAT PORTION OF VACATED CEDAR STREET ADJOINING, AS VACATED UNDER CITY OF SEATTLE ORDINANCE NO. 90532 WHICH, UPON VACATION, ATTACHES TO SAID PROPERTY BY OPERATION OF LAW;

AND TOGETHER WITH THAT PORTION OF VACATED ALASKAN WAY ADJOINING, AS VACATED UNDER CITY OF SEATTLE ORDINANCE NO. 109009 WHICH, UPON VACATION, ATTACHES TO SAID PROPERTY BY OPERATION OF LAW;

SITUATE IN THE CITY OF SEATTLE, COUNTY OF KING, STATE OF WASHINGTON.

AND

[note: following is legal for the portion of the Land on which the Garage is located]

LOTS 1, 2, 3 AND 4 IN BLOCK 8 OF THE PORTION OF THE TOWN OF SEATTLE, AS LAID OUT ON THE CLAIM OF WILLIAM H. BELL AND THE NORTHWESTERN EXTREMITY OF THE CLAIM OF A.A. DENNY (COMMONLY KNOWN AS BELL AND DENNY’S ADDITION TO THE CITY OF SEATTLE), AS PER PLAT RECORDED IN VOLUME 1 OF PLATS, PAGE 29, RECORDS OF KING COUNTY;

SITUATE IN THE CITY OF SEATTLE, COUNTY OF KING, STATE OF WASHINGTON.


EXHIBIT B

EXPENSES AND TAXES

This Exhibit is attached to and made a part of the Office Lease Agreement (the “Lease”) by and between SRI-WR ELLIOTT AVENUE LLC, a Delaware limited liability company (“Landlord”), and ZULILY, INC., a Delaware corporation (“Tenant”), for space in the Building located at 2601 Elliott Avenue, Seattle, Washington. Capitalized terms used but not defined herein shall have the meanings given in the Lease.

1. Payments.

1.01 Tenant shall pay Tenant’s Pro Rata Share of the total amount of Expenses and Taxes for each calendar year during the Term. Landlord shall provide Tenant with a good faith estimate of the total amount of Expenses and Taxes for each calendar year during the Term. On or before the first day of each month, Tenant shall pay to Landlord a monthly installment equal to one-twelfth of Tenant’s Pro Rata Share of Landlord’s estimate of the total amount of Expenses and Taxes for the applicable calendar year. If Landlord determines that its good faith estimate was incorrect by a material amount, Landlord may provide Tenant with a revised estimate. After its receipt of the revised estimate, Tenant’s monthly payments shall be based upon the revised estimate. If Landlord does not provide Tenant with an estimate of the total amount of Expenses and Taxes by January 1 of a calendar year, Tenant shall continue to pay monthly installments based on the previous year’s estimate until Landlord provides Tenant with the new estimate. Upon delivery of the new estimate, an adjustment shall be made for any month for which Tenant paid monthly installments based on the previous year’s estimate. Tenant shall pay Landlord the amount of any underpayment within 30 days after receipt of the new estimate. Any overpayment shall be refunded to Tenant within 30 days or credited against the next due future installment(s) of Additional Rent.

1.02 As soon as is practical following the end of each calendar year, but not later than June 1st of the following calendar year, Landlord shall furnish Tenant with a statement of the actual amount of Expenses and Taxes for the prior calendar year. Such statement shall be final and binding upon Tenant unless, within sixty (60) days of its receipt of such statement, Tenant shall contest any item thereon by giving written notice thereof to Landlord, specifying in reasonable detail each item contested and the reason therefor, or Tenant shall give notice of its initiation of its audit rights pursuant to Section 4 below. If the estimated amount of Expenses and Taxes for the prior calendar year is more than the actual amount of Expenses and Taxes for the prior calendar year, Landlord shall either provide Tenant with a refund or apply any overpayment by Tenant against Additional Rent due or next becoming due, provided if the Term expires before the determination of the overpayment, Landlord shall refund any overpayment to Tenant, after first deducting the amount of Rent due, no later than June 1st of the calendar year following the expiration of the Term. If the estimated amount of Expenses and Taxes for the prior calendar year is less than the actual amount of Expenses and Taxes for such prior year, Tenant shall pay Landlord, within 30 days after its receipt of the statement of Expenses and Taxes, any underpayment for the prior calendar year.

2. Expenses.

2.01 “Expenses” means all costs and expenses incurred in each calendar year in connection with operating, maintaining, repairing, and managing the Building, the Garage and the balance of the Property. Expenses include, without limitation: (a) all labor and labor related costs (not above the position of general manager), including wages, salaries, bonuses, taxes, insurance, uniforms, training, retirement plans, pension plans and other employee benefits; (b) management fees; (c) the cost of equipping, staffing and operating an on-site and/or off-site management office for the Building, provided if the management office services one or more other buildings or properties, the shared costs and expenses of equipping, staffing and operating such management office(s) shall be equitably prorated and apportioned between the Building and the other buildings or properties; (d) accounting costs; (e) the cost of services; (f) rental and purchase cost (including sales, use and excise taxes thereon) of parts, supplies, tools and equipment; (g) insurance premiums and deductibles; (h) electricity, gas and other utility costs; and (i) the amortized cost of capital improvements (as distinguished from replacement parts or components installed in the ordinary course of business) which are: (1) performed primarily to reduce current or future operating expense costs, to upgrade Building security, to otherwise improve the operating efficiency of the Property, or for the protection of the health and safety of the occupants of the Property; or (2) required to comply with any Laws that are enacted, or first interpreted to apply to the Property, after the date of the Lease. The cost of capital improvements shall be amortized by Landlord over the lesser of the Payback Period (defined below), where applicable, or such other period as reasonably determined by


Landlord consistent with generally accepted real property management practices in the Applicable Market. The amortized cost of capital improvements may, at Landlord’s option, include actual or imputed interest at the rate that Landlord would reasonably be required to pay to finance the cost of the capital improvement. “Payback Period” means the reasonably estimated period of time that it takes for the cost savings resulting from a capital improvement to equal the total cost of the capital improvement. Landlord, by itself or through an affiliate, shall have the right to directly perform, provide and be compensated for any services under the Lease. If Landlord incurs Expenses for the Building or Property together with one or more other buildings or properties, whether pursuant to a reciprocal easement agreement, common area agreement or otherwise, the shared costs and expenses shall be equitably prorated and apportioned between the Building and Property and the other buildings or properties.

2.02 Expenses shall not include: the cost of capital improvements (except as set forth in Section 2.01 above); depreciation; principal payments of mortgage and other non-operating debts of Landlord; the cost of repairs or other work to the extent Landlord is reimbursed by insurance or condemnation proceeds; costs in connection with leasing space in the Building, including brokerage commissions; lease concessions, rental abatements and construction allowances granted to specific tenants; costs incurred in connection with the sale, financing or refinancing of the Building; fines, interest and penalties incurred due to the late payment of Taxes or Expenses; organizational expenses associated with the creation and operation of the entity which constitutes Landlord; any penalties or damages that Landlord pays to Tenant under the Lease or to other tenants in the Building under their respective leases; the cost of services made available at no special cost to any tenant in the Building but not to Tenant; the cost of electricity to leasable space in the Building (other than electricity utilized to furnish base Building HVAC service, which cost shall be included in Expenses); any expense for which Landlord is actually directly reimbursed by a tenant or other party (other than by means of an escalation or expense pass-through provision similar to this Exhibit B); advertising, promotional and marketing expenses; charitable contributions; the cost of any large scale abatement, removal, or other remedial activities with respect to Hazardous Materials, provided, however, Expenses may include the incidental costs attributable to those actions taken by Landlord in connection with the ordinary operation and maintenance of the Building and Property, including costs incurred in removing limited amounts of Hazardous Materials from the Building and Property when such removal is directly related to such ordinary maintenance and operation; overhead and profit increments paid to subsidiaries or affiliates of Landlord for management or other services on or to the Building or for supplies or other materials to the extent that the cost of the services, supplies or materials materially exceed the amounts normally payable for similar goods and services under similar circumstances (taking into account the market factors in effect on the date any relevant contracts were negotiated) in comparable buildings in the Applicable Market (as defined in Section 3.E. of Exhibit F); penalties or other costs incurred due to a violation by Landlord, as determined by written admission, stipulation, final judgment or arbitration award, of any of the terms and conditions of this Lease or any other lease relating to the Building, except to the extent such costs reflect costs that would have been incurred by Landlord absent such violation; accountants’ and attorneys’ fees and expenses incurred in connection with lease negotiations or lease disputes with current or prospective Building tenants or in connection with the defense of Landlord’s title to the Property; bad debt reserves or reserves for future Expenses.

Notwithstanding anything to the contrary contained in this Exhibit B, in no event shall the aggregate amount payable by Tenant for any given calendar year after 2014 on account of Controllable Expenses (as defined below) exceed the amount that is equal to the Controllable Expenses payable by Tenant for calendar year 2014, as increased 5% per year, compounded annually, through the expiration of the subject calendar year for which Controllable Expenses are to be calculated, as calculated on a per rentable square foot basis; provided, however, that any increases in Controllable Expenses not recovered by Landlord in any calendar year due to the foregoing limitation shall be carried forward into succeeding calendar years during the Term (subject to the foregoing limitation) until fully recouped by Landlord. As used herein, “Controllable Expenses” mean all Expenses, excluding (i) costs and expenses associated with improvements or repairs required by applicable Laws (including capital improvements and repairs includable in Expenses pursuant to Section 2.01 above), and (ii) costs and expenses for insurance premiums and deductibles, electricity, gas and other utilities. All calculations pursuant to this paragraph shall be made after giving effect to Section 2.03 below.

2.03 If at any time during a calendar year the Building is not at least 95% occupied or Landlord is not supplying services to at least 95% of the total Rentable Square Footage of the Building, Expenses shall, at Landlord’s option, be determined as if the Building had been 95% occupied and Landlord had been supplying services to 95% of the Rentable Square Footage of the Building during that calendar year. Notwithstanding the foregoing, Landlord may calculate the extrapolation of Expenses under this Section based on 100% occupancy and service so

 

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long as such percentage is used consistently for each year of the Term. The extrapolation of Expenses under this Section shall be performed in accordance with the methodology specified by the Building Owners and Managers Association.

3.Taxes” shall mean: (a) all real property taxes and other assessments on the Building and/or Property, including, but not limited to, gross receipts taxes, all rental, sales and use taxes imposed upon or measured by gross rent, assessments for special improvement districts and building improvement districts, governmental charges, fees and assessments for police, fire, traffic mitigation or other governmental service of purported benefit to the Property, taxes and assessments levied in substitution or supplementation in whole or in part of any such taxes and assessments and the Property’s share of any real estate taxes and assessments under any reciprocal easement agreement, common area agreement or similar agreement as to the Property; (b) all personal property taxes for property that is owned by Landlord and used exclusively in connection with the operation, maintenance and repair of the Property; and (c) all costs and fees incurred in connection with seeking reductions in any tax liabilities described in (a) and (b), including, without limitation, any costs incurred by Landlord for compliance, review and appeal of tax liabilities. Without limitation, Taxes shall not include any income, capital levy, transfer, capital stock, franchise, gift, estate or inheritance tax. If a change in Taxes is obtained for any year of the Term during which Tenant paid Tenant’s Pro Rata Share of any Taxes, then Taxes for that year will be retroactively adjusted and Landlord shall provide Tenant with a credit, if any, based on the adjustment. Tenant shall pay Landlord the amount of Tenant’s Pro Rata Share of any such increase in Taxes within 30 days after Tenant’s receipt of a statement from Landlord.

4. Audit Rights. If Tenant wishes to dispute an amount shown on the annual statement, Tenant shall give Landlord written notice of such dispute within sixty (60) days after Tenant’s receipt of the annual statement. If Tenant does not give Landlord such notice within such time, Tenant shall have waived its right to dispute the annual statement. Promptly after the receipt of such written notice from Tenant, Landlord and Tenant shall endeavor in good faith to resolve such dispute. If such efforts do not succeed, Tenant shall have the right to cause a nationally or regionally recognized independent certified public accountant designated by Tenant, to be paid on an hourly or fixed fee basis and not a contingent fee basis, to audit the items questioned by Tenant in its original notice contesting the annual statement, provided that Tenant (i) notifies Landlord in writing of Tenant’s intention to exercise such audit right within 30 days after the relevant initial written notice from Tenant to Landlord with respect to such dispute, (ii) actually begins such audit within 45 days after the notice from Tenant to Landlord advising Landlord that Tenant will require an audit (provided that such 45-day period within which the audit must be commenced shall be extended by the length of any delay in the commencement of the audit that is caused by Landlord) and (iii) diligently pursues such audit to completion as quickly as reasonably possible. Landlord agrees to make available to Tenant’s auditors, at Landlord’s office in Seattle Washington and/or at Landlord’s office in the Building (at Landlord’s sole option), the books and records relevant to the audit for review and copying, but such books and records may not be removed from Landlord’s offices. Tenant shall bear all costs of such audit, including Landlord’s actual copying costs and personnel costs, if any incurred in connection with such audit (provided that, prior to incurring any personnel costs in connection with any such audit, Landlord shall advise Tenant of Landlord’s anticipated personnel costs so that Tenant may, at Tenant’s option, modify Tenant’s activities with regard to such audit in order to preclude the need for Landlord to incur such personnel costs), except that, if the audit (as conducted and certified by the auditor) shows an aggregate overstatement of the Taxes and Expenses payable by Tenant of 5% or more, and Landlord’s auditors concur in such findings (or, in the absence of such concurrence, such overstatement is confirmed by a court of competent jurisdiction or such other dispute resolution mechanism as to which the parties mutually agree in writing), then Landlord shall bear all costs of the audit. If the agreed or confirmed audit shows an aggregate underpayment of Taxes Expenses payable by Tenant, Tenant shall pay to Landlord, within 30 days after the audit is agreed to or confirmed, the amount owed to Landlord, and, if the agreed or confirmed audit shows an aggregate overpayment of Taxes Expenses payable by Tenant, Landlord shall reimburse Tenant for such overpayment within 30 days after the audit is agreed to or confirmed.

Notwithstanding anything to the contrary set forth above, Tenant’s audit rights under this Section 4 shall be conditioned upon (i) Tenant having paid the total amounts billed by Landlord under this Exhibit B within the time stipulated herein for payment (including, without limitation, the contested amounts) and (ii) Tenant executing, prior to the commencement of the audit, a confidentiality agreement in form and substance reasonably satisfactory to Landlord in which Tenant shall agree to keep confidential, and not disclose to any other party, the results of any such audit or any action taken by Landlord in response thereto

 

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5. Personal Property Taxes. Tenant shall pay, prior to delinquency, all personal property taxes payable with respect to Tenant’s Property and promptly upon request of Landlord shall provide written proof of such payment. In the event that Tenant does not pay all personal property taxes prior to delinquency, the nonpayment shall be deemed a default hereunder if unpaid within ten (10) Business Days after written notice from Landlord. In addition, should Landlord pay such personal property taxes on behalf of Tenant, Tenant shall repay Landlord immediately upon notice, together with interest of twelve percent (12%) per annum from the date of such payment by Landlord.

 

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EXHIBIT C

WORK LETTER

This Exhibit (the “Work Letter”) is attached to and made a part of the Office Lease Agreement (the “Lease”) by and between SRI-WR ELLIOTT AVENUE LLC, a Delaware limited liability company (“Landlord”), and ZULILY, INC., a Delaware corporation (“Tenant”), for space in the Building located at 2601 Elliott Avenue, Seattle, Washington. Capitalized terms used but not defined herein shall have the meanings given in the Lease.

 

I. Alterations and Allowance.

A. Tenant, upon the full and final execution and delivery of this Lease and all prepaid rental and security deposits required hereunder, shall have the right to perform alterations and improvements in the Premises (the “Initial Alterations”). Notwithstanding the foregoing, Tenant and its contractors shall not have the right to perform Initial Alterations in the Premises unless and until Tenant has complied with all of the terms and conditions of Section 9.03. of this Lease, including, without limitation, approval by Landlord of the final plans for the Initial Alterations and the contractors to be retained by Tenant to perform such Initial Alterations, except that where the provisions of Section 9.03 shall conflict with the provisions of this Work Letter, the provisions of this Work Letter shall control. Landlord shall respond to Tenant’s plans within five (5) Business Days after Landlord’s receipt thereof with (i) Landlord’s approval, (ii) Landlord’s reasonable disapproval (with the reasons therefor in reasonable detail), (iii) Landlord’s request for further information reasonably required by Landlord in order to review the plans and the proposed work, or (iv) in those certain limited circumstances where such five (5) Business Day period for Landlord to respond to Tenant as provided in clauses (i), (ii) or (iii) above may not be reasonably possible, Landlord’s reasonable estimate of the additional time required for Landlord to so respond to Tenant (which shall in any event be as soon as reasonably possible consistent with Landlord’s exercise of commercially reasonable efforts). Such circumstances include, without limitation, plans which Landlord requires to be reviewed by its third party architects, engineers or other consultants where, despite Landlord’s commercially reasonable efforts, such third parties do not respond in a timely manner so as to enable Landlord to meet such five (5) Business Day response period, or plans which include significant and unanticipated revisions to the plans or information previously submitted by Tenant to Landlord. Landlord and Tenant shall cooperate and coordinate with each other during the preparation and approval process of the plans so that the five (5) Business Day response period set forth above will be honored in all but the most limited circumstances. Tenant shall be responsible for all elements of the design of Tenant’s plans (including, without limitation, compliance with law, functionality of design, the structural integrity of the design, the configuration of the premises and the placement of Tenant’s furniture, appliances and equipment), and Landlord’s approval of Tenant’s plans shall in no event relieve Tenant of the responsibility for such design. Landlord’s approval of the contractors to perform the Initial Alterations shall not be unreasonably withheld. The parties agree that Landlord’s approval of the general contractor to perform the Initial Alterations shall not be considered to be unreasonably withheld if any such general contractor (i) does not have trade references reasonably acceptable to Landlord, (ii) does not maintain insurance as required pursuant to the terms of this Lease, (iii) does not have the ability to be bonded for the work in an amount of no less than the amount equal to the entire cost of the Initial Alterations, (iv) does not provide current financial statements reasonably acceptable to Landlord, or (v) is not licensed as a contractor in the state/municipality in which the Premises is located. Tenant acknowledges the foregoing is not intended to be an exclusive list of the reasons why Landlord may reasonably withhold its consent to a general contractor. Landlord hereby approves HST Construction as Tenant’s general contractor for the Initial Alterations, and Yamaguchi Architects as Tenant’s architect for the Initial Alterations.

B. Provided Tenant is not in default under this Work Letter or the balance of the Lease (but without relieving Landlord of its obligation as hereinafter provided if Tenant cures such default within any applicable notice and cure period), Landlord agrees to contribute the applicable Allowance set forth below toward the cost of performing the Initial Alterations in preparation of Tenant’s occupancy of the applicable Increment of the Premises. The Allowance may only be used for the cost of preparing design and construction documents and mechanical and electrical plans for the Initial Alterations, for hard costs in connection with the Initial Alterations, and for voice, data and other cabling in the applicable Increment of the Premises. The Allowance, less a 10% retainage (which retainage shall be payable as part of the final draw), shall be paid to Tenant or, at Landlord’s option, to the order of the general contractor that performs the Initial Alterations, in periodic disbursements within thirty (30) days after receipt of the following documentation: (i) an application for payment and sworn statement of contractor substantially in the form of AIA Document G-702 covering all work for which disbursement is to


be made to a date specified therein; (ii) a certification from an AlA architect substantially in the form of the Architect’s Certificate for Payment which is located on AIA Document G702, Application and Certificate of Payment; (iii) Contractor’s, subcontractor’s and material supplier’s waivers of liens which shall cover all Initial Alterations for which disbursement is being requested and all other statements and forms required for compliance with the mechanics’ lien laws of the State of Washington, together with all such invoices, contracts, or other supporting data as Landlord or Landlord’s Mortgagee may reasonably require; (iv) with the initial draw, a cost breakdown for each trade or subcontractor performing the Initial Alterations, and with each subsequent draw a cost breakdown for each trade or subcontractor performing the work for which the draw is requested; (v) plans and specifications for the Initial Alterations, together with a certificate from an AIA architect that such plans and specifications comply in all material respects with all laws affecting the Building, Property and Premises; (vi) copies of all construction contracts for the Initial Alterations, together with copies of all change orders, if any; and (vii) a request to disburse from Tenant containing an approval by Tenant of the work done and a good faith estimate of the cost to complete the Initial Alterations. Upon completion of the Initial Alterations, and prior to final disbursement of the Allowance, Tenant shall furnish Landlord with: (1) general contractor and architect’s completion affidavits, (2) full and final waivers of lien, (3) receipted bills covering all labor and materials expended and used, (4) as-built plans of the Initial Alterations, and (5) the certification of Tenant and its architect that the Initial Alterations have been installed in a good and workmanlike manner in accordance with the approved plans, and in accordance with applicable laws, codes and ordinances. In no event shall Landlord be required to disburse the Allowance more than one time per month. If the Initial Alterations exceed the Allowance, Tenant shall be entitled to the Allowance in accordance with the terms hereof, but each individual disbursement of the Allowance shall be disbursed in the proportion that the Allowance bears to the total cost for the Initial Alterations, less the 10% retainage referenced above. Notwithstanding anything herein to the contrary, Landlord shall not be obligated to disburse any portion of the Allowance during the continuance of an uncured default under this Work Letter or the balance of the Lease, and Landlord’s obligation to disburse shall only resume when and if such default is cured.

The “Allowance” with respect to Increments 1 and 2 is Fifty Dollars ($50.00) per rentable square foot of each such Increment. The “Allowance” with respect to Increment 3 is Forty-Five and 42/100 Dollars ($45.42) per rentable square foot of such Increment. The “Allowance” with respect to Increment 4 is Thirty-Nine and 17/100 Dollars ($39.17) per rentable square foot of such Increment. Tenant may not use any portion of the Allowance applicable to any Increment towards the costs of the Initial Alterations in any other Increment, except that Tenant may use up a portion of the Allowance applicable to Increment 3 towards the costs of the Alterations in the Staging Premises pursuant to Section 5 of the Additional Provisions attached as Exhibit F, except that the portion of the Increment 3 Allowance so used shall not exceed Five Dollars ($5.00) per rentable square foot of the Staging Premises.

In addition to the Allowance, Landlord shall reimburse Tenant (or, at Tenant’s direction, directly pay the contractor designated by Tenant) the amount of Thirty-Nine Thousand Five Hundred Seventy-six and 39/100 Dollars ($39,576.39) for the cost of Tenant performing demolition work to the Staging Premises substantially in accordance with the demolition plans dated 4/10/13.

C. If after completion of the Initial Alterations with respect to any Increment and payment of all costs and expenses in connection therewith, any portion of the Allowance with respect to such Increment remains outstanding (other than by reason of Tenant’s default under the Lease), at Tenant’s election Tenant may utilize such remaining balance of the Allowance towards Base Rent, Taxes and Expenses payable pursuant to the Lease, moving expenses, and furniture to be utilized by Tenant in the Premises.

D. Landlord represents and warrants to Tenant that as of the applicable Commencement Date of each Increment, the Base Building HVAC, plumbing and electrical systems serving such Increment, up to (but not past) the point of connection with the horizontal or other local distribution systems within or serving such Increment, shall be in good working order and repair.

E. Tenant acknowledges that the fee payable to Landlord pursuant to Section 9.03 of the Lease for Landlord’s oversight and coordination shall apply to the Initial Alterations, except that such fee shall be calculated using a factor of 1.5% rather than 10%, and shall not apply to voice, data and other cabling costs. At Landlord’s option, Landlord may withhold all or any portion of such fee (to the extent applicable to a requested disbursement or any prior disbursements for which the fee was not fully withheld) from the disbursements of the Allowance made pursuant to this Work Letter. Upon completion of the Initial Alterations with respect to each Increment, Tenant shall furnish Landlord with invoices and other documentation

 

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reasonably required by Landlord to evidence the total cost of the Initial Alterations in such Increment, so that the final amount of said fee may be calculated, and Tenant shall, within fifteen (15) days of written demand, pay to Landlord the remainder, if any, of said fee not yet withheld by Landlord or paid to Landlord.

F. In addition to the Allowance, and not as a deduction therefrom, Landlord shall reimburse Tenant up to (i) $35,411.40 (being $0.15 per rentable square foot of the Premises) for the costs incurred by Tenant for having its architect produce test fit conceptual plans for the Initial Alterations, and (ii) $590,190.00 (being $2.50 per rentable square foot of the Premises), to be allocated to each Increment on a per rentable square foot basis and disbursed with respect to each Increment on such basis, for the costs incurred by Tenant for having its architect and engineers produce construction and design drawings for the Initial Alterations in the respective Increment. Landlord shall make such reimbursement to Tenant within thirty (30) days after Tenant’s delivery to Landlord of paid receipts for the items to be reimbursed, together with such other documents, if any, as Landlord shall reasonably request to evidence such costs.

G. Subject to the provisions of this Work Letter, at Tenant’s election the Initial Alterations may include removal of the existing escalators and infill the third-floor of the atrium area of the Building (the “Atrium infill Work”). Without limitation of the requirements of Section 9.03 of the Lease, which Tenant acknowledges shall be applicable to the Atrium Infill Work (except that where the provisions of Section 9.03 shall conflict with the provisions of this Section G or the balance of this Work Letter, the provisions of this Section G first, and the balance of this Work Letter second, shall control), the Atrium Infill Work shall comply with all applicable Laws and be subject to Landlord’s reasonable approval in accordance with the plan review and approval process set forth above, and Landlord may require that Tenant utilize Landlord’s designated structural engineer for the Atrium lnfill Work. Landlord makes no representation or warranty the Atrium Infill Work will be allowed pursuant to applicable Laws. The Atrium Infill Work shall be performed at Tenant’s sole cost and expense, including the cost of obtaining all required permits applicable thereto, except that Tenant may utilize the Allowance applicable to Increments 1 and 2 towards the costs of the Atrium Infill Work. If Landlord shall sell the Building prior to the expiration of the initial Lease Term set forth in Section 1.06 of the Lease, on or prior to the closing of such sale Landlord shall pay Tenant its unamortized costs of the Atrium Infill Work (excluding costs associated with removal of the existing escalators). For purposes of the preceding sentence, (i) the costs of the Atrium lnfill Work (excluding costs associated with removal of the existing escalators) shall be the lesser of the actual cost thereof or One Million Dollars ($1,000,000.00), and (ii) the amortization shall be computed on a straight line basis over the period commencing on the Rent Commencement Date for Increment 1 and ending on the Termination Date, with interest at the rate of 5% per annum. Provided that such payment has been made, effective as of the closing of such sale, the area of the Premises shall be increased by the square footage of the atrium area that has been infilled, which the parties hereby stipulate as 3,972 rentable square feet, and the Base Rent and Tenant’s Share amounts under this Lease shall be increased to take into account such additional square footage. Base Rent for the infilled area shall be at the same rate per rentable square foot as is in effect from time to time for the corresponding period for Increment 3 of the Premises.

H. Landlord, at Landlord’s sole cost and expense, shall perform the following work in the Building (“Landlord’s Work”):

 

  (i) Create loading docks on the north and south sides of the ground floor of the Building, and such north side loading dock shall be for Tenant’s exclusive use;

 

  (ii) Expand and renovate the main lobby of the Building and the skybridge lobby of the Building consistent with the character of a high-tech adaptive re-use project substantially in accordance with the concept plans dated March 12, 2013, prepared by GGLO and Wright Runstad & Company, captioned “Concept Design Package”;

 

  (iii) Install a freight elevator at the north end of the Building within the existing elevator shaft at gridline 7;

 

  (iv) Expand the bicycle parking area in the Garage to create capacity in a covered area of the Garage for 50 bicycles for every 100,000 rentable square feet of the Premises;

 

  (v) Provide a workout / shower and changing area, with lockers, in the retail space in the Garage;

 

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  (vi) Remove all existing Cable from the Premises (the “Cable Removal Work”);

 

  (vii) Paint the exterior of the Building and install an awning consistent with the character and quality of the Building;

 

  (viii) Perform landscape work substantially in accordance with the concept plans dated March 12, 2013, prepared by GGLO and Wright Runstad & Company, captioned “Concept Design Package”; and

 

  (ix) Install electrical submeter(s) to measure electricity furnished to the Premises (other than electricity utilized to furnish base Building HVAC service).

Except as expressly provided in any plans referenced above with respect to Landlord’s Work, the design and scope of Landlord’s Work, including the materials and finishes thereof, shall be as determined by Landlord in its good faith discretion. Landlord shall complete the Cable Removal Work in each Increment prior to delivery of such Increment to Tenant, it being acknowledged by the parties that the Cable Removal Work in the portion of the Staging Premises that is included in Increment 3 of the Premises will be performed by Landlord after Tenant surrenders such Staging Space as such, and prior to Landlord’s re-delivery of such space to Tenant as part of Increment 3 of the Premises. If Tenant does not surrender the portion of the Staging Premises that is included in Increment 3 of the Premises by the date that is fifteen (15) days prior to the scheduled Commencement Date for Increment 3, as set forth in Section 1.02 of the Lease, then Landlord shall have no obligation to perform the Cable Removal Work in such portion of Increment 3. The balance of Landlord’s Work (i.e., all of Landlord’s Work other than the Cable Removal Work) shall be performed by Landlord concurrently with and/or after Tenant’s construction of the Initial Alterations in Increment 1 and substantially completed prior to the Rent Commencement Date of Increment 1, subject to delays caused by Force Majeure, except that Landlord’s Work described in clauses (i) (south loading dock only), (iii), and (viii) (at the Café area only) above shall be substantially completed within one hundred eighty (180) days following the Rent Commencement Date of Increment 1, subject to delays caused by Force Majeure, and except further than Landlord’s Work described in clause (i) (north loading dock only) shall be substantially completed and delivered to Tenant on or prior to May 15, 2014, subject to delays caused by Force Majeure, and except further than Landlord’s installation of electrical submeters shall be performed as to each Increment prior to the respective Rent Commencement Date of such Increment, subject to delays caused by Force Majeure. Landlord and Tenant shall cooperate with each other and coordinate the scheduling of the construction of Landlord’s Work and the Initial Alterations so as to cause all such work to proceed in an efficient and orderly manner.

I. This Exhibit shall not be deemed applicable to any additional space added to the original Premises at any time or from time to time, whether by any options under the Lease or otherwise, or to any portion of the original Premises or any additions to the Premises in the event of a renewal or extension of the original Term of this Lease, whether by any options under the Lease or otherwise, unless expressly so provided in the Lease or any amendment or supplement to the Lease.

 

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EXHIBIT D

COMMENCEMENT LETTER

(EXAMPLE)

 

Date   

 

  
Tenant   

 

  
Address   

 

  
  

 

  
  

 

  

 

Re: Commencement Letter with respect to that certain Lease dated as of             , 2013, by and between SRI-WR ELLIOTT AVENUE LLC, a Delaware limited liability company, as Landlord, and ZULILY, INC., a Delaware corporation, as Tenant, for certain premises (the “Premises”) in the Building located at 2601 Elliott Avenue, Seattle, Washington.

Dear                     :

In accordance with the terms and conditions of the above referenced Lease, Tenant accepts possession of Increment          of the Premises and acknowledges:

1. The Commencement Date of the Lease with respect to Increment          is                     ;

2. The Rent Commencement Date with respect to Increment          is                     ; and

2. The Termination Date of the Lease is                     .

Please acknowledge the foregoing and your acceptance of possession by signing all 3 counterparts of this Commencement Letter in the space provided and returning 2 fully executed counterparts to my attention. Tenant’s failure to execute and return this letter, or to provide written objection to the statements contained in this letter, within 10 Business Days after the date of this letter shall be deemed an approval by Tenant of the statements contained herein.

 

Sincerely,

 

Authorized Signatory
Acknowledged and Accepted:
Tenant:  

 

By:  

EXHIBIT — DO NOT SIGN

Name:  

 

Title:  

 

Date:  

 


EXHIBIT E

BUILDING RULES AND REGULATIONS

This Exhibit is attached to and made a part of the Office Lease Agreement (the “Lease”) by and between SRI-WR ELLIOTT AVENUE LLC, a Delaware limited liability company (“Landlord”), and ZULLY, INC., a Delaware corporation (“Tenant”), for space in the Building located at 2601 Elliott Avenue, Seattle, Washington. Capitalized terms used but not defined herein shall have the meanings given in the Lease.

The following rules and regulations shall apply, where applicable, to the Premises, the Building, the parking facilities (if any), the Property and the appurtenances. In the event of a conflict between the following rules and regulations and the remainder of the terms of the Lease, the remainder of the terms of the Lease shall control.

 

1. Sidewalks, doorways, vestibules, halls, stairways and other similar areas shall not be obstructed by Tenant or used by Tenant for any purpose other than ingress and egress to and from the Premises. No rubbish, litter, trash, or material shall be placed, emptied, or thrown in those areas. At no time shall Tenant permit Tenant’s employees to loiter in Common Areas or elsewhere about the Building or Property.

 

2. Plumbing fixtures and appliances shall be used only for the purposes for which designed and no sweepings, rubbish, rags or other unsuitable material shall be thrown or placed in the fixtures or appliances.

 

3. No signs, advertisements or notices shall be painted or affixed to windows, doors or other parts of the Building, except those of such color, size, style and in such places as are first approved in writing by Landlord. All Building standard tenant identification and suite numbers at the entrance to the Premises shall be installed by Landlord, at Landlord’s cost and expense, using the standard graphics for the Building. Except in connection with the hanging of lightweight pictures and wall decorations, no nails, hooks or screws shall be inserted into any part of the Premises or Building except by the Building maintenance personnel without Landlord’s prior approval, which approval shall not be unreasonably withheld. Tenant, at Tenant’s sole cost and expense, may provide and install non-Building standard signage identifying Tenant’s business at the entrance to the Premises, provided that the design, size, color and location of the sign shall be subject to Landlord’s prior reasonable approval. Tenant shall be entitled, at Landlord’s cost and expense, to have the name of Tenant’s company listed on (a) the Building directory situated in the lobby of the Building and (b) the Tenant directory on each multi-tenant floor of the Building on which the Premises are located. If, after Tenant’s name is initially listed on the directories, Tenant requests a change in Tenant’s name as printed thereon, Tenant shall reimburse Landlord for Landlord’s cost of reprinting Tenant’s name for the directories.

 

4. Landlord may provide and maintain in the first floor (main lobby) of the Building an alphabetical directory board or other directory device listing tenants and no other directory shall be permitted unless previously consented to by Landlord in writing.

 

5. Tenant shall not place any lock(s) on any door in the Premises or Building without Landlord’s prior written consent, which consent shall not be unreasonably withheld, and Landlord shall have the right at all times to retain and use keys or other access codes or devices to all locks within and into the Premises. A reasonable number of keys to the locks on the entry doors in the Premises shall be furnished by Landlord to Tenant at Tenant’s cost and Tenant shall not make any duplicate keys. All keys shall be returned to Landlord at the expiration or early termination of the Lease.

 

6. All contractors, contractor’s representatives and installation technicians performing work in the Building shall be subject to Landlord’s prior approval, which approval shall not be unreasonably withheld, and shall be required to comply with Landlord’s standard rules, regulations, policies and procedures, which may be revised from time to time upon reasonable prior notice to Tenant.

 

7. Movement in or out of the Building of furniture or office equipment, or dispatch or receipt by Tenant of merchandise or materials requiring the use of elevators, stairways, lobby areas or loading dock areas, shall be performed in a manner and restricted to hours reasonably designated by Landlord. Tenant shall obtain Landlord’s prior approval by providing a detailed listing of the activity, including the names of any contractors, vendors or delivery companies, which approval shall not be unreasonably withheld. Tenant shall assume all risk for damage, injury or loss in connection with the activity.


8. Landlord shall have the right to approve the weight, size, or location of heavy equipment or articles in and about the Premises, which approval shall not be unreasonably withheld; provided that approval by Landlord shall not relieve Tenant from liability for any damage in connection with such heavy equipment or articles

 

9. Corridor doors, when not in use, shall be kept closed.

 

10. Tenant shall not: (a) make or permit any reasonably objectionable noises or odors in the Building, or otherwise unreasonably interfere with other tenants or persons having business with them; (b) solicit business or distribute or cause to be distributed, in any portion of the Building, handbills, promotional materials or other advertising; or (c) conduct or permit other activities in the Building that might, in Landlord’s reasonable opinion, constitute a nuisance.

 

11. No animals, except those assisting handicapped persons, shall be brought into the Building or kept in or about the Premises. Notwithstanding the foregoing, Tenant shall have the right to bring domestic household pets such as dogs, cats, and rabbits into the Premises for photography purposes as set forth in Section 1.11 of the Lease as an Ancillary Use, subject to applicable Laws and Landlord’s reasonable written regulations (as the same may be prepared and reasonably amended from time to time) regarding animals in the Building, including, without limitation, those regarding animal waste, noise, animal behavior and limitations on the use of Common Areas. The existing Building rules regarding dogs in the Property are set forth on Exhibit E-1 attached hereto, and shall apply with equal force (to the extent applicable) to animals brought into the Premises by Tenant pursuant to the foregoing, which rules are subject to reasonable modification from time to time, in Landlord’s reasonable judgment. Notwithstanding Exhibit E-1 attached hereto and the Building’s current policy to allow dogs in the Building subject thereto, Tenant acknowledges that it shall not be permitted to have dogs in the Premises except for photography purposes as an Ancillary Use as set forth above, and the foregoing shall not give rise to any claim by Tenant that the Building Rules, or Landlord’s enforcement thereof, are discriminatory against Tenant.

 

12. No inflammable, explosive or dangerous fluids or substances shall be used or kept by Tenant in the Premises, Building or about the Property, except for those substances as are typically found in similar premises used for general office purposes or the Ancillary Uses and are being used by Tenant in a safe manner and in accordance with all applicable Laws. Tenant shall not, without Landlord’s prior written consent, use, store, install, spill, remove, release or dispose of, within or about the Premises or any other portion of the Property, any asbestos-containing materials or any solid, liquid or gaseous material now or subsequently considered toxic or hazardous under the provisions of 42 U.S.C. Section 9601 et seq. or any other applicable environmental Law which may now or later be in effect (collectively, “Hazardous Materials”). Tenant shall comply with all Laws pertaining to and governing the use of these materials by Tenant and shall remain solely liable for the costs of abatement and removal.

 

13. Tenant shall not use or occupy the Premises in any manner or for any purpose which might injure the reputation or impair the present or future value of the Premises or the Building. Tenant shall not use, or permit any part of the Premises to be used for lodging, sleeping or for any illegal purpose.

 

14. Tenant shall not take any action which would violate Landlord’s labor contracts or which would cause a work stoppage, picketing, labor disruption or dispute or interfere with Landlord’s or any other tenant’s or occupant’s business or with the rights and privileges of any person lawfully in the Building (“Labor Disruption”). Tenant shall take the actions necessary to resolve the Labor Disruption, and shall have pickets removed and, at the request of Landlord, immediately terminate any work in the Premises that gave rise to the Labor Disruption, until Landlord gives its written consent for the work to resume. Tenant shall have no claim for damages against Landlord or any of the Landlord Related Parties nor shall the Commencement Date of the Term be extended as a result of the above actions.

 

15.

Tenant shall not install, operate or maintain in the Premises or in any other area of the Building, electrical equipment that would overload the electrical system beyond its capacity for proper, efficient and safe operation as reasonably determined by Landlord. Tenant shall not furnish cooling or heating to the Premises, including, without limitation,

 

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  the use of electric or gas heating devices, without Landlord’s prior written consent. Tenant shall not use more than its proportionate share of telephone lines and other telecommunication facilities available to service the Building.

 

16. Tenant shall not operate or permit to be operated a coin or token operated vending machine or similar device (including, without limitation, telephones, lockers, toilets, scales, amusement devices and machines for sale of beverages, foods, candy, cigarettes and other goods), except for machines for the exclusive use of Tenant’s employees and invitees.

 

17. Bicycles and other vehicles are not permitted inside the Building or on the walkways outside the Building, except in areas designated by Landlord.

 

18. Landlord may from time to time adopt systems and procedures for the security and safety of the Building and Property, its occupants, entry, use and contents. Tenant, its agents, employees, contractors, guests and invitees shall comply with Landlord’s reasonable systems and procedures.

 

19. Landlord shall have the right to prohibit the use of the name of the Building or any other publicity by Tenant that in Landlord’s sole opinion may impair the reputation of the Building or its desirability. Upon written notice from Landlord, Tenant shall refrain from and discontinue such publicity immediately.

 

20. Neither Tenant nor its agents, employees, contractors, guests or invitees shall smoke or permit smoking anywhere in the Building (including the Premises) or in the Common Areas. The Building (including the Premises) has been designated as a non-smoking building and is subject to all applicable Laws regarding prohibitions on smoking in proximity to all entrances, exits, windows and air intake vents of the Building.

 

21. Landlord shall have the right to designate and approve standard window coverings for the Premises and to establish rules to assure that the Building presents a uniform exterior appearance. Tenant shall ensure, to the extent reasonably practicable, that window coverings are closed on windows in the Premises while they are exposed to the direct rays of the sun.

 

22. Deliveries to and from the Premises shall be made only at the times in the areas and through the entrances and exits reasonably designated by Landlord. Tenant shall not make deliveries to or from the Premises in a manner that might interfere with the use by any other tenant of its premises or of the Common Areas, any pedestrian use, or any use which is inconsistent with good business practice.

 

23. The work of cleaning personnel shall not be hindered by Tenant after 5:30 P.M., and cleaning work may be done at any time when the offices are vacant. Windows, doors and fixtures may be cleaned at any time. Tenant shall provide adequate waste and rubbish receptacles to prevent unreasonable hardship to the cleaning service.

 

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EXHIBIT E-1

DOG RULES AND REGULATIONS

This Exhibit is attached to and made a part of the Office Lease Agreement (the “Lease”) by and between SRI-WR ELLIOTT AVENUE LLC, a Delaware limited liability company (“Landlord”), and ZULILY, INC., a Delaware corporation (“Tenant”), for space in the Building located at 2601 Elliott Avenue, Seattle, Washington. Capitalized terms used but not defined herein shall have the meanings given in the Lease.

The following rules and regulations shall apply, where applicable, to the Premises, the Building, the parking facilities (if any), the Property and the appurtenances. In the event of a conflict between the following rules and regulations and the remainder of the terms of the Lease, the remainder of the terms of the Lease shall control.

The ability to bring a dog to the Premises is a privilege. A dog owner is required to respect the needs and rights of the Landlord and the other employees, visitors and tenants of the Building when bringing a dog to the office. The following rules apply to bringing a dog onto the Project:

 

1. An employee working in the Premises may bring a dog to the Premises, subject to the rules herein. The dog must be under control of its owner or on a leash when at the Project and when in the Premises. Dogs may not be kept in the Common Areas at any time.

 

2. Dogs must stay with their owners or a designated watcher.

 

3. Dogs brought into the Building must be clean. Dogs with fleas or ticks may not be brought into the Building.

 

4. Owners are responsible for having their dog completely up to date on all immunizations, including, without limitation, rabies and distemper. If requested by Building management, the owner must show reasonable evidence of such immunization to Building management.

 

5. Owners must find suitable spots outside of the Project for relieving their dog during walks. Dogs may not relieve themselves at the Project. In the event a dog accidentally relieves itself at the Project, the owner is responsible for clean-up of solid waste and disposing of the same in sealed plastic bags in trash receptacles outside of the Building. If a dog has repeated accidents, the dog will not be allowed inside the Building until the owner can prove to Building management that the dog has been through some kind of training program or the issue is otherwise resolved.

 

6. Aggressive behavior, loud or repetitive barking or other disruptive behavior or persistent odor is not permitted.

 

7. If any employee has a problem with the dog, he/she should discuss it directly with the dog’s owner. A dog owner must remove the dog from the Building if the presence of the dog is harmful to another occupant of the Premises or Building due to allergies.

 

8. A tenant’s right to have dogs in the Premises may be revoked by Landlord in the event of repeated violations of these rules.

 

9. If a dog is brought into the Building by an employee, agent or guest of Tenant (or by any guest of any such party) and the dog bites, scratches or otherwise attacks or is aggressive towards any person at the Building, any Losses (as defined in Section 13 of the Lease) arising therefrom shall be covered by Section 13 of the Lease.


EXHIBIT F

ADDITIONAL PROVISIONS

This Exhibit is attached to and made a part of the Office Lease Agreement (the “Lease”) by and between SRI-WR ELLIOTT AVENUE LLC, a Delaware limited liability company (“Landlord”), and ZULILY, INC., a Delaware corporation (“Tenant”), for space in the Building located at 2601 Elliott Avenue, Seattle, Washington. Capitalized terms used but not defined herein shall have the meanings given in the Lease.

 

1. Parking.

A. During the Lease Term, Landlord shall lease to Tenant, or cause the operator (the “Operator”) of the garage servicing the Building (the “Garage”) to lease to Tenant, and Tenant shall lease from Landlord or such Operator, 1.75 unreserved parking spaces in the Garage for each 1,000 rentable square feet of the Premises, as rounded up to the nearest whole number of unreserved parking spaces, for the first 200,000 rentable square feet of the Premises then demised under the Lease, for the use of Tenant and its employees. In addition, Tenant shall have the right, but not the obligation, to lease from Landlord, upon not less than thirty (30) days’ prior notice to Landlord and, if applicable, the Operator, and Landlord or the Operator shall lease to Tenant, on a month to month basis (subject to termination by Tenant upon not less than thirty (30) days’ prior notice to Landlord and, if applicable, the Operator), up to 1.75 unreserved parking spaces in the Garage for each 1,000 rentable square feet of the Premises then demised under the Lease in excess of 200,000 rentable square feet, as rounded up to the nearest whole number of unreserved parking spaces, for the use of Tenant and its employees. The parking spaces leased by Tenant hereunder are referred to herein as the “Spaces”. The Spaces shall be leased at the then current rate for parking in the Garage, plus applicable taxes thereon, as such rate may be adjusted from time-to-time by Landlord or the Operator upon at least thirty (30) days’ prior written notice to Tenant to reflect the fair market monthly rate being charged for comparable nearby garages, as reasonably determined by Landlord or the Operator. At Tenant’s election upon at least thirty (30) days prior written notice to Landlord and, if applicable, the Operator, (i) Tenant may surrender up to ten (10) of the unreserved parking spaces required to be leased by Tenant hereunder for a corresponding number of marked visitor stalls located near the entrance to the Building’s second floor sky bridge for use by Tenant’s visitors, (ii) Tenant may surrender up to three (3) of the unreserved parking spaces required to be leased by Tenant hereunder for a corresponding number of marked electric car plug-in stations for exclusive use by Tenant’s employees. The first such electric car plug-in station shall be installed at Landlord’s cost within a reasonable period after Tenant’s request. Any additional electric car plug-in stations shall be installed at Tenant’s cost within a reasonable period after Tenant’s request. Landlord shall identify such stalls as Tenant’s visitor stalls, and such electric car plug-in station(s) as Tenant’s station(s), but Landlord shall have no obligation to police use of such stalls or station or remove any third party vehicles parked in such stalls or station(s). Tenant shall pay for each such stall and electric car plug-in station at the rate set forth herein for unreserved parking spaces. In addition, Tenant shall pay the electric charges for such electric car plug-in station(s) at such rates as Landlord or the Operator shall establish from time to time, plus applicable taxes thereon, as such rate may be adjusted from time-to-time by Landlord or the Operator upon at least thirty (30) days’ prior written notice to Tenant to reflect the fair market monthly rate being charged for use of electric car plug in stations in comparable nearby garages, as reasonably determined by Landlord or the Operator.

B. No deductions or allowances shall be made for days when Tenant or any of its employees does not utilize the parking facilities or for Tenant utilizing less than all of the Spaces. Subject to availability, Tenant shall have the right to lease more than the number of Spaces set forth above on a month-to-month basis at the then-prevailing rate.

C. All parking in the Garage shall be on an unreserved, first-come, first-served basis. Tenant acknowledges that Landlord may implement a valet parking system in the Garage or other measures for the reasonable enforcement of the parking rights of the users of the Garage.

D. Neither Landlord nor the Operator shall be responsible for money, jewelry, automobiles or other personal property lost in or stolen from the Garage regardless of whether such loss or theft occurs when the Garage or other areas therein are locked or otherwise secured. Except as caused by the negligence or willful misconduct of Landlord and without limiting the terms of the preceding sentence, Landlord shall not be


liable for any loss, injury or damage to persons using the Garage or automobiles or other property therein, it being agreed that, to the fullest extent permitted by law, the use of the Spaces shall be at the sole risk of Tenant and its employees.

E. Landlord or its Operator shall have the right from time to time to designate the location of the Spaces and to promulgate reasonable rules and regulations regarding the Garage, the Spaces and the use thereof, including, but not limited to, rules and regulations controlling the flow of traffic to and from various parking areas, the angle and direction of parking and the like. Tenant shall comply with and cause its employees to comply with all such rules and regulations, all reasonable additions and amendments thereto after reasonable notice thereof from Landlord to Tenant, and the terms and provisions of the Parking Agreement.

F. Tenant shall not store or permit its employees to store any automobiles in the Garage without the prior written consent of Landlord. Except for emergency repairs, Tenant and its employees shall not perform any work on any automobiles while located in the Garage or on the Property.

G. Landlord or the Operator shall have the right to temporarily close the Garage or certain areas therein in order to perform necessary repairs, maintenance and improvements to the Garage. Landlord or the Operator, as applicable, shall give Tenant reasonable prior notice of any scheduled closure.

H. Tenant shall not assign or sublease any of the Spaces without the consent of Landlord except in connection with an assignment or sublease of this Lease approved by Landlord in accordance with Section 11 of the Lease.

I. Landlord may elect to provide parking cards or keys to control access to the Garage. In such event, Landlord shall provide Tenant with one card or key for each Space that Tenant is leasing hereunder, provided that Landlord shall have the right to require Tenant or its employees to place a deposit on such access cards or keys and to pay a fee for any lost or damaged cards or keys.

 

2. Bicycle Storage; Exercise Facility.

A. Bicycle Storage. Landlord shall make available to Tenant, at no additional charge, a storage facility (“Bicycle Storage Area”) in an area of the Garage or in another covered area of the Property determined by Landlord in its sole discretion. Tenant and its on-site employees, in common with other tenants of the Building and their on-site employees, shall have the right, at no additional cost, to use the Bicycle Storage Area on a non-exclusive basis as hereinafter set forth. Tenant and its on-site employees shall have the right to use the Bicycle Storage Area for fifty (50) bicycles for each 100,000 rentable square feet of the Premises then demised under the Lease, as rounded up to the nearest whole number of bicycles. All spaces in the Bicycle Storage Area shall be on an unreserved, first-come, first-served basis. Tenant and/or its employees shall not store any personal property in the Bicycle Storage Area overnight. All costs associated with the Bicycle Storage Area, whether operated by Landlord or a third party operator, shall in any event be included in Expenses. The provisions of Section 13 of the Lease shall fully apply in connection with use of the Bicycle Storage Area by Tenant or any other Tenant Related Parties. Without limitation of the preceding sentence, Tenant shall hold Landlord and the Landlord Related Parties harmless from and indemnify Landlord and the Landlord Related Parties against any and all Losses to the extent arising from (a) the acts or omissions of Tenant or any other Tenant Related Parties in, on or about the Bicycle Storage Area, or (b) any accident, injury or damage, howsoever and by whomsoever caused, to Tenant or any Tenant Related Parties, occurring in, on or about the Bicycle Storage Area, except, in each case of clauses (a) and (b) above, to the extent caused by the negligence or willful misconduct of Landlord or any Landlord Related Parties. Landlord and the Landlord Related Parties shall not be responsible for money, jewelry or other personal property lost in or stolen from the Bicycle Storage Area regardless of whether such loss or theft occurs when the Bicycle Storage Area or any areas therein are locked or otherwise secured. Landlord may prescribe reasonable rules and regulations for the use of the Bicycle Storage Area. Tenant’s use of the Bicycle Storage Area shall be conditioned upon Tenant’s observance of such rules and regulations. Landlord may at any time temporarily discontinue operation of the Bicycle Storage Area, and/or increase or reduce the amenities thereof, and/or relocate the Bicycle Storage Area to covered space elsewhere on the Property, all without any liability to Tenant. Landlord shall give Tenant reasonable prior notice of any scheduled closure or relocation.

 

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B. Exercise Facility. Landlord shall make available to Tenant, at no additional charge, an exercise facility with such limited workout equipment, showers, lockers and changing areas as Landlord shall determine in its sole discretion (the “Exercise Facility”) in a location in the retail space area of the Garage determined by Landlord in its sole discretion. Tenant and its on-site employees, in common with other tenants of the Building and their on-site employees, shall have the right, at no additional cost, to use the Exercise Facility on a non-exclusive basis as hereinafter set forth. Use of the Exercise Facility shall be on an unreserved, first-come, first-served basis. Tenant and/or its employees shall not store any personal property in the Exercise Facility overnight. All costs associated with the Exercise Facility, whether operated by Landlord or a third party operator, shall in any event be included in Expenses. The provisions of Section 13 of the Lease shall fully apply in connection with use of the Exercise Facility by Tenant or any other Tenant Related Parties. Without limitation of the preceding sentence, Tenant shall hold Landlord and the Landlord Related Parties harmless from and indemnify Landlord and the Landlord Related Parties against any and all Losses to the extent arising from (a) the acts or omissions of Tenant or any other Tenant Related Parties in, on or about the Exercise Facility, or (b) any accident, injury or damage, howsoever and by whomsoever caused, to Tenant or any Tenant Related Parties, occurring in, on or about the Exercise Facility, except, in each case of clauses (a) and (b) above, to the extent caused by the negligence or willful misconduct of Landlord or any Landlord Related Parties. Landlord and the Landlord Related Parties shall not be responsible for money, jewelry or other personal property lost in or stolen from the Exercise Facility regardless of whether such loss or theft occurs when the Exercise Facility or any areas therein are locked or otherwise secured. Landlord may prescribe reasonable rules and regulations for the use of the Exercise Facility. Tenant’s use of the Exercise Facility shall be conditioned upon Tenant’s observance of such rules and regulations. Landlord may at any time temporarily discontinue operation of the Exercise Facility, and/or increase or reduce the amenities thereof, and/or relocate the Exercise Facility to elsewhere on the Property, all without any liability to Tenant. Landlord shall give Tenant reasonable prior notice of any scheduled closure or relocation.

 

3. Renewal Option.

A. Grant of Option; Conditions. Tenant shall have the right to extend the Term (the “Renewal Option”) for one (1) additional period of seven (7) years commencing on the day following the Termination Date of the initial Term and ending on the 7th anniversary of the Termination Date, unless earlier terminated as set forth in the Lease (the “Renewal Term”), if:

1. Landlord receives notice of exercise (the “Renewal Notice”) not more than twenty-four (24) full calendar months and not less than fifteen (15) full calendar months prior to the expiration of the initial Term; and

2. Tenant is not in default under the Lease beyond any applicable cure periods at the time that Tenant delivers the Renewal Notice; and

3. Not more than forty percent (40%) of the Premises is sublet (other than pursuant to a Business Transfer) at the time that Tenant delivers the Renewal Notice.

For the avoidance of doubt, the parties acknowledge that the Renewal Option as provided hereunder shall be available to then Tenant hereunder, regardless of whether such Tenant is the Tenant originally named in this Lease or any successor Tenant hereunder.

B. Terms Applicable to Premises During Renewal Term.

1. The initial Base Rent rate per rentable square foot for the Premises during the Renewal Term shall equal 95% of the Prevailing Market (hereinafter defined) rate per rentable square foot for the Premises. Base Rent during the Renewal Term shall increase, if at all, in accordance with the increases assumed in the determination of Prevailing Market rate. Base Rent attributable to the Premises shall be payable in monthly installments in accordance with the terms and conditions of Article 4 of the Lease.

2. Tenant shall pay Additional Rent (i.e. Taxes and Expenses) for the Premises during the Renewal Term in accordance with Exhibit B to the Lease, and the manner and method in which Tenant reimburses Landlord for Tenant’s share of Taxes and Expenses shall be some of the factors considered in determining the Prevailing Market rate for the Renewal Term.

 

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C. Procedure for Determining Prevailing Market. The Renewal Notice shall be irrevocable and, subject to compliance with Sections 3.A.1 — 3 above, upon delivery of the Renewal Notice the Term shall be extended for the Renewal Term. The Prevailing Market rate for the Premises shall be mutually agreed upon by Landlord and Tenant in writing within the 30 calendar day period commencing 6 months prior to the commencement of the Renewal Term. When Landlord and Tenant have agreed upon the Prevailing Market rate for the Premises, such agreement shall be reflected in a written agreement between Landlord and Tenant, whether in a letter or otherwise, and Landlord and Tenant shall enter into the Renewal Amendment (as defined below) in accordance with the terms and conditions hereof. If Landlord and Tenant are unable to agree upon the Prevailing Market rate for the Premises within the 30-day period described above, then the Prevailing Market rate for the Premises shall be established by appraisal in accordance with the procedures set forth in Exhibit H attached hereto.

D. Renewal Amendment. If Tenant is entitled to and properly exercises its Renewal Option, Landlord shall prepare an amendment (the “Renewal Amendment”) to reflect changes in the Base Rent, Term, Termination Date and other appropriate terms. The Renewal Amendment shall be sent to Tenant within a reasonable time after the agreement (or deemed agreement) by Landlord and Tenant regarding the Prevailing Market rate, and Tenant shall execute and return the Renewal Amendment to Landlord within 15 days after Tenant’s receipt of same, subject to any extensions in such time during which the parties are negotiating the terms of such Renewal Amendment in good faith, but an otherwise valid exercise of the Renewal Option shall be fully effective whether or not the Renewal Amendment is executed.

E. Definition of Prevailing Market. For purposes of this Renewal Option, including the appraisal procedure set forth in Exhibit H attached hereto, “Prevailing Market” shall mean the arms length fair market annual rental rate per rentable square foot under leases and renewal amendments entered into on or about the date on which the Prevailing Market is being determined hereunder for a comparable term for space comparable to the Premises in the Building and office buildings comparable to the Building in the Waterfront, South Lake Union and Denny Regrade submarkets of Seattle, Washington (collectively, the “Applicable Market”). The determination of Prevailing Market shall take into account any material economic differences between the terms of this Lease and any comparison lease or amendment, such as rent abatements, construction costs and other concessions and the manner, if any, in which the landlord under any such lease is reimbursed for operating expenses and taxes. The determination of Prevailing Market shall also take into consideration any reasonably anticipated changes in the Prevailing Market rate from the time such Prevailing Market rate is being determined and the time such Prevailing Market rate will become effective under this Lease.

 

4. Tenant’s Termination Option.

A. Termination Option. Tenant shall have the option (“Tenant’s Termination Option”) to terminate this Lease as of the expiration of the 84th full calendar month following the Rent Commencement Date for Increment 1 (the “Early Termination Date”) with respect to the entire Premises then demised under the Lease, except that Tenant’s Termination Option shall not apply to any First Refusal Space or Expansion Option Space delivered to Tenant on or after the first anniversary of the Rent Commencement Date for Increment 1. Tenant’s Termination Option shall be exercised, if at all, by (i) written notice to Landlord given no later than twelve (12) full calendar months prior to the Early Termination Date, and (ii) Tenant’s payment to Landlord of a fee (the “Termination Fee”) equal to the sum of (A) the unamortized cost (as of the Early Termination Date) of (1) the brokerage commissions paid by Landlord in connection with this Lease to the brokers identified in the Section 1.10 of the Lease, and (2) the Allowance disbursed by Landlord pursuant to the Work Letter, (B) an amount equal to the Base Rent, Taxes, Expenses and parking charges that would have been paid by Tenant for the three (3) calendar months following the Early Termination Date (as reasonably estimated by Landlord in the case of Taxes and Expenses), and (C) Three Hundred Seventy-One Thousand Five Hundred Seventy-Two Dollars ($371,572.00), which amount the parties agree to be the unamortized amount of free rent (and interest thereon at the rate set forth below) granted to Tenant with respect to (i) Increment 1 for the period from the Rent Commencement Date applicable thereto (assuming such Rent Commencement Date is January 15, 2014) through June 30, 2014 (i.e., the period

 

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during which Base Rent for Increment 1 is abated), and (ii) Increment 2 for the period from the Rent Commencement Date applicable thereto (assuming such Rent Commencement Date is May 15, 2014) through June 30, 2014 (i.e., the period during which Base Rent for Increment 2 is calculated on the basis of 15,433 rentable square feet rather than 58,073 rentable square feet). For purposes of clause (A) above, the amortization shall be computed on a straight line basis over the period commencing on the Rent Commencement Date for Increment 1 and ending on the Termination Date, with interest at the rate of 5% per annum. The Termination Fee shall be paid to Landlord concurrently with Tenant’s delivery of its exercise notice, and if not so paid, then at Landlord’s option Tenant’s Termination Option shall be deemed to have not been validly exercised. Within thirty (30) days after Tenant’s request, but not sooner than the 70th full calendar month following the Rent Commencement Date for Increment 1, Landlord shall give notice to Tenant of the dollar amounts of the items specified in clauses (ii)A,1, 2 and 3 above, as well as the dollar amounts of the corresponding items applicable to First Refusal Space or Expansion Option Space that is delivered to Tenant prior to the first anniversary of the Rent Commencement Date for Increment 1, as set forth in the next paragraph. Using such information, the parties shall cooperate with each other to determine and agree upon the actual amount of the Termination Fee, but Tenant shall in any event remain obligated to pay the Termination Fee concurrently with Tenant’s delivery of its exercise notice as set forth above.

If Tenant shall lease any First Refusal Space or Expansion Option Space that is delivered to Tenant prior to the first anniversary of the Rent Commencement Date for Increment 1, then, as set forth above, Tenant’s Termination Option shall apply to such space, and the Termination Fee shall be increased by an amount equal to the sum of (A) unamortized amount (as of the Early Termination Date) of any tenant improvement allowance granted by Landlord to Tenant with respect to Tenant’s lease of such space (or the cost of any work performed by Landlord in connection with Tenant’s initial occupancy of such space, as the case may be), any brokerage commissions paid by Landlord in connection with Tenant’s lease of such space, any free rental period with respect to Tenant’s lease of such space, any free parking period with respect to Tenant’s lease of such space, such amortization to be computed on a straight line basis over the period commencing on the rent commencement date under this Lease with respect to such space (or, if the rent commencement date is not the first day of a calendar month, on the first day of the first full calendar month after the rent commencement date), and ending on the Termination Date, together with interest at the rate of 5% per annum, and (B) an amount equal to the Base Rent, Taxes and Expenses and parking charges that would have been paid by Tenant for such space for the three (3) calendar months following the Early Termination Date (as reasonably estimated by Landlord in the case of Taxes and Expenses).

B. Effect of Assignment; Default. Tenant’s Termination Option is personal to the Tenant originally named in this Lease and to a Successor of such original Tenant pursuant to a Business Transfer. Accordingly, if the original Tenant named in this Lease shall assign the Lease prior to its exercise of Tenant’s Termination Option, other than to a Successor of such original Tenant pursuant to a Business Transfer, then Tenant’s Termination Option shall thereupon be deemed terminated and Tenant shall have no rights pursuant to this Section 4 and any purported exercise of Tenant’s Termination Option after the date of such assignment shall be deemed void and of no force or effect. Tenant’s assignment of the Lease after its exercise of Tenant’s Termination Option shall not in any way affect the validity of such exercise or the termination of the Lease as of the Early Termination Date in accordance with such exercise. Notwithstanding the foregoing, if Tenant shall be in default under the Lease beyond any applicable notice and cure periods at the time it exercises Tenant’s Termination Option, then, at Landlord’s election by notice to Tenant within fifteen (15) Business Days after Landlord’s receipt of Tenant’s exercise notice, such exercise shall be deemed void and of no force or effect.

C. Surrender. If Tenant shall exercise Tenant’s Termination Option, then, on or before the Early Termination Date, Tenant shall vacate and surrender the Premises (or the applicable portion thereof, as the case may be) to Landlord in the condition required by the Lease (as if the Early Termination Date were the original expiration date under the Lease).

D. Unexercised Rights. As of the date Tenant provides notice exercising Tenant’s Termination Option, any unexercised rights or options of Tenant to renew the Term or to expand the Premises (whether expansion options, rights of first refusal, rights of first offer, or other similar rights), and any outstanding tenant improvement allowance not

 

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claimed and properly utilized by Tenant in accordance with the Lease as of such date, shall immediately be deemed terminated and no longer available or of any further force or effect.

 

5. Staging Premises.

A. Staging Premises. Those certain premises on the first (1st), third (3rd) and fourth (4th) floors of the Building, agreed by Landlord and Tenant to contain 19,060 rentable square feet, 30,517 rentable square feet, and 14,136 rentable square feet, respectively, being an aggregate of 63,713 rentable square feet, as shown outlined on the attached Exhibit I (the “Staging Premises”), shall be added to the premises demised under the Lease for the period (the “Staging Period”) commencing on the date of the Lease and ending on the Deletion Date (as defined below); except that the commencement date of the entire portion of the Staging Premises on the first (1st) floor of the Building, and of two portions of the Staging Premises on the fourth (4th) floor of the Building comprising approximately 3,454 and 282 rentable square feet, respectively, as shown on Exhibit I, shall not be the date of the Lease but shall instead be the commencement date applicable thereto specified on Exhibit I. The parties acknowledge that certain portions of the Staging Premises will constitute a portion of Increment 3 of the Premises from and after the Increment 3 Commencement Date (the “Increment 3 Staging Premises”), that certain portions of the Staging Premises will constitute a portion of Increment 4 of the Premises from and after the Increment 4 Commencement Date, and that certain portions of the Staging Premises will not be included in any part of the Premises after Tenant’s surrender of the Staging Premises (as such) to Landlord, all as more particularly shown on Exhibit I. The “Deletion Date” with respect to the Increment 3 Staging Premises is the date that is the earlier to occur of Tenant’s substantial completion of the Initial Alterations to Increment 1 or Tenant’s commencement of the conduct of business in Increment 1 or any portion thereof. The “Deletion Date” with respect to the first (1st) floor Staging Premises is the later of May 15, 2014 or Landlord’s delivery of the north loading dock to Tenant for Tenant’s exclusive use as provided in the Work Letter as part of Landlord’s Work. The “Deletion Date” with respect to the balance of the Staging Premises is the Rent Commencement Date for Increment 1.

Tenant acknowledges that Landlord has delivered possession to Tenant of the portion of the Staging Premises required to be delivered to Tenant on the date of the Lease pursuant to the preceding paragraph.

B. Terms of Tenant’s Lease of Staging Premises. Tenant’s lease of the Staging Premises shall be on all of the terms, covenants and conditions of the Lease, and all references in the Lease to the “Premises” shall be deemed to include the Staging Premises, except as set forth herein, and except further that, subject to Section D below where Tenant shall holdover in the Staging Premises, Tenant shall have no obligation to pay Base Rent, Taxes or Expenses for the Staging Premises.

C. Staging Premises As-Is. Tenant shall accept the Staging Premises in its “as is” state and condition, and Landlord shall have no obligation to make or, except as set forth in Paragraph 1.B. of the Work Letter, pay for, any improvements, renovations or other work in or to the Staging Premises to prepare the Staging Premises for Tenants’ occupancy. At Tenant’s election, Tenant may make Alterations to the Staging Premises in accordance with the Work Letter, and utilize a portion of the Allowance under the Work Letter applicable to Increment 3 towards the costs of Alterations to the Staging Premises as more particularly set forth in the Work Letter, except that no additional Allowance or other amounts shall be payable by Landlord to Tenant on account of the Staging Premises,

D. Deletion of Staging Premises. On or prior to the respective Deletion Date applicable thereto, Tenant shall vacate the Staging Premises and surrender the same to Landlord. All portions of the Staging Premises, other than the Increment 3 Staging Premises, shall be surrendered to Landlord vacant and broom clean, with all trade fixtures, furniture, office equipment, and other equipment and personal property installed by or on behalf of Tenant removed therefrom, and otherwise in the condition received by Tenant (with the same force and effect as if the Deletion Date were the expiration date under the Lease with respect thereto), and Tenant’s removal and restoration obligations with respect to Alterations to all portions of the Staging Premises, other than the Increment 3 Staging Premises, shall be governed by Section 8 of the Lease. In no event shall Tenant be required to remove from the Increment 3 Staging Premises any trade fixtures, furniture, office equipment, or other equipment or personal property installed by or on behalf of Tenant, or any Alterations, as a condition to the Surrender Date of the

 

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Increment 3 Staging Premises (since Tenant will thereafter take possession of the Increment 3 Staging Premises as part of Increment 3), but all of the foregoing, including any Alterations that Tenant shall have performed thereto during the Staging Period, shall be subject to any applicable removal and restoration obligations under the Lease at the expiration or earlier termination of the Lease as respects Increment 3.

if Tenant does not surrender the Increment 3 Staging Premises on or prior to the Deletion Date applicable thereto in the condition required above, as Landlord’s sole and exclusive remedy by reason thereof, commencing as of the Deletion Date and continuing until the Surrender Date (as defined below), Tenant shall pay as monthly Base Rent for the Increment 3 Staging Premises the amount of $37,899.63 per month (which equals $23.50 per rentable square foot per annum). If Tenant shall retain possession of the Increment 3 Staging Premises until the Increment 3 Commencement Date, effective as of the Increment 3 Commencement Date the Increment 3 Staging Premises shall be deemed part of Increment 3 under the Lease, the Surrender Date of the Increment 3 Staging Premises shall be deemed the Increment 3 Commencement Date, and Tenant’s lease of the Increment 3 Staging Premises (as such) shall be deemed terminated as set forth in the last paragraph of this Section 5 as of such Surrender Date.

If Tenant does not surrender the balance of the Staging Premises (all Staging Premises other than the Increment 3 Staging Premises) on or prior to the Deletion Date applicable thereto in the condition required above, Tenant shall be deemed in holdover thereof without Landlord’s consent as a tenant at sufferance, and without limitation of Landlord’s other rights and remedies by reason thereof, including as set forth in Section 22 of the Lease (which the parties agree shall be applicable thereto), commencing as of the Deletion Date and continuing until the Surrender Date, Tenant shall pay as monthly Base Rent for the Staging Premises (other than the Increment 3 Staging Premises) the amount of $55,988.75 per month for the first (1st) floor Staging Premises, $32,794.25 for the third (3rd) floor Staging Premises, and $41,524.50 for the fourth (4th) floor Staging Premises (which in each case equals $35.25 per rentable square foot per annum).

The date that is the later of the applicable Deletion Date or the date on which Tenant shall surrender the corresponding Staging Premises to Landlord in the condition required by this Paragraph D is referred to herein as the “Surrender Date”. Effective as of the applicable Surrender Date, the corresponding Staging Premises shall be deemed deleted from the Lease and Tenant shall be released from its obligations thereafter arising under the Lease with respect thereto. Notwithstanding anything to the contrary in this Lease, Tenant shall remain liable for its obligations with regard to each portion of the Staging Premises that arise prior to the Surrender Date applicable thereto, and without limitation of the foregoing, Tenant’s indemnification obligations under Section 13 of the Lease shall survive the deletion of each portion of the Staging Premises from the Lease with regard to any events which occur prior to the Surrender Date applicable thereto.

 

6. BUILDING TOP SIGNAGE; MAIN ENTRANCE SIGNAGE

A. So long as (i) Tenant hereunder shall be the Tenant originally named in the Lease or a Successor thereto pursuant to a Business Transfer (collectively, “Original Tenant”), (ii) no default beyond any applicable cure period has occurred and is continuing under the Lease, (iii) the Premises then demised pursuant to the Lease comprises at least fifty-one percent (51%) of the rentable square footage of the Building, and (iv) Original Tenant qualifies under the applicable Seattle code requirements and any other applicable Laws for the applicable Above Standard Signage (as defined below), then subject to this Section 6, Tenant, at Tenant’s sole cost and expense, shall have the non-exclusive right to display Original Tenant’s Name (as defined below) in one location at the top of the Building (the “Building Top Signage”), and in one location on the exterior of the Building at the main entrance to the Building (the “Main Entrance Signage”, together with the Building Top Signage, collectively, the “Above Standard Signage”). The design, size, color, material, content, and location of the Above Standard Signage and the manner in which it is attached to the Building, shall be subject to the approval of Landlord in its reasonable discretion and all applicable governmental authorities, and comply with all Laws. The Above Standard Signage shall be appropriate for a first class office building in the Applicable Market, as determined by Landlord in its reasonable discretion, shall be in conformity with the overall design and ambiance of the Property, shall comply with all applicable Laws, the requirements applicable to construction of Alterations pursuant to Section 9.03 of the Lease, and such other reasonable rules, procedures and requirements as Landlord shall impose with respect to the Above Standard Signage and all work with respect thereto, including insurance coverage in connection therewith. The liability insurance maintained by Tenant’s

 

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contractor with respect to installation and removal of the Building Top Signage and any work with respect to the Building Top Signage performed by Tenant and/or its contractor from time to time shall be at least Five Million Dollars ($5,000,000.00) per occurrence / general aggregate, with such policies naming Landlord and its agents, and such other parties as Landlord shall reasonably require as additional insureds.

B. Tenant shall operate and maintain the Above Standard Signage at its sole cost and expense. Notwithstanding the foregoing, at Landlord’s election, Landlord may install and/or maintain all or any portion of the Above Standard Signage and Tenant shall pay Landlord the reasonable out of pocket costs thereof within 30 days after Landlord’s demand from time to time together with reasonable supporting documentation. If Landlord is required to modify any component of the Base Building or any other portion of the Building as a result of the installation, operation, repair or maintenance of the Above Standard Signage, as reasonably determined by Landlord, then Tenant shall pay Landlord the reasonable out of pocket costs thereof within 30 days after Landlord’s demand from time to time together with reasonable supporting documentation. Whether or not Landlord elects to install, maintain and/or remove the Above Standard Signage or any portion thereof, the costs reimbursable by Tenant to Landlord in connection with the Above Standard Signage shall include, without limitation, reasonable costs of retaining engineers or other consultants to review the design, weight, construction, and/or manner of installation and removal of the Above Standard Signage, and costs incurred by Landlord in connection with the application for and/or issuance of any permits or approvals required in connection with the Above Standard Signage. Tenant’s access to the Above Standard Signage for purposes of installing, maintaining and/or removing the same shall be in accordance with Landlord’s reasonable requirements and procedures regarding such access. Any cost or reimbursement obligations of Tenant under this Section 6, including with respect to the installation, maintenance or removal of the Above Standard Signage, shall survive the expiration or earlier termination of the Lease. If, with Landlord’s consent in its reasonable discretion, any of the Above Standard Signage is illuminated, Tenant shall also pay Landlord within 30 days after demand from time to time, the costs of any electricity supplied to the Above Standard Signage, as reasonably estimated by Landlord, or if so required by Landlord, as evidenced by a separate meter installed by Tenant at Tenant’s sole cost and expense as part of the installation of the Above Standard Signage. Landlord makes no representation or warranty to Tenant that electrical power is available or will remain available to Tenant for the Above Standard Signage, and to the extent sufficient power is not then available for the Above Standard Signage, subject to Landlord’s approval as set forth herein, Tenant, at Tenant’s sole cost and expense, shall cause sufficient power to be supplied to the Above Standard Signage.

C. Tenant shall have sole responsibility, at its sole cost and expense, for obtaining any and all permits required from the City of Seattle (and other agencies, if applicable) for the installation of the Above Standard Signage, and Landlord shall cooperate therewith as reasonably requested by Tenant at Tenant’s sole cost and expense. Landlord makes no representation or warranty whatsoever that such permits will be obtainable or issued. Tenant may elect to remove its Above Standard Signage prior to the scheduled expiration of the Lease, provided that Tenant shall give at least 6 full calendar months’ prior written notice thereof to Landlord.

D. Upon the expiration or earlier termination of the Lease or Tenant’s right to possession of the Premises, or the earlier termination of Tenant’s applicable rights to the Above Standard Signage by Landlord’s written notice to Tenant by reason of Tenant’s failure to meet the conditions applicable thereto pursuant to the foregoing, at Landlord’s election Tenant shall remove the Above Standard Signage at Tenant’s sole cost and expense and repair and restore to good condition the areas of the Building on which the signage was located or that were otherwise affected by such signage or the removal thereof, or at Landlord’s election, Landlord may perform any such removal and/or repair and restoration and Tenant shall pay Landlord the reasonable cost thereof within 30 days after Landlord’s demand from time to time. If Tenant shall at any time fail to meet the requirements of this Section 6, and such failure shall continue for thirty (30) days after Landlord’s notice thereof to Tenant, at Landlord’s election by written notice to Tenant at any time thereafter, such signage rights shall thereupon immediately forever cease and terminate and Tenant shall not regain any of such rights even if it shall thereafter meet the requirements applicable thereto (but Tenant shall not remove any such signage except as provided pursuant to the preceding provisions of this Section 6). Notwithstanding the foregoing, Tenant must provide Landlord with prior written notice of any installation, removal or repair of the Above Standard Signage and coordinate such work with Landlord in order to avoid voiding or otherwise adversely affecting any warranties granted to Landlord with respect to the Building.

 

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E. Landlord and any Mortgagees shall not be liable to Tenant and Tenant hereby waives all Losses against such parties for any loss, injury or other damage to the Above Standard Signage from any cause whatsoever, including without limitation, water leakage of any character from the roof or walls, or gas, fire, explosion, or any malfunction within the Property, or acts of other tenants of, or persons entering, the Building or roof of the Building, except to the extent caused by the gross negligence or willful misconduct of Landlord or any Landlord Related Parties. Tenant shall hold Landlord and the Landlord Related Parties harmless from and indemnify the Landlord and the Landlord Related Parties from and against any and all Losses, to the extent arising from any accident, injury or damage, howsoever and by whomsoever caused, to any person or property (including, without limitation, the Property), occurring in connection with the Above. Standard Signage (including, without limitation, the installation, existence or removal thereof) except to the extent such Losses are caused by the negligence or willful misconduct of Landlord or any Landlord Related Parties. In case any action or proceeding be brought against Landlord or any of the Landlord Related Parties by reason of any such Losses, Tenant, upon notice from Landlord, covenants to resist and defend at Tenant’s sole expense such action or proceeding by counsel reasonably satisfactory to Landlord. The provisions of this Section 6.E. shall survive the expiration or earlier termination of the Lease.

F. For purposes of this Section 6 “Original Tenant’s Name” shall mean and be limited to “Zulily” and shall not include any other name (nor any logo) without Landlord’s prior written consent in its sole and absolute discretion, except that if Original Tenant shall change its name under which it conducts business with the public to another name, Landlord shall not unreasonably withhold its consent to such other name being substituted as “Original Tenant’s Name” hereunder. In no event shall Landlord’s consent to a name be deemed unreasonably withheld if Landlord denies its consent based on Landlord’s good faith determination that such name is associated with services, products or ideologies of a sexual, provocative, political, or controversial nature or that such name is not consistent with the character of the Building as a first class office building in the Applicable Market.

G. The rights provided for in this Section 6 shall be personal to Original Tenant and non-transferable unless otherwise agreed to by Landlord in writing in its sole and absolute discretion.

 

7. NAME OF BUILDING. So long as (i) Tenant hereunder shall be Original Tenant, (ii) no default beyond any applicable cure period has occurred and is continuing under the Lease, and (iii) Original Tenant shall be in occupancy for the conduct of its business of at least 60% of the entire Premises then demised pursuant to the Lease, if Landlord references the Building by any name other than its address, Landlord shall reference the Building as “The Zulily Building” or such other name as Landlord shall have approved for the Above Standard Signage pursuant to Section 6 above. The preceding shall not require Landlord to place any signage on the Building identifying it as “The Zulily Building” or such other Building name, nor shall the preceding require Landlord to reference such name in its lease form, promotional materials or other materials with respect to the Building.

 

8. TENANT’S RIGHT TO CONNECT TO BACKUP GENERATOR.

A. Use; Maintenance. Tenant shall have the right to connect to the existing back-up generator (the “Generator”) located at the Building as shown on Exhibit J attached hereto, solely for the purpose of providing emergency electrical capacity to the Premises, at no cost to Tenant during the Lease Term. Tenant acknowledges that the Generator was utilized by a prior tenant of the Building, that Landlord does not know the condition thereof, and that Landlord makes no representation or warranty as to its condition, fitness, operation or otherwise, and that Tenant shall accept the Generator in its as-is condition. Tenant, at its sole cost and expense, shall maintain, repair and replace the Generator as reasonably necessary during the Lease Term. Tenant, at its sole cost and expense, shall procure and maintain in full force and effect, a contract (the “Service Contract”) for the service, maintenance, repair and replacement of the Generator with an electrical generator service and maintenance contracting firm reasonably acceptable to Landlord. Tenant shall follow all reasonable recommendations of said contractor for the use, maintenance, repair and replacement of the Generator. A copy of the then current Service Contract shall be delivered to Landlord annually.

 

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Tenant shall bear all risk of loss with respect to the Generator, whether or not Tenant elects to insure the Generator. If Tenant’s use of the Generator exceeds the capacity thereof, Landlord may revoke Tenant’s right to connect to and use the Generator by providing written notice of such revocation to Tenant and in such event, Tenant shall immediately cease using the Generator. Tenant’s connection to and use of the Generator shall be for Tenant’s use at the Premises only. Tenant shall have no right to sell, sublet or assign Tenant’s rights with respect to the Generator, except to a permitted assignee of this Lease or subtenant of the Premises or any portion thereof. The manner in which Tenant connects the Premises to the Generator be subject to the approval of Landlord in its reasonable discretion and all applicable governmental authorities, and comply with all Laws. All work with respect to the Generator and connection of the same to the Premises shall comply with all applicable Laws, the requirements applicable to construction of Alterations pursuant to Section 9.03 of the Lease, and such other reasonable rules, procedures and requirements as Landlord shall impose with respect to the Generator and all work with respect thereto, including insurance coverage in connection therewith. Upon the expiration or earlier termination of the Lease Term, at Landlord’s option, Tenant shall either surrender the Generator to Landlord in place, in good working order and condition, or remove the Generator from the Property and restore the affected areas of the Property to good condition.

B. Waiver. Tenant hereby agrees that Tenant’s connection to the Generator and its use of the Generator is at Tenant’s sole risk, and Tenant hereby agrees that Landlord and the Landlord Related Parties shall not be liable for, and Tenant hereby waives, all claims for loss or damage to Tenant’s business or damage to person or property sustained by Tenant or any Tenant Related Parties resulting from Tenant’s use of the Generator or connection to the same, the failure of the Generator to operate properly, or the interruption or cessation of electrical service from the Generator.

C. Indemnification. Tenant hereby agrees to indemnify and hold Landlord and all Landlord Related Parties harmless from all liability, losses, claims, penalties, and expenses, including, without limitation, reasonable attorneys’ fees, resulting from or arising out of Tenant’s connection to, or use or operation, of, the Generator.

D. Alternative Generator. If Tenant prefers to install a new back-up generator to connect to the Premises rather than utilizing the Generator referenced above, Tenant shall give notice thereof to Landlord no later than 90 days after the date of the Lease. Thereafter Landlord shall designate a reasonable location determined by Landlord for such generator, and give notice thereof to Tenant. If such location is acceptable to Tenant, Tenant shall give notice thereof to Landlord within 15 days after Tenant’s receipt of Landlord’s notice. If Tenant fails to timely give Landlord such acceptable notice, Tenant’s right to use an alternative generator shall thereupon terminate unless Landlord and Tenant agree as to an alternate location prior to the expiration of such 15 day period. If Tenant timely accepts such location, upon Tenant’s installation of an alternate generator in such location within the time period agreed by Landlord and Tenant, Tenant shall be deemed to have surrendered its rights to the Generator referenced above, and thereafter all references in this Section 8 to the “Generator” shall be deemed references to such alternative generator.

 

9. RIGHT OF FIRST REFUSAL.

A. Right of First Refusal; Available Space. Tenant shall have an ongoing right of first refusal (“Right of First Refusal”) with respect with respect to all available space in the Building (the “First Refusal Space”), subject to the terms of this Section 9. After Landlord shall have entered into preliminary discussions with a party for its lease of such First Refusal Space, as evidenced by Landlord’s exchange of a proposal and counter proposal and/or a letter of intent with such party, and prior to leasing the First Refusal Space to such party or any other party, Landlord shall notify Tenant in writing of such availability and the commencement date (which shall not be less than 120 days from the date of Landlord’s notice), economic and other material terms upon which Landlord would be willing to lease the First Refusal Space (the “ROFR Proposal”). For a period of 10 Business Days after Tenant’s receipt of the ROFR Proposal, Tenant shall have an option to lease the First Refusal Space described in the ROFR Proposal on the terms of the ROFR Proposal. If Tenant does not exercise its Right of First Refusal within the 10 Business Day period provided above, Landlord shall have the right to enter into a lease of the First Refusal Space described in the ROFR Proposal with any other party, provided that the terms of such lease are not materially more favorable (as defined below) than those offered to Tenant in the ROFR Proposal. If such terms are materially more favorable, Landlord shall resubmit such changed terms to Tenant and Tenant shall

 

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have 10 Business Days after its receipt of such resubmitted offer to exercise the Right of First Refusal on such terms. The term “materially more favorable” shall mean the net effective rental rates and other material business terms are less than 90% of the net effective rental rates and other material business terms originally offered to Tenant in the ROFR Proposal.

Notwithstanding the preceding paragraph, if the term of the lease of the First Refusal Space, as set forth in the ROFR Proposal, is scheduled to commence prior to the first anniversary of the Rent Commencement Date as to Increment 1, then Landlord shall not include in the ROFR Proposal the economic and other material terms upon which Landlord would be willing to lease the First Refusal Space, and in lieu thereof Tenant’s lease of the First Refusal Space (if Tenant exercises its Right of First Refusal) shall be on the same terms and conditions, including Base Rent for the corresponding periods, as Tenant’s lease of the Premises originally demised under the Lease, except that the Allowance for the First Refusal Space shall be pro-rated to reflect the Lease Term with respect to the First Refusal Space. First Refusal Space leased by Tenant pursuant to the terms of this paragraph is referred to herein as “Early ROFR Space”).

Further notwithstanding the first paragraph above, if the term of the lease of the First Refusal Space, as set forth in the ROFR Proposal, is scheduled to commence during the last three (3) years of the Lease Term as respects the Premises originally demised under the Lease, Tenant shall have no right to exercise the Right of First Refusal unless Tenant’s Renewal Option pursuant to Section 3 above remains in effect and Tenant exercises such Renewal Option concurrently with its exercise of its Right of First Refusal.

B. Limitation on Tenant’s Right of First Refusal. Notwithstanding the foregoing, Tenant shall have no such Right of First Refusal hereunder and Landlord need not provide Tenant with a ROFR Proposal, if:

1. Tenant is in default under the Lease beyond any applicable cure periods at the time that Landlord would otherwise deliver the ROFR Proposal; or

2. More than forty percent (40%) of the Premises is sublet (other than pursuant to a Business Transfer) at the time Landlord would otherwise deliver the ROFR Proposal; or

3. The Lease has been assigned (other than to a Successor pursuant to a Business Transfer) prior to the date Landlord would otherwise deliver the ROFR Proposal; or

4. The First Refusal Space is leased to another tenant for the applicable period, or the existing tenant in the First Refusal Space is extending or renewing its lease for the First Refusal Space, pursuant to a right or option existing on the date of the Lease or granted in any Cleared Lease (as defined in Section F below); or

5. There are less than three (3) years remaining in the then current Lease Term as respects the Premises originally demised under the Lease and Tenant’s Renewal Option pursuant to Section 3 above may no longer be exercised by Tenant (either because it has already been exercised, has expired unexercised, or has been terminated or otherwise rendered invalid by its terms).

C. Terms for First Refusal Space.

1. The term for the First Refusal Space shall commence upon the commencement date stated in the ROFR Proposal and thereupon such First Refusal Space shall be considered a part of the Premises, and, except for Early ROFR Space (which shall be on the terms set forth above), all of the terms stated in the ROFR Proposal shall govern Tenant’s leasing of the First Refusal Space, including the term of Tenant’s lease thereof, and only to the extent that they do not conflict with the ROFR Proposal, the terms and conditions of this Lease shall apply to the First Refusal Space.

2. Except for Early ROFR Space, which shall be on the terms set forth above, Tenant shall pay Base Rent, Taxes and Expenses in accordance with the terms and conditions of the ROFR Proposal.

 

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3. Except for Early ROFR Space, which shall be on the terms set forth above, the First Refusal Space (including improvements and personalty, if any) shall be accepted by Tenant in its condition and as-built configuration existing on the earlier of the date Tenant takes possession of the First Refusal Space or as of the date the term for such First Refusal Space commences, unless the ROFR Proposal specifies any work to be performed or improvement allowances to be given by Landlord in the First Refusal Space, in which case Landlord shall perform such work or give such improvement allowances in the First Refusal Space. If Landlord is delayed delivering possession of the First Refusal Space due to the holdover or unlawful possession of such space by any party, Landlord shall use reasonable efforts to obtain possession of the space, and the commencement of the term for the First Refusal Space shall be postponed until the date Landlord delivers possession of the First Refusal Space to Tenant free from occupancy by any party.

4. If Tenant exercises the Right of First Refusal granted herein, Landlord shall use reasonable efforts to deliver the First Refusal Space to Tenant on the stated availability date for the lease thereof. Tenant acknowledges that Landlord does not guarantee that the First Refusal Space will be available on the stated availability date for the lease thereof, if the then existing occupants of the First Refusal Space shall hold over, or delivery is delayed for any other reason beyond Landlord’s reasonable control, and in such event, as Tenant’s sole recourse, the term of this Lease as respects the First Refusal Space shall not commence until Landlord delivers the same to Tenant; provided, however, that if Landlord shall not deliver the First Refusal Space to Tenant within ninety (90) days of the stated availability date for the lease thereof, as such ninety (90) day period shall be extended for any delay due to Limited Force Majeure (as defined in Section 4 of the Lease), Tenant shall have the right to terminate its lease of the First Refusal Space by notice thereof to Landlord given within ten (10) Business Days after the expiration of such ninety (90) day period as so extended.

D. ROFR Amendment. Upon Tenant’s election to lease the First Refusal Space, Landlord and Tenant shall promptly enter into an amendment to the Lease, adding such First Refusal Space to the Premises at the Rent and on the other terms and conditions set forth above.

F. Subordination. Notwithstanding anything herein to the contrary, Tenant’s Right of First Refusal is subject and subordinate to the renewal and extension rights and options existing on the date of the Lease of any tenant of the Building or granted in any Cleared Lease. As used herein and in Section 10 below, a “Cleared Lease” means any lease of space (including any amendment to lease) entered into by Landlord with another party for First Refusal Space which was (i) offered to Tenant hereunder and as to which Tenant did not exercise its Right of First Refusal, or (ii) not offered to Tenant hereunder or which Tenant has no right to lease hereunder, by reason of Section B above.

 

10. Expansion Option.

A. Expansion Option; Available Space. Within fifteen (15) Business Days after Tenant’s written request from time to time, Landlord shall advise Tenant of all space then available in the Building for lease. Tenant shall have an ongoing option (the “Expansion Option”) to lease all available space in the Building (the “Option Space”), subject to the terms of this Section 10. Tenant shall exercise the Expansion Option by providing Landlord with notice thereof (each, an “Option Space Notice”), in which Tenant shall designate the location and rentable square footage of the Option Space requested by Tenant and the commencement date with respect to Tenant’s lease thereof (which shall not be more than 120 days from the date of Tenant’s notice). Tenant shall have no right to designate any Option Space that is not then separately demised as a leaseable unit of space, nor may Tenant designate as Option Space less than the entire rentable area of any floor of the Building (or less than the entire rentable area on the north or south wing of any floor) if such floor (or wing) is not then constituted as a multi-tenant floor (or wing) (i.e., if the entire rentable area of any floor or wing is available for lease, Tenant’s Option Space Notice shall apply to all, and not less than all, of the entire rentable area of such floor or wing), unless in each such case Tenant, at Tenant’s sole cost and expense, performs all work necessary to separately demise the Option Space and to create entrances to the remaining leasable units of space on such floor or wing, and, to the extent not then existing, to create a multi-tenant corridor on such floor or wing so that the entrances to the remaining leasable units of space are

 

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accessible. In addition, if Tenant shall designate as Option Space less than the entire rentable area of any floor of the Building (or less than the entire rentable area on the north or south wing of any floor), by notice to Tenant given within ten (10) Business Days after Landlord’s receipt of tenant Option Space Notice, Landlord shall have the right to nullify Tenant’s exercise of its Expansion Option if the remaining space on such floor or wing, as applicable, would be of such size or configuration as not to be reasonably leasable by Landlord, as reasonably determined by Landlord.

The initial Base Rent rate per rentable square foot for the Option Space shall equal the Prevailing Market rate per rentable square foot. Base Rent for the Option Space shall increase, if at all, in accordance with the increases assumed in the determination of Prevailing Market rate. Base Rent attributable to the Option Space shall be payable in monthly installments in accordance with the terms and conditions of Article 4 of the Lease. Tenant shall pay Additional Rent (i.e. Taxes and Expenses) for the Option Space in accordance with Exhibit B to the Lease, and the manner and method in which Tenant reimburses Landlord for Tenant’s share of Taxes and Expenses shall be some of the factors considered in determining the Prevailing Market rate for the Option Space.

The Prevailing Market rate for the Option Space shall be mutually agreed upon by Landlord and Tenant in writing within the 30 calendar day period commencing after Landlord’s receipt of Tenant’s Option Space Notice. When Landlord and Tenant have agreed upon the Prevailing Market rate for the Option Space, such agreement shall be reflected in a written agreement between Landlord and Tenant, whether in a letter or otherwise, and Landlord and Tenant shall enter into the Amendment referenced in Section D Below. If Landlord and Tenant are unable to agree upon the Prevailing Market rate for the Option Space within the 30-day period described above, then the Prevailing Market rate for the Premises shall be established by appraisal in accordance with the procedures set forth in Exhibit H attached hereto.

Notwithstanding the preceding paragraph, if the term of the lease of the Option Space, as set forth in the Option Space Notice, is scheduled to commence prior to the first anniversary of the Rent Commencement Date as to Increment 1, then Tenant’s lease of the Option Space shall be on the same terms and conditions, including Base Rent for the corresponding periods, as Tenant’s lease of the Premises originally demised under the Lease, except that the Allowance for the Option Space shall be pro-rated to reflect the Lease Term with respect to the Option Space. Option Space leased by Tenant pursuant to the terms of this paragraph is referred to herein as “Early Option Space”).

Further notwithstanding the first paragraph above, if the term of the lease of the Option Space, as set forth in the Option Space Notice, is scheduled to commence during the last three (3) years of the Lease Term as respects the Premises originally demised under the Lease, Tenant shall have no right to exercise the Expansion Option unless Tenant’s Renewal Option pursuant to Section 3 above remains in effect and Tenant exercises such Renewal Option concurrently with its delivery of the Option Space Notice.

B. Limitation on Tenant’s Expansion Option. Notwithstanding the foregoing, Tenant shall have no such Expansion Option hereunder and no right to send Landlord an Option Space Notice, if:

1. Tenant is in default under the Lease beyond any applicable cure periods at the time that Tenant would otherwise deliver the Option Space Notice; or

2. More than forty percent (40%) of the Premises is sublet (other than pursuant to a Business Transfer) at the time Tenant would otherwise deliver the Option Space Notice; or

3. The Lease has been assigned (other than to a Successor pursuant to a Business Transfer) prior to the date Tenant would otherwise deliver the Option Space Notice; or

4. The Option Space is leased to another tenant for the applicable period, or the existing tenant in the Option Space is extending or renewing its lease for the Option Space, pursuant to a right or option existing on the date of the Lease or granted in any Cleared Lease (as defined in Section 9 above);

5. The Option Space that would otherwise be designated by Tenant was (i) offered to Tenant as First Refusal Space under Section 9 above and Tenant did

 

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not exercise its Right of First Offer with respect thereto, or (ii) not offered to Tenant as First Refusal Space under Section 9 above by reason of Section 9.B. above, and in either such case, Landlord has not yet entered into a corresponding Cleared Lease by reason thereof; or

6. There are less than three (3) years remaining in the Lease Term as respects the Premises originally demised under the Lease and Tenant’s Renewal Option pursuant to Section 3 above may no longer be exercised by Tenant (either because it has already been exercised, has expired unexercised, or has been terminated or otherwise rendered invalid by its terms).

C. Terms for Option Space.

1. The term for the Option Space shall commence upon the commencement date stated in the Option Space Notice and thereupon such Option Space shall be considered a part of the Premises for the Lease Term applicable thereto, and the terms and conditions of the Lease shall apply to the Option Space, except as expressly set forth in this Section 10.

2. Tenant shall pay Base Rent, Taxes and Expenses in accordance with the terms and conditions set forth in Section 10.A. above.

3. Except for Early Option Space, which shall be on the terms set forth above, the Option Space (including improvements and personalty, if any) shall be accepted by Tenant in its condition and as-built configuration existing on the earlier of the date Tenant takes possession of the Option Space or as of the date the term for such Option Space commences, unless the determination of the Prevailing Market rate has specified any work to be performed or improvement allowances to be given by Landlord in the Option Space, in which case Landlord shall perform such work or give such improvement allowances in the Option Space. If Landlord is delayed delivering possession of the Option Space due to the holdover or unlawful possession of such space by any party, Landlord shall use reasonable efforts to obtain possession of the space, and the commencement of the term for the Option Space shall be postponed until the date Landlord delivers possession of the Option Space to Tenant free from occupancy by any party.

4. If Tenant exercises the Expansion Option granted herein, Landlord shall use reasonable efforts to deliver the Option Space to Tenant on the stated availability date for the lease thereof. Tenant acknowledges that Landlord does not guarantee that the Option Space will be available on the stated availability date for the lease thereof, if the then existing occupants of the Option Space shall hold over, or delivery is delayed for any other reason beyond Landlord’s reasonable control, and in such event, as Tenant’s sole recourse, the term of this Lease as respects the Option Space shall not commence until Landlord delivers the same to Tenant; provided, however, that if Landlord shall not deliver the Option Space to Tenant within ninety (90) days of the stated availability date for the lease thereof, as such ninety (90) day period shall be extended for any delay due to Limited Force Majeure (as defined in Section 4 of the Lease), Tenant shall have the right to terminate its lease of the Option Space by notice thereof to Landlord given within ten (10) Business Days after the expiration of such ninety (90) day period as so extended.

D. Option Space Amendment. Upon Tenant’s election to lease the Option Space, Landlord and Tenant shall promptly enter into an amendment to the Lease, adding such Option Space to the Premises at the Rent and on the other terms and conditions set forth above.

E. Subordination. Notwithstanding anything herein to the contrary, Tenant’s Expansion Option is subject and subordinate to the renewal and extension rights and options existing on the date hereof of any tenant of the Building or granted in any Cleared Lease.

 

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EXHIBIT G

FORM OF LETTER OF CREDIT

[Date]

 

Beneficiary:    Applicant:
[NAME AND ADDRESS OF LANDLORD]    [NAME AND ADDRESS OF TENANT]

IRREVOCABLE STANDBY LETTER OF CREDIT NO.                     

We hereby establish our Irrevocable Letter of Credit in your favor available by your drafts drawn on [NAME OF BANK], at sight, for any sum or sums not exceeding                      Dollars ($        ), for account of [NAME OF TENANT] at [TENANT’S ADDRESS]. Draft(s) must be accompanied by supporting documents as described below:

A written statement to [INSERT NAME OF BANK] stating that “The principal amount [or the portion requested] of this Letter of Credit is due and payable to Beneficiary in accordance with the provisions of that certain Office Lease dated                     , between Beneficiary and Applicant, as such lease may be amended from time to time.”

The written statement shall be accompanied by this Letter of Credit for surrender; provided, however, that if less than the balance of the Letter of Credit is drawn, this Letter of Credit need not be surrendered and shall continue in full force and effect with respect to the unused balance of this Letter of Credit unless and until we issue to you a replacement Letter of Credit for such unused balance, the terms of which replacement Letter of Credit shall be identical to those set forth in this Letter of Credit. We are not required to inquire as to the accuracy of the matters recited in the written statement or as to the authority of the person signing the written statement and may take the act of signing as conclusive evidence of such accuracy and his or her authority to do so. The obligation of [BANK] under this Letter of Credit is the individual obligation of [BANK], and is in no way contingent upon reimbursement with respect thereto.

Each draft must bear upon its face the clause “Drawn under Letter of Credit No.                     , dated                     , of [BANK].”

This Letter of Credit shall be automatically extended for an additional period of one year from the present or each future expiration date unless we have notified you in writing delivered via U.S. registered mail, return receipt requested, to your address stated above, or to such other address as you shall have furnished to us for such purpose, not less than sixty (60) days before such expiration date, that we elect not to renew this Letter of Credit. Upon your receipt of such notification, you may draw your sight draft on us prior to the then applicable expiration date for the unused balance of the Letter of Credit, which shall be accompanied by your signed written statement that you received notification of our election not to extend.

Except so far as otherwise expressly stated herein, this Letter of Credit is subject to the “Uniform Customs and Practices for Documentary Credits (2007 Revision), International Chamber of Commerce - Publication No. 600, subject to the following: (a) if this Letter of Credit expires during an interruption of business as described in Article 36 of the UCP, we hereby specifically agree to effect payment if this Letter of Credit is drawn against within 30 days after the resumption of business; and (b) notwithstanding Article 14 or any other provision of the UCP, and regardless of whether the words “strict”, “exact” or “identical” or similar words are used in this Letter of Credit, a document presented under this Letter of Credit need not reproduce the wording in this Letter of Credit exactly, including typographical errors, punctuation, spacing, blank lines and spaces (or the completion or deletion thereof), and the like.

We hereby agree with you that drafts drawn under and in compliance with the terms of this Letter of Credit will be duly honored if presented to the above-mentioned drawee at our offices at [ADDRESS] on or before         PM [TIME ZONE] Time on [INITIAL EXPIRATION DATE], or such later expiration date to which this Letter of Credit is extended pursuant to the terms hereof.

If at any time Beneficiary or its authorized transferee is not in possession of the original of this letter of credit (together with all amendments, if any) because such original has been delivered to us as required hereunder for a draw thereon or transfer thereof, our obligations as set forth in this letter of credit shall continue in full force and effect as if Beneficiary or such authorized transferee still held such original, and any previous delivery to us, without return by us, of such original shall be deemed to have satisfied any requirement that such original be delivered to us for a subsequent draw hereunder or transfer hereof.


This Letter of Credit may be, without charge and without recourse, assigned to, and shall inure to the benefit of, any successor in interest to [LANDLORD], under the Office Lease. Transfer charges, if any, are for the account of the applicant.

Sincerely, [BANK]

 

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EXHIBIT H

APPRAISAL PROCEDURE

A. Within 15 calendar days after the expiration of the 30-calendar day period set forth in Section 3.C. of Exhibit F to the Lease for the mutual agreement of Landlord and Tenant as to the Prevailing Market rate for the Premises, each party hereto, at its cost, shall engage a State of Washington licensed real estate broker to act on its behalf in determining the Prevailing Market rate for the Premises. The brokers each shall have at least 10 years’ experience with leases in first-class office buildings comparable to the Building in Seattle, Washington, and shall submit to Landlord and Tenant in advance for Landlord’s and Tenant’s reasonable approval the appraisal methods to be used. If a party does not appoint a broker within such 15-calendar day period but a broker is appointed by the other respective party, the single broker appointed shall be the sole broker and shall set the Prevailing Market rate for the Premises. If the two brokers are appointed by the parties as stated in this paragraph, such brokers shall meet promptly and attempt to set the Prevailing Market rate for the Premises. If such brokers are unable to agree within 30 calendar days after appointment of the second broker, the brokers shall elect a third broker meeting the qualifications stated in this paragraph within 10 calendar days after the last date the two brokers are given to set the Prevailing Market rate for the Premises. Each of the parties hereto shall bear 1/2 the cost of appointing the third broker and of the third broker’s fee. The third broker shall be a person who has not previously acted in any capacity for either party.

B. The third broker shall conduct his own investigation of the Prevailing Market rate for the Premises, and shall be instructed not to advise either party of his determination of the Prevailing Market rate for the Premises except as follows: when the third broker has made his determination, he shall so advise Landlord and Tenant and shall establish a date, at least 7 calendar days after the giving of notice by the third broker to Landlord and Tenant, on which he shall disclose his determination of the Prevailing Market rate for the Premises. Such meeting shall take place in the third broker’s office unless otherwise agreed by the parties. After having initialed a paper on which his determination of the Prevailing Market rate for the Premises is set forth, the third broker shall place his determination of the Prevailing Market rate for the Premises in a sealed envelope. Landlord’s broker and Tenant’s broker shall each set forth their determination of the Prevailing Market rate for the Premises on a paper, initial the same and place them in sealed envelopes. Each of the three envelopes shall be marked with the name of the party whose determination is inside the envelope.

C. In the presence of the third broker, the determination of the Prevailing Market rate for the Premises by Landlord’s broker and Tenant’s broker shall be opened and examined. If the higher of the two determinations is 105% or less of the amount set forth in the lower determination, the average of the 2 determinations shall be the Prevailing Market rate for the Premises, the envelope containing the determination of the Prevailing Market rate for the Premises by the third broker shall be destroyed and the third broker shall be instructed not to disclose his determination. If either party’s envelope is blank, or does not set forth a determination of the Prevailing Market rate for the Premises, the determination of the other party shall prevail and be treated as the Prevailing Market rate for the Premises. If the higher of the 2 determinations is more than 105% of the amount of the lower determination, the envelope containing the third broker’s determination shall be opened. If the value determined by the third broker is the average of the values proposed by Landlord’s broker and Tenant’s broker, the third broker’s determination of the Prevailing Market rate for the Premises shall be the Prevailing Market rate for the Premises. If such is not the case, the Prevailing Market rate for the Premises shall be the rent proposed by whichever of Landlord’s broker or Tenant’s broker is closest to the determination of the Prevailing Market rate for the Premises by the third broker.


EXHIBIT I

OUTLINE AND LOCATION OF STAGING PREMISES

This Exhibit is attached to and made a part of the Office Lease Agreement by and between SRI-WR ELLIOTT AVENUE LLC, a Delaware limited liability company (“Landlord”), and ZULILY, INC., a Delaware corporation (“Tenant”), for space in the Building located at 2601 Elliott Avenue, Seattle, Washington.


 

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EXHIBIT J

OUTLINE AND LOCATION OF BACK-UP GENERATOR

This Exhibit is attached to and made a part of the Office Lease Agreement by and between SRI-WR ELLIOTT AVENUE LLC, a Delaware limited liability company (“Landlord”), and ZULILY, INC., a Delaware corporation (“Tenant”), for space in the Building located at 2601 Elliott Avenue, Seattle, Washington.


EXHIBIT J

LOCATION OF BACK-UP GENERATOR

 

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Amended and Restated Lease by and between the Company and Eagle CPT, LLC

Exhibit 10.13

AMENDED AND RESTATED LEASE

This Amended and Restated Lease (“Lease”), dated as of November 1, 2011, is made by and between Eagle CPT, LLC, a Nevada limited liability company (“Lessor”), and Zulily, Inc., a Delaware corporation (“Lessee”) (collectively the “Parties,” or individually a “Party”). This Lease is intended to amend and restate in its entirety that certain Lease dated September 2011 by and between Lessor and Lessee.

1. Basic Provisions.

1.1 Premises: The “Premises” comprise a portion of that certain building commonly known as 700 Milan Drive, McCarran, Nevada (the “Building”), containing approximately 632,120 square feet of gross leasable area, which Building, in turn, comprises a portion of the Project, as described below, all as generally depicted on the site plan attached hereto as Exhibit A. The Premises consist of (a) approximately 171,080 square feet of gross leasable area (the “Initial Premises”), comprising approximately 27.06% of the Building, and (b) approximately 157,205 square feet of gross leasable area (the “Expansion Premises”), comprising approximately 24.87% of the Building, and together comprise approximately 328,285 square feet of gross leasable area (51.93% total) within the Building

1.2 Project: That certain industrial park located within the Tahoe Reno Industrial Center, Storey County, Nevada, and commonly known as West America Commerce Center (the “Project”). The Project consists of three parcels. The parcel on which the Building is located is designated “Lot 1,” while the other two parcels are designated “Lot 2” and “Lot 3.”

1.3 Term: The “Term” of this Lease shall commence on November 1, 2011 (the “Commencement Date”) and shall expire on December 31, 2014 (“Expiration Date”).

1.4 Early Possession: From and after the date on which this Lease is fully executed, Lessee shall have access to the Premises for the limited purpose of installation of Lessee’s racking systems, utility installations, and telecommunications systems, unloading and staging inventory, testing systems and processes, and training employees. (See also Paragraphs 3.2 and 3.3.)

1.5 Rent Commencement: Lessee shall begin paying Base Rent (as defined below) on the Initial Premises commencing on May 1, 2012, and shall begin paying Base Rent on the Expansion Premises commencing on October 1, 2012.

 

1.


1.6 Base Rent: Lessee shall pay monthly base rent (“Base Rent”), payable on the first day of each month of the Term; in accordance with the rates set forth below:

 

Lease Months

   Monthly Base Rent/square
feet of gross leasable area
     Monthly Base Rent  

Nov 2011 – Apr 2012

   $ 0.00       $ 0.00   

May 2012 – Oct 2012

   $ 0.25       $ 42,770.00   

Oct 2012

   $ 0.25       $ 82,071.25   

Nov 2012 – Oct 2013

   $ 0.26       $ 85,354.10   

Nov 2013 – Oct 2014

   $ 0.275       $ 90,278.38   

Nov 2014 – Dec 2014

   $ 0.2875       $ 94,381.94   

1.7 Base Rent Paid Upon Execution: $42,770.00 to be applied to Base Rent for the month of May 2012 (based on 171,080 square feet of gross leasable area in the Initial Premises).

1.8 Intentionally Omitted.

1.9 Agreed Use: The Premises shall be used for warehouse, storage and distribution of retail goods, general office use, and related ancillary legal purposes. (See also Paragraph 6.)

1.10 Real Estate Brokers: The following real estate brokers (collectively, the “Brokers”) and brokerage relationships exist in this transaction:

 

  (a) Investment Property Advisors (Michael Schnabel) represents Lessor exclusively (“Lessor’s Broker”); and

 

  (b) CB Richard Ellis (Eric D. Bennett and Shawn Childs) represents Lessee exclusively (“Lessee’s Broker”).

1.11 Exhibits: The following exhibits are attached to and form a part of this Lease:

Exhibit A        Site Plan

Exhibit B        Tenant Improvement Construction Agreement

Exhibit C        Rules and Regulations

Exhibit D        Notice of Lease Term Dates

Exhibit E        ERISA Certification

2. Premises.

2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of size set forth in this Lease, or that may have been used in calculating rental, is an approximation which the Parties agree is reasonable, and the rental based thereon is not subject to revision. The site plan which is attached as Exhibit A to this lease generally depicts the general layout of the Project and the location of the Premises, including the Zulily Parking Area and Zulily Truck Area (each defined below). It shall not be deemed a warranty, representation or agreement on the part of Lessor that the Project will be (or has been) constructed exactly as indicated on said site plan, or that it will continue in the future to be exactly as indicated thereon.

 

2.


(a) Condition of Premises. Lessor represents and warrants that the Premises shall be in sound structural condition and otherwise in accordance with all applicable laws on the Commencement Date. In addition, Lessor shall deliver the Premises to Lessee in broom-clean condition and free of debris, with the existing Building-standard plumbing, lighting, mechanical, water and sewer, HVAC and life safety systems and subsystems in good operating condition. If any of such Building systems or structural elements should malfunction or fail within the first one hundred eighty (180) days of this Lease for reasons other than Lessee’s misuse or negligence, Lessor shall, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, malfunction or failure, repair same at Lessor’s sole cost and expense (and not as an Operating Expense). Subject to the foregoing and except as expressly set forth elsewhere in this Lease and the Improvement Agreement, Lessor shall have no obligation to perform any construction within the Premises, the Building or the Project, and Lessee shall lease the Premises in an AS-IS condition, it being expressly acknowledged that Lessee has had the full opportunity to inspect, and has approved the condition of, the Premises, the Building and the Project.

2.2 Common Areas. From and after the Commencement Date (as defined below), Lessor grants to Lessee, for the benefit of Lessee and its employees, suppliers, shippers, contractors, customers and invitees, during the term of this Lease, the non-exclusive right to use, in common with others entitled to such use, the Common Areas (as defined below) as they exist from time to time, subject to any rights, powers, and privileges reserved by Lessor under the terms hereof or under the terms of any rules and regulations or restrictions governing the use of the Project. The term “Common Areas” is defined as all areas and facilities outside the Premises and within the exterior boundary line of Lot 1 and interior utility raceways and installations within the Premises that are provided and designated by the Lessor from time to time for the general non-exclusive use of Lessor, Lessee and other tenants of the Project and their respective employees, suppliers, shippers, customers, contractors and invitees, including parking areas, loading and unloading areas, trash areas, roadways, walkways, driveways and landscaped areas. Under no circumstances shall the right herein granted to use the Common Areas be deemed to include the right to store any property, temporarily or permanently, in the Common Areas. Any such storage shall be permitted only by the prior written consent of Lessor or Lessor’s designated agent, which consent may be revoked at any time. In the event that any unauthorized storage shall occur then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove the property and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. Lessor or such other person(s) as Lessor may appoint shall have the exclusive control and management of the Common Areas and shall have the right, from time to time, to establish, modify, amend and enforce reasonable rules and regulations (“Rules and Regulations”) for the management, safety, care, and cleanliness of the grounds, the parking and unloading of vehicles and the preservation of good order, as well as for the convenience of other occupants or tenants of the Building and the Project and their invitees. Attached hereto as Exhibit C are the Rules and Regulations in effect as of the date of this Lease. Lessee agrees to abide by and conform to the Rules and Regulations and to cause its employees, suppliers, shippers, customers, contractors and invitees to so abide and conform. Lessor shall not be responsible to Lessee for the non-compliance with

 

3.


said Rules and Regulations by other tenants of the Project, but will make reasonable efforts to resolve disputes in a timely manner. Lessor shall have the right, in Lessor’s sole discretion, from time to time (i) to make changes to the Common Areas, including, without limitation, changes in the location, size, shape and number of driveways, entrances, parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, landscaped areas, walkways and utility raceways; (ii) to close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to the Premises remains available; (iii) to designate other land outside the boundaries of the Project to be a part of the Common Areas; (iv) to add additional buildings and improvements to the Common Areas; (v) to use the Common Areas while engaged in making additional improvements, repairs or alterations to the Project, or any portion thereof; and (vi) to do and perform such other acts and make such other changes in, to or with respect to the Common Areas and Project as Lessor may, in the exercise of sound business judgment, deem to be appropriate. In the event that Lessor makes any of the Common Area changes set forth herein, Lessor and Lessee agree that there shall be no change to the square footage of the Premises as a result thereof, no increase in Lessee’s financial obligations hereunder and Lessor shall use reasonable efforts to minimize any interference with Lessee’s business caused by such changes and the construction thereof. Lessor shall have the further right, in Lessor’s sole discretion and with notice to Lessee of forty-five (45) days, to designate portions of the Common Area as “Exclusive Common Area” available only for the use of certain occupants of the Project. In the event Lessor designates a portion of the Common Area as Exclusive Common Area for the benefit of one or more occupants and not for the benefit of Lessee, Lessee shall not have the right to use such Exclusive Common Area, and the Operating Expenses associated with maintaining such Exclusive Common Area shall not be included in the cost pool(s) established by Lessor pursuant to Paragraph 4.2(a) of which Lessee is responsible for paying its Proportionate Share. Lessor shall not designate Exclusive Common Areas not for the benefit of Lessee if the same would prevent Lessee from reasonable access to and use of the Premises or the parking to which Lessee is entitled pursuant to Paragraph 2.3.

(a) Vehicle Parking. Lessee shall be entitled to use the parking spaces in the area designated on the Site Plan as “Zulily Parking Area.” Said parking spaces shall be used for parking by vehicles no larger than full-size passenger automobiles or pick-up trucks, herein called “Permitted Size Vehicles”; provided, however, that Lessee shall have the right to park passenger vehicles, trucks and trailers, loaded or unloaded, within the area designated on the Site Plan as “Zulily Truck Area” and at loading docks serving the Premises. Lessor may regulate the loading and unloading of vehicles by adopting Rules and Regulations as provided above. No vehicles other than Permitted Size Vehicles may be parked in the Zulily Parking Area (other than trucks and trailers within the Zulily Truck Area) without the prior written permission of Lessor. Lessee shall not permit or allow any vehicles that belong to or are controlled by Lessee or Lessee’s employees, suppliers, shippers, customers, contractors or invitees to be loaded, unloaded, or parked in areas other than those designated by Lessor for such activities. Lessee shall not service or store any vehicles in the Common Areas. If Lessee permits or allows any of the prohibited activities described in this paragraph, then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove or tow away the vehicle involved and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor.

 

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2.3 Expansion of Lot 1 and Building. Lessor shall have the right, but not the obligation, to expand Lot 1 by adding thereto approximately 13.5 acres of land to the immediate south of the current Lot 1 and consisting of a portion of APN 005-111-24 (the “Lot 1 Expansion Area”) and to construct on the Lot 1 Expansion Area and those portions of the Common Areas to the immediate south of the Building an additional approximately 241,808 square feet of leasable area (the “Building Addition”). From and after Substantial Completion of the Building Addition, the Building Addition shall be considered part of the Building. From and after the addition of the Lot 1 Expansion Area, the Lot 1 Expansion Area shall, except to the extent contained within the footprint of the Building, be considered part of the Common Areas. The cost of acquiring the Lot 1 Expansion Area and constructing the Building Addition shall not be included in Operating Expenses nor shall Lessee’s financial obligations hereunder increase as a result of such additions.

3. Term.

3.1 Term. The Commencement Date, Expiration Date and Term of this Lease are as specified in Paragraph 1.3.

3.2 Early Possession. If Lessee totally or partially occupies the Premises prior to the Commencement Date, all terms of this Lease (other than the obligation to pay Base Rent and Operating Expenses) shall be in effect during such period, including, without limitation, the obligation to carry the insurance required hereunder, to maintain the Premises and to comply with all Rules and Regulations.

3.3 Intentionally Omitted.

3.4 Lessee Compliance. Lessor shall not be required to tender possession of the Premises to Lessee, or to permit Early Possession, until Lessee complies with its obligation to provide evidence of insurance in accordance with the provisions of this Lease. Pending delivery of such evidence, Lessee shall be required to perform all of its obligations under this Lease from and after the Commencement Date, including the payment of Rent, notwithstanding Lessor’s election to withhold possession pending receipt of such evidence of insurance. Further, if Lessee is required to perform any other conditions prior to or concurrent with the Commencement Date, the Commencement Date shall occur but Lessor may elect to withhold possession until such conditions are satisfied.

4. Rent.

4.1 Rent Defined. All obligations of Lessee to pay money to Lessor under the terms of this Lease are deemed to be rent (“Rent”).

4.2 Operating Expenses Defined. As used herein, the following terms shall have the following meanings:

(a) “Proportionate Share” shall mean the percentage factor determined by dividing the gross leasable square footage contained in the Premises by the square footage of building space in Lot 1, subject to the following exceptions: (i) Lessee’s Proportionate Share of the Operating Expenses attributable to the common drive shared by Lot 1

 

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and Lot 2 shall mean the percentage factor determined by dividing the gross leasable square footage contained in the Premises by the square footage of building space in Lot 1 and Lot 2, and (ii) Lessee’s Proportionate Share of the Operating Expenses attributable to the fire suppression facility serving Lot 1, Lot 2 and Lot 3 shall be the percentage factor determined by dividing the Gross Leasable Area contained in the Premises by the building space in Lot 1, Lot 2 and Lot 3.

(b) “Operating Expenses” shall mean all costs and expenses incurred by Lessor with respect to the ownership, maintenance and operation of Lot 1, including the Building and the fire suppression facility serving Lot 1, Lot 2 and Lot 3, and all costs and expenses incurred by Lessor with respect to the ownership, maintenance and operation of the common drive shared by Lot 1 and Lot 2. Without limitation, Operating Expenses shall include: (i) costs of Lessor which are allocable to the Premises under the terms of any CC&Rs affecting the Premises; (ii) insurance deductibles and the costs of and/or relating to the insurance maintained by Lessor with respect to the Building (provided however, with respect to any earthquake or flood insurance that Lessor does or may in the future carry, Lessee’s Proportionate Share of any deductible thereunder shall not exceed $200,000); (iii) all costs paid or incurred by Lessor to maintain, repair or replace any portion of the Premises, the Building or the Common Areas or facilities; (iv) Real Estate Taxes (as hereinafter defined); (v) electricity, gas, water and other utility charges for the Common Areas; (vi) license permits and inspection fees; (vii) supplies and materials used by Lessor or its vendors in the operation and management of the Building and Common Areas and facilities; (viii) equipment not treated by Lessor as capital expenditures of the Building and Common Areas and facilities; (ix) personal property taxes on property used in the operation, maintenance, service and management of the Building and Common Areas and facilities; (x) the cost of Lessor’s property manager, such cost not to exceed 3% of the gross rents of the Building, and (xi) all other expenses necessary for the operation and management of the Building and Common Areas and facilities, except as otherwise set forth herein. To the extent any such expenditure constitutes a capital expenditure as reasonably determined by Lessor in accordance with generally acceptable accounting principles, then such capital expenditure shall be amortized (including annualized interest on the unamortized cost at a rate of 8%) over its useful life as reasonably determined by Lessor in accordance with generally acceptable accounting principles.

Notwithstanding the foregoing, Operating Expenses shall not include the following: (1) interest, principal, points or amortization (except in connection with the financing of items which may be included in Operating Expenses) on any mortgage, deed of trust or any other debt instrument encumbering the Building or the Project; (2) rent and other payments under any ground lease of the Project; (3) any costs for which Lessor has received reimbursement or contribution from any insurance carrier, condemning authority, contractor warranty or third party in response to any claim made by Lessor; (4) Lessor’s general corporate overhead costs; (5) all costs relating to activities for the marketing, solicitation, negotiation and execution of new leases of space in the Building or Project (or renewal of existing leases), including without limitation, costs of advertising, promotional materials, leasing commissions, legal fees, allowances, rental abatement and tenant improvements; (6) capital reserves; (7) expenses that relate to preparation of rental space for a lessee or for services separately billed to, rendered to or for the benefit of other lessees but not made available to or for the benefit of Lessee; (8) legal expenses relating to other lessees; (9) costs of repairing, maintaining or replacing the Building’s roof structure and membrane, foundation and structural components; (10) salaries of executive officers of Lessor;

 

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(11) depreciation; (12) any fines, interest, penalties or costs of compliance incurred by Lessor (and attorneys’ fees relating thereto) as a result of Lessor’s violation of any Applicable Requirements or due to the breach of this Lease or any other lease in the Building or Project by Lessor; (13) the cost to remediate, remove or otherwise comply with Applicable Regulations relating to Hazardous Substances, to the extent Hazardous Substances were present upon, in or about the Premises, Building or Project prior to the Start Date or Hazardous Substances were brought onto the Premises, Building or Project after the Start Date by Lessor or its agents, employees or invitees in violation of Applicable Requirements; (14) overhead profit increments paid to Lessor’s subsidiaries or affiliates for management or other services on or to the Premises, Building or Project or for supplies or other materials to the extent that the cost of the services, supplies or materials materially exceeds the cost that would have been paid had the services, supplies or materials been provided by unaffiliated parties on a competitive basis; (15) salaries, compensation and fringe benefits of ownership and management personnel to the extent that such persons (A) are above the grade of Building or Project manager or (B) provide services to properties other than the Building, except to the extent equitably prorated as among the Project and other projects for which services of such personnel apply; (16) costs of selling the Building or Project; (17) charitable or political contributions or fees paid to trade associations; and (18) costs for sculpture, paintings or other objects of art (and insurance thereon or extraordinary security in connection therewith).

(c) “Controllable Operating Expenses” shall mean all Operating Expenses other than utilities, snow removal, Real Estate Taxes and insurance.

(d) “Real Estate Taxes” shall mean all real property and personal property taxes, charges, and assessments which are levied or assessed upon or imposed by any governmental authority during the term of this Lease, or with respect to each fiscal year falling in whole or in part during the term of this Lease with respect to Lot 1 or any part thereof, including the land, buildings and any improvements, fixtures and equipment and all other property of Lessor, real or personal, comprising Lot 1 and used in connection with the operation thereof. As used herein, the term “Real Estate Taxes” shall include, without limitation, any form of assessment, license fee, license tax, business license fee, business license tax, commercial rent tax, levy, charge, penalty, tax or similar imposition, imposed by any authority having the direct power to tax, including any city, county, state or federal government, or any school, agricultural, lighting, drainage or other improvement or special assessment district thereof, including, but not limited to, the following: (i) any tax on Lessor’s right to rental or other income from Lot 1 or as against Lessor’s business of leasing the space in Lot 1; (ii) any assessment, tax, fee, levy or charge in substitution, partially or totally, or any assessment, tax, fee, levy or charge previously included within the definition of Real Estate Taxes; (iii) any assessment, tax, fee, levy, or charge allocable to or measured by the area of Lot 1 or the rental payable hereunder, including, without limitation, any gross income tax or excise tax levied by the state, city or federal government, or any political subdivision thereof, with respect to the receipt of such rental, or upon or with respect to the possession, leasing, operating, management, maintenance, alteration, repair, use or occupancy by Lessee of Lot 1, or any portion thereof; and (iv) any assessment, tax, fee, levy or charge, upon this transaction or any document to which Lessee is a party, creating or transferring an interest or an estate in Lot 1. Without limiting the foregoing, the term “Real Estate Taxes” shall include any taxes paid by Lessor to any taxing authority pursuant to any lease by which Lessor holds possession of any part of the land comprising Lot 1. If the tax statement from the

 

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taxing authority does not allocate assessments with respect to the Project and assessments relating to any other improvements located upon the land, Lessor shall make a reasonable determination of the proper allocation of such assessment bases, to the extent possible, upon records of the assessor.

Real Estate Taxes also shall include the expense of contesting, in good faith, the amount or validity of any such taxes, charges or assessments, such expense to be applicable to the period of the item contested. Real Estate Taxes shall not, however, include income, franchise, capital stock, transfer, estate, gift, succession or inheritance taxes unless such taxes are in lieu of real estate taxes, assessments, rental, occupancy and other like excise taxes. For purposes of this Lease, Real Estate Taxes for any calendar year shall be those taxes the last timely payment date for which occurs within such calendar year. In case of special taxes or assessments payable in installments, only the amount of the installment(s) the last timely payment date for which occurs on or after the first day and on or before the last day of such calendar year shall be included in Real Estate Taxes for that calendar year.

Lessor shall retain the sole right to participate in any proceedings to establish or contest, in good faith, the amount of Real Estate Taxes. If a complaint against valuation, protest of tax rates or other action increases or decreases the Real Estate Taxes for any calendar year, resulting in an increase or decrease in rent hereunder, the Real Estate Taxes for the affected calendar year shall be recalculated accordingly and the resulting increased rent plus the expenses incurred in connection with such contest, or decreased rent, less the expenses incurred in connection with such contest, shall be paid simultaneously with or applied as a credit against, as the case may be, the rent next becoming due.

4.3 Payment of Proportionate Share of Operating Expenses. Lessee shall pay to Lessor, as additional Rental, Lessee’s Proportionate Share of the Operating Expenses; provided, however, that, beginning with the second full calendar year of the Lease term and continuing in each of the subsequent calendar years of the term, the amount of Lessee’s Proportionate Share of the Controllable Operating Expenses shall not be more than five percent (5%) greater than Lessee’s Proportionate Share of the Controllable Operating Expenses in the immediately preceding calendar year. If this Lease commences on a date other than January 1 or expires or terminates on a date other than December 31, the annual Operating Expenses shall be prorated by multiplying one-twelfth (1/12) of the annual Operating Expenses by the number of full or partial months between the Commencement Date and December 31 of the year of commencement or between January 1 of the year of expiration or termination and the Expiration Date or date of termination, as the case may be. To provide for current payments of Operating Expenses, Lessee shall pay Lessee’s Proportionate Share of the Operating Expenses, as estimated by Lessor from time to time, in twelve (12) monthly installments, commencing on the first day of the month following the month in which Lessor notifies Lessee of the amount of its estimated Proportionate Share. Lessor shall, on or before the beginning of each calendar year, estimate the amount of Operating Expenses for the upcoming calendar year and, within one hundred twenty (120) days after the end of each calendar year, reconcile the estimated expenses paid by Lessee in the preceding year based on actual Operating Expenses for such calendar year paid by Lessor. If Lessee’s Proportionate Share of the actual Operating Expenses shall be greater than or less than the aggregate of all installments so paid on account to Lessor for such twelve (12) month period, then within thirty (30) days of Lessee’s receipt of Lessor’s statement of reconciled

 

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Operating Expenses, Lessee shall pay to Lessor the amount of such underpayment, or Lessor shall credit Lessee for the amount of such overpayment against the next maturing installment(s) of rent, as the case may be. The obligation of Lessee with respect to the payment of Lessee’s Proportionate Share of the Operating Expenses shall survive the termination of this Lease. Any payment, refund, or credit made pursuant to this Paragraph 4.3 shall be made without prejudice to any right of Lessee to dispute the statement as hereinafter provided, or of Lessor to correct any item(s) as billed pursuant to the provisions hereof. Lessor’s failure to give such statement shall not constitute a waiver by Lessor of its right to recover rent that is due and payable pursuant to this paragraph. Lessor shall have the right, from time to time, to change to a fiscal year that does correspond to a calendar year, or vice versa. If Lessor does so, Lessor shall appropriately prorate Operating Expenses for the year in which such change occurs.

4.4 Dispute of Operating Expenses. Lessee shall have the right, within ninety (90) days following receipt of a notice of reconciled Operating Expenses (or revised notice thereof), to deliver written notice to Lessor of Lessee’s intent to challenge such reconciliation, which notice shall set forth in reasonable detail the basis for such challenge. If Lessee does not deliver such written notice within such ninety (90) day period, Lessee shall be deemed to have accepted Lessor’s reconciliation. If Lessee timely provides such notice, and if the challenge raised by Lessee is not amicably settled between Lessor and Lessee within thirty (30) days after such notice of challenge, Lessee shall have the right, during the ninety (90) days next following the expiration of such thirty (30) day period, to employ an independent certified public accountant to audit Operating Expenses. Any such audit shall be conducted during normal business hours of Lessor in a diligent and prompt fashion and in such a manner as to minimize impact on the conduct of Lessor’s business. Provided that Lessor does not dispute the results of such audit (in which case the parties shall proceed to arbitration in accordance with the provisions of Paragraph 54), any change in the reconciled Operating Expenses required by such accountant’s determination shall be made within thirty (30) days after such determination has been rendered. Lessee understands that the actual itemization of, and the amount of individual items constituting, Operating Expenses is confidential, and, while Lessor shall keep and make available to such accountant all records in reasonable detail, and shall permit such accountant to examine and audit such of Lessor’s records as may reasonably be required to verify such reconciled Operating Expenses, at reasonable times during business hours, Lessor shall not be required to (and the accountant and Lessee shall not be permitted to) disclose to any person, firm or corporation, other than its legal and financial advisors, any such details. The expenses involved in such audit shall be borne by Lessee, unless the results of such audit determine that Lessor overstated Lessee’s Proportionate Share of the Operating Expenses by more than five percent (5%), in which case Lessor shall promptly reimburse Lessee for the reasonable and actual costs of such audit up to a maximum of $5,000.

4.5 Adjustments to Operating Expenses. If a clerical error occurs or Lessor or Lessor’s accountants discover new facts, which error or discovery causes Operating Expenses for any period to increase or decrease, upon notice by Lessor to Lessee of the adjusted additional Operating Expenses for such calendar year, which notice must be given within one (1) year after Lessor delivers its original statement of reconciled Operating Expenses for such calendar year, the adjusted additional Operating Expenses shall apply and any deficiency or overpayment of Lessee’s Proportionate Share of the Operating Expenses, as the case may be, shall be paid by Lessee or taken as a credit by Lessee according to the provisions set forth above. This provision shall survive the termination of the Lease.

 

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4.6 Other Charges. All costs, expenses and other sums that Lessee assumes or agrees to pay to Lessor pursuant to this Lease shall be deemed Rent and, in the event of nonpayment thereof, Lessor shall have all the rights and remedies herein provided for in case of nonpayment of Base Rent.

4.7 Payment. Lessee shall cause payment of Base Rent and other rent or charges, as the same may be adjusted from time to time, to be received by Lessor in lawful money of the United States, without offset or deduction (except as specifically permitted in this Lease), on or before the day on which it is due. Base Rent and other Rent or charges for any period during the term hereof which is for less than one (1) full calendar month shall be prorated based upon the actual number of days of said month. Payment of Base Rent and other Rent or charges shall be made to Lessor at its address stated herein or to such other persons or place as Lessor may from time to time designate in writing. Acceptance of a payment which is less than the amount then due shall not be a waiver of Lessor’s rights to the balance of such Base Rent and other Rent or charges, regardless of Lessor’s endorsement or notation on any check so stating.

4.8 Rent Control. If the amount of Rent or any other payment due under this Lease violates the terms of any governmental restrictions on such Rent or payment, then the Rent or payment due during the period of such restrictions shall be the maximum amount allowable under those restrictions. Upon termination of the restrictions, Lessor shall, to the extent it is legally permitted, recover from Lessee the difference between the amounts received during the period of the restrictions and the amounts Lessor would have received had there been no restrictions.

5. Intentionally Omitted.

6. Use.

6.1 Use. Lessee shall use and occupy the Premises only for the Agreed Use, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that is unlawful, creates damage, waste or a nuisance, or that disturbs owners and/or occupants of, or causes damage to neighboring properties.

6.2 Hazardous Substances.

(a) Reportable Uses Require Consent. The term “Hazardous Substance” as used in this Lease shall mean any product, substance, or waste whose presence, use, manufacture, disposal, transportation, or release, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment or the Premises, (ii) regulated or monitored by any governmental authority, or (iii) a basis for potential liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substances shall include, but not be limited to, PCB’s, hydrocarbons, petroleum, gasoline, and/or crude oil or any products, by-products or fractions thereof. Lessee shall not engage in any activity in or on the Premises which constitutes a Reportable Use of Hazardous Substances without the express

 

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prior written consent of Lessor, which consent may be given or withheld in Lessor’s sole discretion, and timely compliance (at Lessee’s expense) with all Applicable Requirements. “Reportable Use” shall mean (i) the installation or use of any above ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority, and/or (iii) the presence at the Premises of a Hazardous Substance with respect to which any Applicable Requirements requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may use any ordinary and customary materials, in reasonable quantities, which are reasonably required to be used in the normal course of the Agreed Use, so long as such use is in compliance with all Applicable Requirements, is not a Reportable Use, and does not expose the Premises or neighboring property to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may condition its consent to any Reportable Use upon receiving such additional assurances as Lessor reasonably deems necessary to protect itself, the public, the Premises and/or the environment against damage, contamination, injury and/or liability, including, but not limited to, the installation (and removal on or before Lease expiration or termination) of protective modifications (such as concrete encasements) and/or increasing the Security Deposit.

(b) Duty to Inform Lessor. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance has come to be located in, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately give written notice of such fact to Lessor, and provide Lessor with a copy of any report, notice, claim or other documentation which it has concerning the presence of such Hazardous Substance.

(c) Lessee Remediation. Lessee shall not cause or knowingly permit any Hazardous Substance to be spilled or released in, on, under, or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee’s sole cost and expense, take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of the Premises or neighboring properties, that was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance brought onto the Premises during the term of this Lease, by or for Lessee, or any third party agent, representative or contractor of Lessee.

(d) Lessee Indemnification. Lessee shall indemnify, defend and hold Lessor, its agents, employees and lenders, if any, harmless from and against any and all loss of rents and/or damages, liabilities, judgments, claims, expenses, penalties, and attorneys’ and consultants’ fees arising out of or involving any Hazardous Substance brought onto the Premises during the term of this Lease by or for Lessee, or any third party agent, representative or contractor of Lessee (provided, however, that Lessee shall have no liability under this Lease with respect to underground migration of any Hazardous Substance under the Premises from adjacent properties which Lessee did not contribute to or exacerbate). Lessee’s obligations shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation, removal, remediation, restoration and/or abatement thereof, and shall survive the expiration or termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall

 

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release Lessee from its obligations under this Lease with respect to Hazardous Substances, unless Lessor specifically agrees thereto in writing at the time of such agreement and such agreement specifically identifies this paragraph of the Lease.

(e) Investigations and Remediations. Lessor shall retain the responsibility and pay for any investigations or remediation measures required by governmental entities having jurisdiction with respect to the existence of Hazardous Substances on the Premises prior to the Commencement Date, unless such remediation measure is required as a result of Lessee’s use (including “Alterations”, as defined below) of the Premises, in which event Lessee shall be responsible for such payment if any violation is found. Lessee shall cooperate fully in any such activities at the request of Lessor, including allowing Lessor and Lessor’s agents to have reasonable access to the Premises at reasonable times in order to carry out Lessor’s investigative and remedial responsibilities. To Lessor’s actual knowledge, Lessor has delivered to Lessee a complete copy of the report of any third party that has investigated the potential presence of Hazardous Substances on the Premises at the request of Lessor.

(f) Lessor’s Responsibilities. Lessor warrants and represents to Lessee that, to Lessor’s actual knowledge, the Premises are free from Hazardous Substances. Lessor shall indemnify and hold Lessee harmless from and against any liability (but not consequential damages) arising from the presence of Hazardous Substances in or around the Premises caused by other than Lessee or its agents, employees, guests, invitees or sublessees.

6.3 Lessee’s Compliance with Applicable Requirements. With the exception of compliance of the Premises upon completion of Tenant Improvements in accordance with the provisions of Exhibit B with the requirements of the Americans with Disabilities Act as it may be amended from time to time (“ADA”), which compliance shall be the responsibility of Lessor, Lessee shall, at Lessee’s sole expense, fully, diligently and in a timely manner, materially comply with all applicable laws, covenants or restrictions of record, regulations and ordinances applicable to the Premises (“Applicable Requirements”), including, without limitation, any requirements of the ADA subsequently imposed as a result of any changes to the Premises made by Lessee, whether with or without Lessor consent, and also including the requirements of any applicable fire insurance underwriter or rating bureau and the recommendations of Lessor’s engineers and/or consultants which relate in any manner to the Lessee’s use of Premises, without regard to whether said requirements are now in effect or become effective after the Commencement Date. Lessee shall indemnify and hold Lessor harmless from Lessee’s failure to comply with this Paragraph 6.3, including without limitation, any failure by Lessee to comply with its ADA obligations. Lessee shall, within ten (10) days after receipt of Lessor’s written request, provide Lessor with copies of all permits and other documents, and other information evidencing Lessee’s compliance with any Applicable Requirements specified by Lessor, and shall immediately upon receipt by Lessee, notify Lessor in writing (and immediately provide to Lessor copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving the failure of Lessee or the Premises to comply with any Applicable Requirements. Notwithstanding the foregoing, in no event shall Lessee be required to make structural alterations or changes to the Premises or Building unless and to the extent necessitated by Lessee’s Alterations or by the specific use of the Premises or nature of the goods being stored in the Premises by Lessee (as opposed to the mere use of the Premises for warehousing and distribution of goods generally).

 

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6.4 Inspection; Compliance. Lessor, it consultants, and any ground lessor, mortgagee and/or beneficiary of a deed of trust (each, a “Lender”) under a ground lease, mortgage, deed of trust, or other hypothecation or security device recorded against the Project or any part thereof (collectively, “Security Device”) shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times upon reasonable prior telephonic notice, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease. The reasonable cost of any such inspections shall be paid by Lessee if any violation is found to exist and be the responsibility of Lessee hereunder.

7. Maintenance and Repair

7.1 Lessee’s Obligations. Except as set forth in subsection (b), below, Lessee shall, at Lessee’s sole expense, keep the non-structural portions of the Premises, and every part thereof, in good order, condition and repair, including, but not limited to, all equipment or facilities, such as plumbing, heating, ventilating, air-conditioning, electrical, lighting facilities, (but only to the extent such facilities serve only the Premises and are not part of the common portion of shared facilities), fixtures, interior walls, interior surfaces of exterior walls, ceilings, floors, windows, doors, plate glass and skylights. Notwithstanding the foregoing, Lessee shall not be obligated to effect repairs to the Premises that are made necessary by reason of structural defects in the Building, and Lessor shall be responsible for such repairs. Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices, specifically including the procurement and maintenance of the service contracts required below. Lessee’s obligations shall include restorations, replacements or renewals when necessary to keep the Premises, and each portion thereof, and all improvements thereon, in good order, condition and state of repair. Without limiting the foregoing, Lessee’s maintenance obligations shall be subject to each of the following:

(a) Service Contracts. Lessee shall, at Lessee’s sole expense, procure and maintain contracts, in form and substance reasonably satisfactory to Lessor, with copies to Lessor, for, and with contractors specializing and experienced in the maintenance of the following equipment and improvements, if any, if and when installed on and exclusively serving the Premises: (i) HVAC equipment, (ii) boiler, and pressure vessels, (iii) clarifiers, and (iv) any other equipment, if reasonably required by Lessor; provided, however, that Lessor reserves the right, upon notice to Lessee, to procure and maintain any or all of such service contracts, and, if Lessor so elects, Lessee shall reimburse Lessor, promptly upon demand, for the cost thereof.

(b) Qualifications to Lessee’s Maintenance Obligations. In the event that (i) the HVAC system(s) or a major component of the HVAC system(s) or any major operating system need to be replaced for reasons other than Lessee’s negligence, and the cost exceeds $2,000 for any single such replacement, or (ii) Lessee is required to make a repair or replacement that constitutes a capital expenditure, then, subject to the reimbursement obligation of Lessee in the next sentence, Lessee shall have the right to elect to have Lessor effect the repair or replacement at Lessor’s initial cost; provided that, for HVAC replacements, Lessee shall be responsible for the first $2,000 of such cost. Lessor shall amortize the cost of any repair or

 

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replacement made in accordance with the immediately preceding sentence over the useful life of the component repaired or replaced at a reasonable interest rate, all as reasonably determined by Lessor in accordance with generally accepted accounting principles, and Lessee shall, in addition to Lessee’s Proportionate Share of Operating Expenses, pay each month to Lessor during the term of this Lease, as the same may be extended, the monthly amount of such amortization. Lessor shall maintain all subgrade sewer and plumbing lines and the fire life safety equipment serving the Premises, and the cost of such maintenance shall be included in Operating Expenses.

(c) Lessor’s Election. If Lessee fails to perform Lessee’s maintenance and repair obligations set forth in this Lease, Lessor may at its option (but shall not be required to) enter upon the Premises after ten (10) days prior written notice to Lessee (except in the case of an emergency, in which case no notice shall be required), perform such obligations on Lessee’s behalf and put the same in good order, condition and repair, and the cost thereof, together with interest at the Lease Rate (as defined below) shall become due and payable as additional Rent to Lessor, together with Lessee’s next installment of Base Rent. Lessee shall indemnify, defend and hold Lessor, its employees, partners, directors, officers, representatives, agents and affiliates harmless from any and all claims of any kind or nature arising from or related to the foregoing.

7.2 Lessor’s Obligations. Subject to the foregoing, Lessor shall keep and maintain in good and tenantable condition and repair all the roof (including structural elements and coverings), bearing walls and foundations of the Building, Building systems, including HVAC, electrical, plumbing and the fire protection (but only those portions thereof that are shared, and not including portions located in and exclusively serving the Premises), and the Common Areas; provided, however, that Lessor shall not be required to make repairs necessitated by reason of the negligence or willful misconduct of Lessee, its servants, agents, employees or contractors, or anyone claiming under Lessee, or by reason of the failure of Lessee to perform or observe any conditions or agreements contained in this Lease, or caused by alterations, additions or improvements made by Lessee or anyone claiming under Lessee. Notwithstanding anything to the contrary contained in this Lease, Lessor shall not be liable to Lessee for failure to make repairs as herein specifically required of it unless Lessee has previously notified Lessor, in writing, of the need for such repairs and Lessor has failed to commence and complete said repairs within such period of time following receipt of Lessee’s written notification as is reasonable under the circumstances. Lessor shall have no liability to Lessee nor shall Lessee’s obligations under this Lease be reduced or abated in any manner whatsoever by reason of any inconvenience, annoyance, interruption or injury to business arising from Lessor’s making any repairs or changes which Lessor is required or permitted by this Lease or by any other lessee’s lease or required by law to make in or to any portion of the Project, Building or Premises unless arising from the gross negligence or willful misconduct of Lessor. It is the intention of the Parties that the terms of this Lease govern the respective obligations of the Parties as to maintenance and repair of the Premises, and they expressly waive the benefit of any statute now or hereafter in effect to the extent it is inconsistent with the terms of this Lease, including any statute now or hereafter in effect which would otherwise afford Lessee the right to make repairs at Lessor’s expense or to terminate this Lease because of Lessor’s failure to keep the Premises in good order, condition and repair.

 

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8. Utility Installations; Trade Fixtures; Alterations.

8.1 Definitions; Consent Required. The term “Utility Installations” refers to all floor and window coverings, air lines, power panels, electrical distribution, security and fire protection systems, communication systems, lighting fixtures, HVAC equipment, plumbing, and fencing in or on the Premises. The term “Trade Fixtures” shall mean Lessee’s machinery and equipment that can be removed without doing material damage to the Premises. The term “Alterations” shall mean any modification of the improvements, other than Utility Installations or Trade Fixtures, whether by addition or deletion. “Lessee Owned Alterations and/or Utility Installations” are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor pursuant to the provisions set forth below. Lessee shall not make any Alterations or Utility Installations to the Premises without Lessor’s prior written consent; provided that, Lessee may, however, make Alterations, which do not affect the structural components of the Building or building systems, to the interior of the Premises (excluding the roof or ceiling) without such consent but upon written prior notice to Lessor, so long as the Utility Installations are not visible from the outside, do not involve puncturing, relocating or removing the roof or any existing walls, and the cumulative cost thereof during this Lease as extended does not exceed $100,000 in the aggregate during the term, or $25,000 in any one year.

8.2 Consent. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with detailed plans. Consent shall be deemed conditioned upon Lessee’s: (i) acquiring all applicable governmental permits, (ii) furnishing Lessor with copies of both the permits and the plans and specifications prior to commencement of the work, and (iii) compliance with all conditions of said permits and other Applicable Requirements in a prompt and expeditious manner. Any Alterations or Utility Installations shall be performed in a workmanlike manner with good and sufficient materials. Lessee shall promptly upon completion furnish Lessor with as-built plans and specifications for any Alterations or Utility Installations, whether or not Lessor’s consent is required. For work which costs more than $100,000, Lessor may condition its consent upon Lessee providing a lien and completion bond in an amount equal to one and one-half times the estimated cost of such Alteration or Utility Installation and/or upon Lessee’s posting additional security for the completion of such Alterations or Utility Installations with Lessor.

8.3 Indemnification. Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanic’s or materialmen’s lien against the Premises or any interest therein. Lessee shall give Lessor not less than ten (10) days’ notice prior to the commencement of any work in, on or about the Premises, and Lessor shall have the right to post notices of non-responsibility. If, notwithstanding the foregoing, any liens or encumbrances for any obligation or for work claimed to have been furnished, done for, obligations incurred for or materials claimed to have been furnished to Lessee or any other party are asserted against the Project, or any portion thereof, such liens will be discharged by Lessee, by bond or otherwise, within ten (10) days after demand by Lessor, at the cost and expense of Lessee, and Lessee further agrees to defend, indemnify and hold harmless Lessor from and against any such liens or claims or actions thereon, together with costs of suit and attorneys’ fees incurred by Lessor in connection with any such claims or actions. If Lessee fails to discharge

 

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any such lien within such ten (10) day period, Lessor may, without waiving its rights and remedies based on such breach of Lessee and without releasing Lessee from any of its obligations, cause such liens to be released by any means it shall deem proper, including payment in satisfaction of the claims giving rise to such liens. Lessee shall reimburse Lessor, within ten (10) days after demand therefor, for any sum paid or incurred by Lessor to remove such liens.

8.4 Ownership; Removal; Surrender; and Restoration.

(a) Ownership. Subject to Lessor’s right to require removal or elect ownership as hereinafter provided, all Alterations and Utility Installations made by Lessee shall be the property of Lessee, but considered a part of the Premises. Lessor may, at any time, elect in writing to be the owner of all or any specified part of the Lessee Owned Alterations and Utility Installations. Unless Lessor requires removal as provided below, all Lessee Owned Alterations and Utility Installations shall, at the expiration or termination of this Lease, become the property of Lessor and be surrendered by Lessee with the Premises.

(b) Removal. By delivery to Lessee of written notice from Lessor not later than thirty (30) days prior to the end of the term of this Lease, Lessor may require that any or all Lessee Owned Alterations or Utility Installations be removed by the expiration or termination of this Lease; provided, however, that Lessor will not require removal of any such items that were made with Lessor’s consent unless Lessor conditioned such consent on such removal at the end of the term. Lessor may require the removal at any time of all or any part of any Lessee Owned Alterations or Utility Installations made without the required consent of Lessor

(c) Surrender/Restoration. Lessee shall surrender the Premises on or before the Expiration Date or any earlier termination date, with all of the improvements, parts and surfaces thereof broom clean and free of debris, and in good operating order, condition and state of repair, ordinary wear and tear, casualty damage that is not Lessee’s responsibility to repair and Lessor’s obligations hereunder excepted. “Ordinary wear and tear” shall not include any damage or deterioration that would have been prevented by good maintenance practice. Lessee shall repair any damage occasioned by the installation, maintenance or removal of Trade Fixtures, Lessee Owned Alterations and/or Utility Installations, furnishings, and equipment as well as the removal of any storage tank installed by or for Lessee, and the removal, replacement, or remediation of any soil, material or groundwater contaminated by Lessee. Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee. The failure by Lessee to timely vacate the Premises pursuant to this subparagraph without the express written consent of Lessor shall constitute a holdover under the provisions of this Lease.

8.5 Construction Covenants.

(a) Lessee acknowledges that labor disruption during Lessor’s development, construction, ownership and operation of the Project would result in damages to Lessor. Accordingly, Lessee covenants and agrees that all work performed on the Premises, including tenant improvements, which is covered by or the subject of collective bargaining agreements in effect from time-to-time for carpentry work between employers and the Southwest

 

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Regional Council of Carpenters shall be done in its entirety by general contractors signatory to and abiding by a collective bargaining agreement with the Carpenters Union (each, a “Carpenter Entity”). Further, Lessee agrees that the foregoing construction covenant will be included in all of Lessee’s contracts and subcontracts relating to construction work at the Premises. In addition, Lessee shall be responsible for all unpaid fringe benefit contributions of delinquent or bankrupt contractors or subcontractors for the carpentry work on the Premises.

(b) At least ten (10) days prior to the commencement of construction of any work to be performed by Lessee, Lessee shall submit to Lessor the names and addresses of all contractors and subcontractors selected by Lessee to perform such work, and Lessor shall have the right to disapprove the use of any contractor that Lessor believes, in good faith, would result in labor disruption or otherwise interfere with the development, construction and operation of the Project. Without limiting the foregoing, Lessor shall have the absolute right to disapprove any contractor or subcontractor whom Lessee proposes to use for carpentry work if such contractor or subcontractor is not signatory to and abiding by a collective bargaining agreement with the Carpenters Union. Upon Lessee’s request, Lessor shall provide Lessee with a copy of the Carpenters Union collective bargaining agreement.

(c) As used herein, the term “Qualified Non-Carpenter Entity” shall mean any contractor or subcontractor which is not a Carpenter Entity but which has comparable experience and competence in the performance of the applicable work. Lessor shall pay to Lessee the difference between (i) the amounts paid by Lessee to Carpenter Entities performing carpentry and millwright work in the Premises, and (ii) the cost that Lessee would have incurred if such work had been performed by Qualified Non-Carpenter Entities (“Increased Labor Cost”). The Increased Labor Cost shall be paid to Lessee following completion of the applicable work, subject to Lessee’s delivery to Lessor of the lowest bid for performance of the carpentry and millwright work by a Carpenter Entity and the lowest bid from a Qualified Non-Carpenter Entity.

9. Insurance; Indemnity.

9.1 Lessee’s Insurance. From and after the Commencement Date or the date of Early Possession of the Premises, whichever first occurs, and continuing thereafter until the expiration or sooner termination of the term of the Lease, Lessee shall carry and maintain, at its sole cost and expense, the following types of insurance in the amounts specified and in the form hereinafter provided for:

(a) Liability Insurance. A Commercial General Liability Policy of Insurance protecting Lessee and Lessor against claims for bodily injury, personal injury and property damage based upon or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $1,000,000 per occurrence with an “Additional Insured-Managers or Lessors of Premises Endorsement” and contain the “Amendment of the Pollution Exclusion Endorsement” for damage caused by heat, smoke or fumes from a hostile fire. The Policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an “insured contract” for the performance of Lessee’s indemnity obligations under this

 

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Lease. The limits of said insurance shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. In addition, Lessee shall obtain and keep in force excess or umbrella insurance in the amount of $5,000,000 which shall comply in all respects with requirements set forth herein for insurance.

(b) Property Insurance. A policy or policies of property damage insurance covering Lessee’s personal property, Trade Fixtures, and Lessee Owned Alterations and Utility Installations. Such insurance shall be full replacement cost coverage with a reasonable deductible. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property, Trade Fixtures and Lessee Owned Alterations and Utility Installations. Lessee shall provide Lessor with written evidence that such insurance is in force.

(c) Comprehensive Automobile Liability Insurance. Business automobile liability insurance, or equivalent form, with a combined single limit of not less than One Million Dollars ($1,000,000) per occurrence. Such insurance shall include coverage for owned, non-owned and hired automobiles. If Lessee is not using automobiles in connection with its business, the foregoing coverage will not be required.

(d) Business Interruption. Business interruption insurance covering loss of income and extra expense in such amounts as will reimburse Lessee for loss of earnings, income and extra expense for at least six (6) months attributable to all perils commonly insured against by prudent lessees, or attributable to the inaccessibility of or to the Premises, the Building or the Project as a result of such perils, or otherwise, preferably by the same insurance carrier that issues Lessee’s property insurance.

(e) Worker’s Compensation. Workers’ compensation as required by law, including employer’s liability insurance, with limits of not less than $1,000,000. Such policy shall be in full compliance with all current laws governing Worker’s Compensation.

(f) Other. Such other form(s) of insurance as Lessee, Lessor, or Lessor’s Lenders may reasonably require from time to time. Such insurance shall be in such form and amounts, and cover such risks as would be maintained by a prudent lessee of comparable size in a comparable business.

9.2 Lessee Policy Requirements. Insurance required herein shall be provided by companies duly licensed or admitted to transact business in the state where the Premises are located, and maintaining during the policy term a “General Policyholders Rating” of at least A-, VII, or such other rating as may be required by a Lender, as set forth in the most current issue of “Best’s Insurance Guide”. Lessee shall not do or permit to be done anything which invalidates the required insurance policies. Lessee shall, prior to the earlier of the Commencement Date or the date of Early Possession, deliver to Lessor certificates evidencing the existence and amounts of the required insurance. No such policy shall be cancelable or subject to material modification except after ten (10) business days’ prior written notice to Lessor. As used herein, “material modifications” shall mean changes that, if implemented, would cause Lessee not to be in compliance with the insurance requirements set forth in this Lease, including reduction in policy limits below the minimum required limits described in Paragraph 9.1. Lessee shall, at least ten (10) business days prior to the expiration of such policies, furnish Lessor with evidence of

 

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renewals or “insurance binders” evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. Such policies shall be for a term of at least one year, or the length of the remaining term of this Lease, whichever is less. All public liability, property damage and other casualty policies shall be written as primary policies, not contributing with and not in excess of coverage carried by Lessor, whose insurance shall be considered excess insurance only. If Lessee shall fail to procure and maintain the insurance required to be carried by it, Lessor may, but shall not be required to, procure and maintain the same, in which case, Lessee shall reimburse Lessor for all costs incurred by Lessor in procuring and maintaining such insurance within thirty (30) days after written notice from Lessor.

9.3 Lessor’s Insurance. During the term of this Lease, Lessor shall maintain casualty insurance covering the Building and the Project (excluding Trade Fixtures, Lessee Owned Alterations and Utility Installations). Such insurance shall provide protection against any peril included within the classification “Fire and Extended Coverage.” Lessor shall also maintain comprehensive public liability and property damage insurance with respect to the use, operation and condition of the Common Areas of the Building and the Project. Such insurance shall be in such amounts and with such deductibles as Lessor considers appropriate. Lessor may, but shall not be obligated to, obtain and carry any other form or forms of insurance as it or Lessor’s Lenders may determine advisable. The cost of all insurance maintained by Lessor shall be included in Operating Expenses. Notwithstanding any contribution by Lessee to the cost of insurance premiums as provided in this Lease, Lessee acknowledges that it has no right to receive any proceeds from any insurance policies maintained by Lessor.

9.4 Waiver of Subrogation. Without affecting any other rights or remedies, Lessee and Lessor each hereby release and relieve the other, and waive their entire right to recover damages against the other, for loss of or damage to its property arising out of or incident to the perils required to be insured against herein. The effect of such releases and waivers is not limited by the amount of insurance carried or required, or by any deductibles applicable hereto. The Parties agree to have their respective property damage insurance carriers waive any right to subrogation that such companies may have against Lessor or Lessee, as the case may be, so long as the insurance is not invalidated thereby, and to provide evidence thereof.

9.5 Indemnity. Except for Lessor’s negligence or willful misconduct, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor’s master or ground lessor, partners, property managers and Lenders, from and against any and all claims, loss of rents and/or damages, liens, judgments, penalties, attorneys’ and consultants’ fees, expenses and/or liabilities arising out of, involving, or in connection with, the use and/or occupancy of the Premises by Lessee. If any action or proceeding is brought against Lessor by reason of any of the foregoing matters, Lessee shall upon notice defend the same at Lessee’s expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be defended or indemnified. Lessee shall pay for any increase in the premiums for Lessor’s property insurance applicable to the Building or the Project if said increase is caused by Lessee’s acts, omissions, use or occupancy of the Premises.

 

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9.6 Exemption of Lessor from Liability. Except for Lessor’s gross negligence or willful misconduct, Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee’s employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, HVAC or lighting fixtures, or from any other cause, whether the said injury or damage results from conditions arising upon the Premises or upon other portions of the Building of which the Premises are a part, or from other sources or places. Lessor shall not be liable for any damages arising from any act or neglect of any other tenant of Lessor. Notwithstanding Lessor’s negligence or breach of this Lease, Lessor shall under no circumstances be liable for injury to Lessee’s business or for any loss of income or profit therefrom.

10. Damage and Destruction.

10.1 Definitions.

(a) “Premises Partial Damage” shall mean damage or destruction to the improvements on the Premises, other, than Lessee Owned Alterations and Utility Installations, which can reasonably be repaired in nine (9) months or less from the date of the damage or destruction. Lessor shall notify Lessee in writing within thirty (30) days from the date of the damage or destruction as to whether or not the damage is Partial or Total.

(b) “Premises Total Destruction” shall mean damage or destruction to the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which cannot reasonably be repaired in nine (9) months or less from the date of the damage or destruction. Lessor shall notify Lessee in writing within thirty (30) days from the date of the damage or destruction as to whether or not the damage is Partial or Total.

(c) “Insured Loss” shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which was caused by an event required to be covered by the insurance described in this Lease, irrespective of any deductible amounts or coverage limits involved.

(d) “Replacement Cost” shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of Applicable Requirements, and without deduction for depreciation.

(e) “Hazardous Substance Condition” shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in this Lease, in, on, or under the Premises.

10.2 Partial Damage - Insured Loss. If a Premises Partial Damage that is an Insured Loss occurs, Lessor shall, at Lessor’s expense (subject to receipt of adequate insurance proceeds), repair such damage (but not Lessee’s Trade Fixtures or Lessee Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect.

 

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10.3 Partial Damage - Uninsured Loss. If a Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee’s expense), Lessor may either: (i) repair such damage as soon as reasonably possible at Lessor’s expense, in which event this Lease shall continue in full force and effect, or (ii) terminate this Lease by giving written notice to Lessee within 30 days after receipt by Lessor of knowledge of the occurrence of such damage. Such termination shall be effective 60 days following the date of such notice.

10.4 Total Destruction. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs, at the election of Lessor or Lessee, this Lease shall terminate thirty (30) days following such Premises total Destruction. If the damage or destruction was caused by the gross negligence or willful misconduct of Lessee, Lessor shall have the right to recover Lessor’s damages from Lessee, to the extent not covered by insurance required to be carried hereunder. If neither Lessor nor Lessee elects to terminate this Lease, then the Premises Total Destruction shall be treated as a Premises Partial Damage and the provisions set forth above shall apply.

10.5 Damage Near End of Term. If at any time during the last year of this Lease there is damage for which the cost to repair exceeds three (3) months’ Base Rent, whether or not an Insured Loss, Lessor or Lessee may terminate this Lease effective sixty (60) days following the date of occurrence of such damage by giving written termination notice to Lessee within thirty (30) days after the date of occurrence of such damage. Notwithstanding the foregoing, if Lessee at that time has an exercisable option to extend this Lease, then Lessee may preserve this Lease by, (a) exercising such option and (b) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs on or before the earlier of (i) the date which is ten days after Lessee’s receipt of Lessor’s written notice purporting to terminate this Lease, or (ii) the day prior to the date upon which such option expires. If Lessee duly exercises such option during such period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor’s commercially reasonable expense, repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during such period, then this Lease shall terminate on the date specified in the termination notice and Lessee’s option shall be extinguished.

10.6 Abatement of Rent; Lessee’s Remedies.

(a) Abatement. In the event of Premises Partial Damage or Premises Total Destruction or a Hazardous Substance Condition for which Lessee is not responsible under this Lease, the Rent thereafter payable by Lessee for the remaining period required for the repair, remediation or restoration of such damage shall be abated in proportion to the degree to which Lessee’s use of the Premises is impaired. All other obligations of Lessee hereunder shall be performed by Lessee, and Lessor shall have no liability for any such damage, destruction, remediation, repair or restoration except as provided herein.

(b) Remedies. If Lessor shall be obligated to repair or restore the Premises and does not commence, in a substantial and meaningful way, such repair or restoration within sixty (60) days after such obligation shall accrue, Lessee may, at any time prior to the

 

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commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice, of Lessee’s election to terminate this Lease on a date not less than sixty (60) days following the giving of such notice. If Lessee gives such notice and such repair or restoration is not commenced within thirty (30) days thereafter, this Lease shall terminate as of the date specified in said notice. If the repair or restoration is commenced within said thirty (30) days, this Lease shall continue in full force and effect. “Commence” shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever first occurs.

10.7 Termination-Advance Payments. Upon termination of this Lease pursuant to the provisions of the damage and destruction provisions of this Lease, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor.

10.8 Waive Statutes. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent inconsistent herewith.

11. Utilities and Personal Property Taxes.

11.1 Utilities. Lessor, as part of the Tenant Improvements, shall stub and submeter all utilities and services supplied to the Premises, including water, gas, heat, light, power, and telephone, and trash disposal. Lessee shall pay for all utilities and services supplied to the Premises, as measured by such sub-meters, together with any taxes thereon. If any such services cannot be separately metered to Lessee, Lessee shall pay a reasonable proportion of all charges jointly metered.

11.2 Personal Property Taxes. Lessee shall pay, prior to delinquency, all taxes assessed against and levied upon Lessee Owned Alterations, Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee. When possible, Lessee shall cause such property to be assessed and billed separately from the real property of Lessor. If any of Lessee’s said personal property shall be assessed with Lessor’s real property, Lessee shall pay Lessor the taxes attributable to Lessee’s property within thirty (30) days after receipt of a written statement.

12. Assignment and Subletting.

12.1 Lessor’s Consent Required.

(a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or encumber (collectively, “assign or assignment”) or sublet all or any part of Lessee’s interest in this Lease or in the Premises without Lessor’s prior written consent, which consent, subject to the provisions of this Paragraph 12, shall not be unreasonably withheld.

(b) An assignment or subletting without consent shall, at Lessor’s option, be a Default curable after notice pursuant to the terms of this Lease, or a noncurable Breach without the necessity of any notice and grace period. If Lessor elects to treat such

 

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unapproved assignment or subletting as a noncurable Breach, Lessor may either: (i) terminate this Lease, or (ii) upon thirty (30) days written notice, increase the monthly Base Rent to the fair market rental value or one hundred ten percent (110%) of the Base Rent then in effect, whichever is greater. Further, in the event of such Breach and rental adjustment, all fixed and non-fixed rental adjustments scheduled during the remainder of the Lease term shall be increased to One Hundred Ten Percent (110%) of the scheduled adjusted rent.

(c) Lessee’s remedy for any breach of this Paragraph 12.1 by Lessor shall be limited to compensatory damages and/or declaratory/injunctive relief.

12.2 Terms and Conditions Applicable to Assignment and Subletting.

(a) Regardless of Lessor’s consent, any assignment or subletting shall not: (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of any obligations hereunder, or (iii) alter the primary liability of Lessee for the payment of Rent or for the performance of any other obligations to be performed by Lessee.

(b) Lessor may accept Rent or performance of Lessee’s obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of Rent or performance shall constitute a waiver or estoppel of Lessor’s right to exercise its remedies for Lessee’s Default or Breach.

(c) Lessor’s consent to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting.

(d) In the event of any Default or Breach by Lessee, Lessor may proceed directly against Lessee, any Guarantors or anyone else responsible for the performance of Lessee’s obligations under this Lease, including any assignee or sublessee, without first exhausting Lessor’s remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor.

(e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor’s determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises, if any, together with an administrative fee to Lessor of $2,000. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested.

(f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented to in writing.

 

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12.3 Additional Terms and Conditions Applicable to Subletting. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein:

(a) Lessee hereby assigns and transfers to Lessor all of Lessee’s interest in all Rent payable on any sublease, and Lessor may collect such Rent and apply same toward Lessee’s obligations under this Lease; provided, however, that until a Breach shall occur in the performance of Lessee’s obligations, Lessee may collect said Rent. Lessor shall not, by reason of the foregoing or any assignment of such sublease, nor by reason of the collection of Rent, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee’s obligations to such sublessee. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exists in the performance of Lessee’s obligations under this Lease, to pay to Lessor all Rent due and to become due under the sublease. Sublessee shall rely upon any such notice from Lessor and shall pay all Rents to Lessor without any obligation or right to inquire as to whether such Breach exists, notwithstanding any claim from Lessee to the contrary.

(b) In the event of a Breach by Lessee, Lessor may, at its option, require sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any prior Defaults or Breaches of such sublessor.

(c) Any matter requiring the consent of the sublessor under a sublease shall also require the consent of Lessor.

(d) No sublessee shall further assign or sublet all or any part of the Premises without Lessor’s prior written consent.

12.4 Intentionally Omitted.

12.5 Standards for Consent to Assignment or Subletting. Once Lessor has received the fee referred to in Paragraph 12.2(e) and such information as Lessor may reasonably request regarding the proposed assignee or subtenant, Lessor shall undertake to review Lessee’s request for consent to assign or sublease. In determining whether to give its consent to such assignment or subletting, Lessor shall consider all commercially reasonable factors, including, but not limited to, the following:

(a) The financial responsibility of the proposed assignee or sublessee;

(b) The nature of the occupancy and of the business to be conducted on the Premises and its suitability for the Premises, Building and/or the Project; and

(c) The need for and nature of any indicated alteration of the Premises by the proposed assignee or sublessee.

 

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Without limiting any other reasonable basis for withholding of consent, it shall be reasonable for Lessor to withhold consent to a proposed assignment or subletting if either the proposed assignee or sublessee, and/or any person or entity which directly or indirectly, controls, is controlled by, or is under common control with, such proposed assignee or sublessee is a tenant in the Project at the time of the request for consent, or if the proposed assignee or sublessee is a person with whom Lessor has, within the four (4) months prior to the request for consent, actively negotiated for a lease of space in the Project.

12.6 Permitted Transfer. Notwithstanding any contrary provision of the Lease, if Lessee is not in default, and provided the same is being done in good faith and not as a subterfuge in order to avoid Lessor’s rights of approval, Lessee may, without Lessor’s consent, assign this Lease to (i) an Affiliate of Lessee, (ii) a successor to Lessee by merger, reincorporation, reorganization or consolidation, or (iii) a successor to Lessee by purchase of all or substantially all of Lessee’s assets or capital stock (a “Permitted Transfer”). As used herein, “Affiliate” means, with respect to any party, a person or entity that controls, is under common control with, or is controlled by such party. In addition, a sale or transfer of all or substantially all of the memberships, interests or stock of Lessee shall be deemed a Permitted Transfer if (x) such sale or transfer occurs in connection with any bona fide financing or capitalization for the benefit of Lessee, or (y) Lessee is, or in connection with the proposed transfer becomes, a publicly traded entity. Lessor shall have no right to terminate this Lease in connection with, and shall have no right to any sums or other economic consideration resulting from, any Permitted Transfer.

13. Default; Breach; Remedies.

13.1 Default; Breach. A “Default” is defined as a failure by the Lessee to comply with or perform any of the terms, covenants, conditions or rules under this Lease. A “Breach” is defined as the occurrence of one or more of the following Defaults, and the failure of Lessee to cure such Default within any applicable grace period:

(a) The abandonment of the Premises; or the vacating of the Premises without apparent intent to return and without providing a reasonable level of security, or which results in the coverage of the property insurance described in Paragraph 8.3 being jeopardized as a result thereof, or without providing reasonable security to minimize potential vandalism.

(b) The failure of Lessee to make any payment of Rent (or to restore the Security Deposit) when due, where such failure continues for a period of three (3) business days following written notice to Lessee (which notice requirement may be satisfied by delivery of a statutory notice to pay or quit);

(c) The failure to provide reasonable evidence of insurance or surety bond, or to fulfill any other obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of three (3) business days following written notice to Lessee.

(d) The failure by Lessee to provide (i) reasonable written evidence of compliance with Applicable Requirements, (ii) the service contracts, (iii) the rescission of an

 

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unauthorized assignment or subletting, (iv) a Tenancy Statement, (v) a requested subordination, (vi) evidence concerning any guaranty and/or Guarantor, (vii) any document requested under Paragraph 42 (easements), or (viii) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this Lease, where any such failure continues for a period of ten (10) business days following written notice to Lessee.

(e) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the Rules and Regulations, other than those described in subparagraphs (a), (b) or (c), above, where such Default continues for a period of thirty (30) days after written notice; provided, however, that if the nature of Lessee’s Default is such that more than thirty (30) days are reasonably required for its cure, then it shall not be deemed to be a Breach if Lessee commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion.

(f) The occurrence of any of the following events: (i) the making of any general arrangement or assignment for the benefit of creditors; (ii) becoming a “debtor” as defined in 11 U.S.C. § 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee’s assets located at the Premises or of Lessee’s interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee’s assets located at the Premises or of Lessee’s interest in this Lease, where such seizure is not discharged within thirty (30) days; provided, however, in the event that any provision of this subparagraph is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions.

(g) The discovery that any financial statement of Lessee or of any Guarantor given to Lessor was knowingly and materially false.

(h) If the performance of Lessee’s obligations under this Lease is guaranteed: (i) the death of a Guarantor, (ii) the termination of a Guarantor’s liability with respect to this Lease other than in accordance with the terms of such guaranty, (iii) a Guarantor’s becoming insolvent or the subject of a bankruptcy filing, (iv) a Guarantor’s refusal to honor the guaranty, or (v) a Guarantor’s breach of its guaranty obligation on an anticipatory basis, and Lessee’s failure, within sixty (60) days following written notice of any such event, to provide written alternative assurance or security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the Guarantors that existed at the time of execution of this Lease.

13.2 Remedies. If Lessee fails to perform any of its affirmative duties or obligations, within any applicable notice or grace period (or in case of an emergency, without notice), Lessor may, at its option, perform such duty or obligation on Lessee’s behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee immediately upon receipt of an invoice therefor. If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its option, may require all future payments to be made by Lessee to be by cashier’s

 

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check. In the event of a Breach, Lessor may, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach:

(a) Terminate Lessee’s right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Lessee shall immediately surrender possession to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the unpaid Rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee’s failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys’ fees, and leasing commissions. As used in provisions (i) and (ii) of the immediately preceding sentence, the “worth at the time of award” is computed by allowing interest at the Lease Rate (as defined below). The worth at the time of award of the amount referred to in provision (iii) of the immediately preceding sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). Efforts by Lessor to mitigate damages caused by Lessee’s Breach of this Lease shall not waive Lessor’s right to recover damages under Paragraph 12. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding any unpaid Rent and damages as are recoverable therein, or Lessor may reserve the right to recover all or any part thereof in a separate suit. If a notice and grace period required under this Lease was not previously given, a notice to pay rent or quit, or to perform or quit given to Lessee under the unlawful detainer statute shall also constitute the notice required by this Lease. In such case, the applicable grace period required by this Lease and the unlawful detainer statute shall run concurrently, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute.

(b) Continue the Lease and Lessee’s right to possession and recover the Rent as it becomes due, in which event Lessee may sublet or assign, subject only to reasonable limitations. Acts of maintenance, efforts to relet, and/or the appointment of a receiver to protect the Lessor’s interests, shall not constitute a termination of the Lessee’s right to possession.

Pursue any other remedy now or hereafter available under the laws or judicial decisions of the state wherein the Premises are located, including, without limitation, the right to restrain by injunction the violation or attempted violation of any of the covenants, agreements or conditions of this Lease. The expiration or termination of this Lease and/or the termination of Lessee’s right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee’s occupancy of the Premises.

 

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13.3 Inducement Recapture. Any agreement for free or abated rent or other charges, for any option to extend the term of this Lease, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee’s entering into this Lease, all of which concessions are hereinafter referred to as “Inducement Provisions,” shall be deemed conditioned upon Lessee’s full and faithful performance of all of the terms, covenants and conditions of this Lease. Upon Breach of this Lease by Lessee, any such Inducement Provision shall automatically be deemed deleted from this Lease and of no further force or effect, and any Rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Lessor under such an Inducement Provision shall be immediately due and payable by Lessee to Lessor, notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of Rent or the cure of the Breach which initiated the operation of this paragraph shall not be deemed a waiver by Lessor of the provisions of this paragraph unless specifically so stated in writing by Lessor at the time of such acceptance.

13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee of Rent will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by any Lender. Accordingly, if any Rent shall not be received by Lessor within five (5) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a one-time late charge equal to five percent (5%) of each such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of such late payment. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee’s Default or Breach with respect to such overdue amount, nor prevent the exercise of any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive installments of Base Rent, then notwithstanding any provision of this Lease to the contrary, Base Rent shall, at Lessor’s option, become due and payable quarterly in advance. In the event any check tendered by Lessee is returned by Lessor’s bank for any reason, it will be considered late and will be subject to all late charges plus a Twenty Dollar ($20.00) fee. After two such occasions in any twelve (12) month period, Lessor will have the right to receive further payments of Rent by a cashier’s check or money order.

13.5 Interest. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor, when due as to scheduled payments (such as Base Rent) or within thirty (30) days following the date on which it was due for non-scheduled payment, shall bear interest from the date when due, as to scheduled payments, or the thirty-first (31st) day after it was due as to non-scheduled payments, at the rate per annum (the “Lease Rate”) equal to a rate of interest equal to the prime rate as announced from time to time by Bank of America, N.A., plus three percent (3%), but in no event more than the maximum rate allowed by law. Interest is payable in addition to the late charge provided in the immediately preceding paragraph.

13.6 Breach by Lessor. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph, a reasonable time shall in no event be less than thirty (30) days after receipt by Lessor, and any Lender whose name and address shall have been

 

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furnished Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor’s obligation is such that more than thirty (30) days are reasonably required for its performance, then Lessor shall not be in breach if performance is commenced within such thirty (30) day period and thereafter diligently pursued to completion. Each Lender shall also have a reasonable period of time within which, at such Lender’s option, to remedy the breach.

14. Condemnation.

14.1 Permanent Taking. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (collectively “Condemnation”), this Lease shall terminate as to the part taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than ten percent (10%) of the Premises, or more than twenty-five percent (25%) of the land area portion of the Project not occupied by the Building, is taken by Condemnation, Lessee may, at Lessee’s option, to be exercised in writing within ten (10) business days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten (10) business days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not timely terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in proportion to the reduction in utility of the Premises caused by such Condemnation.

14.2 Condemnation Award. Condemnation awards and/or payments shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold, the value of the part taken, or for severance damages; provided, however, that Lessee may apply for a separate award for Lessee’s relocation expenses or loss of Trade Fixtures, without regard to whether or not this Lease is terminated pursuant to the provisions of this Paragraph. In the event that this Lease is not terminated by reason of the Condemnation, Lessor shall repair any damage to the Premises caused by such Condemnation, provided that Lessor shall not be obligated to incur cost in connection with the same in excess of the amount of any proceeds actually received by Lessor.

14.3 Temporary Taking. In the event of a taking of the Premises or any part thereof for temporary use, (i) this Lease shall be and remain unaffected thereby and Rent shall not abate, and (ii) Lessee shall be entitled to receive for itself such portion(s) of any award made for such use for the period of the taking which is within the Term, provided that if such taking shall remain in force at the expiration or earlier termination of this Lease, Lessee shall then pay to Lessor a sum equal to the reasonable cost of performing Lessee’s obligations under this Lease with respect to surrender of the Premises, and upon such payment Lessee shall be excused from such obligations. For purposes of the foregoing, a temporary taking shall be defined as a taking for a period of one hundred eighty (180) days or less.

15. Brokers.

15.1 Representations and Indemnities. Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder (other than

 

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the Brokers) in connection with this Lease, and that no one other than said named Brokers is entitled to any commission or finder’s fee in connection herewith. Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying Party, including any costs, expenses, attorneys’ fees reasonably incurred with respect thereto.

15.2 Brokers’ Commissions. Lessor’s Broker and Lessee’s Broker shall be compensated in connection with this Lease in accordance with separate written agreements between Lessor and each such Broker.

16. Estoppel Certificates.

(a) Each Party (as “Responding Party”) shall within ten (10) business days after written notice from the other Party (the “Requesting Party”) execute, acknowledge and deliver to the Requesting Party a statement in writing in form of a commercially reasonable “Estoppel Certificate” form, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party, or Lessor’s Lender, if any.

(b) If the Responding Party shall fail to execute or deliver the Estoppel Certificate within such ten business day period, the Requesting Party may execute an Estoppel Certificate stating that: (i) the Lease is in full force and effect without modification except as may be represented by the Requesting Party, (ii) there are no uncured defaults in the Requesting Party’s performance, and (iii) if Lessor is the Requesting Party, not more than one month’s rent has been paid in advance. Prospective purchasers and encumbrancers may rely upon the Requesting Party’s Estoppel Certificate, and the Responding Party shall be estopped from denying the truth of the facts contained in said Certificate.

(c) If Lessor desires to finance, refinance, or sell the Premises, or any part thereof, Lessee and all Guarantors shall deliver to any potential lender or purchaser designated by Lessor such financial statements as may be reasonably required by such lender or purchaser, including but not limited to Lessee’s financial statements for the past three (3) years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth.

17. Definition Of Lessor. The term “Lessor” as used herein shall mean the owner or owners at the time in question of the fee title to the Premises, or, if this is a sublease, of the Lessee’s interest in the prior lease. In the event of a transfer of Lessor’s title or interest in the Premises or this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor. Upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined.

18. Severability. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof.

 

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19. Days. Unless otherwise specifically indicated to the contrary, the word “days” as used in this Lease shall mean and refer to calendar days.

20. Limitation On Liability. In consideration of the benefits accruing hereunder, Lessee on behalf of itself and all successors and assigns of Lessee, covenants and agrees that, notwithstanding anything to the contrary and notwithstanding any applicable law to the contrary:

(a) the liability of Lessor under this Lease (including any liability for any actual or alleged failure, breach or default by Lessor under this Lease and/or negligence of Lessor hereunder) and any recourse against Lessor shall be limited solely to Lessor’s interest in the Project (and not any other assets of Lessor); and

(b) the obligations of Lessor under this Lease do not constitute personal obligations of the members, partners or subpartners of Lessor, or any of the managers, directors, officers or shareholders of Lessor or Lessor’s members, partners or subpartners, and Lessee shall not seek recourse against any such person or against any of their personal assets for satisfaction of any liability with respect to this Lease.

21. Time Of Essence. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease.

22. No Prior or Other Agreements. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective.

23. Notices.

23.1 Notice Requirements. All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by courier) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission, and shall be deemed sufficiently given if served in a manner specified in this paragraph. The addresses noted adjacent to a Party’s signature on this Lease shall be that Party’s address for delivery or mailing of notices. Either Party may by written notice to the other specify a different address for notice, except that upon Lessee’s taking possession of the Premises, the Premises shall constitute Lessee’s address for notice. A copy of all notices to Lessor shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate in writing.

23.2 Date of Notice. Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail the notice shall be deemed given forty-eight (48) hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantee next day delivery shall be deemed given twenty-four (24) hours after delivery of the same to the Postal Service or courier. Notices transmitted by facsimile transmission or similar means shall be deemed delivered upon telephone confirmation of receipt, provided a copy is also delivered via delivery or mail. If notice is received on a Saturday, Sunday or legal holiday, it shall be deemed received on the next business day.

 

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24. Waivers. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or of any other term, covenant or condition hereof. Lessor’s consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor’s consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. The acceptance of Rent by Lessor shall not be a waiver of any Default or Breach by Lessee. Any payment by Lessee may be accepted by Lessor on account of monies or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment.

25. Recording. No recordation of any memorandum of this Lease, or “short form” of this Lease, shall be permitted without the prior written consent of Lessor, which shall be withheld or given in Lessor’s sole discretion. The Party requesting recordation shall be responsible for payment of any fees applicable thereto.

26. Holdover. Provided that Lessee is not in default under the terms of this Lease beyond applicable notice and grace periods, Lessee shall have the right to remain in the Premises at the expiration of the term of the Lease for a period up to six (6) months on the terms and conditions set forth herein, provided that the Base Rent payable during such period shall be one hundred twenty-five percent (125%) of the Base Rent applicable during the month immediately preceding the expiration of the Lease term. Lessee shall, within such six (6) month period, have the right to shorten the period by delivering written notice to Lessor not less than thirty (30) days prior to the date on which Lessee elects to have such period end, in which case Lessee shall vacate the Premises and return possession of the same to Lessor as though that date were the Expiration Date with no further right to hold over. Except as set forth in the immediately preceding two sentences, Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or termination of this Lease. In the event that Lessee holds over, then, without limiting Lessor’s rights and remedies, the Base Rent shall be increased to one hundred fifty percent (150%) of the Base Rent applicable during the month immediately preceding the expiration or termination, and Lessee shall indemnify and hold harmless Lessor against any loss arising out of such holding over. Nothing contained herein shall be construed as consent by Lessor to any holding over by Lessee.

27. Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity.

28. Covenants and Conditions; Construction of Agreement. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. In construing this Lease, all headings and titles are for the convenience of the parties only and shall not be considered a part of this Lease. Whenever required by the context, the singular shall include the plural and vice versa. This Lease shall not be construed as if prepared by one of the parties, but rather according to its fair meaning as a whole, as if both parties had prepared it.

 

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29. Binding Effect; Choice Of Law. This Lease shall be binding upon the parties, their personal representatives, successors and assigns and be governed by the laws of the State of Nevada. Any litigation between the Parties hereto concerning this Lease shall be initiated in Storey County, Nevada, and the Parties hereby expressly consent to the foregoing jurisdiction.

30. Subordination; Attornment; Non-Disturbance.

30.1 Subordination. This Lease and any Option granted hereby shall be subject and subordinate to any Security Device, now or hereafter placed upon the Premises, to any and all advances made on the security thereof, and to all renewals, modifications, and extensions thereof. Lessee agrees that each Lender shall have no liability or obligation to perform any of the obligations of Lessor under this Lease. Any Lender may elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device by giving written notice thereof to Lessee, whereupon this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof.

30.2 Attornment. Subject to the non-disturbance provisions of the immediately following paragraph, Lessee agrees to attorn to a Lender or any other party who acquires ownership of the Premises by reason of a foreclosure of a Security Device, and that in the event of such foreclosure, such new owner shall not: (i) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership; (ii) be subject to any offsets or defenses which Lessee might have against any prior lessor, or (iii) be bound by prepayment of more than one (1) month’s rent.

30.3 Non-Disturbance. With respect to Security Devices entered into by Lessor after the execution of this Lease, Lessee’s attornment shall be subject to receiving from the Lender a non-disturbance agreement in such Lender’s standard from (a “Non-Disturbance Agreement”) which Non-Disturbance Agreement provides that Lessee’s possession of the Premises, and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. Further, within thirty (30) days after the execution of this Lease, Lessor shall request a Non-Disturbance Agreement from the holder of any pre-existing Security Device which is secured by the Premises.

30.4 Self-Executing. The agreements contained in this paragraph shall be effective without the execution of any further documents; provided, however, that, upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of the Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any subordination, attornment and/or Non-Disturbance Agreement provided for herein.

31. Attorneys’ Fees. If any Party brings an action or proceeding involving the Premises to enforce the terms hereof or to declare rights hereunder, the Prevailing Party (as hereafter defined) in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorneys’ fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term,

 

33.


Prevailing Party” shall include, without limitation, a Party who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party of its claim or defense. The attorneys’ fees award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys’ fees reasonably incurred. In addition, Lessor shall be entitled to attorneys’ fees, costs and expenses incurred in the preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach.

32. Lessor’s Access; Showing Premises; Repairs. Lessor and Lessor’s agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times for the purpose of showing the same to prospective purchasers, lenders, or lessees, and making such alterations, repairs, improvements or additions to the Premises as Lessor may deem necessary. All such activities shall be without abatement of rent or liability to Lessee. Lessor may at any time place on the Premises any ordinary “For Sale” signs and Lessor may during the last twelve (12) months of the term hereof place on the Premises any ordinary “For Lease” signs.

33. Auctions. Lessee shall not conduct, nor permit to be conducted, any auction upon the Premises without Lessor’s prior written consent. Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to permit an auction.

34. Signs. Lessee shall not place any sign upon the Premises without Lessor’s prior written consent. All signs must comply with all Applicable Requirements. Lessor shall have the right to remove any signs or other matter installed without Lessor’s consent and/or violating Applicable Requirements, without being liable to Lessee by reason of such removal, and to charge the cost of removal to Lessee as additional rent hereunder, payable within ten (10) days of written demand by Lessor.

35. Termination; Merger. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, that Lessor may elect to continue any one or all existing subtenancies. Lessor’s failure within ten (10) days following any such event to elect to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor’s election to have such event constitute the termination of such interest.

36. Consents. Except as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor’s actual reasonable costs and expenses (including but not limited to architects’, attorneys’, engineers’ and other consultants’ fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent, including but not limited to consents to an assignment, a subletting or the presence or use of a Hazardous Substance, shall be paid by Lessee within ten (10) days after receipt of an invoice. Lessor’s consent to any act, assignment or subletting shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by

 

34.


Lessor at the time of such consent. The failure to specify herein any particular condition to Lessor’s consent shall not preclude the imposition by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. In the event that either Party disagrees with any determination made by the other hereunder and reasonably requests the reasons for such determination, the determining party shall furnish its reasons in writing and in reasonable detail within ten (10) business days following such request.

37. Intentionally Omitted.

38. Quiet Possession. Subject to payment by Lessee of the Rent and performance of all of the covenants, conditions and provisions on Lessee’s part to be observed and performed under this Lease, Lessee shall have quiet possession and quiet enjoyment of the Premises during the term hereof.

39. Further Assurances. The parties agree to promptly sign all documents reasonably requested to give effect to the provisions of this Lease.

40. Security Measures. Lessee hereby acknowledges that the rental payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties.

41. Reservations. Lessor reserves to itself the right, from time to time, to grant, without the consent or joinder of Lessee, such easements (including reciprocal easements affecting the Premises and other buildings within the Project), rights and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights, dedications, maps and restrictions do not increase Lessee’s financial obligations hereunder and do not unreasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement rights, dedication, map or restrictions, and to abide by the terms of any such restrictions and/or agreements.

42. Performance Under Protest. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment “under protest” and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay.

43. Authority. If either Party hereto is a corporation, trust, limited liability company, partnership, or similar entity, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. Each party shall, within thirty (30) days after request, deliver to the other party satisfactory evidence of such authority.

 

35.


44. Conflict. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions.

45. Offer. Preparation of this Lease by either Party or their agent and submission of same to the other Party shall not be deemed an offer to lease to the other Party. This Lease is not intended to be binding until executed and delivered by all Parties hereto.

46. Amendments. This Lease may be modified only in writing, signed by the Parties in interest at the time of the modification. As long as they do not materially change Lessee’s obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by a Lender in connection with the obtaining of normal financing or refinancing of the Premises.

47. Multiple Parties. If more than one person or entity is named herein as either Lessor or Lessee, such multiple Parties shall have joint and several responsibility to comply with the terms of this Lease.

48. ERISA. It is a condition precedent to Lessor’s obligations under this Lease that Lessee execute and deliver to Lessor an ERISA Certification substantially in the form of Exhibit E attached hereto and incorporated herein by reference.

49. Unavoidable Delays. If the performance of Lessor of any act required herein, including, without limitation, the design, planning, permitting, construction and completion of the Tenant Improvements, is prevented or delayed by reason of strikes, lockouts, labor disputes, governmental delays, acts of God, fire, floods, epidemics, freight embargoes, unavailability of materials and supplies, development moratoriums imposed by any governmental authority, or other causes beyond the reasonable control of Lessor, Lessor shall be excused from performing that obligation for the period equal to the period of prevention or delay.

50. Financial Information. Upon reasonable request, Lessee shall furnish Lessor with true and complete copies of (i) Lessee’s most recent audited annual financial statements, (ii) Lessee’s most recent unaudited quarterly financial statements, and (iii) any other financial information or summaries that Lessee typically provides to its lenders or shareholders

51. Captions, Articles and Paragraph Numbers. The captions appearing in the body of this Lease have been inserted as a matter of convenience and for reference only and in no way define, limit or enlarge the scope or meaning of this Lease. All references to paragraph numbers refer to paragraphs in this Lease.

52. Counterparts. This Lease may be executed in multiple counterparts, all of which shall constitute one and the same Lease.

53. Interpretation. Neither Party, nor its attorney, shall be deemed the drafter of this Lease for purposes of interpreting or construing any of the provisions of this Lease in any

 

36.


judicial proceeding which may hereafter arise between the Parties or their respective assigns or successors-in-interest. This Lease shall be interpreted in accordance with the fair meaning thereof, and not strictly for or against any Party hereto. Lessee acknowledges that it has read this Lease in its entirety and has had the opportunity to freely negotiate any or all of the terms hereof before executing the same.

54. Arbitration. In any case where this Lease expressly provides for submission of a dispute or matter to arbitration (but not otherwise), the same shall be settled by arbitration in Las Vegas, Nevada, before one arbitrator in accordance with the procedural rules of the American Arbitration Association (or any successor thereto) then in effect. The decision of the arbitrator shall be final, conclusive and binding on the parties, but the powers of the arbitrator are hereby expressly limited to the determination of factual issues, and the arbitrator shall have no power to reform, supplement or modify this Lease. The arbitrator shall make only required findings of fact incident to an arbitrable dispute, which findings shall be set forth in reasonable detail in a written decision by the arbitrator. Lessor and Lessee shall share equally in the cost and expenses of such arbitration, and each shall separately pay its own attorneys’ fees and expenses, unless the arbitrator finds that one of the parties did not act in good faith in connection with the dispute or the conduct of the arbitration proceeding, in which case the arbitrator may award all or part of said costs, expenses and fees to the other Party.

55. Options to Extend.

55.1 Grant of Initial Option. Lessor hereby grants to Lessee an option (the “Initial Option”) to extend the Term of this Lease for an additional term of five (5) years (the “Initial Option Term”), with all terms, covenants and conditions of this Lease unmodified and in full force and effect except for Minimum Monthly Rent, which shall be as set forth below. In order to exercise the Initial Option, Lessee must give Lessor written notice of its intention to do so (“Initial Option Notice”) on or before February 28, 2014. In the Initial Option Notice, Lessee shall have the right to specify an amount of square footage up to a total of 241,808 square feet that Lessee will lease in the event that, in response to the Initial Option Notice, Lessor opts to construct the Building Addition (or portion thereof) and relocate a portion of the Premises thereto in accordance with the provisions of Section 55.2.

55.2 Lessor’s Election re Initial Option. Within ten (10) business days following the later of (a) receipt of the Initial Option Notice or (b) December 31, 2013, Lessor shall, in its sole and absolute discretion, either (i) elect to have Lessee remain in the Premises for the entire Initial Option Term, or (ii) elect to cause the Building Addition to be constructed in the Lot 1 Expansion Area containing square footage equal to at least the greater of 146,640 square feet or the higher amount specified in Lessee’s Initial Option Notice, if any, and to cause Lessee to relocate from the most northerly 146,640 square feet of the Initial Premises into the Building Addition (or, if Lessor has constructed more than the amount of space to which Lessee is to be relocated, into the most northerly portion of the Building Addition). In the event Lessor makes the election in subpart (ii), above, Lessee shall, within thirty (30) days following notice from Lessor of such election, certify to Lessor that Lessee has a minimum net worth (the “Required Minimum Net Worth”) equal to $10,000,000. Such certification shall be made either by delivery of Lessee’s December 31, 2012 audited financial statement showing satisfaction of the Required Minimum Net Worth or by delivery of a current financial statement prepared in

 

37.


accordance with generally accepted accounting standards and certified as true and correct by an officer of Lessee showing satisfaction of the Required Minimum Net Worth; provided that, if Lessee has specified in Lessee’s Initial Option Notice more that 146,640 square feet, the Required Minimum Net Worth shall be $15,000,000. If Lessor has made the election in subpart (ii), above, and Lessee does not timely deliver the foregoing certification to Lessor, Lessee’s Initial Option Notice shall be deemed withdrawn and of no further force or effect. If Lessor has not made the election in subpart (ii), above, and has instead elected to have Lessee remain in the Premises for the entire Initial Option Term, Lessee shall have no obligation to satisfy any Required Minimum Net Worth or to provide certification regarding the same.

55.3 First Option Term Rent For Original Premises. During the First Option Term, the Minimum Monthly Rent shall be as follows:

(a) If Lessor makes the election in subpart (i) of Section 55.2 to have Lessee remain in the Premises for the entire Initial Option Term, Minimum Monthly Rent shall be as set forth below.

 

Lease Months

   Monthly Base
Rent/square
feet of gross
leasable area
 

Jan 2015 – Oct 2015

   $ 0.2875   

Nov 2015 – Oct 2016

   $ 0.30   

Nov 2016 – Oct 2017

   $ 0.31   

Nov 2017 – Oct 2018

   $ 0.318   

Nov 2018 – Oct 2019

   $ 0.3257   

Nov 2019 – Dec 2019

   $ 0.3338   

(b) If Lessor makes the election in subpart (ii) of Section 55.2 to cause the Building Addition to be constructed and to relocate a portion of the Premises to the Building Addition, the Minimum Monthly Rent for the portion of the Premises located within the Initial Premises and the Expansion Premises (i.e., not located within the Building Addition), shall be as set forth in subsection (a), above. Until the relocation to the Building Addition, such rent shall also apply to the portion of the Premises from which Lessee is to be relocated until such time as the relocation has occurred. The Minimum Monthly Rent for the portion of the Premises located in the Building Addition, shall, on a per square foot basis, initially be the sum of $0.295 multiplied by a fraction, the numerator of which shall be the Index (as defined below) in effect on January 1, 2015 and the denominator of which shall be the Index in effect on January 1, 2012, but in no event shall such initial rent be less than $0.295 per square foot of gross leasable area. On January 1, 2016, and on each subsequent anniversary of the commencement of the First Option Term, the Minimum Monthly Rent shall be increased by 2.5%. As used herein, “Index” shall mean the Consumer Price Index for All Urban Consumers (Los Angeles/Orange County/Riverside Area: Base 1982-84 = 100), as published by the United States Department of Labor. In the event that the Index is no longer published, Landlord shall select another index that reasonably approximates the changes measured by the Index.

55.4 Moving Costs and Improvements in Connection with Relocation. If Lessor makes the election in subpart (ii) of Section 55.2 to cause the Building Addition to be constructed and to relocate a portion of the Premises to the Building Addition, Lessor shall, prior to such relocation, at Lessor’s sole cost and expense, make the following improvements to the portion of the Premises to be located within the Building Addition:

(a) Provide an additional and separate 2,500 square feet of office space and at least 4 male and 4 female restrooms at the south entrance to the portion of the Premises located in the Building Addition.

 

38.


(b) A minimum of twelve (12) dock high doors with mechanical in-pit levelers, seals, and powered dock locks. The location of the outfitted docks shall be identified by the Tenant

(c) Number the interior and exterior loading doors in sequential order.

Further, Lessor shall reimburse Lessee for the reasonable out-of-pocket costs incurred by Lessee in connection with such relocation, including transfer of racking systems and personal property, up to a maximum amount of four hundred thousand dollars ($400,000). In addition, but only in the event Lessor has elected, pursuant to Section 55.2, to construct the Building Addition or portion thereof and relocate Lessee, Lessor shall reimburse Lessee for additional improvements made to the Premises by Lessee up to a maximum reimbursement of seventy five thousand dollars ($75,000). Such improvements shall be made by Lessee in accordance with the provisions of Section 8 of this Lease. In order to obtain any portion of the foregoing reimbursement, Lessee shall submit to Lessor, not later than the date twelve (12) months following relocation of Lessee to the Building Addition pursuant to Section 55.2, an application or applications for payment accompanied by reasonable evidence of the expenditure and incorporation of work into the Premises and waiver of lien claims associated therewith.

55.5 Grant of Second Option. Provided that Lessee has exercised the First Option (and such exercise has not been deemed withdrawn by virtue of Lessee’s failure to provide evidence to Lessor of its satisfaction of the Net Worth Requirement), Lessor hereby grants to Lessee a second option (the “Second Option”) to extend the Term of this Lease for an additional term of five (5) years (the “Second Option Term”), with all terms, covenants and conditions of this Lease unmodified and in full force and effect except for Minimum Monthly Rent, which shall calculated in accordance with Sections 55.6 and 55.7, below. In order to exercise the Second Option, Lessee must give Lessor written notice of its intention to do so (“Second Option Notice”) on or before July 1, 2019.

55.6 Second Option Term Rent. The Base Rent payable during the Second Option Term shall be equal to ninety-five percent (95%) of the then prevailing fair market rental value of the Premises as determined herein. Lessor shall initially determine fair market rental value by using commercially reasonable good faith judgment. As used herein, “fair market rental value” shall mean the projected prevailing rental rate as of the first day of the Second Option Term for renewal and extension leases for similar premises situated in the Project. Lessor shall provide written notice of such amount within thirty (30) days after receipt of the Second Option Notice. Lessee shall have fifteen (15) days (“Lessee’s Review Period”) after receipt of Lessor’s notice of the fair market rental value within which to accept such fair market rental value or to reasonably object thereto in writing. In the event Lessee objects to the fair market rental value submitted by Lessor, Lessor and Lessee shall attempt in good faith to agree

 

39.


upon such fair market rental value, using their best good faith efforts. If Lessor and Lessee fail to reach agreement on such fair market rental value within fifteen (15) days following Lessee’s Review Period (the “Outside Agreement Date”), then each party’s determination shall be submitted to arbitration in accordance with the next paragraph.

55.7 Arbitration.

(a) Lessor and Lessee shall each appoint one arbitrator who shall by profession be a real estate broker who shall have been active over the five (5) year period ending on the date of such appointment in the leasing of industrial and warehouse properties in the Reno/Sparks, Nevada area. The determination of the arbitrators shall be limited solely to the issue of whether Lessor’s or Lessee’s submitted fair market rental value for the Premises is closer to the actual fair market rental value for the Premises as determined by the arbitrators, taking into account the requirements of this paragraph regarding same. Each such arbitrator shall be appointed within fifteen (15) days after the Outside Agreement Date.

(b) The two arbitrators so appointed shall within fifteen (15) days of the date of the appointment of the last appointed arbitrator agree upon and appoint a third arbitrator who shall be qualified under the same criteria set forth hereinabove for qualification of the initial two arbitrators.

(c) The three arbitrators shall within fifteen (15) days of the appointment of the third arbitrator reach a decision as to whether the parties shall use Lessor’s or Lessee’s submitted fair market rental value, and shall notify Lessor and Lessee thereof. Such decision shall be based upon the factors described in this paragraph.

(d) The decision of the majority of the three arbitrators shall be binding upon Lessor and Lessee.

(e) If either Lessor or Lessee fails to appoint an arbitrator within the time period specified hereinabove, the arbitrator appointed by one of them shall reach a decision, notify Lessor and Lessee thereof, and such arbitrator’s decision shall be binding upon Lessor and Lessee.

(f) If the two arbitrators fail to agree upon and appoint a third arbitrator, both arbitrators shall be dismissed and the matter to be decided shall be forthwith submitted to arbitration under the provisions of the American Arbitration Association.

(g) The cost of arbitration shall be paid by Lessor and Lessee equally.

(h) If, for any reason, the fair market rental value has not yet been determined by the date on which the Second Option Term commences, Lessee shall continue to pay the Base Rent in effect immediately prior to the Second Option Term until such time as there shall have been a determination pursuant to the foregoing arbitration provisions, and once the arbitrator(s) determine the fair market value, any overpayment or underpayment shall be reconciled within thirty (30) days.

 

40.


55.8 Effect of Failure by Lessee to Give Notice. As used in this section, “Option” shall refer to both the Initial Option and the Second Option, and “Option Notice” shall refer to the Initial Option Notice and the Second Option Notice. Should Lessee fail to give a timely and effective Option Notice, Lessee shall be deemed to have elected not to exercise the applicable Option, and this Lease shall expire in accordance with its terms. Time is of the essence with respect to the requirement that Lessee give an Option Notice, and Lessee’s failure to timely exercise do so shall constitute a material, irredeemable and incurable failure to satisfy a condition precedent to the vesting of such right, and Lessee hereby expressly waives any right to claim relief from forfeiture, or any other equitable relief, from the consequences of an untimely exercise of its right to extend the term of this Lease. Lessor shall have no obligation to notify Lessee in advance of the impending deadline for the exercise of an Option. Notwithstanding anything to the contrary set forth above, Lessee shall not have the right to exercise an Option during the time commencing from the date Lessor gives Lessee a written notice that Lessee is in default under any material provision of this Lease and continuing until the default described in said notice is cured. The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee’s inability to exercise the Option prior to satisfaction of the foregoing conditions precedent.

56. Intentionally Omitted.

57. Right of First Refusal. Subject and subordinate to the existing right of first refusal of the occupant of the premises to the north of the Premises (currently, Toys “R” Us), which Toys “R” Us shall not have with respect to the Building Addition, Lessee shall have the following continuing right of first refusal: In the event that, during the Term of this Lease, Lessor receives a written offer to lease any other portions of the Building (which offer must contain the material terms of the proposed lease) that Lessor is inclined to accept, Lessor shall first deliver to Lessee written notice of such offer setting forth the terms of the same which shall include a copy of the written offer (“Right of Refusal Notice”). By way of clarification, the offer that triggers the Right of Refusal Notice shall be acceptable to Lessor with respect to all material economic terms and would form the basis of a lease to be fully negotiated between the parties. Lessee shall have a period of ten (10) business days following receipt of the Right of Refusal Notice within which to notify Lessor of its election to lease the space subject to such Right of Refusal Notice on the terms contained in such notice (subject to the caveat in the next sentence), silence being deemed Lessee’s election not to lease such space. If the Right of Refusal Notice is delivered within the first eighteen (18) months of the Lease Term and Lessee timely elects to lease the space that is the subject of the Right of Refusal Notice, the Base Rent and Term applicable to such space shall be the same Base Rent and Term for the balance of this Lease. (By way of clarification, if the first month of the lease for the space that is the subject of the Right of First Refusal is the same month as the thirteenth Lease Month under this Lease, Lessee shall pay Base Rent for such space at the rate of $0.26 per square foot of gross leasable area and the term of the lease for such space shall be fifty four (54) months, notwithstanding any different terms in the Right of Refusal Notice.) If Lessee elects not to or does not timely elect to lease the space that is the subject of the Right of Refusal Notice, Lessor shall thereafter have the right to lease such space to the third party that presented the offer to Lessor on terms and condition not materially more favorable to the lessee than those set forth in the original offer without the necessity for providing any further Right of Refusal Notice. If Lessor fails to consummate such leasing transaction within six (6) months following the Right of Refusal

 

41.


Notice, or if the economic terms thereof change in a manner that is materially more favorable to the lessee, or if the space becomes available later again after such initial leasing, then Lessee’s right of first refusal granted herein shall be renewed as to such space. As used herein, the term “materially more favorable” shall include a reduction of rent if the same is more than ten percent (10%) of the original proposed rent. If Lessee timely elects to lease the space that is the subject of the Right of Refusal Notice, Lessor and Lessee shall execute a lease prepared by Lessor containing the terms described in the Right of Refusal Notice and otherwise conforming to the terms of this Lease (absent this right of first refusal, the right of early termination, any option to extend, or any obligation on the part of Lessor to perform work in the subject space unless and only to the extent any of the same are specified in Lessor’s Right of Refusal Notice.)

LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES.

 

42.


The parties hereto have executed this Lease as of the date first set forth above.

 

Lessor:

EAGLE CPT, LLC,

a Nevada limited liability company

By:   Strategic Property Advisers, Inc.,
  a California Corporation
Its:   Asset Manager
  By:  

/s/ Peter G. Aylward

    Peter G. Aylward
    President

 

Address for notices:
c/o Strategic Property Advisers, Inc.
3250 Vista Diego Road
Jamul, California 91935
Attention: Peter Aylward
Lessee:
Zulily, Inc., a Delaware corporation
By:  

 

Name:  

 

Its:  

 

 

Address for notices:
Zulily, Inc.
2200 1st Avenue South, Suite 400
Seattle, WA 98134
Attention:  

 

 

43.


The parties hereto have executed this Lease as of the date first set forth above.

 

Lessor:

EAGLE CPT, LLC,

a Nevada limited liability company

By:   Strategic Property Advisers, Inc.,
  a California Corporation
Its:   Asset Manager
  By:  

 

    Peter G. Aylward
    President

 

Address for notices:
c/o Strategic Property Advisers, Inc.
3250 Vista Diego Road
Jamul, California 91935
Attention: Peter Aylward
Lessee:  
Zulily, Inc., a Delaware corporation
By:  

/s/ Mike Potter

Name:  

Mike Potter

Its:  

COO

 

Address for notices:
Zulily, Inc.
2200 1st Avenue South, Suite 400
Seattle, WA 98134
Attention:  

Kristin Smith

 

44.


EXHIBIT A

[SITE PLAN]

 

 

 

 

EXHIBIT A

1.


LOGO


EXHIBIT B

TENANT IMPROVEMENT CONSTRUCTION AGREEMENT

Lessor shall construct the following improvements (“Tenant Improvements”) in the Premises in accordance with this Tenant Improvement Construction Agreement (“Improvement Agreement”).

Initial Premises. Within the Initial Premises:

1. Office Space: Lessor shall construct (i) 2,500 square feet of office space containing three (3) private offices, an open bullpen space for cubicles, a break room with sink, counter and cupboards, a small mail/copy/printer room, a conference room, and men’s and women’s office restrooms, and (ii) a Receiving Office, truckers waiting area with one restroom, large break room (suitable for 50-75 people) with sink and accommodations for a refrigerator, vending machines, water cooler, etc., and a small IT office with a lockable door and HVAC, and additional warehouse restrooms to accommodate approximately 150 employees, all pursuant to the space plan attached to this Improvement Agreement as Schedule 1 (the “Plan”).

2. Warehouse Restrooms: Lessor shall construct and men’s and women’s warehouse restrooms in the locations shown on the Plan.

3. Emergency Lighting: Lessor will ensure that the existing T-5 fixtures shall be at the appropriate ratio to comply with applicable building and fire codes.

4. Loading Docks/Loading Dock Doors: Lessor shall update six (6) of the existing dock doors (to be designated by Lessee prior to execution of this Lease) with mechanical in-pit levelers, seals, and powered dock locks, will number the interior and exterior of the loading doors in sequential order, will ensure that all loading doors are operating properly and warrant the operation of these doors for the initial twelve (12) months of the lease term, excluding negligence by Lessee, and will ensure that all dock seals are in acceptable condition and/or replaced.

5. Warehouse Floor: Lessor shall wash the warehouse floor and deliver the floor level and free of obstructions (previous rack anchors) or pits.

6. Separate Meters: Lessor shall install separate meters for all utilities and services serving the Premises.

Expansion Premises. Within the Expansion Premises:

1. Loading Docks/Loading Dock Doors. Lessor shall install/update a minimum of six (6) dock high doors with mechanical in-pit levelers, seals, and powered dock locks. The location of the six (6) outfitted docks shall be identified by Lessee, but must be selected from the existing leveler locations. Lessor shall number the interior and exterior loading doors in sequential order.

 

EXHIBIT B

1.


2. Office Space. Lessor shall expand the new office area to include additional restrooms, a breakroom and additional offices to be located within the existing open office areas pursuant to the Plan.

In addition to the foregoing work, Lessor shall make such additional discretionary improvements (the “Discretionary Improvements”) as Lessee may reasonably designate up to a total cost of fifty thousand dollars ($50,000). One of such Discretionary Improvements shall be a server room (with HVAC) for Lessee’s IT equipment. In order to effect any other such additional work, Lessee shall notify Lessor of the Discretionary Improvements not later than six (6) months after the Commencement Date. Lessor shall not be obligated to perform any Discretionary Improvements costing in excess of $25,000 unless Lessee has first deposited with Lessor the additional cost therefore. As used herein, Substantial Completion of the Tenant Improvements shall not include completion of the Discretionary Improvements. However, Lessor shall use reasonably good faith efforts to cause the Discretionary Improvements to be completed concurrently with the Tenant Improvements and shall, in any event, construct the Discretionary Improvements in a diligent manner. If such Discretionary Improvements are to be made after the Commencement Date, then Lessee shall provide Lessor reasonable access to the Premises to complete such work.

The Tenant Improvements shall be constructed at Lessor’s sole cost and expense (and not as an Operating Expense) by a general contractor selected by Lessor (“Contractor”). All improvements constructed by Lessor or its Contractor shall be constructed in accordance with the Plans and all Applicable Requirements. Such improvements shall be diligently pursued to completion, subject to force majeure and Lessee Delays (as defined below), shall be completed in a good and workmanlike manner, and shall be lien free on completion. Lessor shall have no obligation to contribute or advance any funds, or undertake any work or improvements except as provided expressly herein, and Lessee shall bear all other costs for all work, improvements, furniture, fixtures, and equipment not specified herein.

As used in this Lease, Lessor shall be deemed to have achieved “Substantial Completion” of the Tenant Improvements at such time as (i) Lessor can deliver possession to the Premises in a manner commercially useable by Lessee, with all improvements in place, subject only to “punch list” items, i.e., items to completed, added, or modified but which do not unreasonably interfere with Lessee’s use and enjoyment of the Premises (which punch list items shall be completed within thirty (30) days of Substantial Completion), and (ii) Lessee is legally permitted to use the Premises as evidenced by a certificate of occupancy issued by the County, an equivalent document issued by or on behalf of the County, or the certification to that effect by the Architect.

As used herein, “Lessee Delay” shall mean (a) Lessee’s failure to timely perform any of its obligations pursuant to this Improvement Agreement or the Lease; (b) Lessee’s changes to the Plan after Lessor’s and Lessee’s final approval thereof; or (c) any other act or failure to act by Lessee to the extent (and only to the extent) that any such delay actually causes a delay in Lessor substantially completing the Tenant Improvements.

If the Term of the Lease has not already commenced pursuant to the provisions of the Lease and Substantial Completion of the Tenant Improvements has been delayed on account of

 

EXHIBIT B

2.


Lessee Delays, then promptly following actual Substantial Completion of the Tenant Improvements, Lessor shall notify Lessee, in writing, of the date Substantial Completion of the Tenant Improvements would have occurred but for such Lessee Delays, and the first business day following such date shall thereafter be deemed to be the Commencement Date for all purposes under the Lease.

Upon Substantial Completion of the Tenant Improvements, Lessor and Lessee shall jointly prepare and initial a punch list of items remaining to be completed pursuant to the plans and specifications on the final Plan approved by Lessor and Lessee. When prepared and initialed by Lessor and Lessee, such punch list shall be referred to herein as the “Punch List,” provided, however, that if Lessee fails to cooperate with Lessor in the completion thereof or, alternatively, refuses to initial the same within five (5) business days following Lessor’s written demand, such a punch list prepared by Lessor shall be deemed to constitute the Punch List. Lessor shall cause the Contractor to pursue completion of the items contained in the Punch List.

Lessor acknowledges that Lessee intends to move forward on an accelerated schedule that may result in Lessee commencing conduct of business from the Premises (for other than the uses for which Early Occupancy is granted pursuant to Paragraph 1.4) prior to Substantial Completion of the Tenant Improvements. Lessor shall use reasonable efforts to accommodate Lessee’s accelerated schedule, which efforts shall include making available to Lessee access to restrooms within the Premises and/or vacant portions of the Building or other temporary restroom facilities. Without limiting its other obligations under this Lease, Lessee shall be responsible for compliance with all Applicable Requirements bearing on its occupancy and use of the Premises and such temporary facilities.

 

EXHIBIT B

3.


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EXHIBIT C

RULES AND REGULATIONS

WEST AMERICA COMMERCE CENTER

1. Lessee shall comply with all requirements necessary for the security of the Project. Lessor reserves the right to deny entrance to the Project or have any person removed from the Project in any case where the conduct of such person involves a hazard or nuisance to any Lessee of the Project or to the public or in the event of fire or other emergency, riot, civil commotion, or similar disturbance involving risk to the Project, Lessees, or the general public. Anything to the foregoing notwithstanding, Lessor shall have no duty to provide security protection for the Project at any time or to monitor access thereto.

2. Lessor shall not be responsible for, and Lessee hereby indemnifies and holds Lessor harmless from any liability in connection with the loss, theft, misappropriation, or other disappearance of furniture, furnishings, fixtures, machinery, equipment, money, jewelry, or other items of personal property from the Premises. Lessee assumes any and all responsibility for protecting its Premises from theft and robbery.

3. Lessor reserves the right to exclude or expel from the Project any person who, in the reasonable judgment of Lessor, is intoxicated or under the influence of liquor or drugs or who shall in any manner act in violation of the rules and regulations of the Project.

4. Lessee shall not disturb Lessor, the other occupants of the Project or others having business in the Project, by the use of any musical or sound producing instruments, or by making unseemly noises, odors or vibrations; provided, however, Lessee may install a “paging system” inside the Premises so long as it cannot be heard outside of the Premises.

5. Lessee shall not obstruct or interfere with the rights of Lessor, other Lessees of the Project or of persons having business in the Project or in any way injure or annoy such Lessees or persons.

6. Lessee shall not bring any dogs or other animals into the Project.

7. No cooking shall be done or permitted by Lessee in the Premises beyond the use of a microwave oven or other small appliances.

8. Parking in unmarked areas, blocking of walkways, loading areas, entrances, or alleyways shall not be permitted. Should such a situation exist, Lessor, at its option, shall have the right to tow such vehicle away at the owner’s expense. Lessee will from time to time, upon request of Lessor, supply Lessor with a list of license plate numbers or vehicles owned or operated by its employees and agent.

9. There shall be no automobile parking in the truck courtyard areas, unless all other available automobile parking stalls are filled.

 

EXHIBIT C

1.


10. Lessee is not allowed to lease to another company or entity any designated or in-common parking afforded to the Lessee per the lease.

11. Overnight truck parking is permitted only in dock area directly adjacent to Lessee’s premises and dock doors. However, Lessee shall not have the right to place trucks or trailers in the dock areas on a permanent or semi-permanent basis for storage, it being understood that the dock areas are for temporary parking of trucks for normal loading and unloading and for overnight parking of local delivery trucks used in the ordinary course of Lessee’s business.

12. Canvassing, soliciting, and peddling in the Project is prohibited, and Lessee shall cooperate to prevent the same. Lessee shall notify the Manager promptly of any unauthorized person who is soliciting from or causing annoyance to Lessees, their employees, guests, or invitees.

13. The sidewalks, entries, passages, courtyards, and loading / unloading areas shall not be obstructed or used for purposes other than ingress or egress by Lessee, Lessee’s employees, agents, or invitees.

14. Lessee shall not throw anything out of the doors of the Premises. Lessee shall not deposit any trash, refuse, cigarettes, or other substances of any kind within or out of the Project except in refuse containers provided therefore. Lessee shall not place in any refuse container any material which cannot be disposed of in the ordinary and customary manner of trash / refuse disposal. All refuse containers must be located entirely within the Premises or in the trash enclosures provided by Lessor.

15. Lessee shall not use landscaped areas for any activities, storage or passageways without Lessor prior written authorization.

16. Lessee shall not use the Premises for lodging, sleeping, or for any illegal purpose that will damage the Premises, or the reputation thereof, or for any purposes other than those specified in Lessee’s Lease.

17. Lessee shall not commit any act or permit anything in or about the Project which shall or might subject Lessor to any liability or responsibility for injury to any person or property by reason of any business or operation being carried on, in or about the Project or for any other reason subject to the terms of this Lease.

18. Lessee may not install or use in the premises any air conditioning unit, engine, boiler, generator, machinery, heating unit, stove, water cooler, ventilator, radiator, or any other similar apparatus without the express prior written consent of Lessor.

19. No signs, awnings, showcases, advertising devices, or other projections or obstructions shall be attached to the outside walls of the Premises or attached or placed upon any common areas without the express prior written consent of Lessor. No blinds, drapes, or other window coverings shall be installed in the Premises without the express prior written consent of Lessor. No sign, picture, advertisement, window display, or other public display or notice shall be inscribed, exhibited, painted, or affixed by Lessee upon or within any part of the Premises in such a fashion as to be seen from the outside of the Premises of the Project without the express

 

EXHIBIT C

2.


prior written consent of Lessor. In the event of the violation of any of the foregoing by Lessee, Lessor may, within five (5) days of written notice to Lessee, remove the articles constituting the violation without any liability unless a loss other than said removal arises from Lessor’s willful or negligent acts or omissions, and Lessee shall reimburse Lessor for the reasonable expenses incurred in such removal upon demand and upon submission of applicable bills as Additional Rent under this Lease.

20. Lessee shall not use the name of the Project or the name of Lessor in its business name, trademarks, signs, advertisements, descriptive material, letterhead, insignia, or any other similar item.

21. Lessor shall have the right, exercisable with reasonable notice and without liability to Lessee, to change the name and the street address of the Project.

22. The directory of the Project (if any) will be provided exclusively for the display of the name and location of the Lessees only, and Lessor reserves the right to exclude any other names therefrom.

23. No Lessee and no employees or invitees of any Lessee shall go upon the roof of the building(s) in the Project except for the purpose of installing or maintaining permitted equipment. The roofs are not part of the Premises, and may not be used by Lessee for any other purpose.

24. Lessee shall not overload the floor of the Premises and shall not deface the building(s).

25. Lessor will have reasonable approval over where and how telephone wires are to be introduced. No boring or cutting for or stringing of wires will be allowed without the consent of Lessor.

26. No Lessee shall lay linoleum, tile, carpet or other similar floor coverings so that the same shall be affixed to the floor of the Premises in any manner except as approved by the Lessor. The expense of repairing any damage resulting from a violation of this rule or removal of any floor covering shall be borne by the Lessee by whom, or by whose contractors, employees or invitees, the floor covering shall have been laid.

27. Employees of Lessor shall not be requested to perform any work or do anything outside of their regular duties unless under special instructions from the Lessor.

28. Lessee shall provide Lessor with the name of a designated responsible employee to represent Lessee in all matters pertaining to fire regulations.

Lessor reserves the right to rescind, alter or waive any of these rules and regulations and to make such other and further rules and regulations as in its judgment shall, from time to time, be needed for the safety, protection, care, and cleanliness of the Project, the operation thereof, the preservation of good order therein, and the protection and comfort of the Lessees and their agents, employees, and invitees, which rules and regulations, when made and written notice thereof is given to Lessee, shall be binding upon Lessee in like manner as if originally herein prescribed. In the event of any direct conflict between the terms of these rules and regulations and the Lease, the terms of the Lease shall control.

 

EXHIBIT C

3.


EXHIBIT D

SAMPLE FORM OF

NOTICE OF LEASE TERM DATES

 

To:  

 

    Date:  

 

Re: Lease dated                     , 200     between Eagle CPT, LLC, a Nevada limited liability company (“Lessor”), and                                         , a                      (“Lessee”), concerning premises located in that certain building commonly known as                     , which building comprises a portion of that certain industrial park located within the Tahoe Reno Industrial Center and commonly known as West America Commerce Center, Storey County, Nevada.

Ladies and Gentlemen:

In accordance with the above Lease, we wish to mutually advise and/or confirm as follows:

 

  1. That the Premises have been accepted by Lessee as substantially complete in accordance with the Lease, and that there are no construction deficiencies.

 

  2. That Lessee is in possession of the Premises and acknowledges that under the provisions of the Lease and Term of the Lease commences                          and ends on                      for a Term of                         .

 

  3. That in accordance with the Lease, Rent commenced on                     .

 

  4. That the Premises consist of                  square feet of gross leasable area.

 

AGREED AND ACCEPTED:

 

a  

 

 

By:  

 

Name:  

 

Its:  

 

 

EXHIBIT D

1.


EXHIBIT F

ERISA CERTIFICATION

The undersigned (the “Lessee”) understands and acknowledges that the Carpenters Pension Trust of Southern California, which is a member of Eagle CPT, LLC, a Nevada limited liability company (the “Lessor”), is governed by, and subject to regulation under, the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). ERISA prohibits pension trusts, such as Lessor, from leasing their property to, or acquiring properties subject to leases, with certain persons defined in ERISA as “parties-in-interest.”

 

1. The term “party-in-interest” means, as to a particular pension trust (the “Pension Trust”):

 

  A. any fiduciary (including, but not limited to, any administrator, officer, trustee, or custodian), counsel, or employee of such Pension Trust;

 

  B. a person providing services to such Pension Trust;

 

  C. an employer any of whose employees are covered by such Pension Trust;

 

  D. an employee organization any of whose members are covered by such Pension Trust;

 

  E. an owner, direct or indirect, of fifty percent (50%) or more of:

 

  (i) the combined voting power of all classes of stock entitled to vote or the total value of shares of all classes of stock of a corporation,

 

  (ii) the capital interest or the profits interest of a partnership, or

 

  (iii) the beneficial interest of a trust or unincorporated enterprise,

which is an employer or an employee organization described in subparagraph (C) or (D);

 

  F. a relative (hereinafter defined) of any individual described in subparagraph (A), (B), (C) or (E);

 

  G. a corporation, partnership, or trust or estate of which (or in which) fifty percent (50%) or more of:

 

  (i) the combined voting power of all classes of stock entitled to vote or the total value of shares of all classes of stock of a corporation,

 

  (ii) the capital interest or the profits interest of a partnership, or

 

  (iii) the beneficial interest of such trust or estate,

is owned directly or indirectly, or held by persons described in subparagraphs (A), (B), (C), (D) or (E);

 

EXHIBIT F

1.


  H. an employee, officer, director (or an individual having powers or responsibilities similar to those of officers or directors), or a ten percent (10%) or more shareholder directly or indirectly, of a person described in subparagraph (B), (C), (D), (E), or (G), or of the Pension Trust; or

 

  I. a ten percent (10%) or more (directly or indirectly in capital or profits) partner or joint venturer of a person described in subparagraph (B), (C), (D), (E) or (G).

 

2. The term “employer” means any person acting directly as an employer, or indirectly in the interest of an employer, in relation to a Pension Trust, and includes a group or association of employers acting for an employer in such capacity.

 

3. The term “employee” means an individual employed by an employer.

 

4. The term “person” means an individual, partnership, joint venture, corporation, mutual company, joint-stock company, trust, estate, unincorporated organization, association, or employee organization.

 

5. The term “relative” means a spouse, ancestor, lineal descendant, or spouse of a lineal descendant.

 

6. The term “administrator” means:

 

  (i) the person specifically so designated by the terms of the instrument under which the Pension Trust is operated;

 

  (ii) if an administrator is not so designated, the Pension Trust sponsor; or

 

  (iii) in the case of a Pension Trust for which an administrator is not designated and a Pension Trust sponsor cannot be identified, such other person as the Secretary may by regulation prescribe.

The undersigned hereby covenants, warrants and represents that it is not a party-in-interest with respect to a Pension Trust.

This ERISA Certification shall form a part of any Estoppel Statement from the undersigned, an agreement and a part of any lease between the undersigned and the Lessor.

 

Dated:  

 

Lessee:  

 

By:  

 

Name:  

 

Title:  

 

 

EXHIBIT F

2.


Agreement of Lease by and between the Company and KTR Ohio LLC

Exhibit 10.14

 

AGREEMENT OF LEASE

 

 

   Premises:   

3051 Creekside Parkway

Obetz, Ohio 43137

  


TABLE OF CONTENTS

 

Section

        Page  
1.    Reference Data and Definitions      1   
2.    Demise of Premises      5   
3.    Possession      5   
4.    Term      7   
5.    Base Rent      8   
6.    Additional Rent for Operating Expenses and Real Estate Taxes      10   
7.    Use Compliance With Law      15   
8.    Alterations and Tenant’s Property      17   
9.    Repairs and Other Work      18   
10.    Liens      20   
11.    Subordination      21   
12.    Inability to Perform      22   
13.    Destruction      22   
14.    Insurance      23   
15.    Eminent Domain      25   
16.    Assignment; Subleasing      26   
17.    Utilities and Services      27   
18.    Default      28   
19.    Insolvency or Bankruptcy      30   
20.    Fees and Expenses; Indemnity; Payment      31   
21.    Access to Premises      32   
22.    Notices      32   
23.    No Waiver      32   

 

- i -


24.    Estoppel Certificates      33   
25.    Rules and Regulations      33   
26.    Tenant’s Taxes      33   
27.    Miscellaneous      34   

EXHIBITS

A—Site Plan

B—Plans and Specifications; Improvements

C—Fair Market Rent Determination

SCHEDULES

1—Subordination, Non-Disturbance and Attornment Agreement

2—Construction Schedule

 

- ii -


AGREEMENT OF LEASE

AGREEMENT OF LEASE (the “Lease”) made as of the              day of November, 2011 (“Date of Lease”) between KTR OHIO LLC, a Delaware limited liability company (the “Landlord”), and ZULILY, Inc., a Delaware corporation (the “Tenant”).

Landlord and Tenant agree as follows:

1. Reference Data and Definitions. The following sets forth some of the basic lease information and definitions used in this Lease:

1.1 “Additional Rent” shall mean Real Estate Taxes, Operating Expenses and all other sums (exclusive of Base Rent) payable by Tenant to Landlord under this Lease.

1.2 “Base Rent” shall mean the annual Base Rent payable by Tenant to Landlord from and after the Commencement Date. The Base Rent payable by Tenant to Landlord shall be in the amounts set forth below for the periods set forth below:

 

Period

 

 

Annual

Base Rent

 

 

Monthly Installment

of Annual Base Rent

 

   

Months 1 – 5  

 

  $0.00   $0.00
   

Months 6 – 12

 

  N/A   $107,547.71
   

Months 13 – 24

 

  $1,843,675.00   $153,639.58
   

Months 25 – 36

 

  $2,101,789.50   $175,149.13
   

Months 37 – 48

 

  $2,164,843.19   $180,403.60
   

Months 49 – 60

 

  $2,229,788.48   $185,815.71
   

Months 61 – 65

 

  N/A   $191,390.18

1.3 “Broker” shall mean CB Richard Ellis.

1.4 “Building” shall mean the approximately 737,471 square foot building located at 3051 Creekside Parkway, Obetz, Ohio.

1.5 “Commencement Date” shall mean the later to occur of (i) January 1, 2012, or (ii) the Existing Tenant Surrender Date, subject to the terms of Section 4.1 and 4.2 of this Lease.


1.6 “Concession Costs” shall mean leasing commissions, legal expenses, and all other costs such as construction allowances, rent concessions, moving expenses, incurred in leasing, subleasing or assigning a lease or this Lease.

1.7 “Controllable Operating Expenses” shall mean the Operating Expenses described in Sections 6.1(b) (other than snow removal costs which shall not constitute a Controllable Operating Expense), 6.1(c), 6.1(f), 6.1(i) and 6.1(k).

1.8 “Early Access Date” shall mean the later to occur of (i) December 15, 2011 or (ii) the Existing Tenant Surrender Date; provided, however, that there shall be no Early Access Date in the event the Existing Tenant Surrender Date occurs from and after January 1, 2012. Temporary contingent space will be made available to Tenant by December 1, 2011 pursuant to the terms of a certain Occupancy License Agreement by and between Landlord, as licensor, and Tenant, as licensee.

1.9 “Excess Assignment Consideration” shall mean an amount, if any, equal to: (A) the consideration whenever paid by any assignee for the assignment, less (B) Concession Costs, reasonably incurred by Tenant in connection with such assignment.

1.10 “Excess Sublease Rent” shall mean an amount, if any, equal to: (A) (i) all rent or other consideration paid to Tenant by any subtenant, for and during each month less (ii) the portion of Tenant’s Concession Costs reasonably incurred by Tenant in connection with such subletting and allocable to such month, less (B) (i) the monthly installment of Base Rent for such month plus (ii) such other rent or consideration attributable to such month, which would otherwise be required to be paid by Tenant to Landlord. In determining the amount of Excess Sublease Rent with respect to a sublease for less than all of the Premises, the amount of the monthly installment of Base Rent to be deducted pursuant to clause (B)(i) of this Section 1.10 shall be determined by multiplying the then applicable square foot rate of the monthly installment of Base Rent by the area of the portion of the Premises which has been sublet.

1.11 “Existing Tenant” shall mean Mars Petcare US, LLC.

1.12 “Existing Tenant Surrender Date” shall mean the date upon which the Existing Tenant vacates the Premises and surrenders possession of the Premises to Landlord.

1.13 “Improvements” shall mean the build-out work to be constructed by Landlord as described on Exhibit B.

1.14 “Initial Space” shall mean the approximately 300,000 square foot area within the Building labeled as              on the Site Plan.

1.15 “Landlord” shall mean the Landlord named on page 1 of this Lease or any subsequent owner of such Landlord’s interest in the Premises.

 

- 2 -


1.16 “Landlord’s Address”:

c/o KTR Property Trust I

5 Tower Bridge

300 Barr Harbor Drive, Suite 150

Conshohocken, PA 19428

Attn: Stephen J. Butte

1.17 “Lease Interest Rate” shall mean the lesser of (A) 300 basis points in excess of the Prime Rate in effect from time to time or (B) the maximum amount or rate that lawfully may be charged in the circumstances, if such a maximum exists.

1.18 “Lease Taxes” shall mean any tax, assessment, levy or other charge (other than any income, franchise, state or inheritance tax) by any federal, state or local law now or hereafter imposed directly or indirectly upon Landlord with respect to this Lease or the value thereof, or upon Tenant’s use or occupancy of the Premises, or upon the Base Rent, Additional Rent or any other sums payable under this Lease or upon this transaction.

1.19 “Net Improvement Allowance” shall mean, from time to time, the result of the Tenant Improvement Allowance less all amounts paid by Landlord on account of Tenant Work Costs.

1.20 “Operating Expenses” shall have the meaning set forth in Section 6.1.

1.21 “Permitted Use” shall mean warehousing and order fulfillment and shipping, photography and ancillary office uses.

1.22 “Premises” shall mean the Building together with the parcel of land and all appurtenances thereto on which the Building is located as depicted on the Site Plan, together with all other improvements which may hereafter be constructed on such parcel of land.

1.23 “Prime Rate” shall mean the rate of interest announced from time to time by Wells Fargo Bank, N.A. or its successor as its prime rate or, if such rate is discontinued, such comparable rate as Landlord reasonably designates by notice to Tenant.

1.24 “Real Estate Taxes” shall mean all real estate taxes and assessments, general or special, ordinary or extraordinary, foreseen or unforeseen (other than Lease Taxes) assessed or imposed upon the Premises, if any. If, due to a future change in the method of taxation, any tax shall be levied or imposed in substitution, in whole or in part, for (or in lieu of) any tax or addition to or increase in any tax which would otherwise be included within the definition of Real Estate Taxes, then such other tax shall be deemed to be included within Real Estate Taxes. Real Estate Taxes shall not include excess profits taxes, franchise taxes, gift taxes, capital stock taxes, documentary or mortgage transfer or stamp taxes, inheritance and succession taxes, estate taxes, federal and state income taxes, and other taxes to the extent applicable to Landlord’s general or net income (as opposed to rents, receipts or income attributable to operations at the Building).

1.25 “Rent” shall mean Additional Rent and Base Rent, collectively.

 

- 3 -


1.26 “Security Deposit” shall mean the sum of $600,000 to be posted in the form of the L/C as more particularly described in Section 5.3 below, which amount shall be subject to reduction pursuant to the terms of Section 5.3 below.

1.27 “Site Plan” shall mean the site plan depicting the Premises annexed to this Lease as Exhibit A.

1.28 “Substantial Completion” and “Substantially Complete” shall mean, with respect to the Premises, the date when (i) the construction of the Improvements is substantially completed, excepting only “punch list items” (as that term is commonly used in the construction industry) that will not materially interfere with completion of Tenant Work and/or Tenant’s use of the Premises; and (ii) a temporary or permanent certificate of occupancy has been issued for the Premises provided that such temporary or permanent certificate of occupancy shall not be a condition of Substantial Completion if either the progress with any Tenant Work or Tenant’s failure to obtain any permits, approvals or licenses necessary for its specific use of the Premises prevents or delays its issuance.

1.29 “Tenant” shall mean the Tenant named on page 1 of this Lease and such person’s permitted successors and assigns, subject to the provisions of this Lease.

1.30 “Tenant’s Address” shall mean:

2200 First AVE South

4th Floor

Seattle, WA 98134

1.31 “Tenant Delays” shall mean delays in the design, construction or Substantial Completion of the Improvements by or on behalf of Landlord to the extent caused or contributed by Tenant or its agents, employees, representatives, contractors, subcontractors, consultants or invitees.

1.32 “Tenant Improvement Allowance” shall mean the tenant improvement allowance of $955,500.00 to be provided by Landlord to Tenant with respect to the design, development, construction and completion of the Tenant Work.

1.33 “Tenant Work” shall mean any build out, fixturing and space preparation of any portion of the Premises to be performed by Tenant.

1.34 “Tenant Work Costs” shall mean any and all reasonable, third party costs and expenses paid or incurred by Tenant to perform Tenant Work.

1.35 “Term” shall mean the sixty-five (65) month period commencing on the Commencement Date and terminating on the last day of the calendar month in which the sixty-five (65) month anniversary of the day immediately preceding the Commencement Date occurs, which is presently projected to be the period commencing on January 1, 2012 and expiring on May 31, 2017.

 

- 4 -


2. Demise of Premises. Subject to the terms of this Lease, and from and after the Commencement Date, Landlord leases to Tenant and Tenant leases from Landlord the Premises.

3. Possession.

3.1 Improvement Work. Landlord shall, at Landlord’s sole cost and expense (except as otherwise provided herein), furnish all of the design, material, labor and equipment required to construct the Improvements as described on Exhibit B attached hereto. Landlord shall construct the Improvements in a good and workmanlike manner, and in accordance with all applicable statutes, ordinances and building codes, governmental rules, regulations and orders relating to construction of the Improvements (but not matters arising because of Tenant Work or specific to the particular business Tenant seeks to engage in the Premises). Landlord shall diligently proceed with the construction of the Improvements and use good faith efforts to Substantially Complete the Improvements to the Premises in accordance with the schedule attached as Schedule 2 hereto (“Construction Schedule”); provided, however, if Landlord fails to so Substantially Complete the Improvements in accordance with the Construction Schedule, then (a) the validity of this Lease and the obligations of Tenant under this Lease shall not be affected, and (b) Tenant shall have no claim against Landlord (and Landlord shall have no liability) hereunder, at law or in equity, arising from Landlord’s failure to Substantially Complete the Improvements in accordance with the Construction Schedule. In the event the Improvements are not Substantially Completed within the timeframe for Substantial Completion set forth in the Construction Schedule, Landlord shall continue to use reasonable efforts to cause the Improvements to be Substantially Completed promptly thereafter. Tenant shall reasonably cooperate with Landlord to permit Landlord to complete the Improvements. In the event any accrued Tenant Delays cause Landlord to pay or incur costs or expenses in connection with the design, construction and Substantial Completion of the Improvements in excess of the costs or expenses that would otherwise have been paid or incurred by Landlord, Tenant shall pay any such reasonable out-of-pocket excess costs and expenses to Landlord (“Tenant Delay Costs”), as Additional Rent, within thirty (30) days after Landlord submits invoices for any such excess costs or expenses.

3.2 Tenant’s Access. From and after Early Access Date, Landlord shall provide Tenant with access to the Initial Space; provided, however, that if the Existing Tenant Surrender Date occurs from and after January 1, 2012, then Landlord shall provide Tenant with access to the entire Premises on the Commencement Date. From and after the Commencement Date, all references herein to the term “Initial Space” shall automatically be replaced with “Premises”. Tenant shall perform any Tenant Work in the Initial Space in accordance with, and subject to the limitations contained in this Section 3.2. Prior to commencing any Tenant Work, Tenant shall provide Landlord with: (i) copies of all plans and specifications pertaining to the Tenant Work for which such access is being requested; (ii) copies of all licenses and permits required in connection with the performance of the work for which such access is being requested; and (iii) certificates of insurance naming Landlord as additional insured/loss payee as reasonably applicable. The access to the Initial Space provided to Tenant pursuant to this Section 3.2 shall be subject to the conditions that all of Tenant and Tenant’s agents, contractors, workmen, mechanics, suppliers, and invitees, which shall be chosen in Tenant’s sole and absolute discretion, shall use commercially reasonable efforts to work in harmony and not interfere with Landlord and its agents and contractors in doing its work in, to, or on the

 

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Improvements. If at any time such entry or occupancy shall cause or create an imminent likelihood of such disharmony or interference, Landlord, in Landlord’s reasonable discretion, shall have the right to suspend such access upon twenty-four (24) hours’ written notice to Tenant until such time as Tenant, at Tenant’s sole cost, has used commercially reasonable efforts to remedy such disharmony or interference; provided, however, in no event shall Tenant be required to use unionized contractors, laborers or materialmen. Tenant agrees that any such entry into and occupancy of the Initial Space shall be deemed to be under all of the terms, covenants, conditions and provisions of the Lease, except as to the covenant to pay Rent.

3.3 Tenant Work Costs. Tenant shall perform all Tenant Work subject to the provisions of this Lease applicable to Alterations. Tenant shall perform and complete the Tenant Work in accordance with all applicable laws, ordinances, rules and regulations, the plans and specifications approved by Landlord and in a good workmanlike and lien-free fashion. Tenant shall pay all contractors, laborers and materialmen involved with the Tenant Work directly. Landlord shall reimburse Tenant for all Tenant Work Costs paid or incurred by Tenant on a monthly basis on the express condition that all of the following conditions have been satisfied: (i) the Net Improvement Allowance then remaining exceeds the Tenant Work Costs for which Tenant is seeking reimbursement; (ii) Tenant submits to Landlord all of the following in form acceptable to Landlord: a detailed description of all Tenant Work Costs for which Tenant is seeking reimbursement as well as the Tenant Work related to such Tenant Work Costs, conditional lien waivers from all contractors and subcontractors performing Tenant Work waiving all lien rights in connection with Tenant Work performed by them prior to such date and a certification from its contractor that all Tenant Work for which reimbursement is sought has been performed; and (iii) no event of default on the part of Tenant exists hereunder beyond applicable notice and cure periods (if any). If Landlord receives a request from Tenant seeking reimbursement for Tenant Work Costs and the conditions to reimbursement described in the preceding sentence have been satisfied, Landlord shall reimburse Tenant for such Tenant Work Costs within thirty (30) days. Notwithstanding anything contained herein to the contrary, in no event shall the sum of all Tenant Work Costs paid by Landlord to Tenant exceed the Tenant Improvement Allowance.

3.4 Delivery of Possession, Punch List, and Acceptance Agreement. As soon as the Improvements are Substantially Completed for the Premises, Landlord and Tenant shall together walk through the Premises and inspect all Improvements so Substantially Completed, using reasonable efforts to discover all uncompleted or defective construction in the Improvements. After such inspection has been completed, each party shall sign an acceptance agreement in a reasonably agreed upon form (herein the “Acceptance Agreement”), which shall include, by attachment, a list of all “punch list” items which the parties agree are to be corrected by Landlord in connection with the Premises. Landlord shall use reasonable efforts to complete and/or repair such “punch list” items within thirty (30) days after executing the applicable Acceptance Agreement. Tenant’s commencement of business operations from and in any part of the Premises shall be deemed to be an acceptance by Tenant of the Improvements, except for the agreed upon punch list items. Tenant agrees that Tenant is familiar with the condition of the Premises, and Tenant hereby accepts the foregoing on an “AS-IS,” “WHERE-IS” basis except to the extent of (i) Landlord’s repair and maintenance obligations hereunder and (ii) Landlord’s obligation to deliver the Premises to Tenant on the Commencement Date (x) with all structural components thereof (including, without limitation, foundations, load bearing walls and the roof)

 

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in sound and watertight condition, (y) with all mechanical, electrical, plumbing, heating, ventilation and air conditioning, and life safety systems and equipment in good working order (except to the extent of damage caused by Tenant or any Tenant Party (as hereinafter defined)) and (z) in compliance with all applicable codes relating to the Premises on Date of Lease, except codes specific to Tenant’s particular use of the Premises, as opposed to general warehousing and distribution uses. Notwithstanding the foregoing, for a period of twelve (12) months after the Commencement Date, Landlord warrants that loading doors shall be in good working condition, except that to the extent of repairs needed as a result of a Tenant Necessitated Repair (as hereinafter defined). Tenant acknowledges that Landlord has not made any representation as to the condition of the foregoing or the suitability of the foregoing for Tenant’s intended use, except as may be herein expressly set forth. Tenant represents and warrants that Tenant has made its own inspection of the foregoing. Landlord shall not be obligated to make any repairs, replacements or improvements (whether structural or otherwise) of any kind or nature to the foregoing in connection with, or in consideration of, this Lease, except (a) as set forth herein and (b) with respect to the Improvements. Landlord agrees to make reasonable efforts to enforce, upon Tenant’s request, all manufacturer’s or contractor’s warranties, if any, issued in connection with any of the Improvements or the Premises.

3.5 Landlord’s Representation. Notwithstanding anything to the contrary set forth in this Lease: Landlord represents and warrants to Tenant that, to Landlord’s actual knowledge, as of the Commencement Date, the Premises shall be in compliance with all applicable laws relating to the Premises, including without limitation, the ADA (as hereinafter defined) except for non-compliance resulting from the Tenant Work (or the state of completion of the Tenant Work) or Tenant’s specific use of the Premises.

4. Term.

4.1 Lease Contingency. Notwithstanding anything to the contrary contained herein, the effectiveness and commencement of this Lease is subject to approval, to the reasonable satisfaction of Tenant, of those certain Payroll Tax and Sales Tax incentives (the “Incentives”) by the Ohio Tax Credit Authority. The approval by the Ohio Tax Credit Authority of the Incentives described in that certain Letter dated November 28, 2011 from the Ohio Department of Development to Mr. Mike Potter (Chief Operating Office of Tenant) shall in all events be deemed satisfaction of this contingency, in which case Tenant shall have no right to terminate this Lease pursuant to this Section 4.1. Each party agrees promptly to execute and deliver any other documents or agreements required by such agencies for the completion of such incentive process. If approval of said Incentives in form and amount reasonably satisfactory to Tenant is not received on or before 12:00 noon on December 6, 2011, then Tenant, by written notice to Landlord, may cancel this Lease by written notice to Landlord delivered no later than 12:00 noon on December 6, 2011, in which case Landlord shall promptly return to Tenant all sums theretofore paid by Tenant hereunder.

4.2 Commencement Date. The term of this Lease shall commence on the Commencement Date. If the Commencement Date has not occurred by January 15, 2012, which date shall be subject to extension on account of delays in the Commencement Date resulting from Force Majeure Events, then Tenant shall have the option, in it sole and absolute discretion and as its sole remedy hereunder, at law or in equity, to cancel this Lease by delivery of written notice to Landlord no later than the Existing Tenant Surrender Date, in which case Landlord shall promptly return to Tenant all sums theretofore paid by Tenant hereunder.

 

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4.3 Rent Commencement. Tenant’s obligation to pay Base Rent and Additional Rent shall commence on the Commencement Date; provided, however, that simultaneously with the execution and delivery of this Lease, Tenant shall deposit with Landlord the Base Rent for the sixth (6th) month of the Lease ($107,547.71). From and after the Commencement Date and throughout the initial Term, Tenant shall pay annual Base Rent to Landlord in the amount and in the monthly installments required by Section 1.2.

4.4 Renewal Options. If Tenant is not in material default (beyond applicable periods for notice and cure) under this Lease at the time the applicable option to renew described below (each a “Renewal Option”) is exercised or as of the commencement of the applicable Renewal Period (as hereinafter defined), Tenant shall have three (3) options to extend the Term, each for a period of five (5) years (each a “Renewal Period”) commencing on the first day following the last day of the initial Term, the expiration of the first Renewal Period, or the expiration of the second Renewal Period, as applicable, upon the same terms and conditions as are contained in this Lease, except as hereinafter provided. Base Rent for the first year of the applicable Renewal Period shall be equal to ninety-five percent (95%) of the Fair Market Value Rental (as defined in Exhibit C attached hereto). The Renewal Option shall be exercised by written notice to Landlord given no earlier than twelve (12) months nor later than six (6) months prior to the last day of the initial Term, the first Renewal Period or the second Renewal Period, as applicable, and the failure to timely exercise such right shall mean that such right is null and void.

4.5 Termination Option. If Tenant is not in material default (beyond applicable periods for notice and cure) under this Lease at the time the Termination Option (as hereinafter defined) is exercised or as of the Termination Date (as hereinafter defined), Tenant shall have the one time option to terminate this Lease (the “Termination Option”) as of the last day of the calendar month in which the forty-first (41st) month anniversary of the Commencement Date occurs by providing written notice to Landlord of such election (the “Termination Notice”) not less than six (6) months prior to the Termination Date. As a condition to the effectiveness of the exercise of the Termination Option by Tenant, Tenant must pay to Landlord the sum of $1,968,000 (the “Termination Fee”) simultaneously with its exercise of the Termination Option. If Tenant timely exercises the Termination Option and pays the Termination Fee to Landlord as aforesaid, this Lease shall terminate as of the Termination Date. If Tenant fails to either timely deliver a Termination Notice or pay the Termination Fee, Tenant shall have no right to terminate this Lease and the Lease shall not terminate as of the Termination Date.

5. Base Rent.

5.1 Payment. Base Rent shall be payable by Tenant to Landlord in equal monthly installments on or before the first day of each calendar month, in advance. All payments of Base Rent and Additional Rent shall be made without prior demand and without offset, deduction or counterclaim of any kind, in lawful money of the United States of America. Such payments shall be made at Landlord’s Address or at such other place as Landlord shall

 

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designate from time to time. Tenant’s agreements to lease the Premises and pay Base Rent, Additional Rent and all other sums payable under this Lease are independent of any other covenant, agreement or term of this Lease except as otherwise provided in this Lease.

5.2 Late Charges. Any Rent payable by Tenant to Landlord under this Lease which is not paid within five (5) days after the same is due will be automatically subject to a late payment charge, as Additional Rent, of five percent (5%) of the delinquent amount, in each instance, to cover Landlord’s additional administrative costs. In addition to the late charge set forth above, Tenant shall also be required to pay interest on all such unpaid sums (including any late charge(s)), at a per annum rate equal to the Lease Interest Rate plus four percent (4%) (the “Default Rate”) on all such outstanding charges of Rent, said interest charges, as applicable, to be payable on the first (1st) of each month throughout the Term of this Lease, without further notice or demand therefore by Landlord. Such late charges and interest will be due and payable as set forth herein and will accrue from the date that such Rent (including late charges and interest) sums are payable under the provisions of this Lease until actually paid by Tenant.

5.3 Security Deposit. Simultaneously with the execution and delivery of this Lease, Tenant shall deliver the Security Deposit to Landlord in the amount of $600,000 (the “Security Amount”). The Security Deposit shall be posted in the form of an irrevocable, standby letter of credit (“L/C”) issued by a national U.S. banking institution reasonably acceptable to Landlord, and in form and substance reasonably satisfactory to Landlord. The Security Deposit shall be retained by Landlord as security for the faithful performance and observance by Tenant of its obligations under this Lease, it being expressly agreed that the Security Deposit is not an advance rental deposit or a measure of Landlord’s damages. In addition to any other items that Landlord may reasonably require the L/C shall: (a) name Landlord as its beneficiary; (b) have an initial term of no less than one year; (c) renew for one year periods unless the issuer provides Landlord with at least 60 days’ advance written notice that the L/C will not be renewed; (d) the L/C shall permit partial draws; (e) the sole and exclusive condition to any draw on the L/C shall be that Landlord certifies to the issuer that either or both of the following is/are true: (I) Tenant is the debtor in a pending bankruptcy proceeding; and (II) an event of default by Tenant has occurred under this Lease beyond applicable notice and cure periods; and (f) be transferable to successor landlords, including, successors by foreclosure or deed in lieu of foreclosure, on as many occasions as desired upon payment of a normal and customary fee chargeable to Tenant and not Landlord. Notwithstanding the foregoing, in the event that: (x) the expiration date of any L/C occurs before the expiration date of this Lease, (y) the issuer has advised Landlord that the issuer will not automatically renew the L/C; and (z) Tenant fails to deliver to Landlord at least forty-five (45) days prior to the expiration of such L/C either (A) an amendment thereto extending the expiration date of such L/C for not less than twelve (12) months, (B) a new L/C, in form and substance in accordance with (a) through (f) above and otherwise satisfactory to Landlord (in its reasonable discretion), or (C) a cash Security Deposit in place of the L/C, then Landlord may draw on such L/C and thereafter (in addition to any other remedies available to Landlord under this Lease) hold such proceeds as a cash Security Deposit and apply the proceeds in whatever manner or for whatever purpose Landlord reasonably deems appropriate in the event that an event of default occurs under this Lease on the part of Tenant beyond applicable notice and cure periods. If an event of default occurs hereunder on the part of Tenant beyond applicable notice and cure periods, Landlord may, without notice to Tenant, draw on the L/C (or any cash Security Deposit) and apply the proceeds to the liabilities of Tenant hereunder, in

 

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addition to any and all other remedies available to Landlord under this Lease. In the event Landlord draws against the L/C (or any cash Security Deposit), Tenant shall, upon demand, at Tenant’s option, immediately either (aa) deposit with Landlord a sum equal to amount drawn under the L/C (or any cash Security Deposit) or (bb) deliver to Landlord an additional L/C in an amount equal to the amount drawn. If Tenant fully and faithfully complies with all the covenants hereunder, the Security Amount (or any balance thereof) together with Landlord’s written consent to the cancellation of any and all outstanding L/Cs constituting part of the Security Deposit shall be delivered to Tenant within thirty (30) days after the last to occur of (1) the date the Term expires or terminates or (2) delivery to Landlord of possession of the Premises. Landlord may assign the L/C or cash Security Deposit to any purchaser of Landlord’s interest in the Premises or any successor landlord, if applicable, whereupon Landlord shall be discharged from any further liability with respect to the L/C or cash Security Deposit. In the event that Landlord exercises its right under the preceding sentence, Tenant shall fully cooperate with Landlord, in all reasonable respects, to cause an L/C to be assigned and conveyed to, or reissued to, such purchaser or successor landlord, as the case may be, and Tenant shall bear any expenses incurred in connection therewith. Provided Tenant is not, and has not been, in default of any of its obligations under this Lease at any time prior to or as of the applicable date hereinafter set forth for the reduction in the Security Amount (each, a “Reduction Date”), the Security Amount shall be immediately reduced as follows: (aa) on the first day of the ninth (9th) month of the Term, by $200,000 such that the Security Amount shall be $400,000; and (bb) on the first day of the thirty-seventh (37th) month of the Term, by $200,000 such that the Security Amount shall be $200,000 for the remainder of the Term. If Tenant is in default of any of its obligations hereunder beyond any applicable notice and cure periods as of or prior to any Reduction Date, then no future reductions in the Security Amount shall occur. Tenant may effectuate any of the above reductions by delivering to Landlord (xx) a new L/C in the form required hereby in the new Security Amount (after the applicable reduction), or (yy) an amendment to the existing L/C reducing the Security Amount, as appropriate, with no other modifications to the L/C.

6. Additional Rent for Operating Expenses and Real Estate Taxes.

6.1 Definitions. “Operating Expenses” shall mean any and all reasonable costs and expenses paid or incurred by Landlord in connection with the management, operation, maintenance and repair of the Premises including, without limitation:

 

  (a) the cost of electricity, gas, water, sewer service, and other systems and utilities serving the Premises, and the cost of supplies and equipment and maintenance and service contracts in connection therewith, to the extent the same are not paid by Tenant directly to the applicable utility or service provider;

 

  (b) the cost of repairs, replacements and maintenance, including, without limitation, the cost of snow removal with respect to the Premises, subject to the terms of clauses (g) and (h) below;

 

  (c) the cost of all repairs and maintenance associated with the landscaped areas, surface parking areas and truck courts of the Premises, including, without limitation, the cost of associated roof maintenance in connection with the Premises, subject to the terms of clauses (g) and (h) below;

 

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  (d) the cost of fire, extended coverage, boiler, sprinkler, apparatus, public liability, property damage, rent, earthquake and other insurance as Landlord carries with respect to the Premises, including the amounts of any deductible payment for such insurance incurred by Landlord in connection with any claim thereunder;

 

  (e) an annual management fee not to exceed 3% of the annual Base Rent paid hereunder;

 

  (f) reasonable fees, charges and other costs, including, without limitation, consulting fees, attorneys’ fees and accounting fees of all contractors engaged by Landlord in connection with the operation, maintenance or repair of the Premises;

 

  (g) the cost of any capital improvements made to the Premises after the date of this Lease designed to reduce Operating Expenses (amortized over the useful life in accordance with generally accepted accounting principles consistently applied, “GAAP”), together with interest on the unamortized balance(s) at the rate of ten percent (10%) per annum (or the actual cost of financing to Landlord);

 

  (h) the cost of any capital improvements made to the Premises after the date of this Lease that are required under any Law (as hereinafter defined) (amortized in accordance with GAAP), together with interest on the unamortized balance(s) at the rate of ten percent (10%) per annum (or the actual cost of financing to Landlord);

 

  (i) the cost of supplies, materials and equipment used in the management, operation, maintenance and repair of the Premises, including, without limitation, any rental fees for any such supplies, materials and equipment;

 

  (j) fees, costs and disbursements incurred in connection with good faith proceedings to contest, determine, or reduce Operating Expenses or Real Estate Taxes;

 

  (k) the fee for a bi-annual roof inspection contract, not to exceed $3,000, the costs of Landlord Maintenance (as hereinafter defined) pursuant to Section 9.3 and fire monitoring of the Building; and

 

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  (l) the cost payable by the Premises pursuant to any declaration of protective covenants or comparable recorded instrument affecting the Premises

“Operating Expenses” shall not include:

 

  (1) leasing commissions, accountants’ or attorneys’ fees, costs and disbursements and other expenses incurred in connection with proposals, negotiations, or the defense of Landlord’s title to or interest in the Premises or any part thereof, including in connection with Tenant leases;

 

  (2) except as specifically provided in this Lease with regard to amortization of capital improvement costs, fees and interest on debt or amortization or principal payments on any mortgages or deeds of trust or any other borrowings of Landlord;

 

  (3) except as provided in this Lease with regard to capital expenditures, any other expense that under GAAP would not be considered a maintenance or operating expense;

 

  (4) salaries, benefits or other compensation paid to leasing agents, promotional directors, officers, directors and executives of Landlord above the rank of building managers, or not involved in the day-to-day operations or management of the Premises (except for out-of-pocket expenses of such persons related to the Premises);

 

  (5) costs incurred as a result of latent defects;

 

  (6) all contributions to any organizations, whether political or charitable;

 

  (7) interest or penalties for late payments;

 

  (8) any cost or expenditure for which Landlord is reimbursed, whether by insurance proceeds, warranties, service contracts or otherwise, except through rent adjustment or other tax or operating expense pass-through provisions;

 

  (9) ground lease rental;

 

  (10) depreciation;

 

  (11) costs incurred by Landlord to comply with its obligations under Section 7.4 (Hazardous Materials) and under its indemnity;

 

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  (12) costs paid to Landlord or to affiliates of Landlord for services in the Building to the extent the same materially exceed or would materially exceed the costs for such services if rendered by first class unaffiliated third parties on a competitive basis (other than the management fee paid to Landlord’s affiliate, which shall not be included in this exclusion);

 

  (13) costs of correcting defects in any portion of the Building due to faulty design or construction (other than by Tenant);

 

  (14) interest, fines or penalties assessed as a result of Landlord’s failure to make payments in a timely manner unless such failure is commercially reasonable under the circumstances;

 

  (15) any reserve for future Building repair or replacement or any contingency fund;

 

  (16) costs associated with the operation of the business of the corporation which constitutes Landlord, as the same are distinguished from the costs of operation of the Building, including corporate accounting and legal matters; and

 

  (17) costs of selling, syndicating, financing, mortgaging or hypothecating any of Landlord’s interest in the Building.

6.2 Payment of Real Estate Taxes. Commencing on the Commencement Date, Tenant shall be obligated to pay to Landlord all Real Estate Taxes, if any, as Additional Rent. Without limitation of the foregoing, commencing on the Commencement Date, Tenant shall pay to Landlord, as Additional Rent, one twelfth (1/12th) of Real Estate Taxes, if any, on or before the first day of each month during any calendar year, in advance, in an amount reasonably estimated by Landlord in good faith and billed by Landlord to Tenant. Landlord shall have the right to reasonably revise such estimate from time to time. Within one hundred twenty (120) days after the expiration of each fiscal year for Real Estate Taxes, Landlord shall furnish Tenant with a statement (“Landlord’s Tax Statement”) setting forth in reasonable detail the actual amount of Real Estate Taxes owing on account of such year, if any. If the actual amount of Real Estate Taxes due for such year, if any, differs from the estimated amount of Real Estate Taxes paid by Tenant for such year, then, if Tenant owes any amounts to Landlord, such amounts shall be paid by Tenant (whether or not this Lease has terminated) within thirty (30) days after receipt of Landlord’s Tax Statement, and if Landlord owes any amounts to Tenant, such amounts shall be credited against the next installments of Base Rent and Additional Rent due from Tenant (or if the Lease has terminated for any reason other than Tenant’s default, paid to Tenant within thirty (30) days after delivery of Landlord’s Tax Statement). Tenant shall be obligated to pay Real Estate Taxes on an accrual basis such that Tenant shall pay estimated amounts of Real Estate Taxes for a calendar year on account of the Real Estate Taxes for such calendar year payable in January and June of the following calendar year. By way of illustration, in calendar year 2013 Tenant shall make estimated payments of Real Estate Taxes for calendar year 2013 that are

 

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payable in January and June of 2014 and the actual amount of such Real Estate Taxes shall be known at the end of calendar year 2013.

6.3 Payment of Operating Expenses. Commencing on the Commencement Date, Tenant shall be obligated to pay to Landlord all Operating Expenses as Additional Rent. Without limitation of the foregoing, commencing on the Commencement Date, Tenant shall pay to Landlord, as Additional Rent, one twelfth (1/12th) of all Operating Expenses for the Premises for each calendar year on or before the first day of each month during such year, in advance, in an amount reasonably estimated by Landlord in good faith and billed by Landlord to Tenant. Landlord shall have the right to reasonably revise such estimate from time to time. Within one hundred twenty (120) days after the expiration of each calendar year, Landlord shall furnish Tenant with a statement (“Landlord’s Operating Expense Statement”), setting forth in reasonable detail the actual amount of Operating Expenses for the Premises for such year. If the actual amount of Operating Expenses due for such year payable by Tenant differs from the estimated amount of Operating Expenses paid by Tenant for such year, then, if Tenant owes any amounts to Landlord, such amounts shall be paid by Tenant (whether or not this Lease has terminated) within thirty (30) days after receipt of Landlord’s Operating Expense Statement, and if Landlord owes any amounts to Tenant, such amounts shall be credited against the next installments of Base Rent and Additional Rent due from Tenant (or if the Lease has terminated for any reason other than Tenant’s default, paid to Tenant within thirty (30) days after delivery of Landlord’s Operating Expense Statement).

6.4 Controllable Operating Expenses. Commencing with calendar year 2013 and each calendar year during the Term thereafter, it is understood and agreed that for purposes of calculating Operating Expenses in any calendar year during the Term (for purposes of this Section, the “Remaining Term”), the maximum amount of Controllable Operating Expenses included in Operating Expenses for any calendar year from and after 2012 during the Remaining Term shall be limited to the actual amount of Controllable Operating Expenses paid or incurred by Landlord on account of or in calendar year 2012, increased on a cumulative, compounding basis at five percent (5%) per annum through the applicable calendar year. In the event that the cap applies to limit the Operating Expenses attributable to Controllable Operating Expenses for any calendar year, the excluded amount shall be carried forward to succeeding calendar years and recaptured by Landlord so long as the foregoing limit on the increase in the portion of Operating Expenses attributable to Controllable Operating Expenses is not exceeded in any such succeeding year such that amounts that could not be included in Operating Expenses during such prior years may be re-captured by Landlord.

6.5 Tenant’s Audit Rights. Landlord shall keep reasonably detailed records of all Operating Expenses and Real Estate Taxes for a period of at least two (2) years. Not more frequently than once in every 12-month period and after at least twenty (20) days’ prior written notice to Landlord, Tenant together with any representative of Tenant shall be permitted to audit the records of the Operating Expenses and Real Estate Taxes. If Tenant exercises its audit rights as provided above, Tenant shall conduct any inspection at a reasonable time and in a manner so as not to unduly disrupt the conduct of Landlord’s business. Any such inspection by Tenant shall be for the sole purpose of verifying the Operating Expenses and/or Real Estate Taxes. Tenant shall hold any information obtained during any such inspection in confidence, except that Tenant shall be permitted to disclose such information to its attorneys and advisors, provided

 

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Tenant informs such parties of the confidential nature of such information and uses good faith and diligent efforts to cause such parties to maintain such information as confidential. Any shortfall or excess revealed and verified by Tenant’s audit shall be paid to the applicable party within thirty (30) days after that party is notified of the shortfall or excess to the extent such overage or shortfall has not previously been adjusted pursuant to this Lease. If Tenant’s inspection of the records for any given year or partial year reveals that Tenant was overcharged for Operating Expenses or Real Estate Taxes by an amount of greater than six percent (6%), Tenant paid such overage and such overage was not otherwise adjusted pursuant to the terms of this Lease, Landlord shall reimburse Tenant for its reasonable, third party costs of the audit, up to an amount not to exceed $5,000.

7. Use; Compliance With Law.

7.1 Permitted Use. The Premises shall be used only for the Permitted Use and for no other purpose.

7.2 No Nuisance. Tenant shall not allow, suffer or permit the Premises or any use thereof to constitute a nuisance.

7.3 Compliance with Laws. Tenant, at Tenant’s expense, shall comply with and cause all of Tenant’s contractors, agents, servants, employees, invitees and licensees (the “Tenant Parties”) to comply with all applicable laws, ordinances, rules and regulations of governmental and quasi-governmental authorities (“Laws”) applicable to the Premises or the use or occupancy thereof. Without limiting the generality of the foregoing, Tenant shall comply with the requirements of (a) the Occupational Safety and Health Act (and all regulations promulgated thereunder), and (b) the Americans with Disabilities Act (and all regulations promulgated thereunder), as the same may be amended from time to time (“ADA”). The foregoing obligation of Tenant shall not however permit Tenant to make, without Landlord’s prior written approval, any alterations to the Premises which otherwise would require Landlord’s approval under this Lease, and Tenant shall comply with all of the requirements of this Lease in making any such alterations. Notwithstanding the foregoing, Tenant shall not be obligated to make any alterations to the Premises to bring the Premises in compliance with ADA, unless and to the extent any such alterations are necessary as the result of Tenant’s particular use of the Premises, as opposed to general warehousing and distribution uses.

7.4 Hazardous Materials.

7.4.1 Definitions. “Hazardous Substance” shall mean any hazardous or toxic substance, material or waste which is or becomes regulated by any local, state or federal governmental authority having jurisdiction. The term “Hazardous Substance” includes, without limitation, any material or substance which is (i) designated as a “hazardous substance” pursuant to Section 311 of the Federal Water Pollution Control Act (33 U.S.C. Section 1317), (ii) defined as a “hazardous waste” pursuant to Section 1004 of the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 et seq. (42 U.S.C. Section 6903), (iii) defined as a “hazardous substance” pursuant to Section 101 of the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601 et seq. (42 U.S.C. Section 9601), (iv) petroleum or (v) asbestos or asbestos-containing materials.

 

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7.4.2 Compliance with Law. Tenant shall conduct, and cause to be conducted, all operations and activity at the Premises in compliance with, and in all other respects shall comply with, all applicable present and future federal, state, municipal and other governmental statutes, ordinances, regulations, orders, directives and other requirements, and all present and future requirements of common law, concerning the protection of public health, safety or the environment (collectively “Environmental Statutes”). To Landlord the best of Landlord’s knowledge, based solely on the Phase I environmental report obtained by Landlord in conjunction with Landlord’s acquisition of the Premises, as of the Date of Lease, the Property does not contain Hazardous Substances in violation of Environmental Statutes.

7.4.3 Permits. Tenant, in a timely manner, shall, to the extent required due to Tenant’s use of the Premises or arising out of Tenant’s actions at the Premises, obtain and maintain in full force and effect all permits, licenses and approvals, and shall make and file all notifications and registrations as required by Environmental Statutes. Tenant shall at all times comply with the terms and conditions of any such permits, licenses, approvals, notifications and registrations.

7.4.4 Documents. Tenant shall provide to Landlord copies of the following pertaining to the Premises or Tenant’s use thereof, promptly after each shall have been submitted, prepared or received by Tenant: (A) all applications and associated materials submitted to any governmental agency relating to any Environmental Statute; (B) all notifications, registrations, reports and other documents, and supporting information, prepared, submitted or maintained in connection with any Environmental Statute or otherwise relating to environmental conditions; (C) all permits, licenses, approvals, and amendments or modifications thereof, obtained under any Environmental Statute; and (D) any correspondence, notice of violation, summons, order, complaint, or other document received by Tenant pertaining to compliance with or liability under any Environmental Statute.

7.4.5 Operations. Tenant shall not cause in, on or under, or suffer or permit to occur in, on or under, the Premises any generation, use, manufacturing, refining, transportation, emission, release, treatment, storage, disposal, presence or handling of Hazardous Substances, except that limited quantities Hazardous Substances may be used, handled or stored on the Premises, provided such is incident to and reasonably necessary for the maintenance of the Premises or Tenant’s operations for the Permitted Use and is in compliance with all Environmental Statutes and other applicable governmental requirements. Should a release of any Hazardous Substance occur at the Premises or the Property as the result of the acts or omissions of Tenant and/or any of the Tenant Parties, Tenant shall immediately contain, remove and dispose of, off the Premises, such Hazardous Substances and any material that was contaminated by the release, and remedy and mitigate all threats to human health or the environment relating to such release. When conducting any such measures Tenant shall comply with all Environmental Statutes.

7.4.6 Inspection. Upon not less than twenty-four (24) hours’ prior telephonic or written notice (except in case of an emergency in which event Landlord shall provide such telephonic or written notice as Landlord is able to under the circumstances), Tenant agrees to permit Landlord and its authorized representatives to enter, inspect and assess the Premises at reasonable times for the purpose of determining Tenant’s compliance with the provisions of this Section. Such inspections and assessments may include obtaining samples and performing tests of soil, surface water, groundwater or other media.

 

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7.4.7 Tanks. Tenant shall not install or cause the installation of any above ground or underground storage tank at the Premises.

7.4.8 Indemnification. Notwithstanding any other provision in this Lease to the contrary, Tenant hereby agrees to indemnify and to hold harmless Landlord and its officers, directors, shareholders, partners and principals of, from and against any and all expense, loss, cost, claim, damage, penalty, fine, or liability of any kind or nature suffered by Landlord by reason of the presence or release of Hazardous Substances at or from the Premises, or any violation of Environmental Laws by the Premises, as a result of the acts or omissions of Tenant or the Tenant Parties or Tenant’s breach of any of the provisions of this Section 7, including without limitation: (A) any and all expenses that Landlord may incur in complying with any Environmental Statutes, (B) any and all costs that Landlord may incur in studying, assessing, containing, removing, remedying, mitigating, or otherwise responding to, the presence or release of any Hazardous Substance at or from the Premises, (C) any and all costs for which Landlord may be liable to any governmental agency for studying, assessing, containing, removing, remedying, mitigating, or otherwise responding to, the presence or release of any Hazardous Substance at or from the Premises, (D) any and all fines or penalties assessed, or threatened to be assessed, upon Landlord by reason of a failure of Tenant to comply with any obligations, covenants or conditions set forth in this Section, and (E) any and all reasonable legal fees and costs incurred by Landlord in connection with any of the foregoing. Tenant’s obligations under this Section shall survive the expiration or earlier termination of the Term of this Lease. Notwithstanding anything to the contrary in this Section 7.4, Tenant shall have no liability to Landlord with respect to Hazardous Substances present at the Premises due to the acts or omissions of any party other than Tenant and the Tenant Parties.

7.5 Rules and Regulations; Landlord’s Rights. Tenant shall comply with all reasonable non-discriminatory rules and regulations with respect to the Premises established by Landlord of which Tenant has received written notice. Landlord reserves the right, at any time and from time to time, without the consent of or liability to Tenant, to (i) make alterations or additions to the Premises, to change, add to, eliminate or reduce the extent, size, shape, number or configuration of any aspect of the Premises, (ii) close to the general public all or any portion of the Premises to the extent and for the period necessary to avoid any dedication to the public, provided Tenant has reasonable means of ingress and egress to the Premises, (iii) effect any repairs or further construction, (iv) change the arrangement, character, use or location of entrances or passageways, doors and doorways, corridors, elevators, stairs, landscaping, toilets, mechanical, plumbing, electrical or other operating systems or any other portions of the Premises provided such alterations or additions do not materially adversely affect the use of the Premises by Tenant, or ingress to or egress from the Premises, and (v) change the name, number or designation by which the Premises is commonly known; provided, however, Landlord shall use reasonable efforts to limit and minimize any disruption of Tenant’s use of the Premises in connection with Landlord’s actions undertaken pursuant to this Section and Tenant’s Rent hereunder shall not increase as a result hereof.

8. Alterations and Tenant’s Property.

 

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8.1 Alterations Defined.

8.1.1 Tenant shall not make or suffer or allow to be made any alterations, additions or improvements in or to the Premises (collectively, “Alterations”) without first obtaining Landlord’s written consent based on detailed plans and specifications submitted by Tenant; provided Landlord’s consent will not be required if (a) the proposed Alterations will not affect the structure or the mechanical, electrical, HVAC, plumbing or life safety systems of the Building (collectively, “Building Systems”) and (b) the total cost to acquire and install the proposed Alterations will be no more than (i) $25,000 in any one instance and (ii) $100,000 in the aggregate during any calendar year. In all other instances where Landlord’s consent is so required, it may be granted or withheld by Landlord in its sole and absolute subjective discretion. In all events, Tenant shall notify Landlord prior to commencing Alterations other than de minimis Alterations.

8.1.2 Tenant agrees that all Alterations (regardless of whether Landlord’s consent is required) shall be done at Tenant’s sole cost and expense, in accordance with the plans and specifications approved by Landlord and in a good and workmanlike manner, that the structural integrity of the Building shall not be impaired, and that no liens shall attach to all or any part of the Premises or the Building by reason thereof. Tenant shall obtain, at its sole expense, all permits required for such work.

8.2 Removal of Property. Unless otherwise elected by Landlord as hereinafter provided, all Alterations made by Tenant shall become the property of Landlord and shall be surrendered to Landlord upon the expiration or earlier termination of this Lease, except as otherwise set forth in this Lease. However (i) movable equipment, trade fixtures, personal property, furniture, or any other items that can be removed without material harm to the Improvements will remain Tenant’s property; and (ii) any racks installed by Tenant (collectively, “Tenant Owned Property”) shall not become the property of Landlord but shall be removed by Tenant upon the expiration or earlier termination of this Lease. All Tenant Owned Property shall be removed from the Premises at Tenant’s sole cost and expense at the expiration or sooner termination of this Lease. When granting consent for any Alterations that require Landlord’s consent, Landlord shall indicate whether it will require the removal of those Alterations at the expiration or earlier termination of the Lease. Prior to making any Alterations not requiring Landlord’s consent, Tenant may request that Landlord notify Tenant whether Landlord requires Tenant to remove that Alteration prior to expiration or earlier termination of the Lease. Tenant shall remove those Alterations that Landlord requested be removed under the prior two sentences at the expiration or earlier termination of the Lease. Tenant shall repair at its sole cost and expense all damage caused to the Premises or the Building by removal of any Alterations that Tenant is required to remove or Tenant Owned Property. Landlord may remove any Tenant Owned Property or Alterations that Tenant is required but fails to remove at the expiration or earlier termination of the Lease and Tenant shall pay to Landlord the reasonable cost of removal. Tenant’s obligations under this Section shall survive the expiration or earlier termination of this Lease.

9. Repairs and Other Work.

9.1 Tenant’s Obligations.

 

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9.1.1 Tenant shall maintain in good, clean and sanitary order and condition the Premises, including without limiting the generality of the foregoing, all plumbing, heating, air conditioning, ventilating, electrical, lighting facilities and equipment within the Premises, fixtures, interior walls, ceilings, decking, floors, windows, doors, plate glass and skylights located within the Premises, and signs (except Landlord’s signs, if any) located on the Premises.

9.1.2 Landlord shall deliver the HVAC Systems which service the Building (collectively, the “HVAC Systems”) in good working order as of the Commencement Date. Tenant shall enter into a preventative maintenance contract for the HVAC Systems on terms and with a provider reasonably acceptable to Landlord, which contract shall call for quarterly maintenance, inspection and repair of such HVAC Systems (“HVAC Contract”). For any calendar year, Tenant shall be responsible for the cost of replacing the HVAC Systems (or any major component thereof) up to $2,500 per HVAC System with a maximum replacement cost of $7,500 for all HVAC Systems (the “HVAC Cap”) in such year. Landlord shall be responsible for paying the replacement cost of such HVAC System in excess of the HVAC Cap (such costs being, the “Excess HVAC Costs”), provided such Excess HVAC Costs shall be amortized over the useful life of such replacement (in accordance with GAAP) at the rate of ten percent (10%) per annum (or such other market rate as may be payable by Landlord on funds borrowed for the purpose of funding the replacement) and reimbursed to Landlord by Tenant as Additional Rent on or prior to the first day of each calendar month after such replacement is performed by Landlord. Notwithstanding the foregoing, if the replacement of the particular HVAC System constitutes a Tenant Necessitated Repair, then Tenant shall be responsible for reimbursing Landlord for the entire cost of the replacement of the HVAC System promptly upon demand by Landlord.

9.1.3 Provided that Tenant maintains the HVAC Contract and the replacement(s) are not the result of a Tenant Necessitated Repair, for any calendar year, Landlord shall be responsible for the replacement cost of such HVAC System in excess of the HVAC Cap (such costs being, the “Excess HVAC Costs”), which Excess HVAC Costs shall be amortized over the useful life of such replacement (in accordance with GAAP) at the rate of ten percent (10%) per annum (or such other market rate as may be payable by Landlord on funds borrowed for the purpose of funding the replacement) and reimbursed to Landlord as Additional Rent on or prior to the first day of each calendar month after such replacement is performed by Landlord.

9.1.4 Tenant will not overload the electrical wiring serving the Premises or within the Premises, and will install at its expense, subject to the provisions of this Lease, any additional electrical wiring which may be required in connection with Tenant’s apparatus.

9.1.5 Tenant will repair, at its expense, any damage to the Premises, arising out of Tenant’s use or occupancy thereof, including damage caused by bringing into the Premises any property for Tenant’s use or by the installation or removal of such property, all regardless of fault, or by whom such damage shall be caused, unless caused by Landlord, its agents, employees, or contractors; and in default of such repairs by Tenant, Landlord may make the same and Tenant agrees to pay to Landlord, upon Landlord’s demand, as Additional Rent, the reasonable cost thereof.

 

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9.2 Conditions Applicable to Repairs and Other Work. All repairs, replacements and reconstruction (including, without limitation, all Alterations) made by or on behalf of Tenant shall be made and performed: (a) at Tenant’s cost and expense and at such time and in such manner as Landlord may reasonably designate, (b) by contractors or mechanics reasonably approved by Landlord, (c) at least equal in quality of materials and workmanship to the original work or installation, (d) in accordance with such reasonable requirements as Landlord may impose with respect to insurance to be obtained by Tenant in connection with the proposed work, (e) in accordance with all applicable laws and regulations of governmental authorities having jurisdiction over the Premises, and (f) Tenant shall provide Landlord with as built drawings of such Alterations.

9.3 Landlord’s Obligations. Landlord shall at its sole cost and expense, maintain, repair and/or replace, as necessary, the structure of the Building, the structural elements of the roof, the roof membrane, slab, foundation and exterior walls of the Building, the sub grade sewer and plumbing lines (all such repairs and maintenance (the “Landlord Maintenance”), but not replacements, to be reimbursed as Operating Expenses), except to the extent such is part of any Alterations. Provided, however, if any such work, maintenance, repairs or replacements are required as a result of the negligence or misconduct of Tenant or any Tenant Parties, Tenant’s failure to repair and maintain the Premises or the misuse of the Premises by Tenant or the Tenant Parties (any of the foregoing, a “Tenant Necessitated Repair”), Tenant shall reimburse Landlord for all reasonable costs paid or incurred by Landlord for such work upon demand as Additional Rent. Landlord shall also be responsible for the performance of landscaping and snow removal and repairs and maintenance of the exterior parking areas, sidewalks and truck courts provided that the cost of such activities shall be reimbursable as Operating Expenses. In addition, Landlord, at its sole expense, shall perform any replacements to (a) the sprinkler systems and (b) parking lot, in either instance, the cost of which is in excess of $10,000 per year (such excess costs being the “Replacement Costs”); provided, however, that Tenant shall reimburse Landlord for the Replacement Costs amortized over its useful life in accordance with GAAP, together with interest on the unamortized balance(s) at the rate of ten percent (10%) per annum or such other market rate as may be payable by Landlord on funds borrowed for the purpose of funding the Replacement Costs, as Additional Rent on or prior to the first day of each calendar month after such replacement is performed by Landlord In addition to the foregoing obligations, Landlord shall be responsible, at its expense, for correcting (i) any latent defects throughout the Term and (ii) deferred maintenance throughout the first twelve (12) months of the Term. For the avoidance of ambiguity, Tenant shall be responsible for any replacement costs of the sprinkler systems or parking lot, in either instance, the cost of which are less than $10,000 per year and shall reimburse Landlord within twenty (20) days after receipt of an invoice therefor from Landlord.

10. Liens. Tenant shall keep the Premises and the Property free from any liens arising out of any work performed or material furnished to or for the Premises by or for Tenant. If Tenant shall not, within thirty (30) days following notice of the imposition of any such lien, cause same to be released of record by payment or posting of a bond satisfactory to Landlord, Landlord, in addition to all other remedies provided under this Lease and by law, shall have the right (but not the obligation) to cause the lien to be released by such means as Landlord shall deem proper, including, without limitation, payment of the claim giving rise to such lien. All such sums reasonably paid by Landlord and all expenses incurred by it in connection therewith shall be considered Additional Rent and shall be payable by Tenant within ten (10) days after receipt of written demand.

 

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11. Subordination.

11.1 Provided Tenant is provided with a commercially reasonable subordination, nondisturbance and attornment agreement (“SNDA”), this Lease shall be subject and subordinate at all times to (a) all ground leases or underlying leases that may now exist or hereafter be executed affecting the Premises or any portion thereof, (b) the lien of any mortgage, deed of trust or other security instrument that may now exist or hereafter be executed in any amount for which the Premises or any portion thereof, any ground leases or underlying leases, or Landlord’s interest or estate therein is specified as security, and (c) all modifications, renewals, supplements, consolidations and replacements thereof. If any ground lease or underlying lease terminates for any reason or any mortgage, deed of trust or other security instrument is foreclosed or a conveyance in lieu of foreclosure is made for any reason, Tenant, notwithstanding any subordination, shall attorn to and become the tenant of the successor in interest to Landlord at the option of such successor in interest. The provisions of this Section shall be self operative and no further instrument shall be required to effect the provisions of this Section. The form of Subordination, Non-Disturbance and Attornment Agreement attached hereto as Schedule 1 shall be deemed reasonable for all relevant purposes, and Landlord shall use reasonable efforts deliver the same with respect to all current lenders within thirty (30) days of execution of this Lease.

11.2 If any mortgage is foreclosed, or Landlord’s interest under this Lease is conveyed or transferred in lieu of foreclosure: neither the mortgagee nor any person or entity acquiring title to the Premises as a result of foreclosure or trustee’s sale, nor any successor or assign of either of the foregoing, shall be (i) liable for any default by Landlord, (ii) bound by or liable for any payment of Rent which may have been made more than thirty (30) days before the due date of such installment, (iii) subject to any defense or offset which Tenant may have to the payment of Rent or other performance under this Lease arising from any default by Landlord, or (iv) bound by any amendment or modification to this Lease made without the consent of such mortgagee if such mortgagee’s consent thereto is required.

11.3 Within ten (10) business days following request by Landlord, Tenant agrees to execute any documents reasonably required to effectuate the foregoing subordination or such other reasonable and customary SNDA submitted by Landlord to Tenant, which documents may contain such other terms as any mortgagee or prospective mortgagee may reasonably require, or to make this Lease prior to the lien of any mortgage, deed of trust or underlying lease, as the case may be.

11.4 Tenant agrees to simultaneously give to any party holding a mortgage encumbering the Building (provided Tenant has been advised of such party), by registered or certified mail, a copy of any notice of default served upon Landlord provided Tenant has been notified in writing of the names and addresses of such mortgagee(s) and such parties shall have the same cure rights as Landlord has under this Lease.

 

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12. Inability to Perform. If, by reason of acts of God, governmental restrictions, strikes, labor disturbances, shortages of materials or supplies, actions or inactions of governmental authorities or any other cause or event beyond Landlord’s or Tenant’s reasonable control (collectively, “Force Majeure Events”), Landlord or Tenant is unable to furnish or is delayed in furnishing any utility or service required to be furnished by either party under the provisions of this Lease, or either party hereto is unable to perform or make or is delayed in performing or making any installations, decorations, repairs, alterations, additions or improvements required to be performed or made under this Lease, no such inability or delay shall impose any liability upon such non-performing party or provide the other party with any right to offset, deduction or abatement of Rent by reason of inconvenience or annoyance to such other party, or otherwise. The terms of this Section 12 shall not be applicable to or excuse any failing on the part of Tenant to satisfy Tenant’s obligations to pay Rent or other required payments to Landlord.

13. Destruction.

13.1 Repair. Subject to the provisions of Sections 13.2, 13.3 and 13.4 below, if any portion of the Building is damaged by fire, earthquake, flood or other casualty, Landlord shall proceed immediately to make such repairs in accordance with Section 13.4.

13.2 Tenant’s Right to Terminate. If such damage causes more than fifty percent (50%) of the Premises to be untenantable by Tenant and, in the reasonable estimate of an independent architect or contractor, such damage cannot be repaired within nine (9) months after the date of the event causing such damage (under a normal construction schedule not requiring the payment of overtime or premium), or if such damage occurs during the last twelve (12) months of the Term, Tenant may terminate this Lease by delivery of written notice to Landlord within thirty (30) days after the date on which such architect or contractor’s estimate is delivered to Tenant by Landlord. Upon termination, Rent shall be apportioned as of the date of the damage and, provided Tenant is not in default, all prepaid Rent shall be repaid to Tenant. Landlord agrees to provide Tenant with such estimate within thirty (30) days after Landlord has received written notice of such casualty.

13.3 Landlord’s Right to Terminate. If (i) the cost to repair damage to or destruction of the Premises exceeds fifty (50%) of replacement cost of the Building and other improvements on the Premises for a casualty of the type covered by the insurance required to be carried under Section 14.5, or (ii) the Premises is damaged by a casualty not of the type covered by the insurance required to be carried under Section 14.5 and the amount by which the cost to repair such damage exceeds available insurance proceeds, if any, is greater than fifteen (15%) of the then replacement cost of the Building and other improvements on the Premises, or (iii) such damage cannot be repaired within nine (9) months after the casualty (under a normal construction schedule not requiring the payment of overtime or premium), Landlord may terminate this Lease on twenty (20) days notice to Tenant by delivery of written notice to Tenant within forty-five (45) days after the date of the casualty. Upon termination, Rent shall be apportioned as of the date of the damage and all prepaid Rent shall be repaid to Tenant (less the amount necessary to cure any monetary default of Tenant under this Lease existing as of the date of termination).

 

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13.4 Extent of Repair Obligations. If this Lease is not terminated, Landlord’s repair obligation shall extend to the structure of the Building and all improvements (except those constructed or installed by Tenant, if any and the Tenant Owned Property) in the Premises at the date possession of the Premises was delivered to Tenant, and Tenant shall repair all other portions of the Premises (including, without limitation, Alterations and Tenant Owned Property). All such repairs shall be performed in a good and workmanlike manner, with due diligence, and shall restore the items repaired to substantially the same usefulness and construction as existed immediately before the damage. All work by Tenant shall be performed in accordance with the requirements of Section 9.2 above. In the event of any termination of this Lease, the proceeds from any insurance paid by reason of damage to or destruction of the Premises or any portion thereof, or any other element, component or property insured by Landlord (exclusive of proceeds for damage to Tenant Owned Property), shall belong to and be paid to Landlord.

13.5 Adjustment of Rent. If a casualty renders all or part of the Premises untenantable, Rent shall proportionately abate commencing on the date of the casualty and ending when the Premises are delivered to Tenant with Landlord’s restoration obligation substantially complete. The extent of the abatement shall be based upon the portion of the Premises rendered untenantable, inaccessible or unfit for use in a reasonable business manner for the purposes stated in this Lease.

13.6 Mutual Waiver of Subrogation. Notwithstanding anything to the contrary in this Lease, Landlord and Tenant mutually waive their respective rights of recovery against each other and each other’s officers, directors, constituent partners, agents and employees, and Tenant waives such rights against each lessor under any ground or underlying lease and each lender under any mortgage or deed of trust or other lien encumbering the Premises or any portion thereof or interest therein, to the extent any loss is or would be covered by fire, extended coverage, and other property insurance policies required to be carried under this Lease or otherwise carried by the waiving party, and the rights of the insurance carriers of such policy or policies to be subrogated to the rights of the insured under the applicable policy. Each party shall cause its insurance policy to be endorsed to evidence compliance with such waiver.

14. Insurance.

14.1 Insurance on Tenant’s Property. Tenant shall procure at its cost and expense and keep in effect during the Term insurance coverage for special form of physical loss or damage insuring the full replacement value of Alterations, Tenant’s trade fixtures, furnishings, equipment, plate glass, signs and all other items of Tenant Owned Property and other personal property of Tenant. Landlord shall not be liable for any damage or damages of any nature whatsoever to persons or property caused by explosion, fire, theft or breakage, vandalism, falling plaster, by sprinkler, drainage or plumbing systems, or air conditioning equipment, by the interruption of any public utility or service, by steam, gas, electricity, water, rain or other substances leaking, issuing or flowing into any part of the Premises or by natural occurrence, acts of the public enemy, riot, strike, insurrection, war, court order, requisition or order of governmental body or authority, it being agreed that Tenant shall be responsible for obtaining appropriate insurance to protect its interests.

 

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14.2 Tenant’s Liability Insurance. Tenant shall procure at its cost and expense and maintain throughout the Term comprehensive commercial general liability insurance applicable to the Premises with a minimum combined single limit of liability of Two Million Dollars ($2,000,000), statutory worker’s compensation insurance, and employer’s liability insurance with a One Million Dollar ($1,000,000) minimum limit covering all of Tenant’s employees. Such liability insurance shall include, without limitation, products and completed operations liability insurance, fire and legal liability insurance, and such other coverage as Landlord may reasonably require from time to time. At Landlord’s request Tenant shall increase such insurance coverage to a level that is commercially reasonably required by Landlord.

14.3 Form of Policies. Tenant’s insurance shall be issued by companies authorized to do business in the State of Ohio. Tenant shall have the right to provide insurance coverage pursuant to blanket policies obtained by Tenant if the blanket policies expressly afford coverage required by this Section 14. All insurance policies required to be carried by Tenant under this Lease (except for worker’s compensation insurance) shall (i) name Landlord, and any other reasonable number of parties designated by Landlord as additional insureds, (ii) as to liability coverages, be written on an “occurrence” basis, (iii) provide that Landlord shall receive ten (10) days notice before any cancellation or change in coverage, and (iv) contain a provision that no act or omission of Tenant shall affect or limit the obligation of the insurer to pay the amount of any loss sustained. Each such policy shall contain a provision that such policy and the coverage evidenced thereby shall be primary and non-contributing with respect to any policies carried by Landlord. Tenant shall deliver reasonably satisfactory evidence of such insurance to Landlord on or before the Commencement Date, and thereafter at least ten (10) days before the expiration dates of expiring policies. Notwithstanding the foregoing, if any such insurance expires without having been renewed by Tenant, Landlord shall have the option, in addition to Landlord’s other remedies to procure such insurance for the account of Tenant immediately and without notice to Tenant, and the cost thereof shall be paid to Landlord as Additional Rent. The limits of the insurance required under this Lease shall not limit liability of Tenant.

14.4 Compliance with Insurance Requirements. Tenant shall not do anything, or suffer or permit anything to be done, in or about the Premises that shall invalidate or be in conflict with the provisions of any fire or other insurance policies covering the Building. Tenant, at Tenant’s expense, shall comply with, and shall cause all occupants of the Premises to comply with, all applicable customary rules, orders, regulations or requirements of any board of fire underwriters or other similar body.

14.5 Landlord’s Insurance. Landlord will purchase and maintain a standard policy of special form insurance with customary exclusions covering the Building in the full replacement cost of the Building, together with rent loss insurance and windstorm coverage (on a full replacement cost basis). Landlord will purchase and maintain broad form commercial general liability insurance with a minimum combined single limit of liability of at least Two Million Dollars ($2,000,000), written by companies authorized to do business in the State of Ohio. All costs of insurance carried by Landlord and referred to in this Section or otherwise will constitute Operating Expenses; provided, however, that Tenant shall not be responsible for any deductible for Landlord’s insurance in excess of $150,000.

 

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15. Eminent Domain.

15.1 Effect of Taking. If all of the Premises is condemned or taken in any permanent manner before or during the Term for any public or quasi-public use, or any permanent transfer of the Premises is made in avoidance of an exercise of the power of eminent domain (each of which events shall be referred to as a “taking”), this Lease shall automatically terminate as of the date of the vesting of title as a result of such taking. If a part of the Premises is so taken, this Lease shall automatically terminate as to the portion of the Premises so taken as of the date of the vesting of title as a result of such taking. If such portion of the Premises is taken as to render the balance of the Premises unusable by Tenant for the Permitted Use, as reasonably determined by Tenant and Landlord, this Lease may be terminated by Landlord or Tenant, as of the date of the vesting of title as a result of such taking, by written notice to the other party given within sixty (60) days following notice to Landlord of the date on which said vesting will occur. If this Lease is not terminated as a result of any taking, Landlord shall restore the Building to an architecturally whole unit; provided, however, that Landlord shall not be obligated to expend on such restoration more than the amount of condemnation proceeds actually received by Landlord.

15.2 Award. Landlord shall be entitled to the entire award for any taking, including, without limitation, any award made for the value of the leasehold estate created by this Lease. No award for any partial or entire taking shall be apportioned, and Tenant hereby assigns to Landlord any award that may be made in any taking, together with any and all rights of Tenant now or hereafter arising in or to such award or any part thereof; provided, however, that nothing contained herein shall be deemed to give Landlord any interest in or to require Tenant to assign to Landlord any separate award made to Tenant for its relocation expenses, the taking of personal property and fixtures belonging to Tenant, the unamortized value of improvements made or paid for by Tenant or the interruption of or damage to Tenant’s business.

15.3 Adjustment of Rent. In the event of a partial taking that does not result in a termination of this Lease as to the entire Premises, Base Rent and Additional Rent shall be equitably adjusted in relation to the portions of the Premises and Building taken or rendered unusable by such taking

15.4 Temporary Taking. If all or any portion of the Premises is taken for a limited period of time before or during the Term, this Lease shall remain in full force and effect; provided, however, that Rent shall abate during such limited period in proportion to the portion of the Premises taken by such taking. Landlord shall be entitled to receive the entire award made in connection with any such temporary taking; provided, however, that nothing contained herein shall be deemed to give Landlord any interest in or to require Tenant to assign to Landlord any separate award made to Tenant for its relocation expenses, the taking of personal property and fixtures belonging to Tenant, the unamortized value of improvements made or paid for by Tenant or the interruption of or damage to Tenant’s business. Any temporary taking of all or a portion of the Premises which continues for six (6) months shall be deemed a permanent taking of the Premises or such portion.

 

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16. Assignment; Subleasing.

16.1 Consent Required. Neither Tenant nor any sublessee or assignee of Tenant, directly or indirectly, voluntarily or by operation of law, shall sell, assign, encumber, pledge or otherwise transfer or hypothecate all or any part of the Premises or Tenant’s leasehold estate hereunder (each such act is referred to as an “Assignment”), or sublet the Premises or any portion thereof or permit the Premises to be occupied by anyone other than Tenant (each such act is referred to as a “Sublease”), without Landlord’s prior written consent in each instance. In the case of any proposed Sublease or Assignment, Landlord’s consent shall not be unreasonably withheld. Any Assignment or Sublease that is not in compliance with this Section 16 shall be void. The acceptance of Rent by Landlord from a proposed assignee, sublessee or occupant of the Premises shall not constitute consent to such Assignment or Sublease by Landlord. Fifty percent (50%) of the Excess Assignment Consideration which is attributable to this Lease in connection with any Assignment, and fifty percent (50%) of the Excess Sublease Rent, shall be payable to Landlord as Additional Rent, except that the terms of this sentence shall not apply to any assignment or sublease that is permitted by Section 16.5 below without Landlord’s consent. The right to such amounts is expressly reserved from the grant of Tenant’s leasehold estate for the benefit of Landlord.

16.2 Notice. Any request by Tenant for Landlord’s consent to a specific Assignment or Sublease shall include (a) the name of the proposed assignee, sublessee or occupant, (b) the nature of the proposed assignee’s sublessee’s or occupant’s business to be carried on in the Premises, (c) a copy of the proposed Assignment or Sublease, and (d) such financial information (in the event of an Assignment) and such other information as Landlord may reasonably request concerning the proposed assignee, sublessee or occupant or its business. Landlord shall respond in writing, stating the reasons for any disapproval, within fifteen (15) business days after receipt of all information reasonably necessary to evaluate the proposed Assignment or Sublease.

16.3 No Release. No consent by Landlord to any Assignment or Sublease by Tenant, and no specification in this Lease of a right of Tenant’s to make any Assignment or Sublease, shall relieve Tenant of any obligation to be performed by Tenant under this Lease, whether arising before or after (a) the Assignment or Sublease or (b) any extension of the Term (pursuant to exercise of an option granted in this Lease). The consent by Landlord to any Assignment or Sublease shall not relieve Tenant or any successor of Tenant from the obligation to obtain Landlord’s express written consent to any other Assignment or Sublease.

16.4 Cost of Processing Request. Tenant shall pay to Landlord the reasonable amount of Landlord’s cost of processing every proposed Assignment or Sublease, including without limitation reasonable legal review fees and expenses, together with the reasonable amount of all direct and indirect expenses incurred by Landlord arising from any assignee, occupant or sublessee taking occupancy (including, without limitation, security service, janitorial and cleaning service, and rubbish removal service) up to an amount not to exceed $2,500 in any one instance.

16.5 Corporate or Partnership Transfers. Notwithstanding the foregoing, Tenant may assign this Lease to any affiliate or subsidiary of Tenant or in connection with a

 

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merger or other consolidation of Tenant or to a purchaser of all or substantially all of Tenant’s assets and may sublease all or some portion of the Premises to an affiliate or subsidiary of Tenant without Landlord’s consent provided: (i) Tenant shall remain liable hereunder; and (ii) Tenant provides reasonable prior written notice to Landlord of such Assignment or Sublease. In addition, a sale or transfer of the capital stock, memberships or interests of Tenant shall not be deemed an Assignment or Sublease hereunder if (1) such sale or transfer occurs in connection with any bona fide financing or capitalization for the benefit of Tenant, or (2) Tenant is, or as a result of such transfer, becomes a publicly traded corporation.

16.6 Assumption of Obligations. Each assignee or other transferee of Tenant’s interest under this Lease, other than Landlord, shall assume all obligations of Tenant under this Lease and shall be and remain liable jointly and severally with Tenant for the payment of Base Rent and Additional Rent, and for the performance of all the terms, covenants, conditions and agreements contained in this Lease which are to be performed by Tenant. Each sublessee of all or any portion of the Premises shall agree in writing for the benefit of Landlord (a) to comply with and agree to the provisions of this Lease, and (b) that such sublease (and all further subleases of any portion of the Premises) shall terminate upon any termination of this Lease, regardless of whether or not such termination is voluntary. No Assignment or Sublease shall be valid or effective unless the assignee or sublessee or Tenant shall deliver to Landlord a fully-executed counterpart of the Assignment or Sublease and an instrument that contains a covenant of assumption by the assignee or agreement of the sublessee, reasonably satisfactory in substance and form to Landlord, consistent with the requirements of this Section 16.6. The failure or refusal of the assignee to execute such instrument of assumption or of the sublessee to execute the agreement described above shall not release or discharge the assignee or sublessee from its obligations that would have been contained in such instrument or agreement, all of which obligations shall run automatically to such assignee or sublessee.

17. Utilities and Services.

17.1 Utilities. Tenant shall pay directly to the providing utility companies the cost of all utilities consumed at the Premises.

17.2 Certain Services. Tenant shall contract separately for the provision, at Tenant’s sole cost, of janitorial service and trash removal for the Premises and Landlord will have no obligation to provide any such services to the Premises.

17.3 Involuntary Cessation of Services. Landlord reserves the right, without any liability to Tenant and without affecting Tenant’s covenants and obligations hereunder, to stop service of any or all of the HVAC, electric, sanitary, and other systems serving the Premises, or to stop any other services required by Landlord under this Lease, whenever and for so long as may be necessary by reason of (i) accidents, emergencies, strikes, or the making of repairs or changes which Landlord, in good faith, deems necessary or (ii) any other cause beyond Landlord’s reasonable control. No such interruption of service shall be deemed an eviction or disturbance of Tenant’s use and possession of the Premises or any part thereof, or render Landlord liable to Tenant for damages, or relieve Tenant from performance of Tenant’s obligations under this Lease, including, but not limited to, the obligation to pay Rent; provided, however, that if any interruption of services persists for a period in excess of five (5) consecutive business days Tenant shall, as Tenant’s sole remedy, be entitled to a proportionate abatement of Rent to the extent, if any, of any actual loss of use of the Premises by Tenant.

 

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18. Default.

18.1 Events of Default by Tenant. Except as otherwise provided in this Lease, the failure to perform or honor any covenant, condition or other obligation of Tenant or the failure of any representation made by Tenant under this Lease shall constitute a default by Tenant upon expiration of the applicable grace period, if any. Tenant shall have a period of five (5) days from the date it receives written notice from Landlord that any payment of Rent is due within which to cure any default in the payment of Rent. Except as otherwise provided in Section 19, Tenant shall have a period of thirty (30) days from the date of written notice from Landlord within which to cure any other default under this Lease; provided, however, that with respect to any default (other than a default which can be cured by the payment of money) that cannot reasonably be cured within thirty (30) days, the default shall not be deemed to be uncured if Tenant commences to cure within thirty (30) days from Landlord’s notice, continues to prosecute diligently the curing of such default. Notwithstanding anything contained in this Section 18.1, Landlord shall not be obligated to provide Tenant with notice of substantially similar defaults more than two (2) times in any twelve (12) month period.

18.2 Remedies. Upon the occurrence of a default by Tenant that is not cured by Tenant within the applicable grace periods specified in Section 18.1, Landlord shall have all of the following rights and remedies in addition to all other rights and remedies available to Landlord at law or in equity:

18.2.1 The right to terminate Tenant’s right to possession of the Premises and to recover (i) all Rent which shall have accrued and remain unpaid through the date of termination; plus (ii) the amount by which the unpaid Rent for the balance of the Term, discounted to present value at the Prime Rate then in effect, shall exceed the then fair rental value of the Premises for the balance of the Term (assuming reasonable allowance for downtime and free rent prior to the commencement of such fair market rent), similarly discounted, plus (iii) any other amount necessary to compensate Landlord for all the damages caused by Tenant’s failure to perform its obligations under this Lease (including, without limitation, reasonable attorneys’ and accountants’ fees, costs of alterations of the Premises, interest costs and brokers’ fees incurred upon any reletting of the Premises).

18.2.2 The right to continue the Lease in effect after Tenant’s breach and recover Rent as it becomes due. Acts of maintenance or preservation, efforts to relet the Premises or the appointment of a receiver upon Landlord’s initiative to protect its interest under this Lease shall not of themselves constitute a termination of Tenant’s right to possession.

18.2.3 The right and power, in accordance with Law, to enter the Premises and remove therefrom all persons and property, to store such property in a public warehouse or elsewhere at the cost of and for the account of Tenant, and to sell such property and apply the proceeds therefrom pursuant to applicable law. In such event, Landlord may from time to time sublet the Premises or any part thereof for such term or terms (which may extend beyond the Term) and at such rent and such other terms as Landlord in its sole discretion may

 

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deem advisable, with the right to make alterations and repairs (in character substantially similar to those commonly made in warehouse and distribution facilities in the Obetz, Ohio area) to the Premises. Upon each such subletting, rents received from such subletting shall be applied by Landlord, first, to payment of any costs of such subletting (including, without limitation, reasonable attorneys’ and accountants’ fees, costs of alterations of the Premises, interest costs, and brokers’ fees) and of any such alterations and repairs; second, to payment of Base Rent and Additional Rent due and unpaid hereunder; and the residue, if any, shall be held by Landlord and applied in payment of future Base Rent and Additional Rent as they become due. If any rental or other charges due under such sublease shall not be promptly paid to Landlord by the sublessees, or if such rentals received from such subletting during any month are less than Base Rent and Additional Rent to be paid during that month by Tenant, Tenant shall pay any such deficiency to Landlord the costs of such subletting (including, without limitation, attorneys’ and accountants’ fees, costs of alterations of the Premises, interest costs and brokers’ fees), and any other amounts due Landlord under this Section 18.2. Such deficiency shall be calculated and paid monthly. No taking possession of the Premises by Landlord shall be construed as an election on its part to terminate this Lease unless a written notice of such intention is given to Tenant. Landlord’s subletting the Premises without termination shall not constitute a waiver of Landlord’s right to elect to terminate this Lease for such previous breach.

18.2.4 The right to have a receiver appointed for Tenant, upon application by Landlord, to take possession of the Premises, to apply any rental collected from the Premises and to exercise all other rights and remedies granted to Landlord pursuant to this Section.

18.2.5 The right to specific performance of any or all of Tenant’s obligations under, and to damages for delay in or failure of such performance.

18.2.6 Landlord shall use reasonable efforts to mitigate damages resulting from a default by Tenant, as required by applicable law.

18.3 Remedies Cumulative. The exercise of any remedy provided by law or the provisions of this Lease shall not exclude any other remedies unless they are expressly excluded by this Lease. Tenant hereby waives any right of redemption or relief from forfeiture following termination of, or exercise of any remedy by Landlord with respect to, this Lease.

18.4 Events of Default by Landlord and Tenant’s Remedies. The failure by Landlord to observe or perform any of the covenants, conditions, or provisions of this Lease to be observed or performed by Landlord, where such failure shall continue for a period of thirty (30) days after written notice thereof by Tenant to Landlord, shall be deemed to be a default by Landlord under this Lease; provided, however, that if the nature of Landlord’s default is such that more than thirty (30) days are reasonably required for its cure, then Landlord shall not be deemed to be in default if Landlord commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion, In the event of a default by Landlord beyond applicable cure periods, Tenant shall have the right, at its election, to: (a) sue for damages sustained by reason of the default; or (b) perform the obligations described in the notice in which case Landlord shall reimburse Tenant for the reasonable cost of the performance of such obligations within thirty (30) days after Tenant’s submission of an invoice therefor. If Tenant elects to proceed under clause (b) above, then the Landlord’s default shall be deemed to

 

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have been cured when Tenant’s expense has been reimbursed in full. In the event Tenant commences a suit for damages sustained by reason of a Landlord Default and prevails in such suit and obtains a final, non-appealable judgment with respect to such suit, Tenant may then set-off the amount of such judgment against the amounts due to Landlord under this Lease. Tenant shall have no other right to set-off.

18.5 Limitation of Landlord’s Liability. None of Landlord’s covenants, undertakings or agreements under this Lease is made or intended as personal covenants, undertakings or agreements by Landlord, or by any of Landlord’s shareholders, directors, officers, trustees or constituent partners. All liability for damage or breach or nonperformance by Landlord shall be collectible only out of Landlord’s interest from time to time in the Premises, and no personal liability is assumed by nor at any time may be asserted against Landlord or any of Landlord’s shareholders, directors, officers, trustees or constituent partners.

18.6 Transfer of Landlord’s Interest. Upon the sale or other conveyance or transfer of Landlord’s interest in the Premises, the transferor shall be relieved of all covenants and obligations of Landlord arising under this Lease from and after the closing of such sale, conveyance or transfer, provided the transferee assumes the obligations of Landlord under this Lease from and after the date of transfer and Landlord transfers the Security Deposit thereto.

19. Insolvency or Bankruptcy. The occurrence of any of the following shall, at Landlord’s option, constitute a breach of this Lease by Tenant: (i) the appointment of a receiver to take possession of all or substantially all of the assets of Tenant or the Premises, (ii) an assignment by Tenant for the benefit of creditors, (iii) any action taken or suffered by Tenant under any insolvency, bankruptcy, reorganization, moratorium or other debtor relief act or statute, whether now existing or hereafter amended or enacted, (iv) the filing of any voluntary petition in bankruptcy by Tenant, or the filing of any involuntary petition by Tenant’s creditors, which involuntary petition remains undischarged for a period of ninety (90) days, (v) the attachment, execution or other judicial seizure of all or substantially all of Tenant’s assets or the Premises, if such attachment or other seizure remains undismissed or undischarged for a period of sixty (60) days after the levy thereof, (vi) the admission of Tenant in writing of its inability to pay its debts as they become due, (vii) the filing by Tenant of any answer admitting or failing timely to contest a material allegation of a petition filed against Tenant in any proceeding seeking reorganization, arrangement, composition, readjustment, liquidation or dissolution of Tenant or similar relief, (viii) if within sixty (60) days after the commencement of any proceeding against Tenant seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, such proceeding shall not have been dismissed, or (ix) the occurrence of any of the foregoing with respect to any guarantor of Tenant’s Obligations under this Lease. Upon the occurrence of any such event or at any time thereafter, Landlord may elect to exercise any of its remedies under Section 18 above or any other remedy available at law or in equity. In no event shall this Lease be assigned or assignable by operation of law or by voluntary or involuntary bankruptcy proceedings or otherwise, and in no event shall this Lease or any rights or privileges under this Lease be an asset of Tenant under any bankruptcy, insolvency or reorganization proceedings. If, upon the occurrence of any of the events enumerated above, under applicable law Tenant or the trustee in bankruptcy has the right to affirm this Lease and continue to perform the obligations of Tenant under this Lease, Tenant or such trustee, in such time period as may be permitted by the

 

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bankruptcy court having jurisdiction, shall cure all defaults of Tenant outstanding under this Lease as of the date of the affirmance of this Lease and provide to Landlord such adequate assurances as may be necessary to ensure Landlord of the continued performance of Tenant’s obligations under this Lease. Notwithstanding the provisions of Section 18.1, there shall be no cure periods for any breach or default under this Section 19 except as expressly provided in this Section 19.

20. Fees and Expenses; Indemnity; Payment.

20.1 Landlord’s Right to Remedy Defaults. If Tenant shall default in the performance of any of its obligations under this Lease after notice and expiration of the applicable cure period, Landlord, at any time thereafter and without additional notice, may remedy such default for Tenant’s account and at Tenant’s reasonable expense, without waiving any other rights or remedies of Landlord with respect to such default. Notwithstanding the foregoing, Landlord shall have the right to cure any failure by Tenant to perform any of its obligations under this Lease without notice to Tenant if such failure results in an immediate threat to life or safety of any person. Notwithstanding anything contained in this Lease, Landlord shall not be liable for, and there shall be no abatement of Rent with respect to, any injury to or interference with Tenant’s business arising from the exercise by Landlord of its rights under this Section 20.1.

20.2 Indemnity. Tenant shall indemnify, defend and hold Landlord harmless from and against any and all claims, losses, costs, liabilities, damages and expenses including, without limitation, penalties, fines and reasonable attorneys’ fees, to the extent incurred in connection with or arising from the use or occupancy or manner of use or occupancy of the Premises or any injury or damage caused by Tenant, Tenant Parties or any person occupying the Premises through Tenant. Landlord shall indemnify, defend and hold Tenant harmless from and against any and all claims, losses, costs, liabilities, damages and expenses including, without limitation, penalties, fines and reasonable attorneys’ fees, to the extent incurred in connection with or arising from (a) any injury or damage caused by any negligent or willful acts of any or all of Landlord and (b) the presence of Hazardous Substances introduced in, on, under or about the Premises prior to the Commencement Date or as a result of the actions of Landlord or its agents, employees, representatives or contractors. Nothing contained in this Section 20.2 shall be deemed to exculpate Landlord from, or indemnify Landlord for, Landlord’s negligent or willful acts or omissions. The terms of this Section 20.2 shall survive the expiration or sooner termination of this Lease for two (2) years thereafter (the “Survival Period”); provided, however, if Landlord commences an action against Tenant pursuant to this Section 20.2 prior to the expiration of the Survival Period, then the terms of this Section 20.2 shall survive until the earlier to occur of the date on which (i) Landlord and Tenant enter into a written settlement agreement with respect to the action or (ii) a court of competent jurisdiction renders a final, non-appealable judgment with respect to such action.

20.3 Interest on Past Due Obligations. Unless otherwise specifically provided herein, any amount due from Tenant to Landlord under this Lease which is not paid within ten (10) days after written notice from Landlord shall bear interest from the due date until paid at the Default Rate.

 

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21. Access to Premises. Landlord reserves for itself and its agents, employees and independent contractors the right to enter the Premises upon at least twenty-four (24) hours notice to inspect the Premises, to supply any service to be provided by Landlord to Tenant, to prospective purchasers, mortgagees, beneficiaries or (no earlier than twelve (12) months prior to the expiration of this Lease) tenants, to post notices of nonresponsibility, to determine whether Tenant is complying with its obligations under this Lease, and to alter, improve or repair the Premises or any other portion of the Building. Landlord’s right to enter the Premises shall include the right to grant reasonable access to the Premises to governmental or utility employees. Landlord may erect, use and maintain scaffolding, pipes, conduits and other necessary structures in and through the Premises or any other portion of the Building where reasonably required by the character of the work to be performed in making repairs or improvements, provided that the entrance to the Premises shall not be blocked or access interfered with thereby, and that there is no unreasonable interference with the business of Tenant. In the event of an emergency, Landlord shall have the right to enter the Premises at any time on oral notice. Except to the extent caused by Landlord’s negligence or willful misconduct, Tenant waives any claim for damages for any injury or inconvenience to or interference with Tenant’s business, any loss of occupancy or quiet enjoyment of the Premises, any right to abatement of Rent, or any other loss occasioned by Landlord’s exercise of any of its rights under this Section 21. Any entry to the Premises or portions thereof obtained by Landlord in accordance with this Section 21 shall not be construed or deemed to be a forcible or unlawful entry into, or a detainer of, the Premises, or an eviction, actual or constructive, of Tenant from the Premises or any portion thereof. Landlord shall perform any work pursuant to this Section 21 in a manner designed to cause as little interference with Tenant’s use of the Premises as is reasonably practical, provided, however, that Landlord and Tenant shall cooperate as to the timing and staging of any such work. To the extent reasonably practicable, any entry shall occur during normal business hours.

22. Notices. Except as otherwise expressly provided in this Lease, any payment required to be made and any bills, statements, notices, demands, requests or other communications given or required to be given under this Lease shall be effective only if rendered or given in writing, sent by personal delivery, registered or certified mail, return receipt requested, or by overnight courier service, addressed (a) to Tenant at Tenant’s Address, (b) to Landlord at Landlord’s Address, or (c) to such other address as either Landlord or Tenant may designate as its new address for such purpose by notice given to the other in accordance with the provisions of this Section 22. Any such bill, statement, notice, demand, request or other communication shall be deemed to have been rendered or given on the date of receipt or refusal to accept delivery.

23. No Waiver. Neither this Lease nor any term or provision of this Lease may be waived, and no breach thereof shall be waived, except by a written instrument signed by the party against which the enforcement of the waiver is sought. No failure by Landlord or Tenant to insist upon the strict performance of any obligation of the other party under this Lease or to exercise any right, power or remedy consequent upon a breach thereof, no acceptance of full or partial Base Rent or Additional Rent during the continuance of any such breach, no course of conduct between Landlord and Tenant, and no acceptance of the keys or to possession of the Premises before the termination of the Term by Landlord or any employee of Landlord shall constitute a waiver of any such breach or a waiver or modification of any term, covenant or condition of this Lease or operate as a surrender of this Lease. No waiver of any breach shall

 

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affect or alter this Lease, but each and every term, covenant and condition of this Lease shall continue in full force and effect with respect to any other then-existing or subsequent breach thereof. No payment by Tenant or receipt by Landlord of a lesser amount than the aggregate of all Base Rent and Additional Rent then due under this Lease shall be deemed to be other than on account of the first items of such Base Rent and Additional Rent then accruing or becoming due, unless Landlord elects otherwise. No endorsement or statement on any check and no letter accompanying any check or other payment of Base Rent or Additional Rent in any such lesser amount and no acceptance by Landlord of any such check or other payment shall constitute an accord and satisfaction. Landlord may accept such check or payment without prejudice to Landlord’s right to recover the balance of such Base Rent or Additional Rent or to pursue any other legal remedy.

24. Estoppel Certificates. Either party, at any time and from time to time, within ten (10) business days after written request from the other, shall execute, acknowledge and deliver to the other party, addressed (at Landlord’s request) to the other party and any prospective purchaser, ground or underlying lessor or mortgagee or beneficiary of any part of the Premises, an estoppel certificate in form and substance reasonably designated by the other party. It is intended that any such certificate may be relied upon by the party receiving the same and any prospective purchaser, investor, ground or underlying lessor or mortgagee or beneficiary of all or any part of the Premises.

25. Rules and Regulations. Tenant shall faithfully observe and comply with and cause all of its employees and invitees to observe and comply with all reasonable non-discriminatory rules and regulations which may from time to time be put into effect by Landlord written notice of which is given to Tenant. In the event of any conflict between any such rule or regulation and this Lease, this Lease shall govern.

26. Tenant’s Taxes. In addition to all other sums to be paid by Tenant under this Lease, Tenant shall pay, before delinquency, any and all taxes levied or assessed during the Term, whether or not now customary or within the contemplation of the parties, (a) upon, measured by or reasonably attributable to Tenant’s improvements, equipment, furniture, fixtures and other personal property located in the Premises, (b) upon or measured by Base Rent or Additional Rent, or both, payable under this Lease, including without limitation any sales, gross receipts or excise tax levied upon or measured by Base Rent or Additional Rent by any governmental body having jurisdiction with respect to the receipt of such rental; (c) upon or with respect to the possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises or any portion thereof; or (d) upon this transaction or any document to which Tenant is a party creating or transferring an interest or an estate in the Premises. Tenant shall reimburse Landlord within thirty (30) days of written demand for any and all such taxes paid or payable by Landlord (other than state and federal personal or corporate income taxes measured by the net income of Landlord from all sources). Notwithstanding anything to the contrary in this Section 26, Tenant shall have the right to contest any taxes payable by Tenant under this Section provided that Tenant, at its sole cost and expense, diligently undertakes and pursues any such contest in appropriate proceedings, indemnifies Landlord against and holds Landlord harmless from all loss or damages that Landlord shall suffer by reason of such contest, and does not permit any lien to be placed on the Building or any part thereof or interest therein.

 

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27. Miscellaneous.

27.1 Annual Financial Statement. Within ten (10) days following the request of Landlord, at any time during the Term that Tenant is not a “publicly traded company” (i.e., ownership interests are listed on a public securities exchange) (but not more often than once per calendar year), then Tenant shall furnish to Landlord a financial statement, in form and substance satisfactory to Landlord, showing the complete results of such entity’s operations for the most recent fiscal year for which such financial statement is available, certified as true and correct by a certified public accountant (or the officer of Tenant with primary responsibility as to financial matters if Tenant’s financial statements are not audited or reviewed by a certified public accountant) and prepared in accordance with generally accepted accounting principles applied on a consistent basis from year to year.

27.2 References. All personal pronouns used in this Lease, whether used in the masculine, feminine or neuter gender, shall include all other genders; the singular shall include the plural, and vice versa. The use herein of the word “including” or “include” when following any general statement, term or matter shall not be construed to limit such statement, term or matter to the specific items or matters set forth immediately following such word or to similar items or matters, whether or not non-limiting language (such as “without limitation”, or “but not limited to,” or words of similar import) is used with reference thereto. All references to “mortgage” and “mortgagee” shall include deeds of trust and beneficiaries under deeds of trust, respectively. All Exhibits referenced and attached to this Lease are incorporated in this Lease by this reference. The captions preceding the Sections and Sections of this Lease have been inserted solely as a matter of convenience, and such captions in no way define or limit the scope or intent of any provision of this Lease.

27.3 Relocation. Intentionally deleted.

27.4 Successors and Assigns. The terms, covenants and conditions contained in this Lease shall bind and inure to the benefit of Landlord and Tenant and, except as otherwise provided herein, their respective personal representatives and successors and assigns; provided, however, that upon the sale, assignment or transfer by Landlord (or by any subsequent Landlord) of its interest in the Building as owner or lessee, including, without limitation, any transfer upon or in lieu of foreclosure or by operation of law, Landlord (or subsequent Landlord) shall be relieved from all subsequent obligations or liabilities under this Lease, and all obligations subsequent to such sale, assignment or transfer (but not any obligations or liabilities that have accrued prior to the date of such sale, assignment or transfer) shall be binding upon the grantee, assignee or other transferee of such interest. Any such grantee, assignee or transferee, by accepting such interest, shall be deemed to have assumed such subsequent obligations and liabilities.

27.5 Severability. If any provision of this Lease or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such provision to persons or circumstances other than those as to which it is invalid or unenforceable, shall not be affected thereby, and each provision of this Lease shall remain in effect and shall be enforceable to the full extent permitted by law.

 

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27.6 Construction. This Lease shall be governed by and construed in accordance with the laws of the State in which the Building is located, without regard for such State’s choice of law requirements.

27.7 Integration. The terms of this Lease (including, without limitation, the Exhibits to this Lease) are intended by the parties as a final expression of their agreement with respect to such terms as are included in this Lease and may not be contradicted by evidence of any prior or contemporaneous agreement, arrangement, understanding or negotiation (whether oral or written). The parties further intend that this Lease constitutes the complete and exclusive statement of its terms, and no extrinsic evidence whatsoever may be introduced in any judicial proceeding involving this Lease. Neither Landlord nor Landlord’s agents have made any representations or warranties with respect to the Premises, the Building or this Lease except as expressly set forth herein. The language in all parts of this Lease shall in all cases be construed as a whole and in accordance with its fair meaning and not construed for or against any party by reason of such party having drafted such language.

27.8 Surrender. Upon the expiration or sooner termination of the Term, Tenant will quietly and peacefully surrender to Landlord the Premises in the condition in which they are required to be kept as provided in this Lease, ordinary wear and tear, casualty damage and Landlord’s repair obligations as expressly provided hereunder excepted.

27.9 Quiet Enjoyment. Upon Tenant paying the Base Rent and Additional Rent and performing all of Tenant’s obligations under this Lease, Tenant may peacefully and quietly enjoy the Premises during the Term as against all persons or entities claiming by, through or under Landlord subject, however, to the provisions of this Lease and to any mortgages or deeds of trust or ground or underlying leases referred to in Section 11.

27.10 Holding Over. If Tenant shall hold over after the expiration of the Term, Tenant shall pay one hundred fifty percent (150%) of the Base Rent payable during the final full month of the Term (exclusive of abatements, if any), together, in either period, with an amount reasonably estimated by Landlord for the monthly Additional Rent payable under this Lease, and shall otherwise be on the terms and conditions herein specified so far as applicable (but expressly excluding all renewal or extension rights). No holding over by Tenant after the Term shall operate to extend the Term. Any holding over with Landlord’s written consent shall be construed as a tenancy at sufferance or from month to month, at Landlord’s option. Any holding over without Landlord’s written consent shall entitle Landlord to reenter the Premises as provided in Section 18, and to enforce all other rights and remedies provided by law or this Lease.

27.11 Time of Essence. Time is of the essence of each and every provision of this Lease.

27.12 Broker’s Commissions. Each party represents and warrants to the other that it has not entered into any agreement or incurred or created any obligation which might require the other party to pay any broker’s commission, finder’s fee or other commission or fee relating to the leasing of the Premises, other than the Broker referenced herein. Landlord shall pay Broker pursuant to the terms of a separate agreement between Landlord and the Broker.

 

- 35 -


Each party shall indemnify, defend and hold harmless the other and the other’s constituent partners and their respective officers, directors, shareholders, agents and employees from and against all claims for any such commissions or fees made by anyone claiming by or through the indemnifying party.

27.13 No Merger. The voluntary or other surrender or termination of this Lease by Tenant, or a mutual cancellation hereof shall not work a merger, but, at Landlord’s sole option, shall either terminate all existing subleases or subtenancies or shall operate as an assignment to Landlord of all such subleases or subtenancies.

27.14 Survival. All of Tenant’s and Landlord’s covenants and obligations contained in this Lease which by their nature might not be fully performed or capable of performance before the expiration or earlier termination of this Lease shall survive such expiration or earlier termination. No provision of this Lease providing for termination in certain events shall be construed as a limitation or restriction of Landlord’s or Tenant’s rights and remedies at law or in equity available upon a breach by the other party of this Lease.

27.15 Amendments. No amendments or modifications of this Lease or any agreements in connection therewith shall be valid unless in writing duly executed by both Landlord and Tenant. No amendment to this Lease shall be binding on any mortgagee or beneficiary of Landlord (or purchaser at any foreclosure sale) unless such mortgagee or beneficiary shall have consented in writing to such amendment.

27.16 WAIVER OF JURY TRIAL. LANDLORD AND TENANT KNOWINGLY, INTENTIONALLY AND VOLUNTARILY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING BROUGHT BY EITHER PARTY AGAINST THE OTHER IN ANY MATTER ARISING OUT OF THIS LEASE, THE RELATIONSHIP OF LANDLORD AND TENANT, TENANT’S USE OR OCCUPANCY OF THE PREMISES OR ANY CLAIM OF INJURY OR DAMAGE.

27.17 DELIVERY FOR EXAMINATION. DELIVERY OF THE LEASE TO EITHER PARTY SHALL NOT BIND ANY PARTY IN ANY MANNER, AND NO LEASE OR OBLIGATIONS OF LANDLORD OR TENANT SHALL ARISE UNTIL THIS INSTRUMENT IS SIGNED BY BOTH LANDLORD AND TENANT AND DELIVERY IS MADE TO EACH PARTY.

27.18 Governing Law. This Lease shall be construed and enforced in accordance with the laws of the State of Ohio.

[Signature Page to Follow]

 

- 36 -


IN WITNESS WHEREOF, Landlord and Tenant have each caused their duly authorized representatives to execute this Lease on their behalf as of the date first above written.

 

LANDLORD

 

KTR OHIO LLC,

a Delaware limited liability company

By:

  KTR Property Trust I, a Maryland real estate investment trust

Its:

  Sole Member
  By:   /s/ Stephan J. Butte
  Name:   Stephan J. Butte
  Its:   SVP

 

TENANT

 

ZULILY, INC.

a Delaware corporation

By:   /s/ Michael Potter
Name:   Michael Potter
Its:   COO


STATE OF PA

COUNTY OF MONTGOMERY

Before me, the undersigned, a Notary Public for Montgomery County, personally appeared Stephan J. Butte, the SVP of KTR Property Trust I, the sole member of KTR Ohio LLC, a Delaware limited liability company (“Landlord”), the landlord in the foregoing instrument who acknowledged the signing of the foregoing instrument to be his free act and deed on behalf of the sole member of Landlord for the uses and purpose set forth therein.

IN WITNESS WHEREOF, I have hereunto signed my name and affixed my official seal on the 1st day of December, 2011.

 

 

/s/ Aisha Nyazie

 
[SEAL]   Notary Public  
 

Aisha Nyazie

 
  Type or Print Name  
STATE OF WASHINGTON    
COUNTY OF KING    

 

Before me, the undersigned, a Notary Public for King County, personally appeared Michael Potter, of Zulily, Inc. (the “Tenant”), the tenant in the foregoing instrument who acknowledged the signing of the foregoing instrument to be his free act and deed on behalf of the Tenant for the uses and purpose set forth therein.

IN WITNESS WHEREOF, I have hereunto signed my name and affixed my official seal on the 30 day of November, 2011.

 

 

/s/ Angelina Merola

 
  Notary Public  
[SEAL]  

Angelina Merola

 
  Type or Print Name  

 

S-2


EXHIBIT A

SITE PLAN

 

LOGO


EXHIBIT B

IMPROVEMENTS

 

1. Office Space – Tenant has accepted the approximately 10,000 square feet currently in the Building in as-is condition, subject to the terms of Section 3.3 of the Lease. Any modifications not otherwise addressed herein requested by Tenant shall be deducted from the Tenant Improvement Allowance.

 

2. Lighting – At Landlord’s sole cost and responsibility, Landlord shall provide for a minimum of 30’ foot-candles at 36” above the slab utilizing T-8 high output fluorescent fixtures, on 8 or greater foot whips, designed in an unobstructed building. The lighting system will have central controls near the main office area. Landlord, at its sole cost and responsibility, shall assure current systems (T-8 lighting with 8’ whips) are in good working order.

 

3. Emergency Lighting – Landlord, at Landlord’s sole cost and responsibility, will install emergency lighting, utilizing the existing T-8 fixtures at the appropriate ratio, which shall comply with appropriate building and fire codes assuming Tenant will floor stack. Any modifications of storage methods or lighting as installed in #2 above resulting in modification of emergency lighting will be at Tenant’s sole cost.

 

4. Loading Docks – loading dock doors:
  4.1 A minimum of eighteen (18) dock-high doors with in-pit levelers and seals
  4.2 Number the interior and exterior of the loading doors in sequential order
  4.3 Ensure that all loading doors are operating properly
  4.4 Ensure that all dock seals are in acceptable condition and/or replaced

 

5. Building Electrical – 1200 amp 480 3-Phase Service

 

6. Parking to accommodate up to 500 car parks

 

7. Warehouse Floor – Wash the warehouse floor. The floor must also be level and free of obstructions (previous rack anchors), marks, or pits.

 

8. Warehouse walls – Paint the interior warehouse walls white from floor to roof deck.

Items 1, 4, 5 and 6 have been accepted by Tenant in their “AS-IS,” “Where-Is” condition.


EXHIBIT C

FAIR MARKET RENT DETERMINATION

(a) If Tenant timely exercises the applicable Renewal Option, Landlord shall send to Tenant, within fifteen (15) days of Landlord’s receipt of Tenant’s exercise notice, a notice (the “Fair Market Value Rental Notice”) setting forth Landlord’s designation of the fair market value of Base Rent for the Premises for the first year of the applicable Renewal Period (the “Fair Market Value Rental”). For purposes hereof, “Fair Market Value Rental” shall mean the arms-length, fair-market, annual rental rate per rentable square foot under extension and renewal leases and amendments entered into on or about the date on which the Fair Market Value Rental is being determined hereunder for space comparable to the Premises in the Building and office buildings comparable to the Building in the Columbus, Ohio area. The determination of Fair Market Value Rental shall take into account any material economic differences between the terms of the Lease and any comparison lease or amendment, such as rent abatements, construction costs and other concessions, and the manner, if any, in which the landlord under any such lease is reimbursed for operating expenses and taxes. Landlord and Tenant shall promptly commence negotiations in an effort to reach a mutually acceptable determination of the Fair Market Value Rental. If, within thirty (30) days after the date of the Fair Market Rental Value Notice, Landlord and Tenant have not agreed upon in writing a mutually acceptable Fair Market Value Rental, then, by the close of business on the tenth (10th) business day following the end of such 30-day period each of Landlord and Tenant will submit to the other its final proposed Fair Market Value Rental. If either party fails to timely submit its final proposed Fair Market Value Rental to the other as required above, then the Fair Market Value Rental shall be deemed to be that submitted by the party who has so timely acted.

(b) Within ten (10) Business Days after the last of Landlord’s or Tenant’s proposed Fair Market Value Rental is submitted, each of Landlord and Tenant will appoint a person who is an appraiser and a member of the American Institute of Real Estate Appraisers, with not less than ten (10) years’ commercial/industrial experience in the Obetz, Ohio, area (each, an “Arbitrator”) and with experience in leasing similar properties. The two (2) Arbitrators so appointed shall appoint an impartial third Arbitrator, similarly qualified, who has no business relationship with either Landlord or Tenant, within ten (10) days after the appointment of the last appointed Arbitrator, and shall notify the parties of the identity of such third Arbitrator. If the two (2) Arbitrators are unable to agree upon a third Arbitrator, either Landlord or Tenant may, upon not less than five (5) days’ written notice to the other party, apply to the American Arbitration Association for appointment of a third similarly qualified Arbitrator. The three (3) Arbitrators are referred to in this Lease as the “Arbitration Panel.” Within fifteen (15) days after the appointment of the third Arbitrator, the Arbitration Panel shall (i) conduct a hearing, at which Landlord and Tenant may each make supplemental oral and/or written presentations, with an opportunity for questioning by the members of the Arbitration Panel and (ii) select either the Landlord’s proposed Fair Market Value Rental or the Tenant’s proposed Fair Market Value Rental as the Fair Market Value Rental, which designation will constitute the Fair Market Value Rental for purposes of determining Base Rent for the first year of the applicable Renewal Period. The determination of the Arbitration Panel shall be limited solely to the issue of whether Landlord’s or Tenant’s proposed Fair Market Value Rental is closest to the actual Fair Market Value Rental, and the Arbitration Panel will have no right to propose a middle ground or to


modify either of the two (2) proposals. The decision of a majority of the three (3) members of the Arbitration Panel shall be binding upon Landlord and Tenant. In the event of the failure, refusal or inability of an Arbitrator to act, a successor shall be appointed in the same manner as the original Arbitrator. Each party shall pay any cost of the Arbitrator selected by such party (and their own attorneys and consultants) and one half of the cost of the third Arbitrator so selected plus one half of any other costs incurred in resolving the disagreement regarding the Fair Market Value Rental.

(c) If Landlord and Tenant reach agreement regarding the Fair Market Value Rental, or if the Arbitration Panel determines the Fair Market Value Rental, then, within thirty (30) days, the parties shall execute an amendment to this Lease confirming the terms and conditions applicable to the applicable Renewal Period, including the newly extended expiration date and the Base Rent determined in accordance with this Exhibit C of the Lease.

 

C-2


SCHEDULE 1

SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT

RECORDING REQUESTED

BY AND WHEN RECORDED MAIL TO:

Manatt, Phelps & Phillips

One Embarcadero Center, 30th Floor

San Francisco, CA 94111

Attention: James F. Eastman, Esq.

SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT

NOTE: THE SUBORDINATION PROVIDED FOR IN THIS AGREEMENT

RESULTS IN YOUR LEASEHOLD ESTATE BECOMING SUBJECT TO AN

INTEREST IN THE PROPERTY CREATED BY SOME OTHER INSTRUMENT

This Subordination, Non-disturbance and Attornment Agreement (this “Agreement”) is made as of                      , 200_, by and among THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, a New Jersey corporation (“Lender”),                                         , a                                          (“Landlord”), and                                         , a                                          (“Tenant”).

RECITALS:

A. Lender will make or has made a loan (the “Loan”) to Landlord secured or to be secured by that certain Deed of Trust, Security Agreement and Fixture Filing with Assignment of Rents and Proceeds executed by Landlord, as trustor, in favor of a trustee for the benefit of Lender, as beneficiary (as amended from time to time, the “Deed of Trust”) encumbering the property commonly known as                                          (the “Property”), which Property is more particularly described on Exhibit A attached hereto and incorporated herein by this reference.

B. Tenant has leased a portion of the Property (the “Premises”) pursuant to a Lease dated as of                                         ,                      (the “Lease”).

C. Lender requires the agreements, statements and assurances contained in this Agreement. Tenant understands that, in making the Loan, Lender will rely on the agreements, assurances and statements made in this Agreement.

NOW, THEREFORE, Lender, Tenant, and Landlord agree as follows:

1. Subordination. Tenant agrees that the Lease, and the rights of Tenant in, to and under the Lease and the Property, and any purchase options, rights of first refusal, rights of first offer, or similar purchase rights contained or referenced therein, are hereby subjected and subordinated, and shall remain in all respects and for all purposes subject and subordinate, to the lien of the Deed of Trust, and to any and all renewals, modifications and extensions of the Deed of Trust, and any and all other instruments held by Lender as security for the Loan.


2. Tenant Not To Be Disturbed. Lender agrees that it will not join Tenant as a party defendant in any action or proceeding foreclosing the Deed of Trust unless such joinder is necessary to foreclose the Deed of Trust, and then only for such purpose and not for the purpose of terminating the Lease. If Lender or any other party shall become the owner of the Premises by reason of foreclosure, whether judicial or non-judicial or other proceedings brought to enforce the Deed of Trust or by deed in lieu of foreclosure (collectively a “Succeeding Owner”), such Succeeding Owner agrees that so long as Tenant is not in default under the Lease or this Agreement (beyond the cure period (if any) granted to Tenant under the terms of the Lease), Tenant’s possession or occupancy of the Premises shall not be disturbed, diminished or interfered with by Lender during the remaining term of the Lease.

3. Tenant To Attorn To Lender. If a Succeeding Owner shall become the owner of the Premises by reason of foreclosure, whether judicial or non-judicial or other proceedings brought to enforce the Deed of Trust or by deed in lieu of foreclosure, the Lease shall, subject to the provisions set forth in clauses (a) through (e) below, continue in full force and effect, such Succeeding Owner shall perform (but shall not personally assume) the obligations of the original Landlord thereunder, and Tenant hereby agrees to attorn to the Succeeding Owner as Tenant’s lessor, provided, however, that in any and all events, the Succeeding Owner shall not be:

(a) Liable for any act or omission of any prior lessor (including Landlord) or subject to any offsets or defenses which Tenant might have against any such prior lessor;

(b) Liable or obligated to expand the Property, pay tenant improvement allowances, construct additional improvements or otherwise expend funds which are capital in nature, other than expenses for ordinary maintenance and repair;

(c) Liable to reconstruct the Premises or the Property to the extent insurance proceeds are not available therefor;

(d) Liable for any obligation to indemnify or reimburse Tenant, any leasehold mortgagee, or any other third party or any of their respective successors and assigns from and against any loss, liability, damage or cost relating to or arising from the presence of any toxic or hazardous materials on, under or about the Property; or

(e) Liable or bound by any purchase options, rights of first refusal, rights of first offer, or similar purchase rights with respect to all or any portion of the Property set forth in the Lease.

The agreements to attorn contained in this Paragraph are intended to be self-effectuating in favor of any Succeeding Owner. Nevertheless, upon written request Tenant shall provide such written evidence as may be reasonably required by any Succeeding Owner of the continuing effectiveness of Tenant’s obligations under this Agreement and the Lease as modified by this Agreement.

 

- 2 -


4. Rental Payments. Tenant agrees that upon written demand from Lender at any time prior to release of the Deed of Trust, it will pay rent under the Lease to Lender. Landlord hereby releases Tenant from all claims arising out of Tenant’s payment of rent as instructed by Lender in writing.

5. Lender’s Notice of Default and Options to Cure. Tenant agrees that, until release of the Deed of Trust, it shall not invoke any remedies under the Lease for breaches or defaults by the Landlord without having first given to Lender (i) written notice of such default and (ii) the greater of (a) 30 days after the period provided under the Lease for cure by the Landlord of such default or (b), if cure of such default requires possession of the property, 30 days after Lender has obtained possession within which to cure such default. Notwithstanding any provision contained in this Agreement to contrary, (x) Lender shall be under no obligation to cure any default under the Lease, and (y) Tenant’s obligation contained herein to forbear exercise of its rights and remedies under or with respect to the Lease shall not be defeased by Lender’s failure to cure, (A) any default of Landlord described in clauses 3(a) through (e), inclusive, or (B) any other default under the Lease that cannot reasonably be cured through the expenditure of money (i.e., the bankruptcy of Landlord).

6. Assignment of Lease. Tenant understands that Landlord’s interest in the Lease has been assigned to Lender in connection with the Loan and that no amendment modification or termination of the Lease shall be effective unless approved in writing by Lender. Except as provided herein, however, Lender shall assume no duty, liability or obligation to Tenant under the Lease.

7. Notices. Any notices under this Agreement shall be sent by certified mail to the addresses indicated below.

8. Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties and their heirs, administrators, representatives, successors, and assigns.

 

- 3 -


IN WITNESS WHEREOF, this Agreement has been duly executed by the parities hereto as of the day and year first above written.

 

LENDER:

 

THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, a New Jersey corporation

By:    
  Its:    

Address:

 

 

 

 

 

 

 

LANDLORD:

 

_____________________, a

 

By:    
  Its:    

Address:

 

 

 

 

 

 

 

- 4 -


TENANT:

 

_____________________, a

 

By:    
  Its:    

Address:

 

 

 

 

 

 

 

- 5 -


EXHIBIT A TO SNDA

[REAL PROPERTY DESCRIPTION]


State of _______________________)

                                                                         ) ss.

County of _____________________)

On ____________, 199__, before me, ________________________________, a notary public, personally appeared _________________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument.

WITNESS my hand and official seal.

___________________________________

Notary Public

(seal)

 

- 7 -


State of _______________________)

                                                                         ) ss.

County of _____________________)

On ____________, 199__, before me, ________________________________, a notary public, personally appeared _________________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument.

WITNESS my hand and official seal.

___________________________________

Notary Public

(seal)

 

- 8 -


State of _______________________)

                                                                         ) ss.

County of _____________________)

On ____________, 199__, before me, ________________________________, a notary public, personally appeared _________________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument.

WITNESS my hand and official seal.

___________________________________

Notary Public

(seal)

 

- 9 -


SCHEDULE 2

CONSTRUCTION SCHEDULE

KTR Construction Schedule for Zulily

3051 Creekside Parkway, Obetz, OH 43137

 

Start Date    End Date    Square Feet        Tenant Improvement Details

December 1, 2011

  

December 15, 2011    

   100,000   

Tenant shall have access to 120,000 SF Swing Space located at 5650 Green Point Drive North,

Groveport, OH

Tenant shall follow stacking plan approved by the Fire Marshal

December 5, 2011

  

December 5, 2011

       

Landlord will order T-8 lights and fixtures

December 15, 2011    

  

January 1, 2012

   300,000   

Tenant shall have access to 300,000 SF

Landlord Tenant Improvements for the Initial 300,000 SF space:

–  Make any necessary repairs to emergency lighting to meet code.

–  Ensure that all doors, deck lights, in-pit levelers, seals/canopies, lighting is in good working

    order and make repairs as needed.

–  Wash and scrub warehouse floor leaving it free of obstructions, pits, tire marks, etc.

–  Paint warehouse walls white from floor to roof deck

January 5, 2012

  

February 16, 2012

   737,471   

Landlord shall finish Tenant Improvements in the entire building

–  Landlord to begin upgrade T-8 lighting in the warehouse space, improving the lighting with

    30 foot-candles @ 36” above slab utilizing high output T-8 florescent fixtures

–  Lighting installation shall begin by the office and work toward the end of the building, working

    bay by bay on a mutually agreed upon installation plan;

In addition, Landlord shall evaluate, repair and bring to good working condition the following items:

–  Warehouse roof repairs

–  Truck court, parking areas and additional truck court parking

–  HVAC units for the office space

–  Cambridge Engineered Air Rotation wall units

January 1, 2012

  

December 31, 2013

        Tenant will design additional office space, select a contractor, gain Landlord approval, and construct new office space on the south end of the warehouse

Service Agreement by and between the Company and IntelliSource, LLC

Exhibit 10.15

[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 UNDER THE SECURITIES ACT OF 1933, AS AMENDED.

SERVICE AGREEMENT

THIS AGREEMENT is made as of this 29th day of September, 2011, by and between IntelliSource, LLC, a Colorado limited liability company (“IntelliSource”), and Zulily, Inc. a Delaware corporation (“Zulily”).

WITNESSETH:

WHEREAS, Zulily has a continuing need for supplemental personnel and outsourced services; and

WHEREAS, IntelliSource is a leading provider of such personnel to businesses in the United States and Canada:

NOW, THEREFORE, in consideration of the mutual promises herein contained, the parties hereto agree as follows:

 

1. Services Provided. IntelliSource agrees to provide to Zulily the services in Exhibit A attached hereto and made a part hereof (the “Services”) as Zulily shall require, pursuant to the terms and conditions of this Agreement. Zulily agrees to provide to IntelliSource and its personnel with access to Zulily’s facilities, equipment and technology to permit IntelliSource and its personnel to provide the Services. Unless specifically authorized in Exhibit A, Zulily agrees that IntelliSource personnel will not be placed in any jobs involving driving Zulily vehicles; lifting over fifty (50) pounds; handling of chemicals; handling cash, credit card information or other valuables; the operation of unguarded machinery and any work above floor level, including elevated platforms, scaffolding, manlifts, ladders, etc. The parties may, from time to time, amend Exhibit A in writing signed by a duly authorized representative of each party.

 

2. Term. This Agreement shall continue for a term of three (3) years after the date first entered above, unless sooner terminated as set forth herein. and will be automatically renewed for an additional one (1) year renewal term, unless either party serves written notice of its intent to terminate the Agreement not less than thirty (30) days prior to the expiration of any such term.

 

3. Rates for Service. For the term of this Agreement, the rates for the performance of the Services pursuant to this Agreement are as set forth in Exhibit A attached hereto and made a part hereof. [*]

 

1.


[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 UNDER THE SECURITIES ACT OF 1933, AS AMENDED.

 

[*].

 

4. Invoices. IntelliSource shall submit to Zulily a weekly invoice for the Services performed during the previous Monday through Sunday billing period. Invoices submitted hereunder shall be due and payable by Zulily [*]. A [*] late fee will be charged for payments received after [*]. For added convenience, IntelliSource customers may pay via Wire Transfer or Standard ACH. Bank set up will be handled prior to first scheduled customer payment. IntelliSource reserves the right to remove all employees from their assignments at Zulily because of non-payment of undisputed invoices, aged over [*]. [*]. In the event of termination of this Agreement, Zulily shall pay IntelliSource for all Services performed prior to date of termination.

 

5.

Buyer Satisfaction. Subject to compliance by Zulily with its obligations hereunder, IntelliSource agrees that the Services will be performed to the commercially reasonable satisfaction of Zulily. Without limiting the foregoing, IntelliSource shall perform all Services in accordance with the performance criteria (“KPIs”) for the Services set forth in the Service Level Agreement to be negotiated by the parties by October 14th, 2011 and attached to this Agreement (the “SLA”). Zulily shall retain the right, with the prior written consent of IntelliSource, to update or add to the list of KPIs. Any KPIs, including updated or additional KPIs, that materially impact the Services provided by IntelliSource shall constitute an Event of Change. IntelliSource agrees to allow Zulily a reasonable period of time after Services are performed to determine if the Services provided by IntelliSource were performed in a satisfactory manner. IntelliSource agrees to employ or contract with an adequate force of trained personnel who shall perform the Services substantially in accordance with the SLA. If Zulily reasonably determines within a reasonable period of time after Services are performed that the Services provided by an IntelliSource personnel are not satisfactory, and IntelliSource is so notified, Zulily will not be charged for such Services performed and if necessary IntelliSource will provide corrective Services and replacement personnel within a mutually agreed upon period of time. Zulily may require IntelliSource to replace the operations or account manager assigned to Zulily, if Zulily reasonably determines that a replacement will improve the quality of Services delivered by IntelliSource. [*].

 

6.

[*]. Zulily agrees that it shall not [*] at any time from [*]

 

2.


[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 UNDER THE SECURITIES ACT OF 1933, AS AMENDED.

 

  and subject to compliance with this Section 6. If Zulily [*], Zulily will notify IntelliSource, in writing. Zulily may [*] at any time after the [*], whichever is greater, without further obligation to IntelliSource, as long as the [*] and/or agreed upon [*] have been met. IntelliSource may at its discretion [*].

 

7. [*]. During the term of this Agreement, [*].

 

8. Independent Contractor. IntelliSource is and at all times shall be deemed an independent contractor, and nothing contained herein shall be construed to create the relationship of principal and agent, or employer and employee, between IntelliSource and Zulily. The IntelliSource employees assigned to perform the Services are the employees of IntelliSource.

 

9.

IntelliSource Employees. IntelliSource shall recruit, interview, test, select, hire, and train the persons who shall provide the Services hereunder. IntelliSource shall have sole responsibility to counsel, discipline, review, evaluate, and terminate its personnel assigned to Zulily. IntelliSource shall be solely responsible for its own labor relations with its employees and any trade union or labor organization representing its employees. IntelliSource shall be solely responsible for collective bargaining, adjusting grievances and for any unfair labor practices it might be charged with by any trade unions and labor organizations representing its Employees. IntelliSource shall also be responsible for adjusting all disputes between itself and its employees. IntelliSource shall notify Zulily immediately if IntelliSource has knowledge of any actual or potential labor dispute which is delaying or could delay the timely performance of Services under this Agreement. If any dispute or work stoppage or strike should occur, IntelliSource agrees to make commercially reasonable efforts to settle the matter. In the event of any work stoppage or strike by IntelliSource employees that materially adversely impacts IntelliSource’s ability to provide Services to Zulily, Zulily at its sole discretion may terminate this Agreement upon fourteen (14) days’ written notice to IntelliSource. [*]. IntelliSource acknowledges that warehousemen are to be drug screened in compliance with federal, state and local laws and that no IntelliSource personnel or agent of IntelliSource who will have access to Zulily facilities may have a felony or theft conviction within the past seven (7) years. [*]. IntelliSource assumes full responsibility for all contributions, taxes and assessments with respect to its employees under all

 

3.


[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 UNDER THE SECURITIES ACT OF 1933, AS AMENDED.

 

  applicable federal, state, and local laws (including withholding from wages of employees where required). IntelliSource further agrees that it will comply with all other applicable federal, state or local laws or regulations applicable to IntelliSource as an employer regarding compensation, hours of work or other conditions of employment.

 

10. Non-Solicitation. Except as otherwise provided in Section 6, during the term of this Agreement and for six months following the date of termination of this Agreement (the “Restricted Period”), neither party shall solicit or employ or solicit for employment any salaried, indirect labor person who is or was employed by IntelliSource or Zulily at any time from six months prior to the date of this Agreement through the expiration of the Restricted Period.

 

11. Title to Products; Security and Zulily Employees. Any products purchased and owned by Zulily which either pass through a facility in which the Services are being rendered (a “Facility”) as a cross-dock shipment to a delivery location, or are stocked at such Facility, are defined as “Zulily-Owned Products”. IntelliSource shall not obtain title to any Zulily-Owned Products. Zulily at its expense shall be responsible for all security of each Facility and for all costs associated with such Facility, including without limitation maintenance and upkeep, unless otherwise specified in this Agreement. Zulily shall be solely responsible for its own labor relations with its employees.

 

12. Indemnification.

 

  12.1 Indemnification By IntelliSource. IntelliSource shall indemnify and hold harmless Zulily, its agents and employees from and against any and all claims, losses, actions, damages, expenses, and all other liabilities, including but not limited to attorneys’ fees (the “Liabilities”), arising out of or resulting from IntelliSource’s negligent performance of or failure to perform the work hereunder to the extent any such Liabilities are attributable to bodily injury to or death of any person or to damage to or destruction of any property, whether belonging to Zulily or to another (including the Zulily-Owned Products), provided, however, that (a) IntelliSource shall be liable for any Liabilities related to products [*] and (b) IntelliSource shall not indemnify or hold harmless Zulily to the extent any such Liabilities are caused by the negligent or unlawful acts or omissions of Zulily, its employees or third parties. Work product produced by IntelliSource employees shall be reviewed and approved by a Zulily representative prior to its incorporation into Zulily’s work product, process, or plans, and IntelliSource shall have no liability for such end product, process or plans.

 

  12.2 Indemnification By Zulily. Zulily shall indemnify and hold harmless IntelliSource, its agents and employees from and against any and all Liabilities arising out of or resulting from negligence by Zulily or its employees or agents in connection with the provision of facilities or technology hereunder or otherwise in connection with this Agreement; provided, however, that such indemnification shall not apply to the extent any such Liabilities are caused by the negligent or unlawful acts or omissions of IntelliSource or its employees or agents.

 

4.


[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 UNDER THE SECURITIES ACT OF 1933, AS AMENDED.

 

  12.3 Joint Negligence; No Consequential Damages. If Liabilities are the result of the joint or concurrent negligence of IntelliSource and Zulily, Liabilities shall be apportioned between the parties based on the relative negligence of the parties. In no event shall a party be liable for any special, indirect, incidental, consequential or punitive damages or lost profits in connection with this Agreement.

 

13. Insurance. IntelliSource shall maintain at its expense commercially reasonable amounts of: (a) Workers’ Compensation and Employer’s Liability Insurance, (b) Commercial General Liability Insurance, and (c) a Fidelity Bond. Zulily shall maintain at its expense commercially reasonable amounts of Commercial General Liability Insurance for the facilities provided hereunder and shall name IntelliSource as an additional insured under such policy. Each party shall provide the other with evidence of such insurance. If an insurance policy is to be canceled or changed by an insured or insurer so as to affect the coverage required by this Agreement, at least ten (10) days prior written notice of such cancellation or change shall be sent to the other party.

 

14. Onsite Accommodations Provided by Zulily. Zulily shall provide to IntelliSource at the facilities required for work under this Agreement:

 

  A. Office(s) with furniture for IntelliSource’s employees

 

  B. Phones, voicemail, fax line and Internet connections for IntelliSource’s employees

 

  C. Internet connection for timeclock

 

15. Termination:

 

  15.1 Termination for Convenience. Zulily may, in its sole discretion and without cause terminate this Agreement with ninety (90) days written notice to IntelliSource. IntelliSource may, in its sole discretion and without cause terminate this Agreement with six (6) months written notice to Zulily.

 

  15.2 Termination for Cause. Either party hereto may terminate this Agreement with cause by giving not less than sixty (60) days written notice to the other party hereto; provided that IntelliSource may terminate this Agreement immediately upon notice to Zulily if any undisputed invoice aged over 30 days remains unpaid. If Zulily delivers notice to IntelliSource of its intent to terminate, Zulily shall include therein the reasons for such termination and IntelliSource shall have thirty (30) days to rectify or modify its performance, after which thirty (30) day period Zulily shall revoke or affirm its termination.

 

16. Notices. All notices which it may be necessary or proper for either Zulily or IntelliSource to give or deliver to the other shall be sent, and shall be deemed given when received by registered or certified mail, postage prepaid and return receipt requested, and if given by Zulily to IntelliSource shall be addressed to:

 

5.


[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 UNDER THE SECURITIES ACT OF 1933, AS AMENDED.

 

IntelliSource, LLC

1899 Wynkoop Street,

Ste. 900

Denver, CO 80202

Attn: Robyn Donahue

And if given by IntelliSource to Zulily, shall be addressed to:

Zulily, Inc.

2200 1st Avenue South

Seattle, Washington 98134

Attn: Kristin Smith

 

17. Assignment. The rights and obligations of the parties hereunder shall not be assigned without the prior written consent of the other party. Otherwise, this contract shall be binding upon and shall inure to the benefit of the parties hereto, and their respective successors and assigns.

 

18. Confidentiality. Each party hereby covenants and agrees that it shall not disclose, divulge, transmit or intentionally cause to be disclosed, divulged or transmitted, to any third party at any time any Confidential Information, except as required by law or unless such information has been previously disclosed to the general public by the other party. For the purposes of this Agreement, “Confidential Information” shall include all non-public information and trade secrets of a party, including but not limited to intellectual property, marketing plans, customer information, specialized information and financial information. Without limiting the foregoing, IntelliSource shall not use any Confidential Information in providing services for a Competitor (as defined below) or any other IntelliSource customer. Should IntelliSource provide any services for a Competitor Zulily will be notified in writing. Competitor means any entity that is engaged in [*]. Each party acknowledges that irreparable injury may result to if the terms of this Section 18 are breached by a party and that the remedy at law would be inadequate. Therefore, each party agrees that in the event of a breach by such party, the other party shall be entitled to immediate injunctive relief enforcing the performance of the terms of this Section 18 without the need to post a bond and without the necessity of proving actual damages, in addition to any other remedies which might be available to such party.

 

19. Force Majeure. The obligations of IntelliSource hereunder shall be excused during any period of delay caused by matters such as unavailability of Zulily facilities or equipment, strikes, acts of God, shortages of raw material or power, governmental actions orcompliance with governmental requirements, whether voluntary or pursuant to order, or any other matter which is beyond the reasonable efforts of IntelliSource to control.

 

20. Amendments. This Agreement, and the provisions hereof, may be altered, amended, modified or superseded only in writing executed by both of the parties hereto.

 

6.


[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 UNDER THE SECURITIES ACT OF 1933, AS AMENDED.

 

21. Enforcement, Waiver. No waiver of or failure to exercise any option, right or privilege under the terms of this Agreement by either of the parties hereto on any occasion or occasions shall be construed to be a waiver of the same or of any other option, right or privilege on any other occasion.

 

22. Governing Law. This Agreement shall be governed by the laws of the State of Washington.

 

23. Entire Agreement. This Agreement, together with Exhibit A referenced herein, shall constitute the entire Agreement between the parties with respect to the subject matter and supersedes all previous agreements between Zulily and IntelliSource relating to the subject matter hereof.

[SIGNATURES ON FOLLOWING PAGE]

 

7.


[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 UNDER THE SECURITIES ACT OF 1933, AS AMENDED.

 

Signatures:

 

IntelliSource, LLC      Zulily, Inc.

/s/ Robyn R. Donahue

    

/s/ Mike Vernon

By: Robyn R. Donahue, CEO      By: Mike Vernon, CFO
Date: 9/29/11      Date: 9/29/11

 

8.


[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 UNDER THE SECURITIES ACT OF 1933, AS AMENDED.

 

EXHIBIT A

SERVICES AND RATES

[*]

 

9.


[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 UNDER THE SECURITIES ACT OF 1933, AS AMENDED.

 

[*]

 

Signed  

/s/ Robyn Donahue

     Signed   

/s/ Mike Vernon

  IntelliSource: Robyn Donahue         Zulily: Mike Vernon, CFO
Date: 9/29/11      Date: 9/29/11

 

10.


Contractor Agreement by and between the Company and IntelliSource, LLC

Exhibit 10.16

[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 UNDER THE SECURITIES ACT OF 1933, AS AMENDED.

CONTRACTOR AGREEMENT

THIS CONTRACTOR AGREEMENT (“Agreement”) is made as of this 19th day of December, 2011, by and between IntelliSource, LLC, a Colorado limited liability company (“IntelliSource”), and Zulily, Inc., a Delaware corporation (“Zulily”).

WITNESSETH:

WHEREAS, Zulily desires to engage IntelliSource as a contractor to operate and manage its fulfillment center in Obetz, Ohio (the “Center”); and

WHEREAS, IntelliSource desires to contract with Zulily to operate and manage Zulily’s fulfillment center.

NOW, THEREFORE, in consideration of the mutual promises herein contained, the parties hereto agree as follows:

 

  1. Operation and Management of Center. IntelliSource agrees to operate and manage the Center, pursuant to the terms and conditions of this Agreement. All personnel utilized by IntelliSource to perform this Agreement will be IntelliSource employees. IntelliSource will have sole responsibility for the IntelliSource workforce performing the operations, including all recruitment, screening, interviewing, testing, selection, hiring, orientation, training, supervision, payment, management and retention of all IntelliSource employees. Zulily will establish the parameters of the work to be performed by IntelliSource. Process, productivity and quality standards will be identified and mutually agreed to in an associated Service Level Agreement to be negotiated by the parties as soon as practicable after the execution of this Agreement and attached to this Agreement (the “SLA”). Zulily agrees to provide IntelliSource and its employees with access to the Center and to related facilities, equipment and technology to permit IntelliSource and its employees to operate and manage the Center. Zulily agrees that IntelliSource employees will not be required, without IntelliSource’s written consent which will not be unreasonably withheld, to: drive Zulily automobiles; lift over fifty (50) pounds; handle chemicals; handle cash, credit card information or other valuables; operate unguarded machinery or perform any work above floor level, including elevated platforms, scaffolding, manlifts, ladders, etc.

 

  2. Term. This Agreement shall continue for a term of three (3) years from the date first entered above, unless sooner terminated as set forth herein, and will be automatically renewed for an additional one (1) year renewal term, unless either party serves written notice of its intent to terminate this Agreement not less than thirty (30) days prior to the expiration of any such term.

 

  3.

Fees for Service. For the term of this Agreement, the fees for the operation and management of the Center (“Services”) pursuant to this Agreement are as set forth in Exhibit A attached hereto and made a part hereof. The parties may, from time

 

1.


[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 UNDER THE SECURITIES ACT OF 1933, AS AMENDED.

 

  to time, amend Exhibit A in writing signed by a duly authorized representative of each party.

[*].

 

  4. Invoices. IntelliSource shall submit to Zulily a weekly invoice for the Services performed during the previous Monday through Sunday billing period. Invoices submitted hereunder shall be due and payable by Zulily [*]. A [*] late fee will be charged for payments received after [*]. For added convenience, IntelliSource customers may pay via Wire Transfer or Standard ACH. Bank set up will be handled prior to first scheduled customer payment. IntelliSource reserves the right to remove all employees from their assignments at the Center because of non-payment of undisputed invoices, aged over [*]. [*]. In the event of termination of this Agreement, Zulily shall pay IntelliSource for all Services performed prior to date of termination.

 

  5.

Buyer Satisfaction. Subject to compliance by Zulily with its obligations hereunder, IntelliSource agrees that the Services will be performed to the commercially reasonable satisfaction of Zulily. Without limiting the foregoing, IntelliSource shall perform all Services in accordance with the performance criteria (“KPIs”) for the Services set forth in the SLA. Zulily shall retain the right, with the prior written consent of IntelliSource, to update or add to the list of KPIs. Any KPIs, including updated or additional KPIs, which materially impact the Services provided by IntelliSource, shall constitute an Event of Change. IntelliSource agrees to allow Zulily a reasonable period of time after Services are performed to determine if the Services provided by IntelliSource were performed in a satisfactory manner. IntelliSource agrees to employ an adequate force of trained personnel who shall perform the Services substantially in accordance with the SLA. To further assure that the Services will be performed to the reasonable satisfaction of Zulily, IntelliSource agrees that the employees hired by IntelliSource to perform the Services provided by IntelliSource at the Center will be used by IntelliSource solely at the Center and will not be used by IntelliSource at any other location or for any other customer. IntelliSource shall be responsible for paying all wages, other compensation and benefits of such Center employees,

 

2.


[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 UNDER THE SECURITIES ACT OF 1933, AS AMENDED.

 

  and Zulily shall have no responsibility therefor. Zulily’s sole role under this Agreement shall be to provide general oversight regarding the Services performed by IntelliSource. If Zulily reasonably determines within a reasonable period of time after Services are performed that the Services provided by IntelliSource are not satisfactory, Zulily shall so notify IntelliSource. If necessary, IntelliSource will provide corrective Services within a mutually agreed upon period of time. Zulily may require IntelliSource to replace the operations or account manager assigned to Zulily, if Zulily reasonably determines that a replacement will improve the quality of Services delivered by IntelliSource. [*].

 

  6. [*]. During the term of this Agreement, [*].

 

  7. Independent Contractor. IntelliSource is and at all times shall be deemed an independent contractor, and nothing contained herein shall be construed to create the relationship of principal and agent, or employer and employee, between IntelliSource and Zulily. The employees hired by IntelliSource to perform the Services are exclusively the employees of IntelliSource.

 

  8.

IntelliSource Employees. IntelliSource shall recruit, screen, interview, test, select, hire, orient, train and manage the persons employed by IntelliSource to perform the Services under this Agreement. IntelliSource shall have the sole responsibility to supervise and control the work of its employees at the Center. IntelliSource shall have sole responsibility to counsel, discipline, review, evaluate, and terminate its employees. IntelliSource shall be solely responsible for its own labor relations with its employees and any trade union or labor organization representing its employees. IntelliSource shall be solely responsible for collective bargaining, adjusting grievances and for any unfair labor practices it might be charged with by any trade unions and labor organizations representing its Employees. IntelliSource shall also be responsible for adjusting all disputes between itself and its employees. IntelliSource shall notify Zulily immediately if IntelliSource has knowledge of any actual or potential labor dispute which is delaying or could delay the timely performance of Services under this Agreement. If any dispute or work stoppage or strike should occur, IntelliSource agrees tomake commercially reasonable efforts to settle the matter. In the event of any work stoppage or strike by IntelliSource employees that materially adversely impacts IntelliSource’s ability to provide Services to Zulily, Zulily at its sole

 

3.


[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 UNDER THE SECURITIES ACT OF 1933, AS AMENDED.

 

  discretion may terminate this Agreement upon fourteen (14) days’ written notice to IntelliSource. IntelliSource acknowledges that warehousemen are to be drug screened in compliance with federal, state and local laws and that no IntelliSource personnel or agent of IntelliSource who will have access to Zulily facilities may have a felony or theft conviction within the past seven (7) years. [*]. IntelliSource assumes full responsibility for all contributions, taxes and assessments with respect to its employees under all applicable federal, state, and local laws (including withholding from wages of employees where required). IntelliSource further agrees that it will comply with all other applicable federal, state or local laws or regulations applicable to IntelliSource as an employer regarding compensation, hours of work or other conditions of employment.

 

  9. [*]. During the term of this Agreement and for [*] following the date of termination of this Agreement [*], neither company [*].

 

  10. Title to Products: Security and Zulily Employees. Any products purchased and owned by Zulily which either pass through the Center or another facility in which the Services are being rendered (a “Facility”) as a cross-dock shipment to a delivery location, or are stocked at such Facility, are defined as “Zulily-Owned Products”. IntelliSource shall not obtain title to any Zulily-Owned Products. Zulily at its expense shall be responsible for all security of each Facility and for all costs associated with such Facility, including without limitation maintenance and upkeep, unless otherwise specified in this Agreement. Zulily shall be solely responsible for its own labor relations with its employees.

 

  11. Indemnification.

11.1 Indemnification By IntelliSource. IntelliSource shall indemnify and hold harmless Zulily, its agents and employees from and against any and all claims, losses, actions, damages, expenses, and all other liabilities, including but not limited to attorneys’ fees (the “Liabilities”), arising out of or resulting from IntelliSource’s negligent performance of or failure to perform the work hereunder to the extent any such Liabilities are attributable to bodily injury to or death of any person or to damage to or destruction of any property, whether belonging to Zulily or to another (including the Zulily-Owned Products), provided, however, that (a) IntelliSource shall be liable for any Liabilities related to products [*] and (b) IntelliSource shall not indemnify or hold harmless Zulily to the extent any such Liabilities are caused by the negligent or unlawful acts or omissions of Zulily, its employees or third parties. IntelliSource shall have no liability for

 

4.


[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 UNDER THE SECURITIES ACT OF 1933, AS AMENDED.

 

work product of IntelliSource or its employees that is incorporated into Zulily’s work, product, process or plans.

11.2 Indemnification By Zulily. Zulily shall indemnify and hold harmless IntelliSource, its agents and employees from and against any and all Liabilities arising out of or resulting from negligence by Zulily or its employees or agents in connection with the provision of facilities, equipment or technology hereunder or otherwise in connection with this Agreement; provided, however, that such indemnification shall not apply to the extent any such Liabilities are caused by the negligent or unlawful acts or omissions of IntelliSource or its employees or agents.

11.3 Joint Negligence; No Consequential Damages. If Liabilities are the result of the joint or concurrent negligence of IntelliSource and Zulily, Liabilities shall be apportioned between the parties based on the relative negligence of the parties. In no event shall a party be liable for any special, indirect, incidental, consequential or punitive damages or lost profits in connection with this Agreement.

 

  12. Insurance. IntelliSource shall maintain, at its expense, commercially reasonable amounts of (a) Workers’ Compensation and Employer’s Liability Insurance, (b) Commercial General Liability Insurance, and (c) a Fidelity Bond. Zulily shall maintain at its expense commercially reasonable amounts of Commercial General Liability Insurance for the Center and other facilities and equipment provided hereunder and shall name IntelliSource as an additional insured under such policy. Each party shall provide the other with evidence of such insurance. If an insurance policy is to be canceled or changed by an insured or insurer so as to affect the coverage required by this Agreement, at least ten (10) days prior written notice of such cancellation or change shall be sent to the other party.

 

  13. Onsite Accommodations Provided by Zulily. Zulily shall provide to IntelliSource at the Center or other facilities required for work under this Agreement:

 

  A. Office(s) with furniture for IntelliSource’s employees

 

  B. Phones, voicemail, fax line and Internet connections for IntelliSource’s employees

 

  C. Internet connection for timeclock

 

  14. Termination:

14.1 Termination for Convenience. Zulily may, in its sole discretion and without cause terminate this Agreement with ninety (90) days written notice to IntelliSource. IntelliSource may, in its sole discretion and without cause terminate this Agreement with six (6) months written notice to Zulily.

14.2 Termination for Cause. Either party hereto may terminate this Agreement with cause by giving not less than sixty (60) days written notice to the other party hereto; provided that IntelliSource may terminate this Agreement immediately upon notice to

 

5.


[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 UNDER THE SECURITIES ACT OF 1933, AS AMENDED.

 

Zulily if any undisputed invoice aged over 30 days remains unpaid. If Zulily delivers notice to IntelliSource of its intent to terminate. Zulily shall include therein the reasons for such termination and IntelliSource shall have thirty (30) days to rectify or modify its performance, after which thirty (30) day period Zulily shall revoke or affirm its termination.

 

  15. Notices. All notices which it may be necessary or proper for either Zulily or IntelliSource to give or deliver to the other shall be sent, and shall be deemed given when received by registered or certified mail, postage prepaid and return receipt requested, and if given by Zulily to IntelliSource shall be addressed to:

IntelliSource, LLC

1899 Wynkoop Street, Ste. 900

Denver, CO 80202

Attn: Robyn Donahue

And if given by IntelliSource to Zulily, shall be addressed to:

Zulily, Inc.

2200 1st Avenue South

Seattle, Washington 98134

Attn: Kristin Smith

 

  16. Assignment. The rights and obligations of the parties hereunder shall not be assigned without the prior written consent of the other party. Otherwise, this contract shall be binding upon and shall inure to the benefit of the parties hereto, and their respective successors and assigns.

 

  17. Confidentiality. The parties shall be bound by the Mutual Non-Disclosure Agreement between the parties. In addition, each party hereby covenants and agrees that it shall not disclose, divulge, transmit or intentionally cause to be disclosed, divulged or transmitted, to any third party at any time any Confidential Information, except as required by law or unless such information has been previously disclosed to the general public by the other party. For the purposes of this Agreement, “Confidential Information” shall include all non-public information and trade secrets of a party, including but not limited to intellectual property, marketing plans, customer information, specialized information and financial information. Without limiting the foregoing, IntelliSource shall not use any Confidential Information in providing services for a Competitor (as defined below) or any other IntelliSource customer. Should IntelliSource provide any services for a Competitor, Zulily will be notified in writing. “Competitor” means any entity that is engaged in [*]. Each party acknowledges that irreparable injury may result to if the terms of this Section 17 are breached by a party and that the remedy at law would be inadequate. Therefore, each party agrees that in the event of a breach by such party, the other

 

6.


[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 UNDER THE SECURITIES ACT OF 1933, AS AMENDED.

 

  party shall be entitled to immediate injunctive relief enforcing the performance of the terms of this Section 17 without the need to post a bond and without the necessity of proving actual damages, in addition to any other remedies which might be available to such party.

 

  18. Force Majeure. The obligations of IntelliSource hereunder shall be excused during any period of delay caused by matters such as unavailability of Zulily facilities or equipment, strikes, acts of God, shortages of raw material or power, governmental actions or compliance with governmental requirements, whether voluntary or pursuant to order, or any other matter which is beyond the reasonable efforts of IntelliSource to control.

 

  19. Amendments. This Agreement and the provisions hereof, may be altered, amended, modified or superseded only in writing executed by both of the parties hereto.

 

  20. Enforcement, Waiver. No waiver of or failure to exercise any option, right or privilege under the terms of this Agreement by either of the parties hereto on any occasion or occasions shall be construed to be a waiver of the same or of any other option, right or privilege on any other occasion.

 

  21. Governing Law. This Agreement shall be governed by the laws of the State of Washington.

 

  22. Entire Agreement. This Agreement, together with Exhibit A referenced herein, shall constitute the entire Agreement between the parties with respect to the subject matter and supersedes all previous agreements between Zulily and IntelliSource relating to the subject matter hereof.

 

Signatures:        
IntelliSource LLC      Zulily, Inc.
By:  

/s/ Robyn R. Donahue

     By:   

/s/ Michael Potter

  Robyn R. Donahue, CEO         Michael Potter, COO
Date: 12/19/11      Date: 12/19/11

 

7.


[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 UNDER THE SECURITIES ACT OF 1933, AS AMENDED.

 

EXHIBIT A

SERVICES AND RATES

[*]

 

8.


[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 UNDER THE SECURITIES ACT OF 1933, AS AMENDED.

 

[*]

 

9.


[*] = CERTAIN CONFIDENTIAL INFORMATION CONTAINED IN THIS DOCUMENT, MARKED BY BRACKETS, IS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO RULE 406 UNDER THE SECURITIES ACT OF 1933, AS AMENDED.

 

[*]

 

Signed   

/s/ Robyn Donahue

      Signed   

/s/ Michael Potter

   IntelliSource: Robyn Donahue          Zulily: Michael Potter, COO
Date; 12/19/11       Date: 12/19/11

 

10.


Subsidiaries of zulily, inc.

Exhibit 21.1

List of Subsidiaries of zulily, inc.

 

Subsidiaries

      

Incorporation

zulily UK Ltd.      United Kingdom

<![CDATA[Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm]]>

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the use in this Registration Statement on Form S-1 of our report dated August 8, 2013 (September 25, 2013 as to Notes 12 and 13) relating to the consolidated financial statements of Zulily, Inc. and subsidiary, appearing in the Prospectus, which is a part of this Registration Statement, and to the reference to us under the heading “Experts” in such Prospectus.

/s/ Deloitte & Touche LLP

Seattle, Washington

October 8, 2013