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As filed with the Securities and Exchange Commission on November 2, 2006

Registration No. 333-            

 


U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


Form S-1

REGISTRATION STATEMENT

UNDER THE SECURITIES ACT OF 1933

 


U.S. Auto Parts Network, Inc.

(Exact name of registrant as specified in its charter)

 


 

Delaware   5531   68-0623433

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Number)

 

(I.R.S. Employer

Identification No.)

17150 South Margay Avenue

Carson, CA 90746

(310) 719-8666

(Address, Including Zip Code and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 


Michael J. McClane

Chief Financial Officer, Vice President of Finance and Treasurer

U.S. Auto Parts Network, Inc.

17150 South Margay Avenue

Carson, CA 90746

(310) 719-8666

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 


Copies to:

 

Ellen S. Bancroft, Esq.
Scott R. Santagata, Esq.

J.R. Kang, Esq.

Jason R. Wisniewski, Esq.

Dorsey & Whitney LLP
38 Technology Drive
Irvine, CA 92618
(949) 932-3600

 

Michael J. Sullivan, Esq.

Julia Vax, Esq.
David Tang, Esq.
Howard Rice Nemerovski Canady Falk
& Rabkin, A Professional Corporation
Three Embarcadero Center, Seventh Floor

San Francisco, CA 94111-4024
(415) 434-1600

 


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

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

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

(continued on next page)


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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.   ¨

CALCULATION OF REGISTRATION FEE

 


Title of Each Class of
Securities to be Registered
   Proposed Maximum
Aggregate Offering Price(1)(2)
   Amount of Registration Fee

Common Stock, $0.001 par value

   $100,000,000    $10,700

(1)   Includes the offering price attributable to shares that the Underwriters have the option to purchase solely to cover over-allotments, if any.
(2)   Estimated solely for the purpose of computing the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until 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 cannot sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject to completion, dated November 2, 2006

PROSPECTUS

            Shares

LOGO

Common Stock

 


This is U.S. Auto Parts Network, Inc.’s initial public offering. U.S. Auto Parts Network, Inc. is selling all of the shares of common stock offered by this prospectus.

We expect the public offering price to be between $            and $            per share. Currently, no public market exists for the shares. After pricing the offering, we expect that the common stock will be traded on the NASDAQ Global Market under the symbol “PRTS.”

Investing in our common stock involves risks. See “ Risk Factors ” beginning on page 9.

 


PRICE $     PER SHARE

 


 

     Per Share    Total

Public offering price

   $                     $                 

Underwriting discounts and commissions

   $      $  

Net proceeds, before expenses, to U.S. Auto Parts

   $      $  

The underwriters may also purchase up to an additional             shares from us at the public offering price, less the underwriting discounts and commissions, within 30 days from the date of this prospectus to cover over-allotments, if any.

The underwriters expect to deliver the shares on or about                 , 2006.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

RBC C APITAL  M ARKETS  

T HOMAS  W EISEL  P ARTNERS  LLC

 

 

 

P IPER  J AFFRAY   JMP S ECURITIES

                                , 2006.


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TABLE OF CONTENTS

 

Prospectus Summary

  1

Risk Factors

  9

Forward-looking Statements

  26

Use of Proceeds

  27

Dividend Policy

  28

Capitalization

  29

Dilution

  30

Selected Consolidated Financial Data of U.S. Auto Parts

  31

Selected Combined Financial Data of Partsbin

  34

Unaudited Pro Forma Combined Statement of Operations

  36

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

  39

Business

  58

Management

  70

Related Party Transactions

  77

Principal Stockholders

  80

Description of Capital Stock

  82

Shares Eligible For Future Sale

  86

Underwriting

  88

Legal Matters

  91

Experts

  91

Where You Can Find More Information

  91

Index to Consolidated Financial Statements

  F-1


You should rely only on the information contained in this prospectus. We have not authorized any other person to provide you with different information. If anyone provides you different or inconsistent information, you should not rely on it. We are offering to sell and seeking offers to buy shares of our common stock only in jurisdictions where offers or sales are permitted. The information in this prospectus is only accurate as of the date of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.

This prospectus contains market data and industry forecasts and projections, which we have obtained from third party market research, publicly available information and industry publications. These sources generally state that the information they provide has been obtained from sources believed to be reliable, but that the accuracy and completeness of the information are not guaranteed. The forecasts and projections are based on industry surveys and the preparers’ experience in the industry, and we cannot assure you that any of the projected amounts will be achieved. Similarly, we believe that the surveys and market research others have performed are reliable, but we have not independently verified the information.

For investors outside the United States: Neither we nor any of the underwriters for the offering of our common stock have 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. You are required to inform yourselves about, and to observe any restrictions relating to, our offering and the distribution of this prospectus.

U.S. Auto Parts ® , U.S. Auto Parts Network ® , PartsTrain ® , Partsbin , Kool-Vue and Auto-Vend are our United States trademarks. All other trademarks and trade names appearing in this prospectus are the property of their respective owners.


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PROSPECTUS SUMMARY

This summary highlights the information contained elsewhere in this prospectus. This summary is not complete and may not contain all the information you should consider before investing in our common stock. You should read the entire prospectus carefully, including the “Risk Factors” and the consolidated financial statements and related notes before making an investment decision.

Our Business

Overview

We are a leading online provider of aftermarket auto parts, including body parts, engine parts, performance parts and accessories. Our user-friendly websites provide customers with a comprehensive selection of approximately 550,000 products, identified as stock keeping units or SKUs. We have developed a proprietary product database that maps our 550,000 SKUs to over 4.3 million product applications based on vehicle makes, models and years. We principally sell our products to individual consumers through our network of websites and online marketplaces. Our flagship websites are located at www.partstrain.com and www.autopartswarehouse.com , and our corporate website is located at www.usautoparts.com .

Our online sales channel and relationships with suppliers enable us to eliminate several intermediaries in the traditional auto parts supply chain, allowing us to acquire many of our products directly from manufacturers and sell them to our customers. Additionally, as an online retailer, we do not incur many of the costs associated with operating brick and mortar stores. We believe that our ability to disintermediate the auto parts supply chain, combined with our efficient e-commerce platform, enables us to sell products at competitive prices while achieving higher operating margins and return on invested capital than many traditional automotive parts retailers.

Our business has grown consistently since we launched our first website in 2000. In the year ended December 31, 2005 and the nine months ended September 30, 2006, we generated net sales of $59.7 million and $83.7 million, respectively. In the year ended December 31, 2005 and for the nine months ended September 30, 2006, we generated net income of $6.8 million and $3.5 million, respectively. During the same periods, we also generated Adjusted EBITDA of $8.8 million and $10.2 million, respectively. In addition, we have experienced continued growth in the number of monthly unique visitors to our websites. In September 2006, approximately 6.8 million unique visitors visited our websites. The number of orders placed through all of our e-commerce websites has also increased from approximately 288,000 orders for the year ended December 31, 2005 to approximately 505,000 orders for the nine months ended September 30, 2006. The average order value of purchases on our websites for the nine months ended September 30, 2006 was approximately $120.

Industry Overview

The United States automotive aftermarket industry is forecasted to be $204 billion in 2006 according to the Automotive Aftermarket Industry Association, or AAIA, an independent trade association. Our addressable market is forecasted by AAIA to be approximately $91.3 billion, which consists of approximately $37.8 billion in sales to Do-It-Yourself, or DIY, customers, and approximately $53.5 billion in sales to Do-It-For-Me, or DIFM, customers. While the U.S. auto parts aftermarket is a large market characterized by modest growth, we believe there is an opportunity for e-commerce aftermarket auto parts retailers to grow faster than the overall market.

 

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According to Forrester Research, an independent market research firm, online purchases by U.S. consumers are expected to grow from approximately $172 billion in 2005 to approximately $329 billion by 2010, representing a 13.9% compound annual growth rate. Additionally, according to Forrester Research, the percentage of U.S. households shopping online is projected to grow from 39% in 2005 to 48% in 2010.

In 2006, the online and mail order portion of aftermarket auto part sales is forecasted to be $2.7 billion according to the AAIA. While the portion of online and mail order sales is a relatively small percentage of our addressable market at approximately 3%, we believe online penetration rates of aftermarket auto parts consumers will continue to increase and, as a result, sales for online aftermarket auto parts are expected to continue to grow at a faster rate than the overall auto parts market.

The auto parts market has traditionally been fragmented and inefficient, with multiple intermediaries, including importers, wholesalers, distributors and retailers, between manufacturers and consumers. Furthermore, auto parts retailers who operate brick and mortar stores generally stock only a small percentage of the products that are available for sale. As a result, consumers must often visit several retailers to find a part or have a retailer order the part for future delivery. The fragmented nature of the auto parts market has also meant an absence of a centralized database or a comprehensive, master catalog of products, which maps all aftermarket auto parts to all relevant applications for such parts. We believe this inadequacy of information leads to inefficiencies in the sale and purchase process for both the retailer and the consumer.

Our Solution

We believe our solution addresses the problems faced in the traditional auto parts market and provides additional benefits for our customers. The key components of our solution include:

Disintermediation of the Auto Parts Supply Chain . We have developed an online sales channel that enables us to sell aftermarket auto parts to our customers while eliminating several intermediaries in the traditional auto parts supply chain. Disintermediating the traditional supply chain allows us to offer auto parts to our customers at competitive prices and allows us to more efficiently deliver products to our customers while generating higher profit margins.

Leading Network of Websites. We have developed a network of websites to offer our broad selection of aftermarket auto parts. Our flagship websites for e-commerce are located at www.partstrain.com and www.autopartswarehouse.com . We believe that we provide an intuitive online shopping experience that enables us to cost-effectively attract an increasing number of visitors to our sites while reducing the number of product returns and exchanges.

Proprietary Product Catalog. We have invested significant resources and time over several years to build a proprietary product catalog that maps our 550,000 SKUs to over 4.3 million product applications based on vehicle makes, models and years. By creating a master catalog of individual auto parts and accessories mapped to multiple vehicle makes, models and years, we increase our sales potential while reducing inventory management expense. We believe that there is no other online catalog of aftermarket body parts, engine parts, performance parts and accessories currently available today that offers the same breadth, accuracy and detail.

Flexible Fulfillment Methods. We fulfill customer orders using two primary methods: (i) stock-and-ship, where we take physical delivery of a part and store it in one of our distribution centers until it is shipped to a customer, and (ii) drop-ship, where the part is shipped directly to the customer from

 

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the supplier. We believe that the flexibility of fulfilling orders via two different fulfillment methods allows us to offer a broader selection of products, optimize product inventory and enhance business profitability.

Low Cost Operations. Our offshore and outsourced operations in the Philippines and India, which are responsible for a majority of the development and maintenance of our websites and product catalog, allow us to access a qualified workforce at a significantly lower cost than comparably experienced U.S.-based professionals.

Long-Standing Supplier Relationships. We source products from manufacturers and distributors located in Asia and the United States. We have developed strong relationships with our suppliers, some of whom have been working with us for over a decade. Our supplier relationships and our understanding of the market enable us to set competitive pricing for our products and ensure product availability.

Benefits to Customers

We believe our solution provides multiple benefits to our customers, including:

Broad Product Selection and Availability. Our proprietary product catalog provides our customers with the ability to select from over 4.3 million product applications, based on vehicle makes, models and years.

Competitive Pricing. We are able to offer our customers lower prices relative to original equipment manufacturer, or OEM, parts retailers and traditional aftermarket retailers by eliminating several intermediaries in the aftermarket auto parts supply chain, leveraging our long-term supplier relationships and establishing an efficient online cost structure that capitalizes on relatively inexpensive labor.

Prompt Order Fulfillment. Our proprietary order fulfillment system allows us to efficiently process and ship items from our distribution centers or from our suppliers, ensuring timely delivery of products to our customers.

Detailed Product Information. We provide detailed product descriptions and photographs, specific vehicle applications, part numbers for aftermarket parts, pricing information and related part and brand suggestions for the parts offered on our websites so our customers can make an informed purchasing decision on every order.

Satisfying Shopping Experience and Knowledgeable Customer Service. Our easy to navigate websites are accessible from the convenience of the customer’s home or office or anywhere with an Internet connection. Our customer support staff is available to provide assistance to our customers throughout the purchase process 24 hours a day, seven days a week, via phone, live-chat or e-mail.

Our Growth Strategy

Our primary objective is to continue our growth and to strengthen our position as a leading online provider of aftermarket auto parts. The key elements of our strategy are as follows:

Expand Our Product Offering. We will continue to expand our product selection by adding new SKUs from existing suppliers, adding new suppliers and optimizing our distribution centers to create additional capacity for new items.

Cost-Effectively Increase the Number of Visitors to Our Websites. We intend to increase the number of visitors to our websites by continuing to enhance our site content and layout, so that our websites will be included as a relevant search result when consumers use Internet search engines to find aftermarket auto parts.

 

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Increase Our Visitor Conversion Rate . We seek to increase the conversion rate of visitors to our websites by improving our existing website designs and online purchase processes, and by continuing to focus on customer service.

Increase Repeat Customers. We intend to increase the number of customers who make repeat purchases from our websites by continuing to offer a broad range of products at competitive prices, improving the overall customer shopping experience, focusing on customer service and rapid fulfillment of orders, and by further enhancing the features and functionality of our websites.

Expand e-Commerce Distribution Channels. We plan to build and strengthen partnerships with auction sites, large online marketplaces, complementary niche websites and comparison shopping sites in order to expand the distribution channels for our products.

Pursue Strategic Acquisitions that Augment Our Business. We intend to selectively pursue acquisition opportunities to increase our share of the aftermarket auto parts market and expand our product offering.

Corporate Information

We were formed as a California corporation in 1995 and reincorporated in Delaware in March 2006. Our executive offices are located at 17150 South Margay Avenue, Carson, California 90746, and our telephone number is (310) 719-8666. Our corporate website is located at www.usautoparts.com. Our flagship retail websites are located at www.partstrain.com and www.autopartswarehouse.com. The information contained in, or that can be accessed through, our websites does not constitute a part of this prospectus. Unless the context requires otherwise, as used in this prospectus, the terms “U.S. Auto Parts,” “we,” “us” and “our” refer to U.S. Auto Parts Network, Inc. and its subsidiaries, and the term “Partsbin” refers to All OEM Parts, Inc., ThePartsBin.com, Inc. and their affiliated companies, which we acquired in May 2006.

 

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The Offering

 

Common stock offered by us

             shares

 

Common stock to be outstanding after this offering

             shares

 

Use of proceeds

For repayment of approximately $35.0 million of indebtedness and for working capital and other general corporate purposes, including expanding our infrastructure and sales and marketing activities. In addition, we may use a portion of the net proceeds for acquisitions and investments in complementary businesses, technologies and strategic relationships. See “Use of Proceeds.”

 

Risk Factors

See “Risk Factors” and the other information included in this prospectus for a discussion of factors you should consider carefully before investing in shares of our common stock.

 

Proposed NASDAQ Global Market symbol

PRTS

The number of shares of common stock outstanding after this offering is based on 36,388,226 shares outstanding as of September 30, 2006, which assumes the conversion of all of our outstanding preferred stock into 11,055,425 shares of common stock immediately prior to the completion of this offering, and does not include, as of such date:

 

  Ÿ   4,027,560 shares of common stock issuable upon the exercise of outstanding options at a weighted average exercise price of $4.92 per share;

 

  Ÿ                shares of common stock reserved for future grant or issuance under our stock option plans;

 

  Ÿ   140,554 shares of common stock issuable upon the exercise of outstanding warrants at a weighted average exercise price of $4.38 per share; and

 

  Ÿ   the effect of a             -for-             reverse stock split, which is expected to be effected prior to the completion of this offering.

Unless otherwise indicated, all information in this prospectus assumes:

 

  Ÿ   the underwriters will not exercise their over-allotment option to purchase up to              additional shares of common stock;

 

  Ÿ   no other person will exercise any other outstanding options or warrants; and

 

  Ÿ   the initial public offering price will be $             per share.

 

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Summary Consolidated Financial Data

The following tables summarize our consolidated financial data for the periods presented and should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes appearing elsewhere in this prospectus. The summary consolidated financial data for the years ended December 31, 2003, 2004 and 2005 are derived from our audited consolidated financial statements. We have also included data from our unaudited consolidated financial statements for the nine months ended September 30, 2005 and 2006.

 

    Years Ended December 31,     Nine Months Ended September 30,  
    2003     2004   2005     Pro Forma
2005(1)
    2005     2006     Pro Forma
2006(1)
 
                    (unaudited)     (unaudited)     (unaudited)     (unaudited)  
    (in thousands, except share and per share data)  

Consolidated Statement of Income Data:

             

Net sales

  $31,657     $40,658   $59,698     $97,993     $43,979     $83,665     $107,524  

Cost of sales

  17,814     21,334   34,829     64,227     25,876     53,779     71,469  
                                       

Gross profit

  13,843     19,324   24,869     33,766     18,103     29,886     36,055  

Operating expenses:

             

General and administrative(2)

  2,284     3,599   7,254     10,325     5,555     7,081     8,694  

Marketing(2)

  3,617     4,526   5,802     10,862     4,315     10,313     13,539  

Fulfillment(2)

  3,246     2,990   4,357     4,407     3,162     3,589     3,608  

Technology(2)

  405     776   868     1,431     596     992     1,305  

Amortization of intangibles

      8   17     8,176     13     3,037     6,174  
                                       

Total operating expenses

  9,552     11,899   18,298     35,201     13,641     25,012     33,320  

Income (loss) from operations

  4,291     7,425   6,571     (1,435 )   4,462     4,874     2,735  

Other income (expense), net

  (42 )   36   85     (1,852 )   97     (800 )   (1,529 )
                                       

Income (loss) before income taxes

  4,249     7,461   6,656     (3,287 )   4,559     4,074     1,206  

Income tax provision (benefit)

  478     328   (163 )   (195 )   (199 )   539     (110 )
                                       

Net income (loss)

  $3,771     $7,133   $6,819     $(3,092 )   $4,758     $3,535     $1,316  
                                       

Basic net income (loss) per share

  $0.20     $0.32   $0.31     $(0.12 )   $0.22     $0.15     $0.05  

Diluted net income (loss) per share

  $0.20     $0.32   $0.31     $(0.12 )   $0.22     $0.11     $0.04  

Pro forma basic net income per share(5)

      $0.21         $0.10    

Shares used in computation of basic net income (loss) per share

  18,794,793     22,000,000   22,000,000     25,305,529     22,000,000     23,634,781     25,317,816  

Shares used in computation of diluted net income (loss) per share

  18,794,793     22,000,000   22,000,000     25,305,529     22,000,000     32,270,315     33,953,350  

Shares used in the computation of pro forma basic net income per share(5)

      33,055,425         34,690,206    

Non-GAAP Financial Measures:

             

EBITDA(3)

  4,382     7,961   8,755     8,888     6,095     9,589     10,520  

Adjusted EBITDA(3)

  4,382     7,961   8,755     8,888     6,095     10,193     11,124  

Unaudited Pro Forma Statement of Income Data(4):

             

Income (loss) before income taxes

  4,249     7,461   6,656     (3,287 )   4,559     4,074     1,206  

Pro forma provision (benefit) for income taxes

  1,729     2,964   2,657     (1,301 )   1,822     1,728     586  
                                       

Pro forma net income (loss)

  $2,520     $4,497   $3,999     $(1,986 )   $2,737     $2,346     $620  
                                       

Pro forma basic net income (loss) per share

  $0.13     $0.20   $0.18     $(0.08 )   $0.12     $0.10     $0.02  

Pro forma diluted net income (loss) per share

  $0.13     $0.20   $0.18     $(0.08 )   $0.12     $0.07     $0.02  

(see footnotes on next page)

 

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(footnotes to prior page)

 

(1)   The pro forma financial information gives effect to the acquisition of Partsbin as if the acquisition occurred on January 1, 2005.

 

(2)   Includes share-based compensation expense related to option grants, as follows:

 

     Years Ended December 31,    Nine Months Ended September 30,
     2003    2004    2005    Pro Forma
2005(1)
   2005    2006    Pro Forma
2006(1)
                    (unaudited)    (unaudited)    (unaudited)    (unaudited)
     (in thousands)

General and administrative

   $    $    $    $    $    $ 359    $ 359

Marketing

                              126      126

Fulfillment

                              16      16

Technology

                              103      103
                                                
   $    $    $    $    $    $ 604    $ 604
                                                

 

(3)   EBITDA and Adjusted EBITDA are supplemental non-GAAP financial measures. GAAP means generally accepted accounting principles in the United States. EBITDA is equal to net income plus (a) interest expense, net; (b) income tax provision (benefit); (c) amortization of intangibles; and (d) depreciation and amortization. Our definition of Adjusted EBITDA is different from EBITDA because we further adjust EBITDA to exclude share-based compensation expense. A reconciliation of these non-GAAP financial measures to net income is set forth in the related table under “— Non-GAAP Financial Measures” below.

 

(4)   Presents pro forma provision for income taxes and pro forma net income as if we operated as a C corporation in all periods presented. See Note 1 and Note 7 of the Notes to our Consolidated Financial Statements included elsewhere in this prospectus for an explanation of the unaudited pro forma statement of income data.

 

(5)   Pro forma basic net income per share for the latest year end and interim period only has been computed to give effect to the conversion of the Series A convertible preferred stock into common stock upon the closing of the Company’s initial public offering on an if-converted basis.

The pro forma as adjusted consolidated balance sheet data below give effect to the conversion of all of our outstanding preferred stock into 11,055,425 shares of our common stock immediately prior to the closing of this offering, as well as the receipt of the estimated proceeds from the sale of the              shares in this offering at an assumed initial offering price of $             per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, and the repayment after the closing of this offering of $35.0 million of indebtedness incurred in connection with our acquisition of Partsbin.

 

    

As of

September 30, 2006

     Actual     Pro Forma
As Adjusted
     (unaudited)
     (in thousands)

Consolidated Balance Sheet Data:

    

Cash and cash equivalents

   $ 3,287    

Working capital

     (4,528 )  

Total assets

     68,505    

Total debt, including current portion, capital lease obligations and notes payable to stockholders

     34,888    

Stockholders’ equity

     20,229    

 

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Non-GAAP Financial Measures

Regulation G, “Conditions for Use of Non-GAAP Financial Measures,” and other provisions of the Securities Exchange Act of 1934, as amended, define and prescribe the conditions for use of certain non-GAAP financial information. We provide “EBITDA” and “Adjusted EBITDA,” which are non-GAAP financial measures, because we believe such measures are important supplemental information for investors. We calculate EBITDA as net income before (a) interest expense, net; (b) income tax provision (benefit); (c) amortization of intangibles; and (d) depreciation and amortization. Adjusted EBITDA further adjusts EBITDA to exclude share-based compensation expense related to our grant of stock options and other equity instruments. These non-GAAP financial measures are used in addition to and in conjunction with results presented in accordance with GAAP and should not be relied upon to the exclusion of GAAP financial measures. These non-GAAP financial measures reflect an additional way of viewing aspects of our operations that, when viewed with our GAAP results and the accompanying reconciliations to corresponding GAAP financial measures, provide a more complete understanding of factors and trends affecting our business.

We use EBITDA and Adjusted EBITDA:

 

  Ÿ   as measurements of our operating performance because they assist us in comparing our operating performance on a consistent basis by removing the impact of items not directly resulting from our core operations;

 

  Ÿ   for planning purposes, including the preparation of our internal budget;

 

  Ÿ   to allocate resources to enhance the financial performance of our business;

 

  Ÿ   to evaluate the effectiveness of our operational strategies; and

 

  Ÿ   to evaluate our capacity to fund capital expenditures and expand our business.

We also believe that analysts and investors use EBITDA and Adjusted EBITDA as supplemental measures to evaluate the overall operating performance of companies in our industry.

Management strongly encourages investors to review our consolidated financial statements in their entirety and to not rely on any single financial measure. Because non-GAAP financial measures are not standardized, it may not be possible to compare these financial measures with other companies’ non-GAAP financial measures having the same or similar names. For information about our financial results as reported in accordance with GAAP, see our consolidated financial statements and related notes included in this prospectus.

The table below reconciles net income (loss) to EBITDA and Adjusted EBITDA for the periods presented:

 

   

Years Ended December 31,

    Nine Months Ended September 30,  
    2003   2004   2005     Pro Forma
2005(1)
    2005     2006   Pro Forma
2006(1)
 
                  (unaudited)     (unaudited)     (unaudited)   (unaudited)  
   

(in thousands)

 

Net income (loss)

  $ 3,771   $ 7,133   $ 6,819     $ (3,092 )   $ 4,758     $ 3,535   $ 1,316  

Interest expense, net

    13     44     106       1,931       68       950     1,657  

Income tax provision (benefit)

    478     328     (163 )     (195 )     (199 )     539     (110 )

Amortization of intangibles

        8     17       8,176       13       3,037     6,174  

Depreciation and amortization

    120     448     1,976       2,068       1,455       1,528     1,483  
                                                 

EBITDA

    4,382     7,961     8,755       8,888       6,095       9,589     10,520  

Share-based compensation

                              604     604  
                                                 

Adjusted EBITDA

  $ 4,382   $ 7,961   $ 8,755     $ 8,888     $ 6,095     $ 10,193   $ 11,124  
                                                 

(1)   The pro forma financial information gives effect to the acquisition of Partsbin as if the acquisition occurred on January 1, 2005.

 

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RISK FACTORS

You should consider carefully the following risks before you decide to purchase our common stock. Additional risks and uncertainties not presently known to us or that we currently believe are not important may also impair our business operations. If any of the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected, the value of our common stock could decline and you may lose all or part of your investment.

Risks Relating to Our Business

Purchasers of aftermarket auto parts may not choose to shop online, which would prevent us from acquiring new customers who are necessary to the growth of our business

The online market for aftermarket auto parts is less developed than the online market for many other business and consumer products. Our success will depend in part on our ability to attract new customers and customers who have historically purchased auto parts through traditional retail and wholesale operations. Furthermore, we may have to incur significantly higher and more sustained advertising and promotional expenditures or price our products more competitively than we currently anticipate in order to attract additional online consumers to our websites and convert them into purchasing customers. Specific factors that could prevent prospective customers from purchasing from us include:

 

  Ÿ   concerns about buying auto parts without face-to-face interaction with sales personnel;

 

  Ÿ   the inability to physically handle, examine and compare products;

 

  Ÿ   delivery time associated with Internet orders;

 

  Ÿ   concerns about the security of online transactions and the privacy of personal information;

 

  Ÿ   delayed shipments or shipments of incorrect or damaged products; and

 

  Ÿ   the inconvenience associated with returning or exchanging items purchased online.

If the online market for auto parts does not gain widespread acceptance, our business and financial results may suffer.

We depend on search engines and other online sources to attract visitors to our websites, and if we are unable to attract these visitors and convert them into customers in a cost-effective manner, our business and results of operations will be harmed

Our success depends on our ability to attract online consumers to our websites and convert them into customers in a cost-effective manner. We use a variety of methods to attract visitors to our websites, but we are significantly dependent upon search engines, shopping comparison sites and other online sources for our website traffic. We are included in search results as a result of both paid search listings, where we purchase specific search terms that will result in the inclusion of our listing, and algorithmic searches that depend upon the searchable content on our sites. Algorithmic listings cannot be purchased and instead are determined and displayed solely by a set of formulas utilized by the search engine. We rely on both algorithmic and purchased listings to attract and direct consumers to our websites. Search engines, shopping comparison sites and other online sources revise their algorithms from time to time in an attempt to optimize their search results. If one or more of the search engines, shopping comparison sites or other online sources on which we rely for website traffic were to modify its general methodology for how it displays our websites, resulting in fewer consumers clicking through to our websites, our financial results could be adversely affected. If any free search engine or shopping comparison site on which we rely begins charging

 

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fees for listing or placement, or if one or more of the search engines, shopping comparison sites and other online sources on which we rely for purchased listings, modifies or terminates its relationship with us, our expenses could rise, we could lose customers and traffic to our websites could decrease. In addition, our success in attracting visitors who convert to customers will depend in part upon our ability to identify and purchase relevant search terms, provide relevant content on our sites, and effectively target our other marketing programs such as e-mail campaigns and affiliate programs. If we are unable to attract visitors to our websites and convert them to customers in a cost-effective manner, then our business and financial results may be harmed.

We are dependent upon relationships with suppliers in Taiwan, China and the United States for the vast majority of our products

We acquire substantially all of our products from manufacturers and distributors located in Taiwan, China and the United States. Our top five suppliers represented approximately 47.4% of our total product purchases in 2005 and 55.5% for the nine months ended September 30, 2006. Although we have long standing business relationships with many of our suppliers, we do not have any long-term contracts or exclusive agreements with our suppliers that would ensure our ability to acquire the types and quantities of products we desire at acceptable prices and in a timely manner. In addition, our ability to acquire products from our suppliers in amounts and on terms acceptable to us is dependent upon a number of factors that could affect our suppliers and which are beyond our control. For example, financial or operational difficulties that some of our suppliers may face may increase the cost of the products we purchase from them. In addition, the trend towards consolidation among auto parts suppliers may disrupt or end our relationship with some suppliers, and could lead to less competition and, consequently, higher prices.

In addition, because many of our suppliers are outside of the United States, additional factors could interrupt our relationships or affect our ability to acquire the necessary products on acceptable terms, including:

 

  Ÿ   political, social and economical instability and the risk of war or other international incidents in Asia;

 

  Ÿ   fluctuations in foreign currency exchange rates that may increase our cost of products;

 

  Ÿ   tariffs and protectionist laws and business practices that favor local businesses;

 

  Ÿ   difficulties in complying with import and export laws, regulatory requirements and restrictions; and

 

  Ÿ   natural disasters and public health emergencies.

If we do not maintain our relationships with our existing suppliers or develop relationships with new suppliers on acceptable commercial terms, we may not be able to continue to offer a broad selection of merchandise at competitive prices and, as a result, we could lose customers and our sales could decline.

We recently acquired Partsbin and the integration of our businesses may be time consuming and expensive and may not be immediately successful, if at all

In May 2006, we completed the acquisition of Partsbin, an online retailer of aftermarket auto parts. As a result of the acquisition, we added 47 employees, and our available SKUs and net sales increased significantly. The acquisition of Partsbin has involved significant costs, has resulted in challenges integrating the diverse technologies used by each company and has placed, and may continue to place, pressures on our operational and financial infrastructure. We cannot assure you that our current cost structure or infrastructure will be adequate for the combined companies. To successfully integrate Partsbin, we anticipate that we will need to improve our operational and financial systems, procedures and controls and maintain our cost structure at appropriate levels.

 

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The Partsbin acquisition also expanded our product offerings, particularly in the area of engine parts and performance parts and accessories, and significantly increased our use of drop-ship as a method of fulfillment. We cannot assure you that we can effectively manage this new fulfillment model or address the market for these additional auto parts.

The integration of Partsbin may involve the consolidation of diverse business cultures, require substantial time and expenses, and distract management from other business matters. In addition, this acquisition may include significant intangible assets that are subject to periodic impairment testing which could result in substantial accounting charges. If we are unable to integrate Partsbin in an efficient and timely manner, our business and operating results will be harmed.

We face intense competition and operate in an industry with limited barriers to entry, and some of our competitors may have greater resources than us and may be better positioned to capitalize on the growing e-commerce auto parts market

The auto parts industry is competitive and highly fragmented, with products distributed through multi-tiered and overlapping channels. We compete with both online and offline retailers who offer OEM and aftermarket auto parts to either the DIY or DIFM customer segments. Current or potential competitors include the following:

 

  Ÿ   national auto parts retailers such as Advance Auto Parts, AutoZone, CSK Auto, Napa Auto Parts, O’Reilly Automotive and Pep Boys;

 

  Ÿ   large online marketplaces such as Amazon.com and eBay;

 

  Ÿ   local independent retailers or niche auto parts online retailers; and

 

  Ÿ   wholesale auto parts distributors such as Keystone Automotive and LKQ Corporation.

Barriers to entry are low, and current and new competitors can launch websites at a relatively low cost. Many of our current and potential offline competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing, technical, management and other resources than we do. In addition, some of our competitors have used and may continue to use aggressive pricing tactics and devote substantially more financial resources to website and system development than we do. We expect that competition will further intensify in the future as Internet use and online commerce continue to grow worldwide. Increased competition may result in reduced operating margins, reduced profitability, loss of market share and diminished brand recognition.

We would also experience significant competitive pressure if any of our suppliers were to sell their products directly to customers. Since our suppliers have access to merchandise at very low costs, they could sell products at lower prices and maintain higher gross margins on their product sales than we can. In this event, our current and potential customers may decide to purchase directly from these suppliers. Increased competition from any supplier capable of maintaining high sales volumes and acquiring products at lower prices than us could significantly reduce our market share and adversely impact our financial results.

We rely on key personnel and may need additional personnel for the success and growth of our business

Our business is largely dependent on the personal efforts and abilities of key personnel including Mehran Nia, our Chief Executive Officer and President, and Michael McClane, our Chief Financial Officer, Executive Vice President of Finance, Treasurer and Secretary. Messrs. Nia and McClane, as well as any of our other key employees, can terminate their employment relationship with us at any time. We do not maintain key person life insurance on any officer or employee. Our performance also depends on our ability to identify, attract, retain and motivate highly skilled technical, managerial, merchandising, marketing and

 

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customer service personnel. Competition for such personnel is intense, and we cannot assure you that we will be successful in attracting and retaining such personnel. The loss of any key employee or our inability to attract or retain other qualified employees could harm our business and results of operations.

If our product catalog database is stolen or misappropriated or if a competitor is able to create a substantially similar catalog without infringing our rights, then we may lose an important competitive advantage

We have invested significant resources and time to build and maintain our product catalog, which is maintained in the form of an electronic database, and maps SKUs to relevant product applications based on vehicle makes, models and years. We believe that our product catalog provides us with an important competitive advantage in both driving traffic to our websites and converting that traffic to revenue by enabling customers to quickly locate the products they require. We cannot assure you that we can protect our product catalog from unauthorized copying or theft by a third party. In addition, it is possible that a competitor could develop a catalog or database that is similar to or more comprehensive than ours, without infringing our rights. In the event our product catalog is stolen, copied or otherwise replicated by a competitor, whether lawfully or not, we may lose an important competitive advantage and our business could be harmed.

We must continue to develop and maintain our brands, which is costly and may not generate corresponding revenue

Although we sell our products through a network of websites, our flagship websites are located at www.partstrain.com and www.autopartswarehouse.com , and our corporate website is located at www.usautoparts.com . Maintaining and strengthening these brands is an important factor in attracting new customers and building customer loyalty to generate repeat business. Accordingly, we intend to continue to implement promotional strategies to enhance our brand and attract new customers to our websites. These initiatives require significant expenditures and may not have a material positive impact on our brand identity or result in a commensurate increase in sales. In addition, building our brand will depend upon our ability to continue to provide a broad range of auto parts at competitive prices combined with high quality customer service. If we are unsuccessful in our branding efforts, the strength of our brands may decline and our sales could decline.

Our future operating results may fluctuate and may fail to meet market expectations, which could adversely affect the market price of our common stock

We expect that our revenue and operating results will continue to fluctuate from quarter to quarter due to various factors, many of which are beyond our control. If our quarterly revenue or operating results fall below the expectations of investors or securities analysts, the price of our common stock could significantly decline. The factors that could cause our operating results to fluctuate include, but are not limited to:

 

  Ÿ   fluctuations in the demand for aftermarket auto parts;

 

  Ÿ   price competition on the Internet or among offline retailers for auto parts;

 

  Ÿ   our ability to attract visitors to our websites and convert those visitors into customers;

 

  Ÿ   our ability to maintain and expand our supplier and distribution relationships;

 

  Ÿ   the effects of seasonality on the demand for our products;

 

  Ÿ   our ability to accurately forecast demand for our products and maintain appropriate inventory levels;

 

  Ÿ   our ability to build and maintain customer loyalty;

 

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  Ÿ   the success of our brand-building and marketing campaigns;

 

  Ÿ   government regulations related to use of the Internet for commerce, including the application of existing tax regulations to Internet commerce and changes in tax regulations;

 

  Ÿ   technical difficulties, system downtime or Internet brownouts; and

 

  Ÿ   the amount and timing of operating costs and capital expenditures relating to expansion of our business, operations and infrastructure.

Economic conditions may have an adverse effect on the demand for aftermarket auto parts and could adversely affect our sales and operating results

We sell aftermarket auto parts consisting of body and engine parts used for repair and maintenance, performance parts used to enhance performance or improve aesthetics, and accessories that increase functionality or enhance a vehicle’s features. Demand for our products may be adversely affected by general economic conditions. In declining economies, consumers often defer regular vehicle maintenance and may forego purchases of nonessential performance products, which can result in a decrease in demand for auto parts in general. In expanding economies, consumers may be more likely to purchase new vehicles instead of repairing existing vehicles or they may be less price sensitive, leading to an increase in OEM parts sales at dealerships, either of which could also result in a decline in our sales. If such decreases in demand for our products are not offset by other factors, such as the deferral of new car purchases in declining economies, which may result in more required repairs for older vehicles, or the purchase of performance parts and accessories in expanding economies, our financial condition and results of operations would suffer.

If we are unable to manage the challenges associated with our international operations, the growth of our business could be limited and our business could suffer

We maintain business operations in the United States and the Philippines and outsourced call centers in both India and the Philippines. These international operations include development and maintenance of our websites, software development, enhancements of our online marketing technologies, and customer support services. We also operate a Canadian subsidiary to facilitate sales in Canada. We are subject to a number of risks and challenges that specifically relate to our international operations. Our international operations may not be successful if we are unable to meet and overcome these challenges, which could limit the growth of our business and may have an adverse effect on our business and operating results. These risks and challenges include:

 

  Ÿ   difficulties and costs of staffing and managing foreign operations;

 

  Ÿ   restrictions imposed by local labor practices and laws on our business and operations;

 

  Ÿ   exposure to different business practices and legal standards;

 

  Ÿ   unexpected changes in regulatory requirements;

 

  Ÿ   the imposition of government controls and restrictions;

 

  Ÿ   political, social and economic instability and the risk of war, terrorist activities or other international incidents;

 

  Ÿ   natural disasters and public health emergencies;

 

  Ÿ   potentially adverse tax consequences;

 

  Ÿ   the failure of local laws to provide a sufficient degree of protection against infringement of our intellectual property; and

 

  Ÿ   fluctuations in foreign currency exchange rates.

 

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If our fulfillment operations are interrupted for any significant period of time or are not sufficient to accommodate increased demand, our sales would decline and our reputation could be harmed

Our success depends on our ability to successfully receive and fulfill orders and to promptly deliver our products to our customers. Although we recently added a complementary drop-ship fulfillment method, largely for our Partsbin products, the majority of orders for our other products are filled from our inventory through our distribution centers, where all our inventory management, packaging, labeling and product return processes are performed. Increased demand and other considerations may require us to expand our distribution centers or transfer our fulfillment operations to larger facilities in the future.

Our distribution centers are susceptible to damage or interruption from human error, fire, flood, power loss, telecommunications failures, terrorist attacks, acts of war, break-ins, earthquakes and similar events. We do not currently maintain back-up power systems at our fulfillment centers. We do not presently have a formal disaster recovery plan and our business interruption insurance may be insufficient to compensate us for losses that may occur in the event operations at our fulfillment center are interrupted. Any interruptions in our fulfillment operations for any significant period of time, including interruptions resulting from the expansion of our existing facilities or the transfer of operations to a new facility, could damage our reputation and brand and substantially harm our business and results of operations. In addition, if we do not successfully expand our fulfillment capabilities in response to increases in demand, we may not be able to substantially increase our net sales.

We are dependent upon third parties for distribution and fulfillment operations with respect to many of our products

For a number of the products that we sell, we outsource the distribution and fulfillment operation and are dependent on our distributors to manage inventory, process orders and distribute those products to our customers in a timely manner. For the nine months ended September 30, 2006, we fulfilled 11.4% of our net sales through a single supplier. Our agreements with this supplier may be terminated at any time by either party, with 120 to 365 days’ notice. In addition, we do not have definitive agreements with many of our primary international suppliers. If we do not maintain our existing relationships with our distributors on acceptable commercial terms, we will need to obtain other suppliers and may not be able to continue to offer a broad selection of merchandise at competitive prices, and our sales may decrease.

In addition, because we outsource to distributors a number of these traditional retail functions relating to those products, we have limited control over how and when orders are fulfilled. We also have limited control over the products that our distributors purchase or keep in stock, and our agreements with most of our distributors do not require them to set aside any amount of inventory to fulfill our orders or to give our orders priority over other resellers to whom they sell. Our distributors may not accurately forecast the products that will be in high demand or they may allocate popular products to other resellers, resulting in the unavailability of certain products for sale on our websites. Any inability to offer a broad array of products at competitive prices and any failure to deliver those products to our customers in a timely and accurate manner may damage our reputation and brand and could cause us to lose customers.

Our ability to sustain or increase our profitability will suffer if we fail to manage our growth effectively

In recent years we have experienced rapid growth that has placed, and will continue to place, pressures on our operational and financial infrastructure. Our workforce has increased from 114 employees as of December 31, 2003 to 434 employees as of September 30, 2006. Our net sales have increased from $31.7 million in 2003 to $83.7 million for the nine months ended September 30, 2006. Our strategy for growth includes efforts to increase our operating efficiencies. Our recent expansion and planned growth have

 

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placed, and are expected to continue to place, a strain on our infrastructure, operations and managerial resources. We intend to further increase the size of our operations, and we expect our operating expenses to increase, as we, among other things:

 

  Ÿ   expand our domestic and international operations;

 

  Ÿ   increase our technology and development efforts to enhance and maintain our websites and technology infrastructure;

 

  Ÿ   hire additional personnel, including customer service specialists, sales and marketing professionals, and financial professionals;

 

  Ÿ   upgrade our operational and financial systems, procedures and controls; and

 

  Ÿ   assume the responsibilities and costs of being a public company.

Our success depends upon our ability to manage our operations and our growth effectively. To be successful, we will need to improve our operational and financial systems, procedures and controls, maintain our cost structure at appropriate levels, manage international operations, and hire additional personnel. We cannot assure you that our efforts will be successful or that we can improve our systems, procedures and controls in a timely manner. Delays or problems associated with any improvements or expansion of our systems, procedures and controls could harm our business and operating results. In addition, we may fail to accurately estimate and assess our increased operating expenses as we grow. As our operating expenses increase, we will need to grow our revenue in order to maintain and increase our profitability.

Challenges by OEMs to the validity of aftermarket auto parts and claims of infringement could adversely affect our business

Original equipment manufacturers have attempted to use claims of intellectual property infringement against manufacturers and distributors of aftermarket auto parts to restrict or eliminate the sale of aftermarket auto parts that are the subject of the claims. We have received in the past, and we anticipate we may in the future, receive communications alleging that certain products we sell infringe third-party patents, copyrights, trademarks and trade names or other intellectual property rights. For example, in December 2005, Ford Global Technologies, LLC filed a complaint with the United States International Trade Commission, or USITC, against us and five other named respondents, including four Taiwan-based manufacturers. Ford currently alleges in this action that we and the other respondents infringed ten design patents that Ford claims cover eight parts for the 2004-2005 Ford F-150 truck (see “Business — Legal Proceedings”). Ford has asked the USITC to issue a permanent general exclusion order excluding from entry into the United States all auto parts that infringe the ten Ford design patents and that are imported into the United States, sold for importation in the United States, or sold within the United States after importation. Ford also seeks a permanent order directing us and the other respondents to cease and desist from, among other things, selling, marketing, advertising, distributing and offering for sale imported auto parts that infringe the design patents. To date, our sales of these parts have been minimal, but as the design for the 2004 model is incorporated into later year models of the F-150 and these trucks have been on the road longer, sales of aftermarket replacement parts for these trucks may increase substantially. Furthermore, if Ford continues to pursue, expands or escalates its claims against us, or if other OEMs commence similar actions, and any of them are successful in these actions, we could be restricted or prohibited from selling certain aftermarket products and the aftermarket auto parts industry could decline significantly, which could have a material adverse effect on our business, financial condition and results of operations.

Future infringement claims could also result in increased costs of doing business arising from increased legal expenses, adverse judgments or settlements or changes to our business practices required to

 

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settle such claims or satisfy any judgments. Litigation could result in interpretations of the law that require us to change our business practices or otherwise increase our costs and harm our business. We do not maintain insurance coverage to cover the types of claims that could be asserted. If a successful claim were brought against us, it could expose us to significant liability.

If we fail to offer a broad selection of products and brands at competitive prices to meet our customers’ demands, our revenue could decline

In order to expand our business, we must successfully offer, on a continuous basis, a broad selection of auto parts that meet the needs of our customers. Our auto parts are used by consumers for a variety of purposes, including repair, performance, improved aesthetics and functionality. In addition, to be successful, our product offerings must be broad and deep in scope, competitively priced, well-made, innovative and attractive to a wide range of consumers. We cannot predict with certainty that we will be successful in offering products that meet all of these requirements. If our product offerings fail to satisfy our customers’ requirements or respond to changes in customer preferences, our revenue could decline.

Future acquisitions could disrupt our business and harm our financial condition

Key components of our growth strategy include expanding our product offerings, increasing our customer base and improving the customer experience. In pursuit of our growth strategy, we expect that we will selectively pursue acquisitions of businesses, technologies or services in order to expand our capabilities, enter new markets or increase our market share. We have limited experience in making acquisitions, and we compete with larger, better financed companies in identifying and completing acquisitions. We cannot assure you that we will be able to identify or consummate any future acquisitions on favorable terms, or at all. Integrating any newly acquired businesses, technologies or services is likely to be expensive and time consuming. To finance any acquisitions, it may be necessary for us to raise additional capital through public or private financings. Additional funds may not be available on terms that are favorable to us, and, in the case of equity financings, would result in dilution to our stockholders. If we do complete any acquisitions, we may be unable to operate the acquired businesses profitably, realize the anticipated synergies from the acquisition or otherwise implement our strategy successfully. If we are unable to integrate any newly acquired entities, technologies or services effectively or retain the key employees of any acquired companies, our business and results of operations will suffer. The time and expense associated with finding suitable and compatible businesses, technologies or services could also disrupt our ongoing business and divert our management’s attention. Future acquisitions by us could also result in large and immediate write-offs, assumption of debt and unforeseen liabilities and significant adverse accounting charges, any of which could substantially harm our business, financial condition and results of operations. We have no current plans, agreements or commitments with respect to any acquisitions.

We may be subject to liability for sales and other taxes and penalties, which could have an adverse effect on our business

We currently collect sales or other similar taxes only on the shipment of goods to the states of California, New Jersey and Tennessee. The U.S. Supreme Court has ruled that vendors whose only connection with customers in a state is by common carrier or the U.S. mail are free from state-imposed duties to collect sales and use taxes in that state. However, states could seek to impose additional income tax obligations or sales tax collection obligations on out-of-state companies such as ours, which engage in or facilitate online commerce, based on their interpretation of existing laws, including the Supreme Court ruling, or specific facts relating to us. If sales tax obligations are successfully imposed upon us by a state or other jurisdiction, we could be exposed to substantial tax liabilities for past sales and penalties and fines for

 

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failure to collect sales taxes. We could also suffer decreased sales in that state or jurisdiction as the effective cost of purchasing goods from us increases for those residing in that state or jurisdiction.

In addition, a number of states, as well as the U.S. Congress, have been considering various initiatives that could limit or supersede the Supreme Court’s apparent position regarding sales and use taxes on Internet sales. If any of these initiatives are enacted, we could be required to collect sales and use taxes in additional states and our revenue could be adversely affected. Furthermore, the U.S. Congress has not yet extended a moratorium, which was first imposed in 1998 but has since expired, on state and local governments’ ability to impose new taxes on Internet access and Internet transactions. The imposition by state and local governments of various taxes upon Internet commerce could create administrative burdens for us as well as substantially impair the growth of e-commerce and adversely affect our revenue and profitability. Since our service is available over the Internet in multiple states, these jurisdictions may require us to qualify to do business in these states. If we fail to qualify in a jurisdiction that requires us to do so, we could face liabilities for taxes and penalties.

If we are unable to provide satisfactory customer support, our reputation would be harmed and we could lose customers

We believe that our experienced customer support personnel provide us with a key competitive advantage by providing a positive shopping experience for our customers. We maintain customer support centers in California and have outsourced call centers in the Philippines and India. Any material disruption or slowdown in our customer support services resulting from telephone or Internet failures, power or service outages, natural disasters, labor disputes, or other events could make it difficult or impossible to provide adequate customer support. Furthermore, we may be unable to attract and retain an adequate number of competent customer support representatives, which is essential in creating a favorable customer experience. In addition, because our outsourced call centers are located in the Philippines and India, we may experience difficulties in training our support team or monitoring the level of support provided. If we are unable to continually provide adequate and trained staffing for our customer support operations, our reputation could be seriously harmed and our sales could decline. Further, we cannot assure you that call volumes will not exceed our present system capacities. If this occurs, we could experience delays in accepting orders, responding to customer inquiries and addressing customer concerns. Because our success depends in large part on keeping our customers satisfied, any failure to provide satisfactory levels of customer support would likely impair our reputation and we could lose customers.

We could be liable for breaches of security on our websites

A fundamental requirement for e-commerce is the secure transmission of confidential information over public networks. Anyone who is able to circumvent our security measures could misappropriate proprietary information or cause interruptions in our operations. Although we have developed systems and processes that are designed to protect consumer information and prevent fraudulent credit card transactions and other security breaches, failure to mitigate such fraud or breaches may adversely affect our operating results. We may be required to expend significant capital and other resources to protect against potential security breaches or to alleviate problems caused by any breach. We rely on licensed encryption and authentication technology to provide the security and authentication necessary for secure transmission of confidential information, including credit card numbers. Advances in computer capabilities, new discoveries in the field of cryptography, or other events or developments may result in a compromise or breach of the algorithms that we use to protect customer transaction data. In the event someone circumvents our security measures, it could seriously harm our business and reputation and we could lose customers. Security breaches could also expose us to a risk of loss or litigation and possible liability for failing to secure confidential customer information.

 

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The success of our business depends on the continued growth of the Internet as a retail marketplace and the related expansion of the Internet infrastructure

Our future success depends upon the continued and widespread acceptance and adoption of the Internet as a vehicle to purchase products. If customers or manufacturers are unwilling to use the Internet to conduct business and exchange information, our business will fail. The commercial acceptance and use of the Internet may not continue to develop at historical rates, or may not develop as quickly as we expect. The growth of the Internet, and in turn the growth of our business, may be inhibited by concerns over privacy and security, including concerns regarding “viruses” and “worms,” reliability issues arising from outages or damage to Internet infrastructure, delays in development or adoption of new standards and protocols to handle the demands of increased Internet activity, decreased accessibility, increased government regulation, and taxation of Internet activity. In addition, our business growth may be adversely affected if the Internet infrastructure does not keep pace with the growing Internet activity and is unable to support the demands placed upon it, or if there is any delay in the development of enabling technologies and performance improvements.

If we do not respond to technological change, our websites could become obsolete and our financial results and conditions could be adversely affected

We maintain a network of websites which requires substantial development and maintenance efforts and entails significant technical and business risks. To remain competitive, we must continue to enhance and improve the responsiveness, functionality and features of our websites. The Internet and the e-commerce industry are characterized by rapid technological change, the emergence of new industry standards and practices and changes in customer requirements and preferences. Therefore, we may be required to license emerging technologies, enhance our existing websites, develop new services and technology that address the increasingly sophisticated and varied needs of our current and prospective customers, and adapt to technological advances and emerging industry and regulatory standards and practices in a cost-effective and timely manner. Our ability to remain technologically competitive may require substantial expenditures and lead time and our failure to do so may harm our business and results of operations.

System failures, including failures due to natural disasters or other catastrophic events, could prevent access to our websites, which could reduce our net sales and harm our reputation

Our sales would decline and we could lose existing or potential customers if they are not able to access our websites or if our websites, transaction processing systems or network infrastructure does not perform to our customers’ satisfaction. Any Internet network interruptions or problems with our websites could:

 

  Ÿ   prevent customers from accessing our websites;

 

  Ÿ   reduce our ability to fulfill orders or bill customers;

 

  Ÿ   reduce the number of products that we sell;

 

  Ÿ   cause customer dissatisfaction; or

 

  Ÿ   damage our brand and reputation.

We have experienced brief computer system interruptions in the past, and we believe they will continue to occur from time to time in the future. Our systems and operations are also vulnerable to damage or interruption from a number of sources, including a natural disaster or other catastrophic event such as an earthquake, typhoon, volcanic eruption, fire, flood, terrorist attack, power loss, telecommunications failure, physical and electronic break-ins and other similar events. For example, our headquarters and the majority of our infrastructure, including some of our servers, are located in Southern California, a seismically active

 

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region. We also maintain offshore and outsourced operations in the Philippines, an area that was recently subjected to a typhoon and a volcanic eruption. In addition, California has in the past experienced power outages as a result of limited electrical power supplies. Such outages, natural disasters and similar events may recur in the future and could disrupt the operation of our business. Our technology infrastructure is also vulnerable to computer viruses, physical or electronic break-ins and similar disruptions. Although the critical portions of our systems are redundant and back up copies are maintained offsite, not all of our systems and data are fully redundant. We do not presently have a formal disaster recovery plan in effect and may not have sufficient insurance for losses that may occur from natural disasters or catastrophic events. Any substantial disruption of our technology infrastructure could cause interruptions or delays in our business and loss of data or render us unable to accept and fulfill customer orders or operate our websites in a timely manner, or at all.

Capacity constraints on our technology infrastructure would harm our business, prospects, results of operations and financial condition

If the volume of traffic on our websites or the number of purchases made by customers increases substantially, we may need to further expand and upgrade our technology, transaction processing systems and network infrastructure. Capacity constraints can cause unanticipated system disruptions, slower response times, degradation in levels of customer service, impaired quality and delays in reporting accurate financial information.

We may be unable to project accurately the rate or timing of traffic increases or successfully and cost-effectively upgrade our systems and infrastructure in time to accommodate future traffic levels on our websites. Any such upgrades to our systems and infrastructure will require substantial expenditures. In addition, we may be unable to upgrade and expand our transaction processing systems in an effective and timely manner or to integrate any newly developed or purchased functionality with our existing systems. Any inability to efficiently upgrade our systems and infrastructure in a timely manner to account for such growth and integrations may cause unanticipated system disruptions, slower response times, degradation in levels of customer service, impaired quality, delayed order fulfillment, any of which could result in a decline in our sales and harm our reputation.

We depend on third-party delivery services to deliver our products to our customers on a timely and consistent basis, and any deterioration in our relationship with any one of these third parties or increases in the fees that they charge could adversely affect our business and financial condition

We rely on third parties for the shipment of our products, but because we do not have written long-term agreements with any of these third parties, we cannot be sure that these relationships will continue on terms favorable to us, or at all. Increases in shipping costs could harm our business, prospects, financial condition and results of operations by increasing our costs of doing business and resulting in reduced gross margins. In addition, if our relationships with these third parties are terminated or impaired, or if these third parties are unable to deliver products for us, whether through labor shortage, slow down or stoppage, deteriorating financial or business condition, responses to terrorist attacks or for any other reason, we would be required to use alternative carriers for the shipment of products to our customers. Changing carriers could have a negative effect on our business and operating results due to reduced visibility of order status and package tracking and delays in order processing and product delivery, and we may be unable to engage alternative carriers on a timely basis, upon terms favorable to us, or at all.

We face exposure to product liability lawsuits

The automotive industry in general has been subject to a large number of product liability claims due to the nature of personal injuries that result from car accidents or malfunctions. As a distributor of auto

 

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parts, we could be held liable for the injury or damage caused if the products we sell are defective or malfunction. While we carry insurance against product liability claims, if the damages in any given action were high or we were subject to multiple lawsuits, the damages and costs could exceed the limits of our insurance coverage. If we were required to pay substantial damages as a result of these lawsuits, it may seriously harm our business and financial condition. Even defending against unsuccessful claims could cause us to incur significant expenses and result in a diversion of management’s attention. In addition, even if the money damages themselves did not cause substantial harm to our business, the damage to our reputation and the brands offered on our websites could adversely affect our future reputation, brand and could result in a decline in our net sales and profitability.

Existing or future government regulation could expose us to liabilities and costly changes in our business operations and could reduce customer demand for our products and services

We are subject to federal and state consumer protection laws and regulations, including laws protecting the privacy of customer non-public information and regulations prohibiting unfair and deceptive trade practices, as well as laws and regulations governing businesses in general and the Internet and e-commerce. Additional laws and regulations may be adopted with respect to the Internet, the effect of which on e-commerce is uncertain. These laws may cover issues such as user privacy, spyware and the tracking of consumer activities, marketing e-mails and communications, other advertising and promotional practices, money transfers, pricing, content and quality of products and services, taxation, electronic contracts and other communications, intellectual property rights, and information security. Furthermore, it is not clear how existing laws such as those governing issues such as property ownership, sales and other taxes, trespass, data mining and collection, and personal privacy apply to the Internet and e-commerce. To the extent we expand into international markets, we will be faced with complying with local laws and regulations, some of which may be materially different than U.S. laws and regulations. Any such foreign law or regulation, any new U.S. law or regulation, or the interpretation or application of existing laws and regulations to the Internet or other online services, may have a material adverse effect on our business, prospects, financial condition and results of operations by, among other things, impeding the growth of the Internet, subjecting us to fines, penalties, damages or other liabilities, requiring costly changes in our business operations and practices, and reducing customer demand for our products and services. We do not maintain insurance coverage to cover the types of claims or liabilities that could arise as a result of such regulation.

If we are unable to protect our intellectual property rights, our reputation and brand could be impaired and we could lose customers

We regard our trademarks, trade secrets and similar intellectual property as important to our success. We rely on trademark and copyright law, and trade secret protection, and confidentiality and/or license agreements with employees, customers, partners and others to protect our proprietary rights. We cannot be certain that we have taken adequate steps to protect our proprietary rights, especially in countries where the laws may not protect our rights as fully as in the United States. In addition, third parties may infringe or misappropriate our proprietary rights, and we could be required to incur significant expenses to preserve them. We have federally-registered and common law trademarks, as well as pending federal trademark registrations for several marks. Even if we obtain approval of such pending registrations, the resulting registrations may not adequately cover our inventions or protect us against infringement by others. Effective trademark, service mark, copyright, patent and trade secret protection may not be available in every country in which our products and services may be made available online. We also currently own or control a number of Internet domain names, including www.usautoparts.com , www.partstrain.com and www.autopartswarehouse.com . We may be unable to protect these domain names or acquire or maintain

 

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relevant domain names in the United States and in other countries. If we are not able to protect our trademarks, domain names or other intellectual property, we may experience difficulties in achieving and maintaining brand recognition and customer loyalty.

Our e-commerce system is dependent on open-source software, which exposes us to uncertainty and potential liability

We utilize open-source software such as Linux, Apache, MySQL, PHP, Fedora and Perl throughout our web properties and supporting infrastructure. Open-source software is maintained and upgraded by a general community of software developers under various open-source licenses, including the GNU General Public License, or GPL. These developers are under no obligation to maintain, enhance or provide any fixes or updates to this software in the future. Additionally, under the terms of the GPL and other open-source licenses, we may be forced to release to the public source-code internally developed by us pursuant to such licenses. Furthermore, if any of these developers contribute any code of others to any of the software that we use, we may be exposed to claims and liability for intellectual property infringement. A number of lawsuits are currently pending against third parties over the ownership rights to the various components within some open-source software that we use. If the outcome of these lawsuits is unfavorable, we may be held liable for intellectual property infringement based on our use of these open-source software components. We may also be forced to implement changes to the code-base for this software or replace this software with internally developed or commercially licensed software.

We rely on bandwidth and data center providers and other third parties to provide products to our customers, and any failure or interruption in the services provided by these third parties could disrupt our business and cause us to lose customers

We rely on third-party vendors, including data center and bandwidth providers. Any disruption in the network access or co-location services, which are the services that house and provide Internet access to our servers, provided by these third-party providers or any failure of these third-party providers to handle current or higher volumes of use could significantly harm our business. Any financial or other difficulties our providers face may have negative effects on our business, the nature and extent of which we cannot predict. We exercise little control over these third-party vendors, which increases our vulnerability to problems with the services they provide. We also license technology and related databases from third parties to facilitate elements of our e-commerce platform. We have experienced and expect to continue to experience interruptions and delays in service and availability for these elements. Any errors, failures, interruptions or delays experienced in connection with these third-party technologies could negatively impact our relationship with our customers and adversely affect our business.

Our systems also heavily depend on the availability of electricity, which also comes from third-party providers. If we were to experience a major power outage, we would have to rely on back-up generators. These back-up generators may not operate properly through a major power outage, and their fuel supply could also be inadequate during a major power outage. Information systems such as ours may be disrupted by even brief power outages, or by the fluctuations in power resulting from switches to and from backup generators. This could disrupt our business and cause us to lose customers.

The United States government may substantially increase border controls and impose restrictions on cross-border commerce that may substantially harm our business

We purchase a substantial portion of our products, including our Kool-Vue mirrors, from suppliers in Taiwan and China. Restrictions on shipping goods into the United States from other countries pose a substantial risk to our business. Particularly since the terrorist attacks on September 11, 2001, the United

 

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States government has substantially increased border surveillance and controls. If the United States were to impose further border controls and restrictions, impose quotas, tariffs or import duties, increase the documentation requirements applicable to cross border shipments or take other actions that have the effect of restricting the flow of goods from Taiwan or China to the United States, we may have greater difficulty acquiring our inventory in a timely manner, experience shipping delays, or incur increased costs and expenses, all of which would substantially harm our business and results of operations.

Risks Relating to this Offering and Ownership of Our Common Stock

No public market for our common stock currently exists and an active trading market may not develop or be sustained following this offering

No public market for our common stock currently exists, and we cannot be certain that an active trading market for our common stock will develop or be sustained following this offering. Further, we cannot be certain that the market price of our common stock will not decline below the initial public offering price. The initial public offering price was determined by negotiation among us and the underwriters based upon several factors and may not be indicative of future market prices for our common stock.

Our stock price may be volatile, which may result in losses to our stockholders

The market prices of technology and e-commerce companies generally have been extremely volatile and have recently experienced sharp share price and trading volume changes. The trading price of our common stock is likely to be volatile and could fluctuate widely in response to, among other things, the risk factors described in this prospectus and other factors beyond our control such as fluctuations in the operations or valuations of companies perceived by investors to be comparable to us and conditions or trends in the Internet or auto parts industries.

The stock markets have historically experienced significant price and trading volume fluctuations. These fluctuations, as well as general economic and political conditions unrelated to our performance, may adversely affect the price of our common stock. In particular, following initial public offerings, the market prices for stocks of Internet and technology-related companies often reach levels that bear no established relationship to the operating performance of these companies. These market prices are generally not sustainable and could vary widely. In the past, following periods of volatility in the market price of a public company’s securities, securities class action litigation has often been initiated. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.

We have broad discretion as to the use of proceeds from this offering and may not use the proceeds effectively

We estimate the net proceeds of this offering to be approximately $            million. Our management will retain broad discretion as to the allocation of the proceeds and may spend these proceeds in ways in which our stockholders may not agree. The failure of our management to apply these funds effectively could result in unfavorable returns and uncertainty about our prospects, each of which could cause the price of our common stock to decline.

Our principal stockholders, executive officers and directors own a significant percentage of our stock and will continue to have significant control of our management and affairs after this offering

Upon completion of this offering, our executive officers and directors and entities that are affiliated with them will beneficially own approximately         % of our outstanding shares of common stock. This

 

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significant concentration of share ownership may adversely affect the trading price for our common stock because investors often perceive disadvantages in owning stock in companies with controlling stockholders. Also, these stockholders, acting together, will be able to control our management and affairs and matters requiring stockholder approval including the election of our entire board of directors and certain significant corporate actions such as mergers, consolidations or the sale of substantially all of our assets. As a result, this concentration of ownership could delay, defer or prevent others from initiating a potential merger, takeover or other change in our control, even if these actions would benefit our other stockholders and us.

A large number of additional shares may be sold into the public market in the near future, which may cause the market price of our common stock to decline significantly, even if our business is doing well

Sales of a substantial amount of common stock in the public market, or the perception that these sales may occur, could adversely affect the market price of our common stock. After this offering, we will have outstanding             shares of common stock. This includes the             shares we are selling in this offering, which may be resold in the public market immediately. All of the remaining 36,388,226 shares outstanding after the offering will become available for resale in the public market 180 days after the date of this prospectus (subject to extension in certain circumstances) due to agreements these stockholders have with us or the underwriters. However, the underwriters can waive this restriction and allow these stockholders to sell their shares at any time. As restrictions on resale end, the market price could drop significantly if the holders of these restricted shares sell them or are perceived by the market as intending to sell them. For a more detailed description, see “Shares Eligible for Future Sale.”

New stockholders will incur substantial and immediate dilution as a result of this offering

The initial public offering price is substantially higher than the book value per share of our outstanding common stock. As a result, investors purchasing common stock in this offering will incur substantial and immediate dilution. At the initial public offering price of $            per share, purchasers in this public offering will experience immediate and substantial dilution of approximately $            per share, representing the difference between our historical net tangible book value per share after giving effect to this offering and the initial public offering price. In addition, purchasers of common stock in this offering will have contributed approximately             % of the aggregate price paid by all purchasers of our stock but will own only approximately             % of our common stock outstanding after this offering. In addition, we have issued options to acquire common stock at prices significantly below the public offering price. To the extent such options are ultimately exercised, there will be further dilution to investors in this offering.

If we fail to maintain an effective system of internal control over financial reporting or are not able to adequately address certain identified significant deficiencies in our system of internal controls or comply with Section 404 of the Sarbanes-Oxley Act of 2002, we may not be able to accurately report our financial results or prevent fraud, and our stock price could decline

Our auditors have identified certain significant deficiencies in our system of internal control over financial reporting that are primarily related to our need to hire additional financial and accounting employees, as well as our need to upgrade our accounting systems and improve the documentation of our key assumptions, estimates, accounting policies and procedures. If we fail to adequately address these significant deficiencies and are not able to staff our accounting and finance department with the appropriate complement of experienced employees, we may not be able to improve our system of internal control over financial reporting to comply with the reporting requirements applicable to a public companies in the United States. Furthermore, it is possible that our auditors will identify material weaknesses or additional significant deficiencies in the future in our system of internal control over financial reporting. Our failure to

 

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address any deficiencies or weaknesses in our internal control over financial reporting or to properly maintain an effective system of internal control over financial reporting could impact our ability to prevent fraud or to issue our financial statements in a timely manner that present fairly our financial condition and results of operations. The existence of any such deficiencies or weaknesses, even if cured, may also lead to the loss of investor confidence in the reliability of our financial statements, could harm our business and negatively impact the trading price of our common stock. Such deficiencies or material weaknesses may also subject us to lawsuits, investigations and other penalties.

In addition, Section 404 of the Sarbanes-Oxley Act of 2002 will require us to evaluate and report on our internal control over financial reporting and have our independent auditors attest to our evaluation, beginning with our Annual Report on Form 10-K for the year ending December 31, 2008. We have prepared an internal plan of action for compliance with Section 404 and for strengthening and testing our system of internal control to provide the basis for our report, but we cannot assure you that this plan of action will be sufficient to meet the rigorous requirements of Section 404, and our independent auditors may issue an adverse opinion regarding management’s assessment of Section 404 compliance. It is also possible that our independent auditors may not be in a position to adequately assess our compliance with Section 404 on a timely basis, which could lead to our inability to comply with our reporting requirements under the Exchange Act of 1934, as amended (the “Exchange Act”). Our failure to comply with Section 404 or our reporting requirements would reduce investors’ confidence in our financial statements and harm our stock price and could subject us to a variety of administrative sanctions, including the suspension or delisting of our common stock from the NASDAQ Global Market and the inability of registered broker/dealers to make a market in our common stock, which could also reduce our stock price.

We will incur increased costs and compliance risks as a result of being a public company

As a public company, we expect to incur significant legal, accounting and other expenses that we did not incur as a private company. These expenses are associated with our public company reporting requirements and certain corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002 and the new rules implemented by the SEC and the NASDAQ Stock Market. We expect that compliance with these rules and regulations, in particular Section 404 of the Sarbanes-Oxley Act of 2002, will substantially increase our legal and financial compliance costs and will likely require us to hire additional personnel and/or consultants. Like many smaller public companies, we expect to face a significant impact from required compliance with Section 404 of the Sarbanes-Oxley Act of 2002. The process of strengthening our internal control and complying with Section 404 will be expensive and time consuming, and will require significant time and attention from our management team. We are currently evaluating and monitoring developments with respect to these new rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.

We also expect these new rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as executive officers.

We do not intend to pay dividends on our common stock

We currently intend to retain any future earnings and do not expect to pay any cash dividends on our capital stock for the foreseeable future.

 

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Our charter documents could deter a takeover effort, which could inhibit your ability to receive an acquisition premium for your shares

Provisions of our certificate of incorporation, bylaws and Delaware law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. For a more detailed discussion of these provisions, see “Description of Capital Stock — Anti-Takeover Provisions.”

 

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FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to our management. The forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” In some cases, you can identify forward-looking statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would” and similar expressions intended to identify forward-looking statements.

Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. We discuss many of these risks in this prospectus in greater detail under the heading “Risk Factors.” Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions only as of the date of this prospectus. 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, completely and with the understanding that our actual future results may be materially different from what we expect.

Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

 

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USE OF PROCEEDS

The net proceeds from our sale of             shares of common stock in this offering are estimated to be approximately $            based on an assumed initial public offering price of $            per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

We presently intend to use the net proceeds of this offering as follows:

 

  Ÿ   Approximately $30.0 million will be used to repay our outstanding indebtedness under two term loans for approximately $20.0 million and $10.0 million, payable to our commercial lender. These loans bear interest at LIBOR plus 1.75% per annum and LIBOR plus 1.50% per annum (except during the first year in which the rate is 4.58%), respectively, and are due and payable beginning June 30, 2007 and March 31, 2007, respectively. Both loans have four year terms with the principal payable monthly over three years. However, the loans become due and payable in full upon the closing of an initial public offering. The proceeds of the loans borrowed were used to fund the acquisition of Partsbin, to fund the stockholder distribution made in connection with the March 2006 recapitalization, and for general working capital needs.

 

  Ÿ   Approximately $5.0 million will be used to repay our outstanding indebtedness under certain promissory notes payable to the former stockholders of Partsbin. The notes bear interest at LIBOR and are due and payable in equal quarterly installments beginning in the quarter ending June 30, 2007, with the final payment due in the quarter ending March 31, 2008. However, the notes become due and payable in full upon the closing of an initial public offering. The amounts outstanding under these promissory notes were used to fund the acquisition of Partsbin.

 

  Ÿ   The remainder of the net proceeds will be used for working capital and for general corporate purposes, including the introduction of new product categories, the expansion of existing product categories and expansion into complementary businesses.

We may also use a portion of the net proceeds of this offering to acquire or invest in complementary businesses, products, websites or technologies, or to enter into strategic marketing relationships with third parties. From time to time, in the ordinary course of business, we expect to evaluate potential acquisitions of these businesses, services or technologies and strategic relationships. Currently, we do not have any understandings, commitments or agreements with respect to any such acquisitions.

As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds to be received upon the completion of this offering, and the amounts we actually spend could be outside of the ranges set forth above. The amounts actually expended for the purposes listed above will depend upon a number of factors, including the growth of our sales and customer base, the type of efforts we make to build our brand and competitive developments in e-commerce. Accordingly, our management will retain broad discretion in the allocation of the net proceeds of this offering. Pending their use, we anticipate that the net proceeds of this offering will be invested in short-term, interest-bearing, investment-grade securities.

 

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DIVIDEND POLICY

Concurrently with our recapitalization and termination of our S corporation status in March 2006, we paid a cash distribution to our stockholders in an aggregate amount of $51.7 million, which included our final S corporation distribution in the amount of $1.7 million. We currently intend to retain any future earnings to finance the growth and development of our business, and we do not anticipate that we will declare or pay any cash dividends on our common stock in the foreseeable future. Any future determination to pay cash dividends will be at the discretion of our board of directors and will be dependent upon our financial condition, results of operations, capital requirements, restrictions under any existing indebtedness and other factors the board of directors deems relevant. Our bank loan documents currently prohibit us from paying any cash dividends on our common stock without the prior written consent of our lender.

 

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CAPITALIZATION

The following table indicates our capitalization at September 30, 2006:

 

  Ÿ   on an actual basis;

 

  Ÿ   on a pro forma basis to reflect the conversion of all of our outstanding preferred stock into an aggregate of 11,055,425 shares of common stock immediately prior to the completion of this offering; and

 

  Ÿ   on a pro forma as adjusted basis to reflect (a) the conversion of all of our outstanding preferred stock into an aggregate of 11,055,425 shares of common stock immediately prior to the completion of this offering; (b) the issuance of              shares of common stock at an assumed initial public offering price of $             per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us; and (c) the repayment after the offering of $35.0 million of indebtedness incurred in connection with the Partsbin acquisition.

This table should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this prospectus.

 

     September 30, 2006
     Actual     Pro Forma     Pro Forma
As Adjusted
          

(unaudited)

     
     (in thousands, except share data)

Cash and cash equivalents

   $ 3,287     $ 3,287     $             

Total debt, including current portion and capital lease obligations and notes payable to stockholders

     34,888       34,888    

Stockholders’ equity :

      

Preferred stock, $0.001 par value; 11,100,000 shares authorized; 11,055,425 shares issued and outstanding, actual and pro forma; no shares issued and outstanding, pro forma as adjusted

     11          

Common stock, $0.001 par value; 50,000,000 shares authorized; 25,332,801 shares issued and outstanding, actual; 36,388,226 shares issued and outstanding, pro forma shares issued and outstanding, pro forma as adjusted

     25       36    

Additional paid-in capital, excluding share-based compensation

     63,048       63,048    

Share-based compensation

     604       604    

Accumulated other comprehensive income

     6       6    

Accumulated deficit

     (43,465 )     (43,465 )  
                      

Total stockholders’ equity

     20,229       20,229    
                      

Total capitalization

   $ 55,117     $ 55,117     $  
                      

The table above excludes, as of September 30, 2006:

 

  Ÿ   4,027,560 shares of common stock issuable upon the exercise of outstanding options at a weighted average exercise price of $4.92 per share;

 

  Ÿ                  shares of common stock reserved for future grant or issuance under our stock option plans; and

 

  Ÿ   140,554 shares of common stock issuable upon the exercise of warrants outstanding at a weighted average exercise price of $4.38 per share.

For additional information regarding our capital structure, see “Management — Employee Benefit Plans,” “Description of Capital Stock” and Note 5 of the Notes to the Consolidated Financial Statements of U.S. Auto Parts.

 

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DILUTION

Our pro forma net tangible book value as of September 30, 2006 was approximately $             million, or $             per share of common stock. Pro forma tangible book value per share represents our total tangible assets less total liabilities divided by the number of shares of common stock outstanding as of September 30, 2006 after giving effect to the conversion of all of our outstanding preferred stock into common stock immediately prior to the closing of this offering. After giving effect to (a) the conversion of all of our outstanding preferred stock into common stock immediately prior to the closing of this offering; (b) our sale of              shares of common stock offered by this prospectus at an assumed offering price of $             per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us; and (c) the repayment of $35.0 million of our indebtedness upon completion of this offering, our pro forma net tangible book value as of September 30, 2006 would have been $             million, or $             per share of common stock. This represents an immediate increase in pro forma net tangible book value of $             per share to existing stockholders and an immediate dilution in pro forma net tangible book value of $             per share to investors purchasing common stock in this offering.

The following table illustrates this per share dilution:

 

Assumed initial public offering price per share

      $             

Pro forma net tangible book value per share as of
September 30, 2006

   $                

Increase per share attributable to new investors

     

Pro forma net tangible book value per share after this offering

     

Dilution per share to new investors

      $  

The following table summarizes, on an as adjusted basis as of September 30, 2006, the difference between the number of shares of common stock purchased from us, the total consideration paid and the average price per share paid by existing stockholders and by new investors, assuming an initial public offering price of $             per share and before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

     Shares Purchased   Total Consideration     Average
Price per
Share
     Number    Percent   Amount     Percent      

Existing stockholders

              %             %     $             

New investors

           
                       

Total

        100 %   100 %  
                       

The foregoing discussion and tables assume no exercise of any stock options or warrants outstanding as of September 30, 2006. To the extent that these options are exercised, new investors will experience further dilution. As of September 30, 2006, options to purchase 4,027,560 shares of common stock were outstanding at a weighted average exercise price of $4.92 per share and warrants to purchase 140,554 shares of common stock were outstanding at a weighted average exercise price of $4.38 per share. Assuming all of our outstanding options and warrants are exercised, new investors will own approximately         % of our outstanding shares while contributing approximately         % of the total amount paid to fund our company.

 

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SELECTED CONSOLIDATED FINANCIAL DATA OF U.S. AUTO PARTS

The consolidated statement of income data of U.S. Auto Parts for the years ended December 31, 2003, 2004 and 2005 and the consolidated balance sheet data as of December 31, 2004 and 2005 have been derived from, and are qualified by reference to, our audited consolidated financial statements included in this prospectus. The consolidated statement of operations data for the year ended December 31, 2002 and the consolidated balance sheet data as of December 31, 2002 and 2003 have been derived from our audited consolidated financial statements that are not included in this prospectus. The consolidated statement of operations data for the nine months ended September 30, 2005 and 2006 and the consolidated balance sheet data as of September 30, 2006 have been derived from, and are qualified by reference to, our unaudited consolidated financial statements that are included in this prospectus. The consolidated statement of operations data for the year ended December 31, 2001 and the consolidated balance sheet data as of December 31, 2001 have been derived from our unaudited consolidated financial statements that are not included in this prospectus. The unaudited consolidated financial statements have been prepared on a basis consistent with our audited consolidated financial statements and, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, that management considers necessary for the fair presentation of the information for the unaudited periods. Historical results are not necessarily indicative of future results. The following data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere in this prospectus.

 

    Years Ended December 31,    

Nine Months Ended

September 30,

 
    2001     2002     2003     2004     2005     2005     2006  
    (unaudited)           (unaudited)  
    (in thousands, except share and per share data)  

Consolidated Statement of Income:

             

Net sales

  $ 9,473     $ 17,936     $ 31,657     $ 40,658     $ 59,698     $ 43,979     $ 83,665  

Cost of sales

    6,202       12,275       17,814       21,334       34,829       25,876       53,779  
                                                       

Gross profit

    3,271       5,661       13,843       19,324       24,869       18,103       29,886  

Operating expenses:

             

General and administrative(1)

    1,528       1,090       2,284       3,599       7,254       5,555       7,081  

Marketing(1)

    467       1,685       3,617       4,526       5,802       4,315       10,313  

Fulfillment(1)

    934       2,473       3,246       2,990       4,357       3,162       3,589  

Technology(1)

    111       259       405       776       868       596       992  

Amortization of intangibles

                      8       17       13       3,037  
                                                       

Total operating expenses

    3,040       5,507       9,552       11,899       18,298       13,641       25,012  
                                                       

Income from operations

    231       154       4,291       7,425       6,571       4,462       4,874  

Other income (expense):

             

Loss from disposition of assets

    (4 )           (62 )                       (5 )

Other income

    6       85       33       80       191       165       155  

Interest expense, net

    (44 )     (21 )     (13 )     (44 )     (106 )     (68 )     (950 )
                                                       

Other income (expense), net

    (42 )     64       (42 )     36       85       97       (800 )

Income before income taxes

    189       218       4,249       7,461       6,656       4,559       4,074  

Income tax provision (benefit)

    3       3       478       328       (163 )     (199 )     539  
                                                       

Net income

  $ 186     $ 215     $ 3,771     $ 7,133     $ 6,819     $ 4,758     $ 3,535  
                                                       

Basic net income per share

  $ 0.01     $ 0.01     $ 0.20     $ 0.32     $ 0.31     $ 0.22     $ 0.15  

Diluted net income per share

  $ 0.01     $ 0.01     $ 0.20     $ 0.32     $ 0.31     $ 0.22     $ 0.11  

Shares used in computation of basic net income per share

    18,332,600       18,332,600       18,794,793       22,000,000       22,000,000       22,000,000       23,634,781  

Shares used in computation of diluted net income per share

    18,332,600       18,332,600       18,794,793       22,000,000       22,000,000       22,000,000       32,270,315  

EBITDA(2)

  $ 274     $ 333     $ 4,382     $ 7,961     $ 8,755     $ 6,095     $ 9,589  

Adjusted EBITDA(2)

  $ 274     $ 333     $ 4,382     $ 7,961     $ 8,755     $ 6,095     $ 10,193  

(see footnotes on next page)

 

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(footnotes to prior page)

 

(1)   Includes share-based compensation expense related to option grants, as follows:

 

    

Years Ended December 31,

   Nine Months
Ended
September 30,
     2001    2002    2003    2004    2005    Pro Forma
2005(1)
   2005    2006
                              (unaudited)    (unaudited)
     (in thousands)

General and administrative

   $         —    $         —    $         —    $         —    $         —    $         —    $         —    $       359

Marketing

                                        126

Fulfillment

                                        16

Technology

                                        103
                                                       
   $    $    $    $    $    $    $    $ 604
                                                       

 

(2)   EBITDA and Adjusted EBITDA are supplemental non-GAAP financial measures. EBITDA is equal to net income plus (a) interest expense, net; (b) income tax provision (benefit); (c) amortization of intangibles; and (d) depreciation and amortization. Our definition of Adjusted EBITDA is different from EBITDA because we further adjust EBITDA to exclude share-based compensation expense. See “— Non-GAAP Financial Measures” for a table that reconciles these non-GAAP financial measures to net income.

 

    December 31,   

September 30,

2006

 
    2001      2002        2003        2004      2005   
    (unaudited)                        (unaudited)  
    (in thousands)  

Consolidated Balance Sheet Data:

                

Cash and cash equivalents

  $       281    $       252    $       2,117    $       2,130    $       1,353    $       3,287  

Working capital

    1,091      744      3,391      1,662      3,136      (4,528 )

Total assets

    2,963      4,290      8,289      13,111      14,484      68,505  

Long-term debt (excluding notes payable to stockholders and current portion)

    205      408      80      83      357      25,437  

Notes payable to stockholders

                             5,000  

Stockholders’ equity

    1,027      1,142      4,543      5,960      5,239      20,229  

Non-GAAP Financial Measures

Regulation G, “Conditions for Use of Non-GAAP Financial Measures,” and other provisions of the Securities Exchange Act of 1934, as amended, define and prescribe the conditions for use of certain non-GAAP financial information. We provide “EBITDA” and “Adjusted EBITDA,” which are non-GAAP financial measures, because we believe such measures are important supplemental information for investors. We calculate EBITDA as net income before (a) interest expense, net; (b) income tax provision (benefit); (c) amortization of intangibles; and (d) depreciation and amortization. Adjusted EBITDA further adjusts EBITDA to exclude share-based compensation expense related to our grant of stock options and other equity instruments. These non-GAAP financial measures are used in addition to and in conjunction with results presented in accordance with GAAP and should not be relied upon to the exclusion of GAAP financial measures. These non-GAAP financial measures reflect an additional way of viewing aspects of our operations that, when viewed with our GAAP results and the accompanying reconciliations to corresponding GAAP financial measures, provide a more complete understanding of factors and trends affecting our business.

 

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We use EBITDA and Adjusted EBITDA:

 

  Ÿ   as measurements of our operating performance because they assist us in comparing our operating performance on a consistent basis by removing the impact of items not directly resulting from our core operations;

 

  Ÿ   for planning purposes, including the preparation of our internal budget;

 

  Ÿ   to allocate resources to enhance the financial performance of our business;

 

  Ÿ   to evaluate the effectiveness of our operational strategies; and

 

  Ÿ   to evaluate our capacity to fund capital expenditures and expand our business.

We also believe that analysts and investors use EBITDA and Adjusted EBITDA as supplemental measures to evaluate the overall operating performance of companies in our industry.

Management strongly encourages investors to review our consolidated financial statements in their entirety and to not rely on any single financial measure. Because non-GAAP financial measures are not standardized, it may not be possible to compare these financial measures with other companies’ non-GAAP financial measures having the same or similar names. For information about our financial results as reported in accordance with GAAP, see our consolidated financial statements and related notes included in this prospectus.

The table below reconciles net income to EBITDA and Adjusted EBITDA for the periods presented:

 

     Years Ended December 31,    

Nine Months Ended

September 30,

     2001    2002    2003    2004    2005     2005     2006
     (unaudited)                         (unaudited)
Consolidated Statement
of Operations Data:
   (in thousands)      

Net income

   $       186    $       215    $     3,771    $     7,133    $     6,819     $     4,758     $ 3,535

Interest expense, net

     44      21      13      44      106       68       950

Income tax provision (benefit)

     3      3      478      328      (163 )     (199 )     539

Amortization of intangibles

                    8      17       13       3,037

Depreciation and amortization

     41      94      120      448      1,976       1,455       1,528
                                                  

EBITDA

     274      333      4,382      7,961      8,755       6,095       9,589

Share-based compensation

                                     604
                                                  

Adjusted EBITDA

   $ 274    $ 333    $ 4,382    $ 7,961    $ 8,755     $ 6,095     $ 10,193
                                                  

 

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SELECTED COMBINED FINANCIAL DATA OF PARTSBIN

The combined statement of operations data of All OEM Parts, Inc., ThePartsBin.com, Inc. and their affiliated companies (collectively, “Partsbin”) for the years ended December 31, 2003, 2004 and 2005 and the combined balance sheet data as of December 31, 2004 and 2005 have been derived from, and are qualified by reference to, the audited combined financial statements of Partsbin that are included in this prospectus. The combined balance sheet data as of December 31, 2002 and 2003 and the combined statement of operations data for the year ended December 31, 2002 have been derived from Partsbin’s audited combined financial statements that are not included in this prospectus. The combined statement of operations data for the three months ended March 31, 2005 and 2006 and the combined balance sheet data as of March 31, 2006 have been derived from, and are qualified by reference to, Partsbin’s unaudited combined financial statements that are included in this prospectus. The combined balance sheet data as of December 31, 2001 and the combined statement of operations data for the year then ended have been derived from Partsbin’s unaudited combined financial statements that are not included in this prospectus. The unaudited combined financial statements of Partsbin have been prepared on a basis consistent with our audited consolidated financial statements and, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, that we consider necessary for the fair presentation of the information for the unaudited periods. Historical results are not necessarily indicative of future results. The following data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the combined financial statements and related notes included elsewhere in this prospectus.

 

    Years Ended December 31,     Three Months Ended
March 31,
 
    2001     2002     2003     2004     2005         2005             2006      
    (unaudited)                             (unaudited)  
    (in thousands)  

Combined Statement of Operations Data:

             

Net sales

  $       3,627     $     10,636     $     17,763     $     23,679     $     38,295     $       7,470     $     13,665  

Cost of sales

    2,771       8,409       13,596       18,148       29,398       5,746       10,255  
                                                       

Gross profit

    856       2,227       4,167       5,531       8,897       1,724       3,410  
                                                       

Operating expenses:

             

General and administrative

    632       904       1,189       1,480       3,111       665       998  

Marketing

    226       1,278       2,417       3,804       5,172       1,077       1,332  

Fulfillment

          10       31       36       50       13       11  

Technology

    44       345       318       319       563       113       238  
                                                       

Total operating expenses

    902       2,537       3,955       5,639       8,896       1,868       2,579  
                                                       

Income (loss) from operations

    (46 )     (310 )     212       (108 )     1       (144 )     831  

Other income (expense):

             

Loss from disposition of assets

          (3 )     (9 )                        

Interest income

          1       2       2       2              

Interest expense

                (1 )     (2 )     (11 )     (1 )     (6 )
                                                       

Other income (expense), net

          (2 )     (8 )           (9 )     (1 )     (6 )
                                                       

Income (loss) before income taxes

    (46 )     (312 )     204       (108 )     (8 )     (145 )     825  

Income tax provision

                                         
                                                       

Net income (loss)

  $ (46 )   $ (312 )   $ 204     $ (108 )   $ (8 )   $ (145 )   $ 825  
                                                       

EBITDA(1)

  $ (30 )   $ (276 )   $ 238     $ (42 )   $ 123     $ (120 )   $ 865  

(see footnotes on next page)

 

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(footnotes to prior page)

 

(1)   EBITDA is a supplemental non-GAAP financial measure. EBITDA is equal to net income (loss) plus (a) interest expense, net; (b) income tax provision (benefit); (c) amortization of intangibles; and (d) depreciation and amortization. See “Selected Consolidated Financial Data of U.S. Auto Parts — Non-GAAP Financial Measures” for additional information regarding our use of this non-GAAP financial measure. This non-GAAP financial measure should not be relied upon to the exclusion of GAAP financial measures.

The table below reconciles net income (loss) to EBITDA for the periods presented:

 

     Years Ended December 31,     Three Months Ended
March 31,
     2001     2002     2003     2004     2005         2005             2006    
     (unaudited)                             (unaudited)
     (in thousands)

Net income (loss)

   $ (46 )   $ (312 )   $ 204     $ (108 )   $ (8 )   $ (145 )   $   825

Interest expense, net

           (1 )     (1 )           9       1       6

Income tax provision

                                        

Amortization of intangibles

                                        

Depreciation and amortization

            16              37              35             66             122             24             34
                                                      

EBITDA

   $ (30 )   $ (276 )   $ 238     $ (42 )   $ 123     $ (120 )   $ 865
                                                      

 

     December 31,        
     2001     2002     2003     2004     2005     March 31,
2006
 
     (unaudited)                             (unaudited)  
     (in thousands)  

Combined Balance Sheet Data:

            

Cash and cash equivalents

   $       11     $     308     $     436     $     558     $     328     $ 1,061  

Working capital (deficiency)

     (120 )     (357 )     (442 )     (964 )     (1,705 )     (892 )

Total assets

     191       462       962       1,569       2,366       3,220  

Long-term debt

     4             21       21       355       353  

Stockholders’/members’ equity (deficiency)

     (48 )     (357 )     (151 )     (239 )     (498 )     327  

 

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UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS

The following unaudited pro forma combined financial information reflects the acquisition of Partsbin on May 19, 2006, which was accounted for as a purchase business combination as defined by SFAS No. 141, “ Business Combinations .” The following unaudited pro forma combined statements of operations for the year ended December 31, 2005 and for the nine months ended September 30, 2006 give effect to the acquisition of Partsbin as if it occurred on January 1, 2005.

The unaudited pro forma combined financial information includes certain reclassifications to conform the presentation of the historical results of operations of Partsbin to our historical results of operations and do not reflect any adjustments for the effect of non-recurring items or operating synergies that we may realize as a result of the acquisition. The unaudited pro forma combined financial information does not purport to represent the actual results of operation that would have been achieved if the acquisition had taken place on January 1, 2005, and are not necessarily indicative of the results of operations that may be achieved in the future.

The unaudited pro forma adjustments made in preparing the pro forma combined statements of operations are based on the preliminary purchase price allocations and on certain management judgments. These preliminary allocations are based on an analysis of the estimated fair values of assets acquired and liabilities assumed, including identifiable tangible and intangible assets, deferred tax assets and liabilities, and estimates of the useful lives of tangible and amortizable intangible assets.

 

     Year Ended December 31, 2005  
     U.S. Auto
Parts
    Partsbin     Pro Forma
Adjustments(1)
    Pro Forma
Combined
 
                 (unaudited)  
     (in thousands, except share and per share data)  

Consolidated Statement of Income Data:

        

Net sales

   $ 59,698     $ 38,295     $     $ 97,993  

Cost of sales

     34,829       29,398             64,227  
                                

Gross profit

     24,869       8,897             33,766  

Operating expenses:

        

General and administrative

     7,254       3,111       (40 )(f)(g)     10,325  

Marketing

     5,802       5,172       (112 )(a)     10,862  

Fulfillment

     4,357       50             4,407  

Technology

     868       563             1,431  

Amortization of intangibles

     17             8,159 (b)     8,176  
                                

Total operating expenses

     18,298       8,896       8,007       35,201  
                                

Income (loss) from operations

     6,571       1       (8,007 )     (1,435 )

Other income (expense):

        

Other income

     191             (112 )(a)     79  

Interest expense, net

     (106 )     (9 )     (1,816 )(c)(g)     (1,931 )
                                

Other income (expense), net

     85       (9 )     (1,928 )     (1,852 )

Income (loss) before income taxes

     6,656       (8 )     (9,935 )     (3,287 )

Income tax benefit

     (163 )           (32 )(e)     (195 )
                                

Net income (loss)

   $ 6,819     $ (8 )   $ (9,903 )   $ (3,092 )
                                

Basic and diluted net income per share

   $ 0.31         $ (0.12 )

Shares used in computation of basic and diluted net income per share

     22,000,000         3,305,529 (d)     25,305,529  

(see footnotes on next page)

 

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(footnotes to prior page)

(1)   The pro forma adjustments reflect (a) the elimination of commission income received from Partsbin for website licensing fees (which was recorded as an expense in Partsbin’s statement of operations) prior to the business combination; (b) the assumed amortization related to the acquired Partsbin intangibles as if the Partsbin acquisition occurred on January 1, 2005; (c) the assumed interest expense related to the notes payable obtained as part of the acquisition (includes interest related to the $22.0 million secured debt, the $5.0 million notes payable to the former stockholders of Partsbin, and the warrants issued to the lender); (d) the assumed number of shares that would have been issued to the former Partsbin stockholders if the Partsbin acquisition occurred on January 1, 2005; (e) taxes as if both companies operated as a combined S corporation subject to California franchise taxes as of January 1, 2005; (f) the conforming of Partsbin’s accounting policies related to the depreciation and amortization of fixed assets as if we had amortized these assets using straight line amortization rather than according to Partsbin’s double declining balance method and had estimated lives in accordance with our accounting policies; and (g) the exclusion of the operations of TPB Real Estate, LLC, which we did not acquire as part of the Partsbin acquisition.

 

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Table of Contents
     Nine Months Ended September 30, 2006  
     U.S. Auto
Parts
    Partsbin(1)     Pro Forma
Adjustments(2)
    Pro Forma
Combined
 
     (unaudited)  
     (in thousands, except share and per share data)  

Consolidated Statement of Income Data:

        

Net sales

   $ 83,665     $ 23,859     $     $ 107,524  

Cost of sales

     53,779       17,690             71,469  
                                

Gross profit

     29,886       6,169             36,055  

Operating expenses:

        

General and administrative

     7,081       1,594       19 (e)(g)(h)     8,694  

Marketing

     10,313       3,419       (193 )(a)(e)     13,539  

Fulfillment

     3,589       19             3,608  

Technology

     992       413       (100 )(e)     1,305  

Amortization of intangibles

     3,037             3,137 (b)     6,174  
                                

Total operating expenses

     25,012       5,445       2,863       33,320  
                                

Income from operations

     4,874       724       (2,863 )     2,735  

Other income (expense):

        

Other income (expense)

     150       1       (23 )(a)     128  

Interest expense, net

     (950 )     (2 )     (705 )(c)     (1,657 )
                                

Other income (expense), net

     (800 )     (1 )     (728 )     (1,529 )

Income before income taxes

     4,074       723       (3,591 )     1,206  

Income tax provision (benefit)

     539             (649 )(f)     (110 )
                                

Net income (loss)

   $ 3,535     $ 723     $ (2,942 )   $ 1,316  
                                

Basic net income per share

   $ 0.16         $ 0.05  

Diluted net income per share

   $ 0.12         $ 0.04  

Shares used in computation of basic net income per share

     22,012,287         3,305,529 (d)     25,317,816  

Shares used in computation of diluted net income per share

     30,647,821         3,305,529 (d)     33,953,350  

(1)   The Partsbin data reflects the period from January 1, 2006 through May 19, 2006, the effective date of the Partsbin acquisition.

 

(2)   The pro forma adjustments reflect (a) the elimination of commission income received from Partsbin for website licensing fees (which was recorded as an expense in Partsbin’s statement of operations) prior to the business combination; (b) the assumed amortization related to the acquired Partsbin intangibles as if the Partsbin acquisition occurred on January 1, 2005; (c) the assumed interest expense related to the notes payable obtained as part of the acquisition (includes interest related to the $22.0 million secured debt, the $5.0 million notes payable to the former stockholders of Partsbin, and the warrants issued to the lender); (d) the assumed number of shares that would have been issued to the former Partsbin stockholders if the Partsbin acquisition occurred on January 1, 2005; (e) the deal related bonus paid to Partsbin employees on May 18, 2006; (f) taxes as if both companies operated as a combined S corporation subject to California franchise taxes as of January 1, 2005 and operated as a C corporation subsequent to March 3, 2006; (g) the exclusion of the operations of TPB Real Estate, LLC, which we did not acquire as part of the Partsbin acquisition; and (h) the conforming of Partsbin’s accounting policies related to depreciation and amortization of fixed assets as if we had amortized such costs using straight-line amortization rather than according to Partsbin’s double declining balance method and had estimated lives in accordance with our accounting policies.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read together with our selected consolidated financial data and the consolidated financial statements and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under the section entitled “Risk Factors” and elsewhere in this prospectus, our actual results may differ materially from those anticipated in these forward-looking statements.

Overview

We are a leading online provider of aftermarket auto parts, including body parts, engine parts and performance parts and accessories. Our user-friendly websites provide customers with a broad selection of approximately 550,000 SKUs, with detailed product descriptions and photographs. Our proprietary product database maps our 550,000 SKUs to over 4.3 million product applications based on vehicle makes, models and years. We principally sell our products to individual consumers through our network of websites and online marketplaces. Our flagship websites are located at www.partstrain.com and www.autopartswarehouse.com . We believe our strategy of disintermediating the traditional auto parts supply channels and selling products directly to customers over the Internet allows us to more efficiently deliver products to our customers while generating higher margins.

Our History. We were formed in 1995 as a distributor of aftermarket auto parts and launched our first website in 2000. We rapidly expanded our online operations, increasing the number of SKUs sold through our e-commerce network, adding additional websites, improving our Internet marketing proficiency and commencing sales in online marketplaces. As a result, our business has grown consistently since 2000, generating net sales of $59.7 million for the year ended December 31, 2005 and $83.7 million for the nine months ended September 30, 2006.

Recent Acquisition . In May 2006, we completed the acquisition of Partsbin. As a result of this acquisition, we expanded our product offering and product catalog to include performance parts and accessories and additional engine parts, enhanced our ability to reach more customers and added a complementary, drop-ship order fulfillment method. Partsbin also expanded our international operations by adding two outsourced call centers in the Philippines and in India, as well as a Canadian subsidiary to facilitate sales in Canada. We also augmented our technology platform and expanded our management team. The purchase price for Partsbin consisted of $25.0 million in cash, promissory notes in the aggregate principal amount of $5.0 million payable to the former stockholders of Partsbin and 3,305,529 shares of our common stock. The acquisition of Partsbin did not result in a new operating segment for financial reporting purposes.

Recent Initiatives. We have recently made several new investments to enhance the value of our business. Since June 30, 2005, we have hired additional key employees, including our Chief Financial Officer and Chief Information Officer, as well as additional sales and marketing, technology and operations personnel. During 2006, we upgraded our accounting system and made significant software development efforts on our operational systems to support our expected future growth. We have added additional space to our distribution facilities to accommodate the stocking of additional products. We have also modified our product catalog to increase the number of applications available on our websites and have reformatted the catalog to more easily integrate with the Partsbin catalog.

International Operations . In addition to the call center capability in the Philippines and in India that we acquired in connection with the Partsbin acquisition, we own a Philippine subsidiary, which is partially

 

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responsible for software development, Internet marketing, customer service and sales functions. We believe the cost advantages of our offshore operations provide us with the ability to grow our business in a cost-effective manner, and we expect to continue to add headcount to our offshore operations. We also acquired a Canadian subsidiary in connection with our acquisition of Partsbin to facilitate sales of our products in Canada.

Basis of Presentation

Net Sales. We generate net sales primarily through the sale of auto parts to consumers through our network of e-commerce websites and online marketplaces. We also sell auto parts to auto body shops and collision repair shops located in Southern California through our wholesale sales channel, and we sell our Kool-Vue private label mirror line to auto parts distributors nationwide. To understand revenue generation through our network of e-commerce websites, we monitor several key business metrics, including the following:

 

  Ÿ   Unique Visitors. A unique visitor to a particular website represents a user with a distinct IP address that visits that particular website. We define the total number of unique visitors in a given month as the sum of unique visitors to each of our websites during that month. We measure unique visitors to understand the volume of traffic to our websites and to track the effectiveness of our online marketing efforts. The number of unique visitors has historically varied based on a number of factors, including our marketing activities and seasonality. We believe an increase in unique visitors to our websites will result in an increase in the number of orders. We seek to increase the number of unique visitors to our websites by attracting repeat customers and improving search engine marketing and other Internet marketing activities.

 

  Ÿ   Total Number of Orders. We closely monitor the total number of orders as an indicator of revenue trends. We recognize revenue associated with an order when the products have been shipped, consistent with our revenue recognition policy discussed in “Critical Accounting Policies” below. Orders are typically processed and shipped within one business day after a customer places an order.

 

  Ÿ   Average Order Value. Average order value represents our net sales for a given period of time divided by the total number of orders recorded during the same period of time. We seek to increase the average order value as a means of increasing net sales. Average order values vary depending upon a number of factors, including the components of our product offering, the order volume in certain online sales channels and the general level of competition online.

Cost of Sales . Cost of sales consists of the direct costs associated with procuring parts from suppliers and delivering products to customers. These costs include product costs offset by purchase discounts, freight and shipping costs and warehouse supplies.

General and Administrative Expense. General and administrative expense consists primarily of administrative payroll and related expenses, credit card and other transaction processing fees, legal and professional fees, amortization of software and other administrative costs. Following this offering, we anticipate we will incur increased general and administrative expenses related to operating as a public company, such as increased legal and accounting fees and expenses, higher insurance premiums, and increased personnel and employee benefit costs and non-employee director costs. We expect that the costs of compliance associated with the transition to and operation as a public company, including the requirements relating to improving and documenting our internal controls and procedures, as well as changes in corporate governance practices, will be significant.

Marketing Expense . Marketing expense consists of Internet marketing costs and fees, Internet commerce facilitator fees and other advertising costs, as well as payroll and related expenses associated

 

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with our marketing and customer service personnel, including the call centers. These costs are generally variable and are typically a function of net sales.

Fulfillment Expense. Fulfillment expense consists primarily of payroll and related costs associated with our warehouse employees, facility rent, building maintenance, depreciation and other costs associated with inventory management and our wholesale operations.

Technology Expense. Technology expense consists primarily of payroll and related expenses of our information technology personnel, the cost of hosting our servers, communications expenses and Internet connectivity costs, computer support and software development.

Amortization of Intangibles. Amortization of intangibles consists primarily of the amortization expense associated with certain intangibles recorded as a result of the Partsbin acquisition, in addition to the amortization expense of our capitalized domain names.

Other Income (Expense), Net. Other income (expense), net consists primarily of interest expense on our outstanding loan balances and capital leases.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, net sales, costs and expenses, as well as the disclosure of contingent assets and liabilities and other related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of our assets and liabilities that are not readily apparent from other sources. In many instances, we could have reasonably used different accounting estimates. Actual results could differ from those estimates, and we include any revisions to our estimates in our results for the period in which the actual amounts become known.

We believe the critical accounting policies described below affect the more significant judgments and estimates used in the preparation of our consolidated financial statements. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our historical consolidated financial condition and results of operations:

Revenue Recognition. We recognize revenue from product sales when the following four revenue recognition criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable and collectibility is reasonably assured.

We evaluate the criteria of EITF 99-19, “ Reporting Revenue Gross as a Principal Versus Net as an Agent ,” in determining whether it is appropriate to record the gross amount of product sales and related costs or the net amount earned as commissions. When we are the primary party obligated in a transaction, are subject to inventory risk, have latitude in establishing prices and selecting suppliers or have several but not all of these indicators, revenue is recorded gross.

Product sales and shipping revenues, net of promotional discounts and return allowances, are recorded when the products are shipped and title passes to customers. Retail items sold to customers are made pursuant to terms and conditions that provide for transfer of both title and risk of loss upon our delivery to the carrier. Return allowances, which reduce product revenue by our best estimate of expected product returns, are estimated using historical experience. We generally require payment by credit card at the point of sale. Amounts received prior to when we ship goods to customers are recorded as deferred revenue.

 

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We periodically provide incentive offers to our customers to encourage purchases. Such offers include current discount offers, such as percentage discounts off of current purchases and other similar offers. Current discount offers, when accepted by our customers, are treated as a reduction to the purchase price of the related transaction. Current discount offers and inducement offers are classified as an offsetting amount in “Net sales.”

Inventory. Inventory consists of finished goods available-for-sale and is stated at the lower of cost or market value, determined using the first in, first out (“FIFO”) method. We purchase inventory from suppliers both domestically and internationally, primarily in Taiwan and China. We believe that our products are generally available from more than one supplier, and we maintain multiple sources for many of our products, both internationally and domestically. We offer a broad line of auto parts for automobiles from model years 1965 to 2006. Because of the continued demand for our products, we primarily purchase products in bulk quantities to take advantage of quantity discounts and to ensure inventory availability. Inventory is reported net of inventory reserves for slow moving, obsolete or scrap product, which are established based on specific identification of slow moving items and the evaluation of overstock considering anticipated sales levels. If actual market conditions are less favorable than those anticipated by management, additional reserves may be required. Historically, our recorded reserve for returns has been adequate to provide for actual returns.

Website and Software Development Costs. We capitalize certain costs associated with software developed for internal use according to EITF No. 00-2, “ Accounting for Website Development Costs ” (“EITF 00-2”) and Statement of Position 98-1, “ Accounting for the Costs of Computer Software Developed or Obtained for Internal Use ” (“SOP 98-1”). Under the provisions of EITF 00-2 and SOP 98-1, we capitalize costs associated with website development and software developed for internal use when both the preliminary project design and testing stage are completed and management has authorized further funding for the project, which it deems probable of completion and to be used for the function intended. Capitalized costs include amounts directly related to website development and software development such as payroll and payroll-related costs for employees who are directly associated with, and who devote time to, the internal-use software project. Capitalization of these costs ceases when the project is substantially complete and ready for its intended use.

Long-Lived Assets and Intangibles. We have adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “ Goodwill and Other Intangible Asset” (“SFAS No. 142”). Under SFAS No. 142, intangible assets with indefinite useful lives are subject to reduction only when their carrying amounts exceed their estimated fair values based on impairment tests established by SFAS No. 142 that must be made at least annually. Capitalized amounts are amortized on a straight-line basis over their estimated useful lives. During the year ended December 31, 2004, we acquired intangibles in the amount of $50,000 relating to Internet domain names. In May 2006, we acquired approximately $52.3 million of intangibles related to the acquisition of Partsbin. We preliminarily allocated $29.0 million to websites, $2.3 million to domain names, $4.1 million to software assets, $3.0 million to long-term, favorable supplier relationships and $13.9 million to goodwill. Domain names are generally not amortized, capitalized websites are amortized over five years, and software assets and supplier relationships are amortized over three years.

In accordance with SFAS No. 142 and SFAS No. 144, “ Accounting for the Impairment or Disposal of Long-Lived Assets ,” we assess long-lived assets, including goodwill and intangibles subject to amortization, and indefinite live intangibles for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable based on the undiscounted estimated future cash flows expected to result from its use and eventual disposition. We recognize impairment in our operating results to the extent that the carrying value exceeds the discounted cash flows of future operations. We did not recognize any impairment losses for the years ended December 31, 2003, 2004 or 2005. If our key assumptions used to determine estimated discounted cash flows change in the future, we may be required to record impairment charges.

 

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Income Taxes . In 1996, we elected to be taxed as an S corporation for income tax purposes under provisions of the Internal Revenue and California Taxation Codes, which require that our income or loss be reported on the individual income tax returns of our stockholders; however, one of our former consolidated entities, MBS Marketing, Inc., was historically subject to federal income taxes and income taxes in California and Tennessee at statutory rates since its inception. In connection with our recapitalization, our S corporation status was terminated in March 2006, and we became a Delaware C corporation. MBS Marketing, Inc. was merged into us in June 2005 and consolidated with us for all periods presented for financial reporting purposes.

We account for income taxes for MBS Marketing, incorporated as a C corporation, and after March 3, 2006, for U.S. Auto Parts, in accordance with SFAS No. 109, “ Accounting for Income Taxes ” (“SFAS No. 109”). Under SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. When appropriate, we establish a valuation reserve to reduce deferred tax assets, which includes tax credits and loss carry forwards, to the amount that is more likely than not to be realized. Should future income be less than anticipated by management, we may be required to record a valuation allowance against our deferred tax assets.

Share-Based Compensation. We did not issue any stock options prior to March 2006. Effective January 1, 2006, we adopted SFAS No. 123 (revised 2004), “ Share-Based Payment ” (“SFAS No. 123(R)”). SFAS No. 123(R) requires that all share-based compensation to employees, including grants of employee stock options, be recognized in our financial statements based on their respective grant date fair values. Under this standard, the fair value of each share-based payment award is estimated on the date of grant using an option pricing model that meets certain requirements. We currently use the Black-Scholes option pricing model to estimate the fair value of our share-based payment awards. The determination of the fair value of share-based payment awards utilizing the Black-Scholes model is affected by our stock price and a number of assumptions, including expected volatility, expected life, risk-free interest rate and expected dividends. We do not have a history of market prices of our common stock as we are not a public company, and as such we estimate volatility in accordance with SAB No. 107 using historical volatilities of similar public entities. The expected life of the awards is based on a simplified method which defines the life as the average of the contractual term of the options and the weighted average vesting period for all open tranches. The risk-free interest rate assumption is based on observed interest rates appropriate for the terms of our awards. The dividend yield assumption is based on our history and expectation of paying no dividends. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Share-based compensation expense recognized in our financial statements in 2006 and thereafter is based on awards that are ultimately expected to vest. If factors change and we employ different assumptions, share-based compensation expense may differ significantly from what we have recorded in the past. If there are any modifications or cancellations of the underlying unvested securities, we may be required to accelerate, increase or cancel any remaining unearned share-based compensation expense. Future share-based compensation expense and unearned share-based compensation will increase to the extent that we grant additional equity awards to employees or we assume unvested equity awards in connection with acquisitions.

Valuation at the Time of Grant. We have granted to our employees options to purchase common stock at exercise prices equal to the fair market value of the underlying common stock at the time of each grant, as determined by our board of directors.

 

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In valuing our common stock, our board of directors considered a number of factors, including:

 

  Ÿ   the illiquidity of our capital stock as a private company;

 

  Ÿ   the vesting restrictions imposed upon the equity awards;

 

  Ÿ   the business risks we faced;

 

  Ÿ   the liquidation preferences and other rights, preferences and privileges of our outstanding preferred stock;

 

  Ÿ   the likelihood of a financing event, such as a public offering;

 

  Ÿ   valuation indicators for our common stock price, primarily established through preferred stock issuances to third parties for cash and issuance values used as consideration for the acquisition of Partsbin;

 

  Ÿ   valuation estimates supported by independent third party valuations;

 

  Ÿ   our actual financial condition and results of operations relative to our formal operating plan during the relevant period;

 

  Ÿ   forecasts of our financial results, market conditions affecting the e-commerce sector, and changes in our management team;

 

  Ÿ   the closing of our Series A convertible preferred stock financing; and

 

  Ÿ   the closing date of the Partsbin acquisition as well as the date of a contemporaneous independent, third party valuation.

At the date of each option grant, our board of directors determined that the exercise price for each option was equal to the then-existing fair value of our common stock.

During the nine months ended September 30, 2006, we recognized share-based compensation of $604,000, determined in accordance with SFAS No. 123(R). Based on options outstanding as of September 30, 2006 and assuming that all employees remain employed by us for their remaining vesting periods, we expect to recognize an aggregate of approximately $367,000 of share-based compensation expense during the remainder of 2006 and an additional $1.5 million of share-based compensation expense during each of 2007 and 2008. The total compensation costs related to unvested stock options as of September 30, 2006 was $5.8 million.

Recent Accounting Pronouncements

FIN 48. In July 2006, the FASB issued Interpretation No. 48, “ Accounting for Uncertainty in Income Taxes   an Interpretation of FASB Statement No. 109 ” (“FIN 48”). FIN 48 clarifies the recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We will adopt this interpretation as required. We are currently evaluating the impact of this interpretation on our consolidated financial statements.

 

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Results of Operations

The following table sets forth selected statement of income data for the periods indicated, expressed as a percentage of net sales:

 

     Years Ended December 31,     Nine Months Ended
September 30,
 
         2003             2004             2005             2005             2006      

Net sales

   100.0 %   100.0 %   100.0 %   100.0 %   100.0 %

Cost of sales

   56.3     52.5     58.3     58.8     64.3  
                              

Gross profit

   43.7     47.5     41.7     41.2     35.7  

Operating expenses:

          

General and administrative

   7.2     8.9     12.2     12.6     8.5  

Marketing

   11.4     11.1     9.7     9.8     12.3  

Fulfillment

   10.3     7.4     7.3     7.2     4.3  

Technology

   1.3     1.9     1.5     1.4     1.2  

Amortization of intangibles

   —       0.0     0.0     0.0     3.6  
                              

Total operating expenses

   30.2     29.3     30.7     31.0     29.9  
                              

Income from operations

   13.6     18.3     11.0     10.2     5.8  

Other income (expense):

          

Loss from disposition of assets

   (0.2 )               (0.0 )

Other income

   0.1     0.2     0.3     0.4     0.2  

Interest income (expense), net

   (0.0 )   (0.1 )   (0.2 )   (0.2 )   (1.1 )
                              

Other income (expense), net

   (0.1 )   0.1     0.1     0.2     (0.9 )

Income before income taxes

   13.4     18.3     11.1     10.4     4.9  

Income tax provision (benefit)

   1.5     0.8     (0.3 )   (0.4 )   0.7  
                              

Net income

   11.9 %   17.5 %   11.4 %   10.8 %   4.2 %
                              

Nine Months Ended September 30, 2005 Compared to Nine Months Ended September 30, 2006

Net Sales and Gross Margin

 

    

Nine Months Ended

September 30,

            
     2005     2006     $ Change    % Change  
     (in thousands)             

Net sales

   $ 43,979     $ 83,665     $ 39,686    90.2 %

Cost of sales

     25,876       53,779       27,903    107.8 %
                         

Gross profit

   $ 18,103     $ 29,886     $ 11,783    65.1 %

Gross margin

     41.2 %     35.7 %      (5.5 )%

Net sales increased due to a 119.8% increase in our online business that was principally driven by the acquisition of Partsbin, which was completed on May 19, 2006. The Partsbin acquisition significantly increased the number of engine parts, performance parts and accessories offered on our websites. The total number of our e-commerce orders increased from 207,000 orders for the nine months ended September 30, 2005 to 505,000 orders in the corresponding period of 2006, and our average order value for the nine months ended September 30, 2006 was $120. The increase in net sales also reflected a $3.7 million increase in our online marketplace sales, which included the contribution of Partsbin sales through this channel. Net

 

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sales of our Kool-Vue product line and sales of other products through our wholesale channel remained relatively constant in absolute dollars for the nine months ended September 30, 2006 as compared to the corresponding period of 2005 but declined as a percentage of net sales. We anticipate that sales through our wholesale channel will continue to decline as a percentage of net sales in the future due to our primary focus on our online business.

While gross profit increased largely as a function of the increase in net sales, gross margin declined in the nine months ended September 30, 2006 primarily due to the introduction of lower gross margins for products sold in our e-commerce channel through our drop-ship distribution method, which distribution method largely commenced in connection with the Partsbin acquisition. While this distribution method has generated lower product margins than our stock-and-ship distribution method, we expect that this new distribution method will provide us with a broader product selection and a more scalable business. Cost of freight increased in absolute dollars as a result of the increase in net sales, which increase was partially offset due to favorable shipping terms with our drop-ship suppliers. The decline in gross margin was also due in part to the expansion of sales in our online marketplaces to include additional lower gross margin products.

General and Administrative Expense

 

     Nine Months Ended
September 30,
            
     2005     2006     $ Change    % Change  
     (in thousands)             

General and administrative expense

   $ 5,555     $ 7,081     $ 1,526    27.5 %

Percent of net sales

     12.6 %     8.5 %      (4.1 )%

The increase in general and administrative expense in the current period was primarily due to an increase of $861,000 in merchant fees related to higher online sales; however, merchant fees remained relatively constant as a percentage of net sales. The increase in general and administrative expense reflects higher payroll and related expenses in the amount of $750,000, which was largely due to the hiring of nine additional administrative personnel, as well as higher compensation payable to such personnel. This increase was partially offset by a $483,000 reduction in legal fees in the current period, which was primarily related to an aborted financing transaction in 2005. This increase also includes $359,000 of share-based compensation related to options granted in the current period.

Marketing Expense

 

     Nine Months Ended
September 30,
            
     2005     2006     $ Change    % Change  
     (in thousands)             

Marketing expense

   $ 4,315     $ 10,313     $ 5,998    139.0 %

Percent of net sales

     9.8 %     12.3 %      2.5 %

The increase in marketing expense for the nine months ended September 30, 2006 was primarily due to a $3.8 million increase in advertising costs related to the expansion of our online marketing efforts, as well as higher sales commissions related to the increase in net sales in the current period of 2006. Marketing expense increased $1.7 million due to the addition of 141 employees, which increased our total number of employees from 148 in the prior year to 289 in the current period.

 

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Fulfillment Expense

 

     Nine Months Ended
September 30,
            
         2005             2006         $ Change    % Change  
     (in thousands)             

Fulfillment expense

   $ 3,162     $ 3,589     $ 427    13.5 %

Percent of net sales

     7.2 %     4.3 %      (2.9 )%

The increase in fulfillment expense in the current period was primarily due to a $325,000 increase in personnel costs related to the addition of 15 employees. In addition, depreciation expense increased by $111,000 as a result of the addition in depreciable warehouse equipment in the current year.

Technology Expense

 

     Nine Months Ended
September 30,
            
         2005             2006         $ Change    % Change  
     (in thousands)             

Technology expense

   $ 596     $ 992     $ 396    66.4 %

Percent of net sales

     1.4 %     1.2 %      (0.2 )%

The increase in technology expense was primarily due to higher communication fees to support the expanded communications infrastructure and the addition of $103,000 of share-based compensation expense.

Amortization of Intangibles

 

     Nine Months Ended
September 30,
          
         2005             2006         $ Change    % Change
     (in thousands)           

Amortization of intangibles

   $ 13     $ 3,037     $ 3,024    Not meaningful

Percent of net sales

     0.0 %     3.6 %     

3.6%

The increase in amortization of intangibles in the current period was primarily due to the intangible assets acquired pursuant to the acquisition of Partsbin completed in May 2006. We preliminarily estimate aggregate amortization expense for the years ending December 31, 2007 and 2008 will be approximately $8.2 and $8.2 million, respectively.

Other Income (Expense), Net

 

     Nine Months Ended
September 30,
           
         2005             2006         $ Change     % Change
     (in thousands)            

Other income (expense), net

   $ 97     $ (800 )   $ (897 )   Not meaningful

Percent of net sales

     0.2 %     (0.9 )%     (1.1)%

The increase in other income (expense), net in the current period was primarily due to an $964,000 increase in interest expense from the notes payable incurred during 2006 as part of the recapitalization and acquisition of Partsbin. This increase was partially offset by increase in interest income during the current period as a result of generally higher cash balances.

 

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Year Ended December 31, 2004 Compared to Year Ended December 31, 2005

Net Sales and Gross Margin

 

     Years Ended December 31,             
          2004               2005          $ Change    % Change  
     (in thousands)             

Net sales

   $ 40,658     $ 59,698     $ 19,040    46.8 %

Cost of sales

     21,334       34,829       13,495    63.3 %
                         

Gross profit

   $ 19,324     $ 24,869     $ 5,545    28.7 %

Gross margin

     47.5 %     41.7 %      (5.8 )%

Net sales increased due to a 66.4% increase in our online business, which was principally driven by the expansion of our online marketplaces, which generated net sales of $10.3 million in 2005 but had nominal sales prior to 2005. Our e-commerce sales increased $7.8 million, or 29%, to $34.9 million in 2005, primarily as a result of an increase of 43.2% in the number of orders in 2005, which was partially offset by a $14 decrease in the average order value in 2005. While sales of our Kool-Vue product line increased $2.0 million in 2005, sales of other products through our wholesale channel declined both in absolute dollars and as a percentage of net sales due to our primary focus on our online business.

While gross profit increased largely as a function of the increase in net sales, gross margin declined in 2005 primarily due to a 2.9% increase in shipping and freight expense as a percent of net sales to 15.2% in 2005 compared to 12.3% in 2004. This increase in shipping and freight expense as a percent of net sales was primarily the result of increased sales in our online marketplaces that have a higher ratio of shipping costs to product sales. Gross margin also decreased as a result of a 4.7% decrease in the gross margin of our e-commerce channel, which was primarily attributable to increased online competition. In addition, the gross margins for product sales in 2005 on our online marketplaces were 6.4% lower than the gross margins for product sales on our e-commerce channel in 2004. Due to the expansion of our online marketplaces, which accounted for 17.8% of net sales in 2005, our overall gross margins declined. Our wholesale channel gross margin was generally stable from 2004 to 2005.

General and Administrative Expense

 

     Years Ended December 31,             
         2004             2005         $ Change    % Change  
     (in thousands)             

General and administrative expense

   $ 3,599     $ 7,254     $ 3,655    101.6 %

Percent of net sales

     8.9 %     12.2 %      3.3 %

The increase in general and administrative expense in 2005 primarily reflects the amortization of software in the amount of $1.8 million related to our purchase of software in late 2004, higher payroll and related costs associated with higher average compensation in 2005, as well as an increase of $980,000 in legal and professional fees in 2005 principally related to an aborted financing transaction. We expect general and administrative expenses to continue to increase in absolute dollars and as a percent of net sales as we expand our sales, increase our staff, and incur additional costs related to the growth of our business and compliance requirements associated with being a public company.

 

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Marketing Expense

 

     Years Ended December 31,             
         2004             2005         $ Change    % Change  
     (in thousands)             

Marketing expense

   $ 4,526     $ 5,802     $ 1,276    28.2 %

Percent of net sales

     11.1 %     9.7 %      (1.4 )%

The increase in marketing expense in 2005 primarily reflects increased Internet marketing costs of $867,000, auction fees related to sales in our online marketplaces, which largely commenced in 2005, higher sales commissions related to the increase in net sales in 2005 and higher payroll and related costs associated with the addition of nine marketing employees in 2005.

Fulfillment Expense

 

     Years Ended December 31,             
         2004             2005         $ Change    % Change  
     (in thousands)             

Fulfillment expense

   $ 2,990     $ 4,357     $ 1,367    45.7 %

Percent of net sales

     7.4 %     7.3 %      (0.1 )%

The increase in fulfillment expense in 2005 primarily reflects higher payroll and related costs associated with the addition of 27 warehouse and shipping employees in 2005, as well as additional rent and moving expenses related to the opening of a second warehouse in Carson, California in September 2004, which only had four months of activity in 2004 compared to a full year in 2005.

Technology Expense

 

     Years Ended December 31,             
         2004             2005         $ Change    % Change  
     (in thousands)             

Technology expense

   $ 776     $ 868     $ 92    11.9 %

Percent of net sales

     1.9 %     1.5 %      (0.4 )%

The increase in technology expense in 2005 primarily reflects an increase in communication infrastructure expense of $115,000, which was partially offset by a $53,000 decrease in computer support services.

Other Income (Expense), Net

 

     Years Ended December 31,             
     2004     2005     $ Change    % Change  
     (in thousands)             

Other income (expense), net

   $ 36     $ 85     $ 49    136.1 %

Percent of net sales

     0.1 %     0.1 %      0.0 %

The increase in other income (expense), net in 2005 primarily reflects a $111,000 increase in website rental income, which was offset by a $62,000 increase in interest expense related to higher average borrowings in 2005.

 

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Year Ended December 31, 2003 Compared to Year Ended December 31, 2004

Net Sales and Gross Margin

 

     Years Ended December 31,             
         2003             2004         $ Change    % Change  
     (in thousands)             

Net sales

   $ 31,657     $ 40,658     $ 9,001    28.4 %

Cost of sales

     17,814       21,334       3,520    19.8 %
                             

Gross profit

   $ 13,843     $ 19,324     $ 5,481    39.6 %

Gross margin

     43.7 %     47.5 %      3.8 %

Net sales increased primarily due to a 24.9% increase in our e-commerce sales, which was largely driven by an increase in the number of orders from online customers by $58,000 from $143,000 in 2003 to $201,000 in 2004. In addition, sales in our wholesale channel increased 18.9%, or $1.1 million, to $6.9 million in 2004 primarily due to an increase in the number of DIFM customers purchasing our products, as well as an increase in the number of products offered to our customers. Our Kool-Vue sales also increased by $1.3 million, which was primarily due to increased purchases from our existing customers.

Gross profit increased as a result of the 28.4% increase in net sales and a 3.8% increase in gross margin. The gross margin increase in 2004 was primarily attributable to a 7.6% increase in the local wholesale gross margin due to a customer mix shift away from high volume, low margin customers to a broader customer base with higher gross margin sales. In addition, outbound freight expense as a percentage of net sales decreased by 0.9% to 12.3% of net sales.

General and Administrative Expense

 

     Years Ended December 31,             
         2003             2004         $ Change    % Change  
     (in thousands)             

General and administrative expense

   $ 2,284     $ 3,599     $ 1,315    57.6 %

Percent of net sales

     7.2 %     8.9 %      1.7 %

The increase in general and administrative expense in 2004 primarily reflects higher payroll and related costs associated with the addition of eight administrative employees in 2004 and employee bonuses. General and administrative expense in 2004 also includes the amortization of software in the amount of $326,000 related to our purchase of software in late 2004.

Marketing Expense

 

     Years Ended December 31,             
         2003             2004         $ Change    % Change  
     (in thousands)             

Marketing expense

   $ 3,617     $ 4,526     $ 909    25.1 %

Percent of net sales

     11.4 %     11.1 %      (0.3 )%

The increase in marketing expense in 2004 primarily reflects higher payroll and related costs associated with the addition of 13 marketing employees in 2004 and higher commissions related to the increase in net sales in 2004, as well as an increase of $1.4 million in Internet marketing costs. These increases were offset by a $1.1 million decline in web development consulting fees, primarily as a result of our software purchase in 2004, enabling us to conduct these marketing activities internally.

 

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Fulfillment Expense

 

     Years Ended December 31,              
         2003             2004         $ Change     % Change  
     (in thousands)              

Fulfillment expense

   $ 3,246     $ 2,990     $ (256 )   (7.9 )%

Percent of net sales

     10.3 %     7.4 %     (2.9 )%

The decrease in fulfillment expense in 2004 primarily reflects a decrease in the number of warehouse and shipping employees in 2004 to 62 from 67 such employees in 2003 and a decline in bad debt expense. In 2003, we incurred bad debt expense of approximately $274,000 related to non-payment by larger wholesale distributor customers whose services were subsequently terminated, for which there was not a similar bad debt expense incurred in 2004. The decrease in fulfillment expense in 2004 was partially offset by increased rental expense and moving expenses relating to the move of our principal warehouse and corporate office in October 2003.

Technology Expense

 

     Years Ended December 31,             
         2003             2004         $ Change    % Change  
     (in thousands)             

Technology expense

   $ 405     $ 776     $ 371    91.6 %

Percent of net sales

     1.3 %     1.9 %      0.6 %

The increase in technology expense primarily reflects an increase of $198,000 in costs associated with computer support services and higher payroll and related costs associated with the addition of one technical employee in 2004, as well as an increase in communications and access fees largely related to increased traffic to our websites and inbound sales calls.

Other Income (Expense), Net

 

     Years Ended December 31,           
          2003               2004          $ Change    % Change
     (in thousands)           

Other income (expense), net

   $ (42 )   $ 36     $ 78    Not meaningful

Percent of net sales

     (0.1 )%     0.1 %      Not meaningful

The increase in other income (expense), net was primarily due to a $47,000 increase in website commissions and a $62,000 loss on asset disposition. The website commissions related to website licensing fees, which fees terminated in April 2006. This increase was partially offset by a $32,000 increase in interest expense associated with capital leases.

 

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Quarterly Results of Operations

The following tables present unaudited quarterly results of operations, in dollar amounts and as a percentage of net sales, for the last seven quarters. This information has been derived from our unaudited consolidated financial statements and has been prepared by us on a basis consistent with our audited consolidated financial statements and includes all adjustments, consisting only of normal recurring adjustments, which management considers necessary for a fair presentation of the information for the periods presented. Our quarterly financial results, including our net sales, gross profit and income from operations, have fluctuated in the past and may continue to fluctuate in the future based on a number of factors, many of which are beyond our control. Factors that may cause our revenue and operating results to vary or fluctuate include those discussed in the “Risk Factors” section of this prospectus.

 

    Three Months Ended  
    March 31,
2005
   

June 30,

2005

    Sept. 30,
2005
   

Dec. 31,

2005

    March 31,
2006
   

June 30,

2006

    Sept. 30,
2006
 
    (in thousands, except share and per share data)  

Consolidated Statement of Income Data:

             

Net sales

    $14,186       $15,238       $14,555       $15,719       $18,005       $26,966       $38,694  

Cost of sales

    7,860       9,410       8,606       8,953       10,259       17,617       25,903  
                                                       

Gross profit

    6,326       5,828       5,949       6,766       7,746       9,349       12,791  

Operating expenses:

             

General and administrative (1)

    1,966       1,905       1,684       1,699       1,969       2,326       2,786  

Marketing (1)

    1,273       1,507       1,535       1,487       2,014       3,240       5,059  

Fulfillment (1)

    950       1,087       1,125       1,195       1,152       1,213       1,224  

Technology (1)

    183       211       202       272       167       345       480  

Amortization of intangibles

    5       4       4       4       4       947       2,086  
                                                       

Total operating expenses

    4,377       4,714       4,550       4,657       5,306       8,071       11,635  

Income from operations

    1,949       1,114       1,399       2,109       2,440       1,278       1,156  

Other income (expense):

             

Other income (expense)

    83       43       39       26       149       3       (2 )

Interest expense, net

    (20 )     (18 )     (31 )     (37 )     (40 )     (317 )     (593 )
                                                       

Other income (expense), net

    63       25       8       (11 )     109       (314 )     (595 )

Income before income taxes

    2,012       1,139       1,407       2,098       2,549       964       561  

Income tax provision (benefit)

    34       (256 )     24       35       (163 )     425       277  
                                                       

Net income

    $  1,978       $  1,395       $  1,383       $  2,063       $  2,712       $  539       $  284  
                                                       

Basic net income per share

    $0.09       $0.06       $0.06       $0.09       $0.12       $0.02       $0.01  

Diluted net income per share

    $0.09       $0.06       $0.06       $0.09       $0.11       $0.02       $0.01  

Shares used in computation of basic net income per share

    22,000,000       22,000,000       22,000,000       22,000,000       22,000,000       23,534,919       25,332,801  

Shares used in computation of diluted net income per share

    22,000,000       22,000,000       22,000,000       22,000,000       25,637,235       34,620,713       36,461,475  

EBITDA

    $2,505       $1,645       $1,945       $2,660       $3,121       $2,777       $3,691  

Share-based compensation

                            5       225       374  
                                                       

Adjusted EBITDA

    $2,505       $1,645       $1,945       $2,660       $3,126       $3,002       $4,065  

(1)    Includes share-based compensation expense related to option grants, as follows:

 

      

    Three Months Ended  
   

March 31,

2005

   

June 30,

2005

    Sept. 30,
2005
    Dec. 31,
2005
    March 31,
2006
   

June 30,

2006

    Sept. 30,
2006
 
    (in thousands)  

General and administrative

  $     $     $     $     $ 3     $ 124     $ 232  

Marketing

                            2       56       68  

Fulfillment

                                  8       8  

Technology

                            0       37       66  
                                                       
  $     $     $     $     $ 5     $ 225     $ 374  

 

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     Three Months Ended  
     March 31,
2005
    June 30,
2005
    Sept. 30,
2005
    Dec. 31,
2005
    March 31,
2006
    June 30,
2006
    Sept. 30,
2006
 

As a Percent of Net Sales:

              

Net sales

   100.0 %   100.0 %   100.0 %   100.0 %   100.0 %   100.0 %   100.0 %

Cost of sales

   55.4     61.8     59.1     57.0     57.0     65.3     66.9  
                                          

Gross profit

   44.6     38.2     40.9     43.0     43.0     34.7     33.1  

Operating expenses:

              

General and administrative

   13.9     12.5     11.6     10.8     10.9     8.6     7.2  

Marketing

   9.0     9.9     10.6     9.5     11.2     12.0     13.1  

Fulfillment

   6.7     7.1     7.7     7.6     6.4     4.5     3.2  

Technology

   1.3     1.4     1.4     1.7     0.9     1.3     1.3  

Amortization of Intangibles

   0.0     0.0     0.0     0.0     0.0     3.5     5.4  
                                          

Total operating expenses

   30.9     30.9     31.3     29.6     29.4     29.9     30.2  

Income from operations

   13.7     7.3     9.6     13.4     13.6     4.8     2.9  

Other income (expense):

              

Other income

   0.6     0.3     0.3     0.1     0.8     0.0     (0.0 )

Interest expense, net

   (0.2 )   (0.1 )   (0.2 )   (0.2 )   (0.2 )   (1.2 )   (1.5 )
                                          

Other income (expense), net

   0.4     0.2     0.1     (0.1 )   0.6     (1.2 )   (1.5 )

Income before income taxes

   14.1     7.5     9.7     13.3     14.2     3.6     1.4  

Income tax provision (benefit)

   0.2     (1.7 )   0.2     0.2     (0.9 )   1.6     0.7  
                                          

Net income

   13.9 %   9.2 %   9.5 %   13.1 %   15.1 %   2.0 %   0.7 %
                                          

EBITDA

   17.7 %   10.8 %   13.4 %   16.9 %   17.3 %   10.3 %   9.5 %

Share-based compensation

                   0.1     0.8     1.0  
                                          

Adjusted EBITDA

   17.7 %   10.8 %   13.4 %   16.9 %   17.4 %   11.1 %   10.5 %

In May 2006, we completed the acquisition of Partsbin, which resulted in lower gross margins related to the introduction of Partsbin’s drop-ship fulfillment method, higher general and administrative expenses resulting from integration costs, higher marketing expense, higher interest expense related to the acquisition indebtedness and higher amortization of intangibles recognized in the second and third quarter of 2006. The termination of our S corporation status in March 2006 also resulted in higher income tax provision in subsequent quarters.

Non-GAAP Financial Measures

We provide “EBITDA” and “Adjusted EBITDA,” which are non-GAAP financial measures because we believe such measures are important supplemental information for investors. See “Selected Consolidated Financial Data of U.S. Auto Parts — Non-GAAP Financial Measures” for additional information regarding our use of EBITDA and Adjusted EBITDA.

 

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The table below provides a quantitative reconciliation of our non-GAAP financial measures to the most comparable GAAP financial measures. For information about our financial results as reported in accordance with GAAP, see our consolidated financial statements and the related notes starting on page F-1.

 

     Three Months Ended
     March 31,
2005
   June 30,
2005
    September 30,
2005
   December 31,
2005
   March 31,
2006
    June 30,
2006
   September 30,
2006
     (unaudited)
     (in thousands)

Net income

   $ 1,978    $ 1,395     $ 1,383    $ 2,063    $ 2,712     $ 539    $ 284

Interest expense, net

     20      18       31      37      40       317      593

Income tax provision (benefit)

     34      (256 )     24      35      (163 )     425      277

Depreciation and amortization

     468      484       503      521      528       549      451

Amortization of intangibles

     5      4       4      4      4       947      2,086
                                                  

EBITDA

     2,505      1,645       1,945      2,660      3,121       2,777      3,691

Share-based compensation

                          5       225      374
                                                  

Adjusted EBITDA

   $ 2,505    $ 1,645     $ 1,945    $ 2,660    $ 3,126     $ 3,002    $ 4,065
                                                  

Liquidity and Capital Resources

We have historically funded our operations from cash generated from operations, credit facilities, bank and stockholder loans, an equity financing and capital lease financings.

In March 2006, we completed a recapitalization pursuant to which we issued and sold 11,055,425 shares of our Series A convertible preferred stock in a private placement for an aggregate purchase price of $45.0 million and borrowed $10.0 million pursuant to a bank term loan. At the closing of the private placement, we terminated our S corporation status under the Internal Revenue Code of 1986, as amended, and became subject to taxation as a C corporation beginning in March 2006. The term loan bears interest at the rate of 4.58% for the first 12 months of the loan and interest accrues thereafter at LIBOR plus 1.5%. Only interest is payable on this loan until March 31, 2007, and thereafter, the remaining principal and any accrued, unpaid interest are payable monthly over the remaining three years of the term. Notwithstanding the foregoing, the term loan will become due and payable upon completion of this offering. Concurrently with this recapitalization, we made stockholder distributions in the aggregate amount of $51.7 million, which included $1.7 million representing our final S corporation distribution.

In May 2006, we completed the acquisition of Partsbin. The purchase price for Partsbin of approximately $50.0 million consisted of $25.0 million in cash, promissory notes in the aggregate principal amount of $5.0 million payable to the former stockholders of Partsbin and 3,305,529 shares of our common stock. We funded this acquisition through the notes payable to the former stockholders of Partsbin and a $22.0 million bank term loan, which loan accrues interest at LIBOR plus 1.75% (7.07% at September 30, 2006). Only interest is payable on this term loan until March 31, 2007 and the remaining principal and any accrued, unpaid interest are payable monthly over the remaining three years of the term. The stockholder notes payable bear interest at LIBOR and are due and payable in four equal quarterly installments of principal and interest commencing June 30, 2007.

We currently maintain a $7.0 million bank line of credit, which expires on May 19, 2007 and bears interest at LIBOR plus 1.75% (7.07% at September 30, 2006). As of September 30, 2006, we did not have any amounts outstanding under this line of credit. The bank line of credit and term loans referenced above are with the same commercial lender and are secured by substantially all of our assets. The notes payable to the former stockholders of Partsbin are also are secured by substantially all of our assets.

 

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Upon completion of this offering, we intend to use a portion of the proceeds of this offering to repay the outstanding indebtedness under (i) the bank term loans, of which approximately $30.0 million was outstanding as of September 30, 2006, and (ii) the $5.0 million notes payable to stockholders incurred in connection with the Partsbin acquisition.

We had cash and cash equivalents of $3.3 million as of September 30, 2006, representing a $1.9 million increase from $1.4 million as of December 31, 2005. The increase in our cash and cash equivalents as of September 30, 2006 was primarily due to the $7.4 million in net cash provided by our operations during the nine months ended September 30, 2006, as well as the issuance of our Series A convertible preferred stock and proceeds from the two term loans. This increase was offset by distributions to stockholders and payments related to the acquisition of Partsbin. The December 31, 2005 cash balance represented a decrease of $0.8 million from the December 31, 2004 cash balance of $2.1 million. The decrease in cash as of December 31, 2005 was primarily due to the stockholder distributions and payments on our credit line, which was offset by cash generated from operations.

We had negative working capital of $4.5 million as of September 30, 2006, which was primarily due to an increase in accounts payable and accrued expenses and notes payable to stockholders related to the acquisition of Partsbin. Our working capital of $3.1 million as of December 31, 2005 represented an increase of $1.4 million from December 31, 2004. This increase was primarily due to an increase in our inventory, which was offset by an increase in accounts payable and accrued expenses. Due to the historical seasonality in our business during the fourth and first calendar quarters of each year, cash and cash equivalents, inventory and accounts payable are generally higher in these quarters, resulting in fluctuations in our working capital. We anticipate that funds generated from operations and funds available under our line of credit will be sufficient to meet our working capital needs and expected capital expenditures for at least the next twelve months. Our future capital requirements may, however, vary materially from those now planned or anticipated. Changes in our operating plans, lower than anticipated net sales, increased expenses or other events, including those described in “Risk Factors,” may cause us to seek additional debt or equity financings in the future. Financings may not be available on acceptable terms, on a timely basis, or at all, and our failure to raise adequate capital when needed could negatively impact our growth plans and our financial condition and results of operations.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Contractual Obligations

The following table sets forth our contractual cash obligations and commercial commitments as of December 31, 2005.

 

     Payment Due By Period

Contractual Obligations:

   Total    Less than
1 year
   1-3 years    3-5 years    More than
5 years
     (in thousands)

Capital lease obligations

   $ 592    $ 203    $ 382    $ 7    $

Notes payable

     96      96               

Operating lease obligations

     1,723      694      1,029          

Commitments under capital leases obligations relate to our leases for telephone and computer equipment, and the operating lease obligations for our principal facility in Carson, California.

 

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Quantitative and Qualitative Disclosures about Market Risk

We do not use financial instruments for trading purposes, and do not hold any derivative financial instruments that could expose us to significant market risk. Our primary market risk exposure with regard to financial instruments is changes in interest rates. We also have some exposure related to foreign currency fluctuations.

Interest Rate Risk . Pursuant to the terms of our term loans and line of credit with our principal lender, changes in the monthly LIBOR rate could affect the existing rate of our outstanding loans and the rates at which we could borrow funds under our line of credit. At September 30, 2006, we had outstanding borrowings in the aggregate amount of $30.0 million under our term loans with our principal lender and none outstanding under our line of credit with this lender. Additionally, we had outstanding borrowings in the aggregate amount of $5.0 million under the notes to the former Partsbin stockholders. A 1% increase or decrease in LIBOR would result in a $350,000 increase or decrease, respectively, in interest expense related to these outstanding borrowings.

Foreign Currency Risk . Our purchases of auto parts from our Asian suppliers are denominated in U.S. dollars, however, a change in the foreign currency exchange rates could impact our product costs over time. While our Philippine operational expenses are paid in Philippine pesos, and Canadian website sales are denominated in Canadian dollars, fluctuations in currency rates have only had a nominal impact on our operations historically.

Change in Accountants

On October 11, 2005, upon the authorization of our Board of Directors, we changed our independent auditors from Stonefield Josephson, Inc. to Ernst & Young LLP. During the years ended December 31, 2004 and 2003, and the subsequent period from January 1, 2005 to October 11, 2005, Stonefield Josephson, Inc. did not have any disagreement with us on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Stonefield Josephson, Inc., would have caused them to make reference to the subject matter of the disagreement in connection with their reports on our financial statements for such years. The reports of Stonefield Josephson, Inc. on our consolidated financial statements for the years ended December 31, 2004, 2003 and 2002 did not contain an adverse opinion or disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles. We did not consult with Ernst & Young LLP on any financial or accounting reporting matters before its appointment.

Seasonality

We believe our business is subject to seasonal fluctuations. We have historically experienced higher sales of body parts in winter months when inclement weather and hazardous road conditions typically result in more automobile collisions and an increased demand for body parts. Partsbin, with its focus on engine parts, performance parts and accessories, has historically experienced higher sales in the summer vacation months when consumers have more time to undertake elective projects to maintain and enhance the performance of their automobiles and the warmer weather during that time is conducive for such projects. We expect the historical seasonality trends to continue to have a material impact on our financial condition and results of operations.

Inflation

Inflation has not had a material impact upon our operating results, and we do not expect it to have such an impact in the near future. We cannot assure you that our business will not be so affected by inflation in the future.

 

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Internal Controls Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting and for the timeliness and reliability of the information disclosed. During 2006, we have been documenting and reviewing the design and effectiveness of our internal controls over financial reporting in anticipation of the requirement to comply with Section 404 of the Sarbanes-Oxley Act. Based on current regulations, we are required to be compliant with Section 404 for the year ending December 31, 2008. Continuous review and monitoring of our business processes will likely identify other possible changes to our internal controls in the future. If we are unable to comply with Section 404 of the Sarbanes-Oxley Act, our share price may be negatively impacted. In addition, we expect our general and administrative expenses to increase substantially as we incur expenses associated with comprehensively analyzing, documenting and testing our system of internal control over financial reporting in anticipation of our compliance with Section 404 of the Sarbanes-Oxley Act.

 

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BUSINESS

Overview

We are a leading online provider of aftermarket auto parts, including body parts, engine parts, performance parts and accessories. Our user-friendly websites provide customers with a comprehensive selection of approximately 550,000 SKUs with detailed product descriptions and photographs. We have developed a proprietary product database which maps our 550,000 SKUs to over 4.3 million product applications based on vehicle makes, models and years. We principally sell our products to individual consumers through our network of websites and online marketplaces. Our flagship websites are located at www.partstrain.com and www.autopartswarehouse.com . Our corporate website is located at www.usautoparts.com .

Our online sales channel and relationships with suppliers enable us to eliminate several intermediaries in the traditional auto parts supply chain, allowing us to acquire many of our products directly from manufacturers and sell them to our customers. Additionally, as an online retailer, we do not incur many of the costs associated with operating brick and mortar stores. We believe that our ability to disintermediate the auto parts supply chain, combined with our efficient e-commerce platform, enables us to sell products at competitive prices while achieving higher operating margins and return on invested capital than many traditional automotive parts retailers.

Our business has grown consistently since we launched our first website in 2000. In the year ended December 31, 2005 and the nine months ended September 30, 2006, we generated net sales of $59.7 million and $83.7 million, respectively. In the year ended December 31, 2005 and for the nine months ended September 30, 2006, we generated net income of $6.8 million and $3.5 million, respectively. During the same periods, we also generated Adjusted EBITDA of $8.8 million and $10.2 million, respectively. In addition, we have experienced continued growth in the number of monthly unique visitors to our websites. In September 2006, approximately 6.8 million unique visitors visited our websites. The number of orders placed through all of our e-commerce websites has also increased from approximately 288,000 orders for the year ended December 31, 2005 to approximately 505,000 orders for the nine months ended September 30, 2006. The average order value of purchases on our websites for the nine months ended September 30, 2006 was approximately $120.

We were incorporated in 1995 as a distributor of aftermarket auto parts and launched our first website in 2000. We rapidly expanded our online operations, increasing the number of SKUs sold through our e-commerce network, adding additional websites, improving our Internet marketing proficiency, and commencing sales on online marketplaces. In May 2006, we acquired Partsbin, an online retailer focused on selling engine parts and performance parts and accessories. This acquisition significantly expanded our product offerings and enhanced our ability to reach more customers and attain greater flexibility in our fulfillment operations.

Industry Overview

Growth in the Aftermarket Auto Parts Market

According to the AAIA’s 2006/2007 Aftermarket Factbook , the United States automotive aftermarket industry is projected to be $204 billion in 2006. Our addressable market is forecasted by AAIA to be approximately $91.3 billion in 2006, which consists of approximately $37.8 billion in sales to the Do-It-Yourself (“DIY”) customers, who independently maintain, repair or improve their vehicles, and $53.5 billion in sales to the Do-It-For-Me (“DIFM”) segment, which includes sales to entities such as collision and repair shops.

 

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We believe industry growth has been driven by several factors, including the:

 

  Ÿ   increased number and age of vehicles in the United States and increased number of miles driven annually;

 

  Ÿ   increased number of licensed drivers; and

 

  Ÿ   increased demand for performance auto parts.

While the U.S. auto parts aftermarket is characterized by modest growth, we believe there is an opportunity for e-commerce aftermarket auto part retailers to grow faster than the overall market due to consumer trends related to the Internet and e-commerce.

Growth of e-Commerce and Online Purchasing

Internet use and online commerce continue to grow worldwide. According to a September 2005 research report, US eCommerce: 2005 to 2010 issued by Forrester Research, online purchases by U.S. consumers are expected to grow from approximately $172 billion in 2005 to approximately $329 billion by 2010, representing a 13.9% compound annual growth rate. We believe several factors will contribute to this anticipated growth, including the increased awareness of the convenience, selection and product information available through online shopping, continued improvement in network infrastructure and payment security and growing access to high speed Internet connections that make online shopping increasingly efficient and attractive to consumers. According to Nielsen/NetRatings, broadband use at home has surpassed dial-up connectivity in the U.S., reaching 72% of residential Internet users in May 2006. In addition, the percentage of U.S. households shopping online is projected to grow from 39% in 2005 to 48% in 2010, according to Forrester Research.

As a percentage of overall retail sales, e-commerce sales today remain relatively small, having grown from 0.9% in the second quarter of 2000 to 2.3% in the second quarter of 2005 according to the U.S. Department of Commerce. However, e-commerce growth continues to increase at a much faster rate than overall retail sales growth. The U.S. Department of Commerce recently reported that online retail sales increased from $27.6 billion in 2000 to $87.8 billion in 2005, representing a 26.1% compound annual growth rate, compared to 4.5% for the overall retail market. According to Forrester Research, e-commerce sales are expected to represent a 13% share of total retail sales by 2010 as Internet and e-commerce growth trends continue to drive a shift from traditional sales channels to online sales channels.

In 2006, the online and mail order portion of aftermarket auto part sales is forecasted to be $2.7 billion according to the AAIA. While the portion of online and mail order sales is a relatively small percentage of our addressable market at approximately 3%, we believe online penetration rates of aftermarket auto parts consumers will continue to increase. As a result, we anticipate that sales for online aftermarket auto parts will continue to grow at a faster rate than the sales in the overall auto parts market.

Market Opportunity

The auto parts market has traditionally been fragmented and inefficient, with multiple intermediaries including importers, distributors and wholesalers between manufacturers and consumers. The involvement of each additional middleman typically leads to an increase in the price that a customer pays for a particular part. Furthermore, auto parts retailers who operate brick and mortar stores generally stock only a small percentage of the products that are available for sale. As a result, consumers must often visit several retailers to find a part or have a retailer order the part for future delivery.

The fragmented nature of the auto parts market has also meant an absence of a centralized database or a comprehensive, master catalog of products, which maps all aftermarket auto parts to all relevant applications

 

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for such parts, including applicable OEM part numbers. This inadequacy of information leads to inefficiencies in the sale and purchase process for both the retailer and the consumer, especially in view of the multiple makes, models and years of various vehicles for which parts are available.

Our Solution

We believe our solution addresses the problems faced in the traditional auto parts market and provides additional benefits for our customers. The key components of our solution include:

Disintermediation of the Auto Parts Supply Chain

We have developed an online sales channel that enables us to sell aftermarket auto parts to our customers while eliminating several intermediaries in the traditional auto parts supply chain. Traditional purchases of auto parts typically involve manufacturers, importers, wholesalers, distributors and retailers. We disintermediate the traditional auto parts supply chain by either obtaining products directly from manufacturers or sourcing products directly from wholesalers to fulfill customer orders. Disintermediating the traditional supply chain allows us to offer auto parts to our customers at competitive prices and allows us to more efficiently deliver products to our customers while generating higher profit margins.

The following diagram illustrates how we disintermediate the traditional supply chain:

LOGO

Leading Network of Websites

We have developed a network of websites to offer our broad selection of aftermarket auto parts. Our flagship websites for e-commerce are located at www.partstrain.com and www.autopartswarehouse.com . Our websites allow customers to search for parts in several ways, including by automobile make, model and year, by specific part name such as bumper or mirror, or by product category such as body or engine part. Our websites also include detailed product information, photographs and other online content, including informative articles and answers to frequently asked questions, in order to enhance the shopping experience. We believe that by providing an intuitive online shopping experience combined with useful auto part information and content, we are able to cost-effectively attract an increasing number of visitors to our sites, maintain high levels of customer satisfaction among our existing customers, and reduce the number of product returns and exchanges.

 

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Proprietary Product Catalog

We have invested significant resources and time over several years to build a proprietary product catalog, or electronic database, that maps SKUs to relevant applications for such parts, correlating the SKUs to applicable vehicle makes, models and years. We conduct our own research and testing as well as aggregate information from both offline and online data sources in order to accurately correlate SKUs to relevant vehicle makes, models and years. We have also developed proprietary technology and have trained personnel to compile and continuously update our product catalog. By creating a master catalog of individual auto parts and accessories mapped to multiple vehicle makes, models and years, we increase our sales potential while reducing inventory management expense. We believe that there is no other online catalog of aftermarket body parts, engine parts, performance parts and accessories currently available that offers the same breadth, accuracy and detail.

Flexible Fulfillment Methods

We fulfill customer orders using two primary methods: (i) stock-and-ship, where we take physical delivery of a part and store it in one of our distribution centers until it is shipped to a customer, and (ii) drop-ship, where the part is shipped directly to the customer from the supplier. We believe that the flexibility of fulfilling orders via two different fulfillment methods allows us to offer a broader selection of products, optimize product inventory, determine optimal pricing and enhance overall business profitability.

Low Cost Operations

Our offshore and outsourced operations in the Philippines and India allow us to access a qualified workforce at a significantly lower cost than comparably experienced U.S.-based professionals and provide us with flexibility and scalability in managing our operations. Our offshore and outsourced operations are responsible for a majority of the development and maintenance of our websites, continuous updates to our product catalog, software development, enhancements of our online marketing technologies and customer service.

Long-Standing Supplier Relationships

We source products from manufacturers and distributors located in Asia and the United States. We have developed strong relationships with our suppliers, some of whom have been working with us for over a decade. Many of our aftermarket products are available from more than one supplier, and we secure secondary sources for most of our top selling products. We continually research and analyze our market to understand how our suppliers are changing their product mix, part availability and pricing. Our supplier relationships and our understanding of the market enable us to set competitive pricing for our products and ensure product availability.

Benefit to Customers

We believe our solution provides multiple benefits to our customers, including:

 

  Ÿ   Broad Product Selection and Availability. Our proprietary product catalog provides our customers with the ability to select from approximately 550,000 SKUs that correlate to over 4.3 million product applications, based on vehicle makes, models and years. A majority of our products are readily available and in stock, either in our distribution center or from our suppliers, providing convenient one-stop shopping for the customer.

 

  Ÿ   Competitive Pricing. We are able to offer our customers lower prices relative to OEM parts retailers and traditional aftermarket retailers by eliminating several intermediaries in the aftermarket auto parts supply chain, leveraging our long-term supplier relationships and establishing an efficient online cost structure that capitalizes on relatively inexpensive labor.

 

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  Ÿ   Prompt Order Fulfillment. Our proprietary order fulfillment system allows us to efficiently process and ship items from our distribution centers or from our suppliers, ensuring timely delivery of products to our customers. Additionally, our customers are generally provided with the option to receive standard ground or expedited shipping.

 

  Ÿ   Detailed Product Information. We provide detailed product descriptions and photographs, specific vehicle applications, part numbers for aftermarket parts, pricing information and related part and brand suggestions for the parts offered on our websites. Providing comprehensive product information enables our customers to make an informed purchasing decision on every order.

 

  Ÿ   Satisfying Shopping Experience and Knowledgeable Customer Service. Our easy to navigate websites are accessible from the convenience of the customer’s home or office or anywhere with an Internet connection. Our customer support staff is available to provide assistance to our customers throughout the purchase process 24 hours a day, seven days a week, via phone, live-chat or e-mail. We believe our user-friendly websites and dedicated customer support staff create a positive shopping experience.

Our Growth Strategy

Our primary objective is to continue our growth and to strengthen our position as a leading online provider of aftermarket auto parts. The key elements of our strategy are as follows:

 

  Ÿ   Expand Our Product Offering. We will continue to expand our product selection by adding new SKUs from existing suppliers, adding new suppliers and optimizing our distribution centers to create additional capacity for new items. We also intend to add new categories of products, including specialty or niche categories.

 

  Ÿ   Cost-Effectively Increase the Number of Visitors to Our Websites. We intend to increase the number of visitors to our websites by continuing to enhance our site content and layout, so that our websites will be included as a relevant search result when consumers use Internet search engines to find aftermarket auto parts, as well as through a variety of cost-effective online marketing techniques.

 

  Ÿ   Increase Our Visitor Conversion Rate. We seek to increase the rate of conversion of visitors to our websites into purchasing customers by continuing to provide detailed information and photographs about products, improving our existing website designs and online purchase processes, and continuing to focus on customer service.

 

  Ÿ   Increase Repeat Customers. We intend to enhance and improve the overall customer shopping experience while offering a broad selection of products at competitive prices, which we believe is a key to increasing repeat customers. We plan to continue to invest in the training and development of our customer service personnel, focus on rapid and accurate fulfillment of orders and further enhance the features and functionality of our websites. We will also make greater efforts to mine our existing customer base through promotional discounts and programs.

 

  Ÿ   Expand e-Commerce Distribution Channels. We plan to build and strengthen partnerships with auction sites, large online marketplaces, complementary niche websites and comparison shopping sites in order to expand the distribution channels for our products.

 

  Ÿ   Pursue Strategic Acquisitions that Augment Our Business. We intend to selectively pursue acquisition opportunities to increase our share of the aftermarket auto parts market and expand our product offering. We plan to focus our efforts on companies that offer us new or complementary areas of expertise, additional customers or more SKUs in our existing product categories.

 

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Our Products

We offer a broad selection of aftermarket auto parts, consisting of approximately 550,000 SKUs that correlate to over 4.3 million product applications based on specific vehicle makes, models and years. We continuously refine our product offering by introducing new merchandise lines and optimize the existing product selection in order to offer a more complete and relevant product line. To increase our product selection, we identify vehicle markets that offer a large number of product choices by application, brand and levels of quality. We periodically identify and remove low-selling or obsolete SKUs.

We broadly classify our products into three categories — body parts, engine parts and accessories. The following table lists some of our products by category:

 

Body Parts

  

Engine Parts

  

Accessories

Bumpers

Fenders

Grills

Hoods

Lights

Mirrors

Wheels

Window regulators

  

Air filters

Brakes

Catalytic converters

Clutch parts

Cold air intake

Condensers

Exhaust systems

Radiators

  

Bike racks

Car covers

Floor mats and carpeting

Gauges

Headers

Navigation systems

Nerf bars

Spoilers

Body Parts

The body parts category is primarily comprised of parts for the exterior of an automobile. Our parts in this category are typically replacement parts for original body parts that have been damaged as a result of a collision or through general wear and tear. In addition, we sell an extensive line of mirror products, including our own private-label brand called Kool-Vue, which are marketed and sold as aftermarket replacement parts and as upgrades to existing parts. Body parts products are sold either primed or raw, which require additional steps such as priming and painting in order to create a finished product. We also provide the necessary components to install our products, such as mounting kits and strut assemblies.

Engine Parts

The engine parts category is comprised of engine components and other mechanical and electrical parts, which are often referred to as hard parts. These parts serve as replacement parts for existing engine parts and are generally used by professionals and do-it-yourselfers for engine and mechanical maintenance and repair.

Accessories

The accessories category generally consists of parts that enhance a non-essential functionality, increase comfort or improve the physical appearance of the automobile’s interior or exterior. Our accessories are often used by our customers to make upgrades to the look and comfort of their automobiles.

Performance Parts

We offer performance versions of many parts sold in each of the above categories. Performance parts generally consist of parts that enhance the performance of the automobile, upgrade existing functionality of a specific part or improve the physical appearance of the automobile.

 

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Warranty

We generally provide, at no cost to our customers, a warranty on all parts for a period of up to 90 days from the date that the part is received by the customer. Our warranty covers the replacement of a defective part, and if a replacement part cannot be obtained, a full refund is issued to the original customer.

Our Proprietary Product Catalog

We have invested significant resources and time to build a proprietary product database that maps SKUs to relevant vehicle makes, models and years for such product. For example, a bumper for a Chevy Tahoe not only fits a Tahoe, but also can be used for the Suburban. By cross-referencing each SKU with all the relevant years, makes and models, we believe we are able to reach a broader market of customers for any given SKU. We have spent years compiling and continuously updating our catalog through a manual and time-consuming process, including researching offline and online resources, conducting our own testing, correlating single SKUs to multiple vehicle makes, models and years, producing descriptive content for each individual SKU and obtaining professional-quality photographs of the products. We believe that there is no other aftermarket product catalog with the same breadth, accuracy and detail.

The development, ongoing maintenance and continual updating of our product catalog is a complex, multi-step process. Each new SKU has multiple data points and product details, such as OEM part numbers and referenced application databases, all of which are entered into our catalog. Additionally, we receive SKU information from our suppliers in varying file formats, and sometimes via hard copy. Each SKU must undergo a quality assurance review, to ensure that data is entered accurately. The database is maintained in a web-based platform that is accessible from both our headquarters and our offshore operations. We frequently update our product catalog as we add new SKUs to our product offering and as we discover new applications for existing SKUs.

Our Sales Channels

Our sales channels include the online channel and the wholesale channel.

Online Sales Channel

Our online sales channel consists of our e-commerce channel and online marketplaces. Our e-commerce channel includes a network of e-commerce websites, supported by our call-center sales agents who generate cross-sell and up-sell opportunities. Our e-commerce channel generated approximately 288,000 orders for the year ended December 31, 2005 and approximately 505,000 orders for the nine months ended September 30, 2006. We also sell our products through our online marketplaces that provide us with access to additional consumer segments not reached by our network of e-commerce websites. The majority of our online sales are to individual consumers.

Wholesale Sales Channel

We sell to auto body shops and collision repair shops throughout Southern California via our wholesale sales channel. We also market our Kool-Vue products nationwide to auto parts wholesale distributors.

Our Fulfillment Operations

We fulfill customer orders using two primary methods: (i) stock-and-ship, where we have physical delivery of merchandise and store it in one of our distribution centers, and (ii) drop-ship, where merchandise is shipped directly to customers from our drop-ship suppliers. We believe that the flexibility of

 

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fulfilling orders using two different fulfillment methods allows us to offer a broader product selection, optimize product inventory and enhance overall business profitability.

The selection of fulfillment methodology occurs at the time of order submission. When a customer submits an order, an invoice with an order number is created. Our fulfillment system then performs a check on the ordered item to determine if it is in stock at any of our distribution centers. Fulfillment teams in our distribution centers then process orders for in-stock products. Orders for non-stocked products are sent to our suppliers and processed via drop-ship. Our proprietary order processing technology allows us to monitor customer orders at each stage of the fulfillment process, from the time the customer places an order until the product is delivered, and provides us with real-time visibility into our inventory, logistics, procurement processes and sales activity.

Stock-and-Ship Fulfillment

Our stock-and-ship products are sourced primarily from suppliers located in Asia and the U.S. and are stored in one of our distribution centers in Carson, California or Nashville, Tennessee. All products received into our distribution centers are entered into our proprietary inventory tracking system, allowing us to closely monitor inventory status on a real-time basis.

We consider a number of factors in determining which items to stock in our distribution centers, including which products can be purchased at a meaningful discount to domestic prices for similar items, which products have historically sold in high volumes, and which products may be out of stock when we attempt to fulfill via drop-ship.

Drop-Ship Fulfillment

We have developed relationships with several U.S.-based automobile parts distributors that operate their own distribution centers and will deliver products directly to our customers. We have internally developed a proprietary distributor selection system, Auto-Vend, which combines product and pricing information provided by each of our drop-ship distributors to create an aggregated view of in-stock items and pricing at our distributors’ fulfillment facilities.

Using the drop-ship method, a customer order for an item that is not in stock in our distribution center is automatically transmitted to the Auto-Vend system, which will seek to fill the order from our selection of distributors. The Auto-Vend system selects the distributor to fill the order based on predetermined set of factors, including price of the item, discounts provided and shipping costs.

Suppliers

We source our products from foreign manufacturers and importers located in Taiwan and China, and from U.S. manufacturers and distributors. We typically order stock-and-ship products from our Asian manufacturers and importers, and utilize our U.S. based manufacturers and distributors for our drop-ship orders. We generally place large-volume orders with these suppliers and, as a result, may receive volume discounts on ordered products. Our domestic suppliers offer direct-to-customer shipping, allowing us to save on fulfillment costs and offer a broader selection of products. We have developed application programming interfaces systems with several of these suppliers which allow us to have near real-time information regarding their inventory and pricing, allowing us to determine the optimal drop-ship vendor for each order. We are a significant customer for many of our drop-ship vendors and have long standing relationships with many of these suppliers. As a result, we enjoy favorable pricing as well as volume rebates which we believe many of our competitors do not receive.

 

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Marketing

Our online marketing efforts are designed to attract visitors to our websites, convert visitors into purchasing customers and encourage repeat purchases among our existing customer base. We use a variety of online marketing methods to attract visitors, including paid search advertising, search engine marketing, affiliate programs, e-mail marketing and inclusion in online shopping engines. To convert visitors into paying customers, we also run in-site promotions for discounted purchases. We create cross-selling opportunities by displaying complementary and related products available for sale throughout the purchasing process. For instance, as a customer places an order for a bumper, we offer the bumper brackets needed to complete installation of the specific product. We utilize several marketing techniques, including targeted e-mails about specific vehicle promotions, to maximize customer awareness of our products.

International Operations

We have established offshore and outsourced operations in the Philippines and India. Our offshore and outsourced operations allow us to access a workforce with the necessary technical skills at a significantly lower cost than comparably experienced U.S.-based professionals. Our offshore and outsourced operations are responsible for a majority of our software development, database management, customer service, phone sales, and search engine marketing technologies. Our outsourced operations provide headcount flexibility and scalability, allowing us to add and reduce headcount as needed for our business. In addition to our operations in the Philippines and India, we also have a Canadian subsidiary to facilitate sales of our products in Canada.

Technology

Over the past ten years, we have developed the technological competencies to procure, receive, inventory, market and sell auto parts on the Internet. The processes that support our core business operate on two primary technology platforms.

Our websites are developed on the LAMP stack, running Linux, Apache, MySQL and PHP, enabling us to rapidly develop, test and deploy websites and our proprietary product catalog, while reducing total cost of ownership and improving performance. We have implemented and maintain proprietary application programming interfaces (“APIs”) with all of our significant drop-ship vendors. These APIs provide us with visibility into inventory availability, pricing, shipping and purchasing information from these vendors.

Our purchasing, receiving, financial, reporting, inventory, warehouse and order management systems are developed and deployed on a scalable back-office platform and run on Microsoft technologies such as SQL Server and Dynamics GP with customizations that enhance their capabilities to our specific needs. Our system provides us with a reliable and robust back-end that maintains an audit trail of all transactions and changes to financial data and provides our management with real-time insight into our daily operations. The majority of our technology is developed in-house, which provides for rapid development and better response to the specific requirements of our business and customers. We have designed and implemented web-based interfaces to monitor, maintain and manage the various software components that form the foundation of our technology infrastructure. Our interfaces are a powerful management tool that can be accessed from anywhere in the world through the Internet.

We plan to expand and upgrade our information technology infrastructure to further support our growth by adding more servers, additional data warehousing/reporting applications and augmenting our inventory, order and vendor management applications.

Our data centers, engineers, quality assurance personnel, content writers and development teams are located in various facilities in Carson, California, Trenton, New Jersey, Chennai, India and the Philippines.

 

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We operate a sophisticated and redundant international communications infrastructure that provides a reliable and highly scalable medium, as well as our call-centers that answer our customers’ phone calls, chat and e-mails.

Competition

The auto parts industry is competitive and highly fragmented, with products distributed through multi-tiered and overlapping channels. We compete with both online and offline retailers who offer OEM and aftermarket parts to either the DIY or DIFM customer segments. Current or potential competitors include the following:

 

  Ÿ   national auto parts retailers such as Advance Auto Parts, AutoZone, CSK Auto, Napa Auto Parts, O’Reilly Automotive and Pep Boys;

 

  Ÿ   large online marketplaces such as Amazon.com and eBay;

 

  Ÿ   local independent retailers or niche auto parts retailers; and

 

  Ÿ   wholesale auto parts distributors such as Keystone Automotive and LKQ Corporation.

We believe the principal competitive factors in our market are maintaining a proprietary product catalog which maps individual parts to relevant auto applications, product selection and availability, price, knowledgeable customer service, and rapid order fulfillment and delivery. We believe we compete favorably on the basis of these factors. However, some of our competitors may be larger, have greater name recognition or may have access to greater financial, technical and marketing resources or have been operating longer than we have.

Government Regulation

We are subject to federal and state consumer protection laws, including laws protecting the privacy of customer non-public information and regulations prohibiting unfair and deceptive trade practices. In addition, since 1998, most states have passed laws that prohibit or limit the use of aftermarket auto parts in collision repair work and/or require enhanced disclosure or vehicle owner consent before using aftermarket auto parts in such repair work. Additional legislation of this kind may be introduced in the future, and the growth and demand for online commerce has and may continue to result in more stringent consumer protection laws that impose additional compliance burdens on online companies. These laws may cover issues such as user privacy, spyware and the tracking of consumer activities, marketing e-mails and communications, other advertising and promotional practices, money transfers, pricing, content and quality of products and services, taxation, electronic contracts and other communications and information security.

There is also great uncertainty over whether or how existing laws governing issues such as property ownership, sales and other taxes, auctions, libel and personal privacy apply to the Internet and commercial online services. These issues may take years to resolve. For example, tax authorities in a number of states, as well as a Congressional advisory commission, are currently reviewing the appropriate tax treatment of companies engaged in online commerce, and new state tax regulations may subject us to additional state sales and income taxes. 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 commercial online services could result in significant additional taxes or regulatory restrictions on our business. These taxes or restrictions could have an adverse effect on our cash flows and results of operations. Furthermore, 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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Employees

As of September 30, 2006, we employed 219 people in the United States and 215 people in the Philippines for a total of 434 employees. None of our employees are represented by a labor union, and we have never experienced a work stoppage.

Facilities

Our corporate headquarters and primary distribution centers are located in Carson, California in approximately 153,000 square feet of office and warehouse space. We have additional management, sales, technical and accounting staff at our Trenton, New Jersey office and another 10,000 square-foot distribution center in Nashville, Tennessee. We lease approximately 12,900 square feet of office space in the Philippines for our employees located in that country. We lease all of our facilities under leases which expire between December 31, 2006 and March 31, 2009. We believe our existing facilities will be sufficient for our needs for at least the next twelve months.

Legal Proceedings

On December 2, 2005, Ford Global Technologies, LLC (“Ford”) filed a complaint with the United States International Trade Commission (“USITC”) against us and five other named respondents, including four Taiwan-based manufacturers. On December 12, 2005, Ford filed an amended complaint. Both the complaint and the amended complaint allege that we and the other respondents infringed 14 design patents that Ford alleges cover eight parts on the 2004-2005 Ford F-150 truck (the “Ford Design Patents”). Ford has asked the USITC to issue a permanent general exclusion order excluding from entry into the United States all automotive parts that infringe the Ford Design Patents and that are imported into the United States, sold for importation in the United States, or sold within the United States after importation. Ford also seeks a permanent order directing us and the other respondents to cease and desist from, among other things, selling, marketing, advertising, distributing and offering for sale imported automotive parts that infringe the Ford Design Patents. We filed our response to the complaint with the USITC in January 2006 denying, among other things, that any of the Ford Design Patents is valid and/or enforceable and, accordingly, denying each and every allegation of infringement. We also asserted several affirmative defenses, any of which, if successful, would preclude the USITC from granting any of Ford’s requested relief. Some of these affirmative defenses were struck by the Administrative Law Judge (“ALJ”) in response to a motion by Ford, but we expect that these interlocutory rulings will eventually be reviewed by the USITC Commissioners following the ALJ’s ruling on the overall investigation. Additionally, the ALJ has recently granted Ford’s request to drop four patents from the investigation. A hearing before the ALJ occurred in August 2006, and the deadline for the ALJ’s ruling is December 4, 2006. The deadline for a determination by the USITC is March 5, 2007. We will continue to vigorously defend this action. To date, our sales of these parts have been minimal, but as the design for the 2004 model is incorporated into later year models of the F-150 and these trucks have been on the road longer, sales of aftermarket replacement parts for these trucks may increase substantially. If the USITC were to uphold each of the remaining ten design patents in question, it is not anticipated that the loss of sales of these parts over time would be materially adverse to our financial condition or results of operations. However, depending upon the nature and extent of any adverse ruling, other car manufacturers may attempt to assert similar allegations based upon design patents on a significant number of parts for several of their models, which over time could have a material adverse impact on the entire aftermarket parts industry.

From time to time, we may be subject to other legal proceedings and claims in the ordinary course of our business, including claims based on pricing errors and/or other errors in product information or advertisements. These claims, even if not meritorious, could be costly and time consuming and could divert

 

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our management and key personnel from our business operations. In connection with such litigation, we may be subject to significant damages or equitable remedies relating to the operation of our business and the sale of products on our website. The uncertainty of litigation increases these risks. Any such litigation may materially harm our business, results of operations and financial condition.

 

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MANAGEMENT

Executive Officers and Directors

The following table provides information with respect to our directors, executive officers and certain significant employees as of September 30, 2006.

 

Name

   Age   

Position(s)

Sol Khazani (2)

   47    Co-Founder and Chairman of the Board

Mehran Nia

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

Ben Elyashar

   36    Co-Founder, Vice President, Operations and Director

Michael J. McClane

   37    Chief Financial Officer, Executive Vice President of Finance, Treasurer and Secretary

Richard Pine

   55    Vice President, East Coast Operations and Director

Alexander Adegan

   37    Chief Information Officer

Houman Akhavan

   28    Vice President of Marketing

Massoud Entekhabi (1)(2)

   52    Director

Fredric W. Harman (1)(2)

   46    Director

Warren B. Riley

   32    Director

(1)   Member of the Audit Committee
(2)   Member of the Compensation Committee
(3)   Member of the Nominating and Corporate Governance Committee

Sol Khazani is a co-founder of U.S. Auto Parts and has been our Chairman of the Board since January 2001. Mr. Khazani also served as our Chief Financial Officer from January 2001 to April 2005 and as a Vice President from October 1995 to January 2001. Since 1995, Mr. Khazani has served as the Vice President of American Condenser, Inc., a company that he co-founded which manufactures air-conditioning condensers for automotive and industrial applications. In 1995, Mr. Khazani founded Kool-Vue, an importer and distributor of automotive replacement mirrors, and served as its president from 1995 until 2002. Mr. Khazani holds a B.S. degree in accounting and an M.B.A. from National University in San Diego.

Mehran Nia is a co-founder of U.S. Auto Parts and has been our Chief Executive Officer and President and a director since October 1995. From October 1995 to January 2001, Mr. Nia also served as our Chief Financial Officer. Mr. Nia holds a B.A. degree in biology from San Diego State University.

Ben Elyashar is a co-founder of U.S. Auto Parts and has served as our Chief Operating Officer since February 2006, our Vice President, Operations since October 2006, and has served as a director, our Secretary and in various other operational positions with us since October 1995. Mr. Elyashar holds a B.S. degree in biology from California State University, Northridge.

Michael J. McClane has been our Chief Financial Officer, Vice President of Finance and Treasurer since September 2005 and became our Executive Vice President, Finance and our Secretary in October 2006. From June 2003 to June 2005, Mr. McClane served as the Chief Financial Officer of Storecast Merchandising Corporation, a nationwide provider of merchandising services. From February 2000 to March 2003, Mr. McClane served as the Vice President of Finance and Corporate Development of FASTNET Corporation, a NASDAQ listed provider of Internet services, and he served as its controller from August 1999 to February 2000. From 1992 to 1999, Mr. McClane was an accountant in the enterprise audit group with Arthur Andersen LLP, a certified public accounting firm. Mr. McClane is licensed as a certified public accountant and holds a B.A. degree in business economics with an accounting concentration from the University of California, Santa Barbara.

 

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Richard Pine has been our Vice President, East Coast Operations since May 2006 and a director since June 2006. Mr. Pine was a co-founder and the Chief Executive Officer of Partsbin, a distributor of aftermarket automobile parts, from December 2000 until we acquired Partsbin in May 2006. From 1995 to 1996, Mr. Pine also operated TheBenzBin, a company that he co-founded which specialized in the sale and distribution of automobile replacement parts for Mercedes-Benz automobiles. From 1980 to 1995, Mr. Pine was the proprietor of CarMedic, an automotive repair facility. Mr. Pine holds a B.S. degree in management and an M.B.A. from the University of Dayton.

Alexander Adegan has been our Chief Information Officer since May 2006. From January 2000 to May 2006, Mr. Adegan served as the founder, President and Chief Executive Officer of uParts, Inc., a developer of electronic networks for auto parts suppliers, repair facilities and insurance companies. From August 1996 to September 1999, Mr. Adegan served as President of Legend Software, Inc., a company he founded that developed and distributed software applications for technical and fundamental analysis of mutual funds, indexes, equities, and derivatives. Mr. Adegan holds a B.S. degree in computer science from the University of Maryland at College Park.

Houman Akhavan has been our Vice President of Marketing since January 2006. From February 2000 to July 2004, Mr. Akhavan served as the founder and Chief Strategy Officer of Edigitalweb, Inc., an online marketing and software development firm. Edigitalweb’s clients included U.S. Auto Parts and Partsbin. From August 2004 to December 2005, Mr. Akhavan continued to serve as a consultant to U.S. Auto Parts.

Massoud Entekhabi has been a director since June 2006. Since January 2004, Mr. Entekhabi has served as the managing director of Zenith Equity Partners, a private equity firm. Prior to that, from July 2000 to December 2003, Mr. Entekhabi served as Managing Director of TL Ventures, a venture capital firm. From September 1973 to July 2000, Mr. Entekhabi was employed by PricewaterhouseCoopers LLP (and its predecessor, Coopers & Lybrand LLP), where he was a partner from 1987 to July 2000. From January 2005 to September 2005, Mr. Entekhabi served as a director of Fastclick, Inc., a provider of Internet advertising technologies and services. Mr. Entekhabi currently serves as a director and chairman of the audit committee of Gmarket, Inc., a Korean e-commerce marketplace, and as a director of Ixia, a provider of IP network testing solutions. Mr. Entekhabi is licensed as a certified public accountant.

Fredric W. Harman has been a director since March 2006. Mr. Harman is a Managing Partner of Oak Investment Partners, a venture capital firm, which he joined as a General Partner in 1994. From 1991 to 1994, Mr. Harman served as a General Partner of Morgan Stanley Venture Capital. Mr. Harman currently serves as a director of Internap Network Services Corporation, an Internet infrastructure company, and several privately held companies. Mr. Harman holds B.S. and M.S. degrees in electrical engineering from Stanford University and an M.B.A. from the Harvard Business School.

Warren B. Riley has been a director since March 2006. Mr. Riley has served as a General Partner of Oak XII, a venture capital fund, since May 2006, and was an associate of Oak Investment Partners from October 1999 to May 2006. From July 1996 to October 1999, Mr. Riley was a senior associate with Robertson Stephens, a technology-focused investment bank. Mr. Riley holds a B.A. degree in government from Dartmouth College.

Messrs. Khazani and Nia are brothers-in-law. Mr. Nia is also the cousin of Mr. Elyashar. Other than the relationships between Messrs. Khazani, Nia and Elyashar, there are no other family relationships among any of our directors or executive officers.

 

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Classified Board of Directors

Our board of directors currently consists of seven members. All directors hold office until their successors have been elected and qualified or until their earlier death, resignation, disqualification or removal. Effective upon the closing of this offering, we will divide the terms of office of the directors into three classes:

 

  Ÿ   Class I, whose term will expire at the annual meeting of stockholders to be held in 2007;

 

  Ÿ   Class II, whose term will expire at the annual meeting of stockholders to be held in 2008; and

 

  Ÿ   Class III, whose term will expire at the annual meeting of stockholders to be held in 2009.

Upon the closing of this offering, Class I shall consist of Messrs.              and             , Class II shall consist of Messrs.              and             , and Class III shall consist of Messrs.             ,              and             . At each annual meeting of stockholders after the initial classification, the successors to directors whose terms will then expire serve from the time of election and qualification until the third annual meeting following election and until their successors are duly elected and qualified. A resolution of the board of directors or affirmative vote of at least 66  2 / 3 % of our outstanding voting stock may change the authorized number of directors. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one third of the directors. This classification of the board of directors may have the effect of delaying or preventing changes in control or management of our company.

Board Committees

Our board of directors has an audit committee and a compensation committee and, prior to the closing of this offering, will have a nominating and corporate governance committee.

Audit Committee. Our audit committee consists of Messrs. Entekhabi and Harman. Mr. Entekhabi is an independent director, as defined in the NASDAQ Stock Market qualification standards. Mr. Entekhabi qualifies as an “audit committee financial expert” as that term is defined in the rules and regulations established by the SEC. The functions of this committee include:

 

  Ÿ   meeting with our management periodically to consider the adequacy of our internal controls and the objectivity of our financial reporting;

 

  Ÿ   meeting with our independent auditors and with internal financial personnel regarding these matters;

 

  Ÿ   pre-approving audit and non-audit services to be rendered by our independent auditors;

 

  Ÿ   engaging and determining the compensation of our independent auditors and oversight of the work of our independent auditors;

 

  Ÿ   reviewing our financial statements and periodic reports and discussing the statements and reports with our management and independent auditors, including any significant adjustments, management judgments and estimates, new accounting policies and disagreements with management;

 

  Ÿ   establishing procedures for the receipt, retention and treatment of complaints received by us regarding accounting, internal accounting controls and auditing matters;

 

  Ÿ   reviewing our financing plans and reporting recommendations to our full board of directors for approval and to authorize action; and

 

  Ÿ   administering and discussing with management and our independent auditors our Code of Ethics.

Both our independent auditors and internal financial personnel regularly meet privately with the audit committee and have unrestricted access to this committee.

 

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Compensation Committee. Our compensation committee currently consists of Messrs. Khazani, Harman and Entekhabi. Mr. Entekhabi is an independent director, as defined in the NASDAQ Stock Market qualification standards. The functions of this committee include:

 

  Ÿ   reviewing and, as it deems appropriate, recommending to our board of directors, policies, practices and procedures relating to the compensation of our directors, officers and other managerial employees and the establishment and administration of our employee benefit plans;

 

  Ÿ   exercising authority under our employee benefit plans;

 

  Ÿ   reviewing and approving executive officer and director indemnification and insurance matters; and

 

  Ÿ   advising and consulting with our officers regarding managerial personnel and development.

Nominating and Corporate Governance Committee. Our nominating and corporate governance committee is comprised of Messrs.            ,              and             . All members of the nominating and corporate governance committee are independent directors, as defined in the NASDAQ Stock Market qualification standards. The functions of this committee include:

 

  Ÿ   identifying qualified candidates to become members of our board of directors;

 

  Ÿ   selecting nominees for election of directors at the next annual meeting of stockholders (or special meeting of stockholders at which directors are to be elected);

 

  Ÿ   selecting candidates to fill vacancies of our board of directors;

 

  Ÿ   developing and recommending to our board of directors our corporate governance guidelines; and

 

  Ÿ   overseeing the evaluation of our board of directors.

Compensation Committee Interlocks and Insider Participation

None of the members of our compensation committee at any time has been one of our officers or employees. None of our executive officers currently serves, or in the past year has served, as a member of the board of directors or compensation committee of any entity that has one or more executive officers on our board of directors or compensation committee.

Director Compensation

We pay Massoud Entekhabi $12,500 per quarter for his service as a director of our company and intend to continue to pay such cash compensation to him after the consummation of this offering. We do not pay cash compensation to any of our other non-employee directors for their service as directors. We reimburse our directors for any out-of-pocket expenses in connection with attending meetings of our board of directors and committees of the board of directors. In the future, we may decide to compensate our other non-employee directors for their service on our board.

Our directors may participate in our stock option plans. In 2005, we did not grant stock options to any of our directors. In June 2006, we granted to Mr. Entekhabi an option to purchase up to 182,000 shares of our common stock at an exercise price of $5.50 per share. One third of Mr. Entekhabi’s options vest on the first anniversary of the option grant date and the balance of such options vest in 24 equal monthly installments thereafter. Any independent director who is first elected to the board of directors following this offering will be granted an option to purchase              shares of our common stock on the date of his or her initial election to the board of directors. These options will have an exercise price per share equal to the fair market value of our common stock on the date of grant and will vest over a three year period, subject to the

 

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director’s continuing service on our board of directors. The term of each option granted to a non-employee director shall be ten years. These options will be granted under our 2006 Omnibus Incentive Plan and the terms of options granted under such plan are described in more detail under “— Benefit Plans.”

Employment Contracts and Termination of Employment and Change of Control Arrangements

We entered into a five year employment agreement with Michael McClane, our Chief Financial Officer, Executive Vice President of Finance, Treasurer and Secretary, in October 2006, pursuant to which Mr. McClane’s annual salary will be at least $225,000, subject to increase from time to time at the discretion of our board of directors. Mr. McClane is also entitled to an annual discretionary bonus of up to $100,000. In the event Mr. McClane’s employment is terminated for any reason other than for cause, then we will be required to pay six months of severance to Mr. McClane if such termination occurs prior to September 18, 2007, and one year of severance if such termination occurs after September 18, 2007. Pursuant to this agreement, Mr. McClane is also entitled to participate in all of our employee benefit programs offered to other executive officers.

In 2006, Mr. McClane was granted two stock options to purchase shares of our common stock, as follows: (i) an option granted on March 1, 2006 to purchase up to 70,400 shares at an exercise price equal to $4.26 per share (which was above fair value); and (ii) an option granted on March 28, 2006 to purchase up to 444,700 shares at an exercise price equal to $4.07 per share, which was equal to the purchase price of our Series A convertible preferred stock sold in March 2006. Mr. McClane’s stock option agreements provide that in the event of an involuntary termination of Mr. McClane’s service with us within 12 months after a change in control of U.S. Auto Parts, then all unvested option shares will immediately vest and will remain exercisable until the earlier of (i) the expiration of such options, or (ii) one year after the termination of his service.

We entered into an employment agreement with Richard Pine on May 19, 2006 pursuant to which he agreed to serve as our Vice President of Operations. The agreement provides for a two-year term of employment, but we may terminate Mr. Pine’s employment at any time during such term for cause. If Mr. Pine is terminated for any reason other than for cause within the first two years of his employment, Mr. Pine is entitled to receive a severance payment equal to the remainder of his unpaid salary for the two year term. Mr. Pine’s annual salary is $200,000 subject to adjustment from time to time in accordance with our standard compensation policies. Additionally, pursuant to this agreement, Mr. Pine was granted an option to purchase up to 498,000 shares of our common stock under our 2006 Equity Incentive Plan at an exercise price of $5.50 per share. Mr. Pine is also entitled to participate in all of our sponsored employee benefit programs.

The stock option granted to Massoud Entekhabi, one of our directors, provides that the option will fully vest in the event of a change in control of U.S. Auto Parts and will continue to be exercisable until the earlier of (a) one year following the change in control or (b) the termination date of the option.

 

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Executive Compensation

The following table shows information regarding the compensation earned during the fiscal year ended December 31, 2005 by our Chief Executive Officer and our other most highly compensated executive officer whose salary and bonus exceeded $100,000 for such fiscal year. The table also includes information regarding Michael McClane, our Chief Financial Officer, who joined us in September 2005 and whose annualized compensation would have exceeded $100,000 if he had been employed at the beginning of 2005. The officers listed below will be collectively referred to as the “named executive officers” in this prospectus. We provide our named executive officers with non-cash group life and health benefits generally available to all salaried employees. These benefits are not included in the table below due to applicable Securities and Exchange Commission rules. Except as indicated below, no named executive officer received personal benefits or perquisites that exceeded the lesser of $50,000 or 10% of his total annual salary and bonus in fiscal year 2005.

Summary Compensation Table

 

                   Long-Term
Compensation
     Annual Compensation   Awards

Name and Principal Position

   Salary    Bonus    Other Annual
Compensation
  Shares of Common
Stock Underlying
Options (#)

Mehran Nia

    Co-Founder, Chief Executive Officer,

    President and Director

   $ 400,000    $    $          —  

Ben Elyashar

    Co-Founder, Vice President, Operations and Director

     300,000            

Michael J. McClane(1)

    Chief Financial Officer, Executive Vice President of Finance, Treasurer and Secretary

     46,442           10,000(2)  

(1)   Mr. McClane joined us in September 2005.

 

(2)   Consists of payment of relocation costs.

Option Grants in Last Fiscal Year

We did not grant any options to purchase shares of our common stock to any of our named executive officers in 2005. We also have not granted any stock appreciation rights.

Year-End Option Holdings

For the year ended December 31, 2005, no named executive officers held any options to purchase shares of our common stock, and no named executive officer exercised any options to purchase our common stock.

 

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Employee Benefit Plans

U.S. Auto Parts Network, Inc. 2006 Equity Incentive Plan

Our 2006 Equity Incentive Plan (the “2006 Incentive Plan”) was adopted by our board of directors and approved by our stockholders in March 2006. A total of 4,365,340 shares of our common stock have been reserved for issuance under the 2006 Incentive Plan. Under the 2006 Incentive Plan, we are authorized to grant to officers and other employees options to purchase shares of our common stock intended to qualify as incentive stock options, as defined under Section 422 of the Internal Revenue Code of 1986, and are authorized to grant to employees, consultants or independent advisors options that do not qualify as incentive stock options under the Internal Revenue Code. All options granted under the 2006 Incentive Plan have terms not exceeding ten years and are immediately exercisable but vest over time. Options granted under the 2006 Incentive Plan are not transferable by the recipient except by will or by the laws of descent and distribution. As of September 30, 2006, options to purchase 4,027,560 shares of our common stock were outstanding under the 2006 Incentive Plan at a weighted average exercise price of $4.92 per share. No further option grants will be made under the 2006 Incentive Plan after the date of the effectiveness of the registration statement of which this prospectus forms a part. Although no further options will be granted under the 2006 Incentive Plan, all outstanding options will continue to be governed by the terms and conditions of this plan.

 

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RELATED PARTY TRANSACTIONS

Since December 31, 2002, there has not been, nor is there any proposed transaction where we were or will be a party in which the amount involved exceeded or will exceed $60,000 and in which any director, executive officer, holder of more than 5% of any class of our voting securities, or any member of the immediate family of any of the foregoing persons had or will have a direct or indirect material interest, other than the compensation agreements and other agreements and transactions which are described in “Management” and the transactions described below.

Transactions with Nia Chloe Enterprises, LLC

Since November 2003, we have leased our corporate headquarters and primary warehouse and certain equipment from Nia Chloe Enterprises, LLC, an entity owned by Mehran Nia, Ben Elyashar and Sol Khazani. Mr. Khazani is our Chairman of the Board and one of our stockholders. Mr. Nia is our Chief Executive Officer, President and a director, as well as a stockholder. Mr. Elyashar is our Chief Operating Officer, a director and a stockholder. Lease payments and expenses associated with this arrangement totaled $106,000, $420,000 and $475,000 in the years ended December 31, 2003, 2004 and 2005, respectively, and $415,000 for the nine months ended September 30, 2006.

We had guaranteed Nia Chloe’s loans from two banks in the aggregate amount of $3.4 million with respect to the property that we lease from it. These guarantees were terminated in March 2006.

An unsecured, non-interest bearing loan of $94,000 was due to Nia Chloe and payable upon demand as of December 31, 2004. This loan was repaid in full in 2005. An unsecured, non-interest bearing receivable totaling $76,000 was due from Nia Chloe as of December 31, 2003 but the balance was repaid by us in 2004.

Transactions with MBS Marketing, Inc.

In June 2005, MBS Marketing, Inc., an Internet marketing company which was owned by Messrs. Khazani, Nia and Elyashar, was merged into us. Prior to the merger, MBS Marketing provided marketing services to us and received an aggregate of $10,000, $498,000 and $338,000 from us in the years ended December 31, 2003, 2004 and 2005, respectively.

Transactions with MBS Tek Corporation

MBS Tek Corporation, through which we manage certain of our international operations, was previously owned primarily by Messrs. Khazani, Nia and Elyashar. In September 2006, MBS Tek was recapitalized and Messrs. Khazani, Nia and Elyashar transferred all of their shares to us. All of the shares of MBS Tek are now held by us, except for five shares in the aggregate, representing approximately 0.1% of the total number of shares of MBS Tek outstanding, of which each of Messrs. Nia and McClane hold one share. For the year ended December 31, 2005 and for the nine months ended September 30, 2006, we paid MBS Tek an aggregate of $398,000 and $759,000, respectively, in connection with marketing, software development, sales and customer service.

Transactions with Sol Khazani and His Affiliates

Prior to November 2003, we leased our corporate headquarters and primary warehouse facility from Mr. Khazani and his spouse. Lease payments and expenses under this arrangement totaled $271,000 for the year ended December 31, 2003.

We paid American Condenser, Inc. (previously Perfect Cooling Products, Inc.), which is owned by Mr. Khazani, consulting fees for Mr. Khazani’s consulting services. Our payments for these consulting

 

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services totaled $120,000 in 2005 and $30,000 during the nine months ended September 30, 2006. Our consulting arrangement with Mr. Khazani and American Condenser was terminated in April 2006.

From time to time, we have purchased inventory from Saman, Inc., d/b/a American Condenser, which is owned by Mr. Khazani and his brother. There is no agreement that requires us to purchase products from Saman. Our purchases from Saman in the years ended December 31, 2003, 2004 and 2005 and in the nine months ended September 30, 2006 totaled $253,000, $185,000, $415,000 and $336,000, respectively. Since November 2003, Saman has used a portion of our facility located in Nashville, Tennessee. In the years ended December 31, 2004 and 2005, Saman paid to us $41,000 and $36,000, respectively, as payment for its use of such portion of our Tennessee facility.

Transactions with Mehran Nia or Persons Affiliated with Mehran Nia

In 2004, in order to support our online marketing efforts, we purchased through MBS Marketing, an aggregate of $2.9 million of software from a company owned in part by the brother-in-law of Mr. Nia. We issued two promissory notes to this company in connection with these software purchases at an interest rate of 5.0% per annum. The notes were personally guaranteed by Messrs. Nia and Khazani and were repaid in full in 2006. Since the software purchases in 2004, we have continued to purchase software and other products and services from this company. Our payments to this company for such services and products in 2003, 2004 and 2005 totaled $665,000, $827,000 and $23,000, respectively.

We also purchased warehouse equipment from Mr. Nia in 2004 at a purchase price of $83,000. The amounts owing to Mr. Nia for these purchases were paid in full in 2005.

Another entity owned by the brother-in-law of Mr. Nia provides printing services for us. For the years ended December 31, 2003, 2004 and 2005, we paid this entity $62,000, $120,000 and $101,000, respectively, for such services.

Transactions with Ben Elyashar or Persons Affiliated with Ben Elyashar

We purchase warehouse supplies from Solomon Disposable Supplies, which is owned by the brother of Mr. Elyashar. In the year ended December 31, 2005 and in the nine months ended September 30, 2006, we paid to Solomon Disposable Supplies an aggregate of $114,000 and $97,000, respectively.

In addition, one of Mr. Elyashar’s brothers received wages from us of approximately $61,000, $69,000 and $79,000 in 2003, 2004 and 2005, respectively, as an employee in our sales department. Mr. Elyashar’s brother remains employed by us and continues to receive wages.

Other Related Party Transactions

In 2003 and 2004, we recorded, as non-interest bearing loans, certain amounts associated with capital account balance adjustments resulting from certain S corporation tax distributions we made to Messrs. Nia and Elyashar (as two of our three stockholders in 2003 and 2004). The total amounts of the loans recorded for Mr. Nia in 2003 and 2004 were $85,000 and $259,000, respectively. The total amounts of the loans recorded for Mr. Elyashar in 2003 and 2004 were $80,000 and $97,000, respectively. As of September 30, 2006, there were no amounts outstanding under these loans.

In March 2006, concurrently with our recapitalization and the termination of our S corporation status, we distributed to our stockholders an aggregate of $51.7 million in cash. Messrs. Khazani, Nia and Elyashar, who were our only stockholders as of March 2006, received an aggregate of $51.7 million, in proportion to their ownership of our company.

 

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In connection with our acquisition of Partsbin in May 2006, we issued to Richard Pine, our Vice President, East Coast Operations and one of our directors, a promissory note in the principal amount of approximately $1.9 million, which bears interest at LIBOR, all of which was outstanding as of September 30, 2006. We intend to repay this note in full upon completion of this offering. See “Use of Proceeds.” Mr. Pine’s son-in-law has also been employed by U.S. Auto Parts since the Partsbin acquisition in May 2006 at an annual salary of $100,000.

In September 2002, a company owned by Mr. Khazani was sued by its landlord, alleging a breach of its lease. We were a sublessee to the property and were added as a co-defendant in the lawsuit, which was settled in March 2003. In October 2004, we were also named as a cross-defendant in a lawsuit filed by an insurance company regarding an insurance claim made by a business owned by Mr. Nia. We paid approximately $29,000, $84,000 and $118,000 during the years ended December 31, 2003, 2004 and 2005, respectively, to defend and settle these lawsuits.

We have entered into, or intend to enter into, indemnification agreements with each of our current directors and executive officers. These agreements will require us to indemnify these individuals to the fullest extent permitted under Delaware law against liabilities that may arise by reason of their service to us, and to advance expenses incurred as a result of any proceeding against them as to which they could be indemnified. We also intend to enter into indemnification agreements with our future directors and executive officers.

 

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PRINCIPAL STOCKHOLDERS

The following table indicates information as of September 30, 2006 regarding the ownership of our common stock by:

 

  Ÿ   each person who is known by us to own more than 5% of our shares of common stock;

 

  Ÿ   each named executive officer;

 

  Ÿ   each of our directors; and

 

  Ÿ   all of our directors and executive officers as a group.

The number of shares beneficially owned and the percentage of shares beneficially owned are based on 36,388,226 shares of common stock outstanding as of September 30, 2006, which assumes the conversion of all of our outstanding preferred stock into 11,055,425 shares of common stock immediately prior to the completion of this offering, and              shares of common stock outstanding upon consummation of this offering. Beneficial ownership is determined in accordance with the rules and regulations of the Securities and Exchange Commission. Shares subject to options that are exercisable within 60 days following September 30, 2006 are deemed to be outstanding and beneficially owned by the optionee for the purpose of computing share and percentage ownership of that optionee, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. Except as indicated in the footnotes to this table, and as affected by applicable community property laws, all persons listed have sole voting and investment power for all shares shown as beneficially owned by them.

 

          Percent of Shares
Beneficially Owned

Name and Address of Beneficial Owners(1)

   Number of Shares
Beneficially Owned
  

Prior to

Offering

    After
Offering

Oak Investment Partners XI, L.P.(2)

   11,055,425    30.4 %  

Sol Khazani(3)

   9,350,000    25.7    

Mehran Nia(4)

   9,350,000    25.7    

Ben Elyashar(5)

   3,300,000    9.1    

Michael J. McClane(6)

   515,100    1.4    

Richard Pine(7)

   1,737,573    4.7    

Massoud Entekhabi(6)

   182,000    *    

Fredric W. Harman(2)

   11,055,425    30.4    

Warren B. Riley(2)

   11,055,425    30.4    

All directors and executive officers as a group (10 persons)(8)

   36,212,370    94.6 %  

 *   Less than one percent

 

(1)   Except for Oak Investment Partners XI, L.P., the address for each of the persons listed is c/o U.S. Auto Parts Network, Inc. at 17150 South Margay Avenue, Carson, California 90746. The address for Oak Investment Partners XI, L.P. is 525 University Avenue, Suite 1300, Palo Alto, California 94301.

 

(2)   Consists of shares of common stock issuable at the closing of this offering upon conversion of all of the outstanding Series A convertible preferred stock. Mr. Harman is a Managing Member of Oak Associates XI, LLC, the general partner of Oak Investment Partners XI, L.P. Mr. Riley is a Class A member of Oak Associates XI, LLC. Messrs. Harman and Riley disclaim beneficial ownership of these shares, except to the extent of their respective pecuniary interests therein.

 

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(3)   Consists of shares held by the Khazani Living Trust established October 26, 2004, of which Mr. Khazani and his spouse are the co-trustees and beneficiaries. Mr. Khazani is our Chairman of the Board and one of our co-founders.

 

(4)   Consists of shares held by the Nia Living Trust established September 24, 2004, of which Mr. Nia and his spouse are the co-trustees and beneficiaries. Mr. Nia is our Chief Executive Officer and President, a director and one of our co-founders.

 

(5)   Consists of shares held by the Elyashar Living Trust established August 4, 2004, of which Mr. Elyashar and his spouse are the co-trustees and beneficiaries. Mr. Elyashar is our Chief Operating Officer, a director and one of our co-founders.

 

(6)   Consists solely of shares issuable upon exercise of outstanding options which are currently exercisable.

 

(7)   Includes 498,000 shares issuable upon exercise of outstanding options which are currently exercisable.

 

(8)   Includes 1,890,100 shares issuable upon exercise of outstanding options which are currently exercisable.

 

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DESCRIPTION OF CAPITAL STOCK

The following description of our securities and provisions of our certificate of incorporation and bylaws is only a summary. You should also refer to the copies of our certificate and bylaws which have been filed with the Securities and Exchange Commission as exhibits to our registration statement, of which this prospectus forms a part. The description of common stock and preferred stock reflect changes to our capital structure that will occur upon the closing of this offering in accordance with the terms of the certificate of incorporation that will be adopted by us immediately prior to the closing of this offering.

Upon the closing of this offering, our authorized capital stock will consist of                      shares of common stock, par value $0.001 per share, and              shares of preferred stock, par value $0.001 per share.

Common Stock

Currently, we are authorized to issue 50,000,000 shares of common stock. At September 30, 2006, 25,332,801 shares of common stock were outstanding and held of record by eight holders. Under the certificate of incorporation and bylaws, holders of common stock do not have cumulative voting rights. Holders of shares representing a majority of the voting power of common stock can elect all of the directors. The holders of the remaining shares will not be able to elect any directors. The shares of common stock offered by this prospectus, when issued, will be fully paid and non-assessable and will not be subject to any redemption or sinking fund provisions. Holders of common stock do not have any preemptive, subscription or conversion rights.

Holders of common stock are entitled to receive dividends declared by the board of directors out of legally available funds, subject to the rights of preferred stockholders, if any, and the terms of any existing or future agreements between us and our lenders. We presently intend to retain future earnings, if any, for use in the operation and expansion of our business. We do not anticipate paying cash dividends in the foreseeable future. See “Dividend Policy.” In the event of our liquidation, dissolution or winding up, common stockholders are entitled to share ratably in all assets legally available for distribution after payment of all debts and other liabilities, and subject to the prior rights of any holders of outstanding shares of preferred stock, if any.

Preferred Stock

As of September 30, 2006, there were 11,055,425 shares of Series A convertible preferred stock held by one stockholder of record. Upon consummation of this offering, each share of Series A convertible preferred stock will convert into one share of our common stock such that all of the outstanding preferred stock will convert into an aggregate of 11,055,425 shares of our common stock.

Upon the closing of this offering, the board of directors will be authorized to issue from time to time up to an aggregate of              shares of preferred stock in one or more series and to fix or alter the designations, preferences, rights and any qualifications, limitations or restrictions of the shares of each of these series, including the dividend rights, dividend rates, conversion rights, voting rights, term of redemption, including sinking fund provisions, redemption price or prices, liquidation preferences and the number of shares constituting any series or designations of a series without further vote or action by the stockholders. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change in control of us without further action by the stockholders and may adversely affect the voting and other rights of the holders of common stock. The issuance of preferred stock with voting and conversion rights may adversely affect the voting power of the holders of common stock, including the loss of voting control. We currently have no plans to issue any shares of preferred stock.

 

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We believe that the ability to issue preferred stock without the expense and delay of a special stockholders’ meeting will provide us with increased flexibility in structuring possible future financings and acquisitions, and in meeting other corporate needs that might arise. This also permits the board of directors to issue preferred stock containing terms which could impede the completion of a takeover attempt, subject to limitations imposed by the securities laws. The board of directors will make any determination to issue these shares based on its judgment as to the best interests of U.S. Auto Parts and our stockholders at the time of issuance. This could discourage an acquisition attempt or other transaction which stockholders might believe to be in their best interests or in which they might receive a premium for their stock over the then market price of the stock.

Anti-Takeover Provisions

We are subject to the provisions of Section 203 of the Delaware General Corporation Law. Subject to exceptions, Section 203 prohibits a publicly-held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years from the date of the transaction in which the person became an interested stockholder, unless the interested stockholder attained this status with the approval of the board of directors or unless the business combination is approved in a prescribed manner. A “business combination” includes mergers, asset sales and other transactions resulting in a financial benefit to the interested stockholder. Subject to exceptions, an “interested stockholder” is a person who, together with affiliates and associates, owns, or within three years did own, 15% or more of the corporation’s voting stock. This statute could prohibit or delay the accomplishment of mergers or other takeover or change in control attempts with respect to us and, accordingly, may discourage attempts to acquire us. Provisions of the certificate of incorporation and bylaws may make it more difficult to acquire control of us. These provisions could deprive stockholders of the opportunity to realize a premium on the shares of common stock owned by them. In addition, these provisions may adversely affect the prevailing market price of the stock and are intended to:

 

  Ÿ   enhance the likelihood of continuity and stability in the composition of the board and in the policies formulated by the board;

 

  Ÿ   discourage transactions which may involve an actual or threatened change in control of us;

 

  Ÿ   discourage tactics that may be used in proxy fights;

 

  Ÿ   encourage persons seeking to acquire control of us to consult first with the board of directors to negotiate the terms of any proposed business combination or offer; and

 

  Ÿ   reduce our vulnerability to an unsolicited proposal for a takeover that does not contemplate the acquisition of all of our outstanding shares or that is otherwise unfair to our stockholders.

Classified Board of Directors; Removal; Filling Vacancies and Amendment . Upon the closing of this offering, our certificate of incorporation and bylaws will provide for the board to be divided into three classes of directors serving staggered, three-year terms. The classification of the board has the effect of requiring at least two annual stockholder meetings, instead of one, to replace a majority of members of the board. Subject to the rights of the holders of any outstanding series of preferred stock, the certificate of incorporation will authorize only the board to fill vacancies, including newly created directorships. Accordingly, this provision could prevent a stockholder from obtaining majority representation on the board by enlarging the board of directors and filling the new directorships with its own nominees. The certificate of incorporation will also provide that directors may be removed by stockholders only for cause and only by the affirmative vote of holders of two-thirds of the outstanding shares of voting stock.

Special Stockholder Meetings . The certificate of incorporation will provide that special meetings of the stockholders for any purpose or purposes, unless required by law, shall be called by the Chairman of the

 

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Board or a majority of the entire board. A special meeting of the stockholders may not be held absent a written request of this nature. The request shall state the purpose or purposes of the proposed meeting. This limitation on the right of stockholders to call a special meeting could make it more difficult for stockholders to initiate actions that are opposed by the board of directors. These actions could include the removal of an incumbent director or the election of a stockholder nominee as a director. They could also include the implementation of a rule requiring stockholder ratification of specific defensive strategies that have been adopted by the board of directors with respect to unsolicited takeover bids. In addition, the limited ability of the stockholders to call a special meeting of stockholders may make it more difficult to change the existing board and management.

Written Consent; Special Meetings of Stockholders . The certificate of incorporation will prohibit the taking of stockholder action by written consent without a meeting. These provisions will make it more difficult for stockholders to take action opposed by the board of directors.

Amendment of Provisions in the Certificate of Incorporation . The certificate of incorporation will generally require the affirmative vote of the holders of at least two-thirds of the outstanding voting stock in order to amend any provisions of the certificate of incorporation concerning:

 

  Ÿ   the removal or appointment of directors;

 

  Ÿ   the authority of stockholders to act by written consent;

 

  Ÿ   the required vote to amend the certificate of incorporation;

 

  Ÿ   calling a special meeting of stockholders;

 

  Ÿ   procedure and content of stockholder proposals concerning business to be conducted at a meeting of stockholders; and

 

  Ÿ   director nominations by stockholders.

These voting requirements will make it more difficult for minority stockholders to make changes in the certificate of incorporation that could be designed to facilitate the exercise of control over us.

Options and Warrants

As of September 30, 2006, options to purchase a total of 4,027,560 shares of common stock were outstanding, at a weighted average exercise price of $4.92 per share. Up to                      additional shares of common stock were reserved for future issuance under our stock plans. For a more complete discussion of our stock option plans, please see “— Employee Benefit Plans.”

As of September 30, 2006, warrants to purchase up to an aggregate of 140,554 shares of common stock were outstanding, at a weighted average exercise price of $4.38 per share. Each warrant expires and terminates upon the earlier of three years from the date of issuance of such warrant or a deemed liquidation of our company. The exercise prices and the shares issuable upon exercise are subject to adjustment in the event of stock dividends, stock splits, reorganizations and reclassifications.

Registration Rights

Upon consummation of this offering, the holders of 11,055,425 shares of our common stock, or their transferees, will be entitled to certain rights with respect to the registration of such shares, or registrable securities, under the Securities Act, as follows:

Demand Registration Rights. Commencing the earlier of September 3, 2007 or six months after the closing of this offering, the holders of shares representing at least a majority of the registrable securities

 

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may request that we register all or a portion of their shares of registrable securities with an aggregate offering price of at least $10.0 million. Upon their request, we must, subject to some restrictions and limitations, use reasonable best efforts to cause a registration statement covering the number of shares of registrable securities that are subject to the request to become effective. The holders of registrable securities may only require us to file a maximum of two registration statements in response to their demand registration rights, and we may delay such registration under certain circumstances for up to 90 days no more than once in any twelve month period.

Piggyback Registration Rights. In the event that we propose to register any of our securities under the Securities Act, the holders of registrable securities are entitled to notice of such registration and are entitled to include their registrable securities in such registration, subject to certain marketing and other limitations. These registration opportunities are unlimited, but the number of shares that may be registered may be cut back in limited situations by the underwriters.

Form S-3 Registration Rights. The holders of registrable securities may request that we register their shares if we are eligible to file a registration statement on Form S-3 and if the aggregate price of the shares sought to be offered to the public by the holders of registrable securities is at least $5,000,000. The holders of registrable securities may only require us to file two registration statements on Form S-3 in any twelve month period, and we may delay such registration under certain circumstances for up to 90 days no more than once in any twelve month period.

We are generally obligated to bear the expenses, other than underwriting discounts and sales commissions, of these registrations. These registration rights terminate upon the earlier of five years after this offering or such time as all of the shares of registrable securities may be sold under Rule 144 under the Securities Act of 1933, as amended, during any three-month period provided that we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended.

Transfer Agent and Registrar

The transfer agent and registrar for our common stock is U.S. Stock Transfer Corporation.

 

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SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the offering, we will have              shares of common stock outstanding assuming no exercise of any options after September 30, 2006. Of this amount, the              shares offered by this prospectus will be available for immediate sale in the public market as of the date of this prospectus. Following the expiration of 180-day lockup agreements with the representatives of the underwriters or U.S. Auto Parts, 36,388,226 shares will be available for sale in the public market, subject in some cases to compliance with the volume and other limitations of Rule 144.

 

Days after the
Date of this Prospectus

   Approximate Number of Shares
Eligible for Future Sale
  

Comment

Upon effectiveness

      Freely tradable shares sold in this offering

180 days

   36,388,226    Lock-up released; shares saleable under Rule 144, 144(k) or 701

Over 180 days

   0    Restricted securities held for less than one year

In general, under Rule 144 as currently in effect, a person who has beneficially owned shares for at least one year is entitled to sell, within any three-month period commencing 90 days after the date of this prospectus, a number of shares that does not exceed the greater of:

 

  Ÿ   1% of the then outstanding shares of common stock; or

 

  Ÿ   the average weekly trading volume during the four calendar weeks preceding the sale, subject to the filing of a Form 144 with respect to the sale.

A person who is not deemed to have been an affiliate of ours at any time during the 90 days immediately preceding the sale and who has beneficially owned his or her shares for at least two years is entitled to sell such shares under Rule 144(k) without regard to the limitations described above. Persons deemed to be affiliates must always sell under the limitations imposed by Rule 144, even after the applicable holding periods have been satisfied.

We are unable to estimate the number of shares that will be sold under Rule 144, since this will depend on the market price for our common stock, the personal circumstances of the sellers and other factors. Prior to the offering, there has been no public market for the common stock, and there can be no assurance that a significant public market for the common stock will develop or be sustained after the offering. Any future sale of substantial amounts of the common stock in the open market may adversely affect the market price of the common stock offered by this prospectus.

U.S. Auto Parts, our directors and executive officers and the holders of our outstanding stock have agreed that, subject to certain exceptions, they will not sell any common stock without the prior written consent of RBC Capital Markets Corporation and Thomas Weisel Partners LLC for a period of 180 days from the date of this prospectus.

The 180-day restricted period described in the preceding paragraph will be extended if:

 

  Ÿ   during the last 17 days of the 180-day restricted period we issue an earnings release or we disclose material news or a material event relating to our company occurs; or

 

  Ÿ   prior to the expiration of the 180-day restricted period, we announce that we will release earnings results during the 16-day period beginning on the last day of the 180-day period,

in which case the restrictions described in the preceding paragraph will continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event.

 

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Any employee or consultant who purchased his or her shares under a written compensatory plan or contract is entitled to rely on the resale provisions of Rule 701, which permits nonaffiliates to sell their Rule 701 shares without having to comply with the public information, holding period, volume limitation or notice provisions of Rule 144 and permits affiliates to sell their Rule 701 shares without having to comply with the Rule 144 holding period restrictions, in each case commencing 90 days after the date of this prospectus. As of September 30, 2006, the holders of options to purchase approximately 4,032,660 shares of common stock will be eligible to sell their shares upon the expiration of the 180-day lockup period, subject to the vesting of those options.

We intend to file a registration statement on Form S-8 under the Securities Act as soon as practicable after the completion of the offering to register              shares of common stock subject to outstanding stock options or reserved for issuance under our stock plans. This registration will permit the resale of these shares by nonaffiliates in the public market without restriction under the Securities Act, upon completion of the lock-up period described above. Shares registered under the Form S-8 registration statement held by affiliates will be subject to Rule 144 volume limitations. See “Management — Executive Compensation” and “— Employee Benefit Plans.” In addition, holders of 11,055,425 shares of common stock have registration rights with respect to their shares. Registration of these securities would enable these shares to be freely tradable without restriction under the Securities Act.

See also “Risk Factors — A large number of additional shares may be sold into the public market in the near future, which may cause the market price of our common stock to decline significantly, even if our business is doing well.”

 

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UNDERWRITING

RBC Capital Markets Corporation, Thomas Weisel Partners LLC, Piper Jaffray & Co. and JMP Securities LLC are acting as the representatives of the underwriters named below. Subject to the terms and conditions in the underwriting agreement, each of the underwriters named below has agreed to purchase from us, on a firm commitment basis, the number of shares of common stock shown opposite its name below:

 

Name

   Number of Shares

RBC Capital Markets Corporation

  

Thomas Weisel Partners LLC

  

Piper Jaffray & Co.

  

JMP Securities LLC

  

Total

  

The underwriting agreement provides that the underwriters’ obligations to purchase our common stock are subject to approval of legal matters by counsel and to the satisfaction of other conditions. The underwriters are obligated to purchase all of the shares (other than those covered by the over-allotment option described below) if they purchase any shares.

Commissions and Expenses

The underwriters have advised us that they propose to offer our common stock directly to the public at the public offering price presented on the cover page of this prospectus, and to selected dealers, who may include the underwriters, at the public offering price less a selling concession not in excess of $             per share. The underwriters may allow, and the selected dealers may reallow, a concession not in excess of $             per share to brokers and dealers. After the offering, the underwriters may change the offering price and other selling terms.

The following table summarizes the underwriting discounts and commissions that we will pay to the underwriters in connection with this offering. These amounts are shown assuming both no exercise and full exercise of the underwriters’ option to purchase additional shares of common stock.

 

     No Exercise    Full Exercise

Per Share

   $                 $             

Total

   $      $  

We estimate that the total expenses of the offering, including registration, filing and listing fees, printing fees and legal and accounting expenses, but excluding underwriting discounts and commissions, will be approximately $            .

Over-Allotment Option

We have granted the underwriters an option to purchase up to an aggregate of              shares of common stock, exercisable solely to cover over-allotments, if any, at the public offering price less the underwriting discounts and commissions shown on the cover page of this prospectus. The underwriters may exercise this option in whole or in part at any time until 30 days after the date of the underwriting agreement. To the extent the underwriters exercise this option, each underwriter will be committed, so long as the conditions of the underwriting agreement are satisfied, to purchase a number of additional shares proportionate to that underwriter’s initial commitment as indicated in the preceding table.

 

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Lock-Up Agreements

We, our executive officers and directors and our stockholders have agreed, subject to certain exceptions, not to offer, sell, pledge, contract to sell, grant any option to purchase, grant a security interest in, hypothecate or otherwise dispose of any shares of our common stock, or any securities convertible into, derivative of or exercisable or exchangeable for our common stock, for a period of not less than 180 days after the date of this prospectus without first obtaining the written consent of RBC Capital Markets Corporation and Thomas Weisel Partners LLC. If we issue an earnings release or material news, or a material event relating to us occurs, during the last 17 days of the 180-day lock-up period, or if, prior to the expiration of the 180-day lock-up period, we announce that we will release earnings results during the 16-day period beginning on the last day of the 180-day lock-up period, the restrictions imposed by these lock-up agreements may be extended until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event for all such shares.

Offering Price Determination

Prior to this offering, there has been no public market for our common stock. The initial public offering price has been negotiated between the underwriters and us. In determining the initial public offering price of our common stock, the underwriters considered:

 

  Ÿ   prevailing market conditions;

 

  Ÿ   our historical performance and capital structure;

 

  Ÿ   estimates of our business potential and earnings prospects;

 

  Ÿ   an overall assessment of our management; and

 

  Ÿ   the consideration of these factors in relation to market valuation of companies in related businesses.

We have applied to have our common stock approved for quotation on the NASDAQ Global Market under the symbol “PRTS.”

Indemnification

We have agreed to indemnify the underwriters against liabilities relating to the offering, including liabilities under the Securities Act of 1933, as amended, and liabilities arising from breaches of the representations and warranties contained in the underwriting agreement, and to contribute to payments that the underwriters may be required to make for these liabilities.

Stabilization, Short Positions and Penalty Bids

The underwriters may engage in over-allotment, stabilizing transactions, syndicate covering transactions and penalty bids or purchases for the purpose of pegging, fixing or maintaining the price of our common stock, in accordance with Regulation M under the Securities Exchange Act of 1934, as amended.

Over-allotment transactions involve sales by the underwriters of shares in excess of the number of shares the underwriters are obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of shares over-allotted by the underwriters is not greater than the number of shares that they may purchase in the over-allotment option. In a naked short position, the number of shares involved is greater than the number of shares in the over-allotment option. The underwriters may close out any short position by either exercising their over-allotment option and/or purchasing shares in the open market.

Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specific maximum.

 

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Syndicate covering transactions involve purchases of our common stock in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of shares to close out the 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 shares through the over-allotment option. If the underwriters sell more shares than could be covered by the over-allotment option, a naked short position, the position can only be closed out by buying shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering.

Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when our common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions.

These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of our common stock. As a result, the price of our common stock may be higher than the price that might otherwise exist in the open market. These transactions may be effected on the NASDAQ Global Market or otherwise and, if commenced, may be discontinued at any time.

Neither we nor any of the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our common stock. In addition, neither we nor any of the underwriters make any representation that the underwriters will engage in these stabilizing transactions or that any transaction, once commenced, will not be discontinued without notice.

Directed Share Program

At our request, the underwriters have reserved up to             shares for sale under a directed share program to our officers, directors, employees and to our business associates. All of the persons purchasing the reserved shares must commit to purchase no later than the close of business on the day following the date of this prospectus. The number of shares available for sale to the general public will be reduced to the extent these persons purchase the reserved shares. Shares committed to be purchased by directed share participants that are not so purchased will be reallocated for sale to the general public in the offering. All sales of shares under the directed share program will be made at the initial public offering price set forth on the cover page of this prospectus.

 

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LEGAL MATTERS

The validity of the issuance of the shares of common stock offered by this prospectus will be passed upon for us by Dorsey & Whitney LLP, Irvine, California. Legal matters relating to the sale of common stock in this offering will be passed upon for the underwriters by Howard Rice Nemerovski Canady Falk & Rabkin, A Professional Corporation, San Francisco, California.

EXPERTS

The consolidated financial statements of U.S. Auto Parts as of December 31, 2005 and for the year then ended, appearing in this prospectus and registration statement have been audited by Ernst & Young LLP, independent registered public accounting firm, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.

The consolidated financial statements of U.S. Auto Parts as of December 31, 2004 and for the years ended December 31, 2003 and 2004 included in this prospectus and registration statement have been audited by Stonefield Josephson, Inc., independent registered public accounting firm, as indicated in their report thereon appearing elsewhere herein, and are included in reliance upon such report given the authority of such firm as experts in auditing and accounting.

The combined financial statements of Partsbin as of December 31, 2004 and 2005 and for each of the years in the three-year period ended December 31, 2005, included in this prospectus and the registration statement have been audited by J.H. Cohn LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We have filed a registration statement on Form S-1 with the Securities and Exchange Commission under the Securities Act with respect to the common stock offered by 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 or the exhibits and schedules filed therewith. For further information with respect to us and our common stock, please see the registration statement and the exhibits and schedules filed with the registration statement. Statements contained in this prospectus regarding the contents of any contract or any other document that is filed as an exhibit to the registration statement are not necessarily complete, and each such statement is qualified in all respects by reference to the full text of such contract or other document filed as an exhibit to the registration statement. The registration statement, including its exhibits and schedules, may be inspected without charge at the public reference room maintained by the SEC, located at 100 F Street, N.E., Room 1580, Washington, D.C. 20549, and copies of all or any part of the registration statement may be obtained from such offices upon the payment of the fees prescribed by the SEC. Please call the SEC at 1-800-SEC-0330 for further information about the public reference room. The SEC also maintains an Internet website that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The address of the website is www.sec.gov .

Upon completion of this offering, we will become subject to the information and periodic reporting requirements of the Exchange Act, and, in accordance therewith, will file periodic reports, proxy statements and other information with the SEC. Such periodic reports, proxy statements and other information will be available for inspection and copying at the public reference room and on the SEC website referred to above.

 

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INDEX TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS

 

U.S. Auto Parts Network, Inc.:

  

Report of Ernst & Young LLP, independent registered public accounting firm, for the year ended December 31, 2005

   F-2

Report of Stonefield Josephson, Inc., independent registered public accounting firm, for the years ended December 31, 2004 and 2003

   F-3

Consolidated Balance Sheets

   F-4

Consolidated Statements of Income

   F-5

Consolidated Statements of Stockholders’ Equity

   F-6

Consolidated Statements of Cash Flows

   F-7

Notes to Consolidated Financial Statements

   F-8

All OEM Parts, Inc. and Affiliates:

  

Report of J.H. Cohn LLP, independent public accountants

   F-34

Combined Balance Sheets

   F-35

Combined Statements of Operations

   F-36

Combined Statements of Stockholders’/Members’ Equity (Deficiency)

   F-37

Combined Statements of Cash Flows

   F-38

Notes to Combined Financial Statements

   F-39

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

U.S. Auto Parts Network, Inc.

We have audited the accompanying consolidated balance sheet of U.S. Auto Parts Network, Inc. (the Company) as of December 31, 2005, and the related consolidated statements of income, stockholders’ equity and cash flows for the year ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. The consolidated financial statements of U.S. Auto Parts Network, Inc. for the years ended December 31, 2004 and 2003, were audited by other auditors whose report dated August 12, 2005, expressed an unqualified opinion on those statements.

We conducted our audit 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 financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit 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 financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of U.S. Auto Parts Network, Inc. at December 31, 2005, and the consolidated results of its operations and its cash flows for the year ended December 31, 2005, in conformity with U.S. generally accepted accounting principles.

/s/ ERNST & YOUNG LLP

Los Angeles, California

February 3, 2006

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

U.S. Auto Parts Network, Inc.

Carson, California

We have audited the accompanying consolidated balance sheet of U.S. Auto Parts Network, Inc. (the “Company”) as of December 31, 2004, and the related consolidated statements of income, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s 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 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, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of U.S. Auto Parts Network, Inc. as of December 31, 2004, and the consolidated results of its operations and its cash flows for each of the two years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.

/s/ STONEFIELD JOSEPHSON, INC.

CERTIFIED PUBLIC ACCOUNTANTS

Irvine, California

August 12, 2005

 

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U.S. AUTO PARTS NETWORK, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

    December 31,   September 30,     Pro Forma
Stockholders’
Equity as of
September 30, 2006
 
    2004     2005   2006    
              (unaudited)     (unaudited)  

Assets

       

Current assets:

       

Cash and cash equivalents

  $ 2,130     $ 1,353   $ 3,287    

Marketable securities

    710              

Accounts receivable, net

    1,149       1,637     2,540    

Inventory, net

    4,586       8,663     7,591    

Other current assets

    75       361     2,201    
                       

Total current assets

    8,650       12,014     15,619    

Property and equipment, net

    3,449       2,259     1,967    

Intangible assets, net

    42       25     35,416    

Goodwill

              13,929    

Deferred income taxes

              1,282    

Other noncurrent assets

    970       185     292    
                       

Total assets

  $ 13,111     $ 14,484   $ 68,505    
                       

Liabilities and Stockholders’ Equity

       

Current liabilities:

       

Accounts payable

  $ 2,134     $ 6,882   $ 9,573    

Accrued expenses

    1,113       1,307     2,566    

Line of credit

    1,500              

Notes payable

    1,549       96     6,889    

Due to stockholders and related party

    324              

Capital leases payable, current portion

    49       170     62    

Other current liabilities

    319       423     1,057    
                       

Total current liabilities

    6,988       8,878     20,147    

Notes payable less current portion, net

              27,817    

Deferred income taxes

    80           192    

Capital leases payable, less current portion

    83       357     120    
                       

Total liabilities

    7,151       9,235     48,276    

Noncontrolling interest in consolidated entity

          10        

Commitments and contingencies

       

Stockholders’ equity:

       

Series A convertible preferred stock, par value $0.001; 11,100,000 shares authorized; 0, 0 and 11,055,425 issued and outstanding, as of December 31, 2004 and 2005, and September 30, 2006 (unaudited), respectively; (liquidation preference of $45,000 at September 30, 2006 (unaudited))

              11      

Common stock, par value $0.001; 50,000,000 shares authorized; 22,000,000, 22,000,000 and 25,332,801 issued and outstanding, as of December 31, 2004 and 2005, and September 30, 2006 (unaudited), respectively

    22       22     25     36  

Additional paid-in capital

    517       517     63,652     63,652  

Loans to stockholders

    (356 )              

Accumulated other comprehensive income

    132           6     6  

Retained earnings (accumulated deficit)

    5,645       4,700     (43,465 )   (43,465 )
                           

Total stockholders’ equity

    5,960       5,239     20,229     20,229  
                           

Total liabilities and stockholders’ equity

  $ 13,111     $ 14,484   $ 68,505    
                       

See accompanying notes.

 

F-4


Table of Contents

U.S. AUTO PARTS NETWORK, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except share and per share data)

 

    Years Ended December 31,     Nine Months Ended
September 30,
 
    2003     2004     2005     2005     2006  
                      (unaudited)  

Net sales

  $ 31,657     $ 40,658     $ 59,698     $ 43,979     $ 83,665  

Cost of sales

    17,814       21,334       34,829       25,876       53,779  
                                       

Gross profit

    13,843       19,324       24,869       18,103       29,886  

Operating expenses:

         

General and administrative(1)

    2,284       3,599       7,254       5,555       7,081  

Marketing(1)

    3,617       4,526       5,802       4,315       10,313  

Fulfillment(1)

    3,246       2,990       4,357       3,162       3,589  

Technology(1)

    405       776       868       596       992  

Amortization of intangibles

          8       17       13       3,037  
                                       

Total operating expenses

    9,552       11,899       18,298       13,641       25,012  
                                       

Income from operations

    4,291       7,425       6,571       4,462       4,874  

Other income (expense), net:

         

Loss from disposition of assets

    (62 )                       (5 )

Other income

    33       80       191       165       155  

Interest income

                            82  

Interest expense

    (13 )     (44 )     (106 )     (68 )     (1,032 )
                                       

Other income (expense), net

    (42 )     36       85       97       (800 )

Income before income taxes

    4,249       7,461       6,656       4,559       4,074  

Income tax provision (benefit)

    478       328       (163 )     (199 )     539  
                                       

Net income

  $ 3,771     $ 7,133     $ 6,819     $ 4,758     $ 3,535  
                                       

Basic net income per share

  $ 0.20     $ 0.32     $ 0.31     $ 0.22     $ 0.15  

Diluted net income per share

  $ 0.20     $ 0.32     $ 0.31     $ 0.22     $ 0.11  

Pro forma basic net income per share (unaudited)

      $ 0.21       $ 0.10  

Shares used in computation of basic net income per share

    18,794,793       22,000,000       22,000,000       22,000,000       23,634,781  

Shares used in computation of diluted net income per share

    18,794,793       22,000,000       22,000,000       22,000,000       32,270,315  

Shares used in computation of pro forma basic net income per share (unaudited)

        33,055,425         34,690,206  

Pro forma provision for income taxes (unaudited)

    1,729       2,964       2,657       1,822       1,728  

Pro forma basic net income per share (unaudited)

  $ 0.13     $ 0.20     $ 0.18     $ 0.12     $ 0.10  

Pro forma diluted net income per share (unaudited)

  $ 0.13     $ 0.20     $ 0.18     $ 0.12     $ 0.07  

(1)   Includes share-based compensation expense related to option grants, as follows:

 

     Years Ended December 31,    Nine Months Ended
September 30,
         2003            2004            2005            2005            2006    
     (in thousands)
                    (unaudited)

General and administrative expense

   $   —    $   —    $   —    $     —    $ 359

Marketing expense

                         126

Fulfillment expense

                         16

Technology expense

                         103
                                  
   $    $    $    $    $ 604
                                  

See accompanying notes.

 

F-5


Table of Contents

U.S. AUTO PARTS NETWORK, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share data)

 

    Preferred Stock   Common Stock  

Additional
Paid-in-

Capital

  Loans to
Stockholders
    Accumulated
Other
Comprehensive
Income (Loss)
    Retained
Earnings
(Accumulated
Deficit)
    Total
Stockholders’
Equity
   

Comprehensive
Income for

the Period

 
    Shares   Amount   Shares   Amount            

Balance, December 31, 2002

    $   18,332,600   $ 18   $ 516   $     $ (9 )   $ 617     $ 1,142    

Net income

                                3,771       3,771     $ 3,771  

Distributions

                                (247 )     (247 )  

Stockholder loans

                    (198 )                 (198 )  

Capital contribution

                1                       1    

Issuance of shares in connection with merger

        3,667,400     4                           4    

Unrealized gain on available-for-sale investments

                          70             70       70  
                                                                 

Total comprehensive income

                      $ 3,841  
                         

Balance, December 31, 2003

      22,000,000     22     517     (198 )     61       4,141       4,543    

Net income

                                7,133       7,133     $ 7,133  

Distributions

                                (5,629 )     (5,629 )  

Stockholder loans

                    (158 )                 (158 )  

Unrealized gain on available-for-sale investments

                          71             71       71  
                                                                 

Total comprehensive income

                      $ 7,204  
                         

Balance, December 31, 2004

      22,000,000     22     517     (356 )     132       5,645       5,960    

Net income

                                6,819       6,819     $ 6,819  

Distributions

                                (7,765 )     (7,765 )  

Repayment of stockholder loans

                    356                   356    

Reclassification adjustment on available-for-sale investments

                          (132 )           (132 )     (132 )
                                                                 

Total comprehensive income

                    $ 6,687  
                         

Balance, December 31, 2005

        22,000,000     22     517                 4,700       5,239    

Net income (unaudited)

                                3,535       3,535     $ 3,535  

Distributions (unaudited)

                                (51,700 )     (51,700 )  

Contributions (unaudited)

                110                       110    

Issuance of common stock (unaudited)

        27,272         150                       150    

Issuance of preferred stock (unaudited)

  11,055,425     11           42,127                       42,138    

Issuance of warrants (unaudited)

                147                       147    

Share-based compensation (unaudited)

                604                       604    

Issuance of common stock in connection with business combination (unaudited)

        3,305,529     3     19,997           20,000    

Effect of changes in foreign currencies (unaudited)

                          6             6       6  
                                                                 

Total comprehensive income (unaudited)

                    $ 3,541  
                         

Balance, September 30, 2006 (unaudited)

  11,055,425   $ 11   25,332,801   $ 25   $ 63,652   $     $ 6     $ (43,465 )   $ 20,229    
                                                           

 

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Table of Contents

U.S. AUTO PARTS NETWORK, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

    Years Ended
December 31,
    Nine Months
Ended
September 30,
 
    2003     2004     2005     2005     2006  
                      (unaudited)  

Operating activities

         

Net income

  $ 3,771     $ 7,133     $ 6,819     $ 4,758     $ 3,535  

Adjustments to reconcile net income to net cash provided by operating activities:

         

Depreciation and amortization

    120       448       1,976       1,455       1,528  

Amortization of intangibles

          8       17       13       3,037  

Non-cash interest expense

                            40  

Non-cash issuance of common stock

    4                          

Loss from disposition of assets

    62                         5  

Share-based compensation and other

                            704  

Realized gain on sale of marketable securities

          (8 )     (75 )     (75 )      

Deferred income taxes

    3       79       (79 )     (79 )     (1,090 )

Effect of changes in foreign currencies

                            6  

Changes in operating assets and liabilities:

         

Accounts receivable, net

    (60 )     (222 )     (489 )     (8 )     (903 )

Inventory, net

    (1,721 )     (829 )     (4,077 )     (5,397 )     1,676  

Other current assets

    (21 )     (32 )     (286 )     (161 )     (1,732 )

Other noncurrent assets

          (41 )     784       924       (79 )

Accounts payable and accrued expenses

    799       (37 )     4,942       3,625       928  

Other current liabilities

    63       4       104       51       (233 )
                                       

Net cash provided by operating activities

    3,020       6,503       9,636       5,106       7,422  

Investing activities

         

Purchase of property, equipment and intangibles

    (38 )     (1,369 )     (439 )     (304 )     (979 )

Acquisition of business, net of cash acquired

                            (24,453 )

Proceeds from sale of equipment

                154       154        

Proceeds from sale of marketable securities

    20       63       653       653        

Purchase of marketable securities

    (20 )     (558 )                  

Payments (borrowings) of related-party loans

    (274 )     (82 )     356       356        
                                       

Net cash provided by (used in) investing activities

    (312 )     (1,945 )     724       859       (25,432 )

Financing activities

         

Proceeds from credit line

    10       1,500       2,000       2,000        

Payments of credit line

          (10 )     (3,500 )     (1,500 )      

Proceeds received from notes payable, net of discount

                            31,705  

Payments made on notes payable

                            (2,111 )

Proceeds received on issuance of Series A convertible preferred stock,
net of offering costs

                            42,246  

Payments of short-term financing

    (348 )     (45 )     (105 )     (59 )     (346 )

(Payments) borrowings to related party

          324       (230 )     (230 )      

Payments to related parties

    (259 )     (686 )     (1,547 )     (1,304 )      

Contributed capital

    1             10       10        

Proceeds from sale of common stock

                            150  

Stockholder distributions

    (247 )     (5,629 )     (7,765 )     (6,031 )     (51,700 )
                                       

Net cash provided by (used in) financing activities

    (843 )     (4,545 )     (11,137 )     (7,114 )     19,944  
                                       

Net (decrease) increase in cash and cash equivalents

    1,865       13       (777 )     (1,149 )     1,934  

Cash and cash equivalents at beginning of period

    252       2,117       2,130       2,130       1,353  
                                       

Cash and cash equivalents at end of period

  $ 2,117     $ 2,130     $ 1,353     $ 981     $ 3,287  
                                       

Supplemental disclosure of noncash financing activities:

         

Property acquired under capital leases

  $ 78     $ 40     $ 500     $ 500     $  

Property acquired under note payable to related party

          2,234                    

Issuance of note payable to selling shareholders in connection with business acquisition

                            5,000  

Issuance of warrants for costs associated with debt and equity issuances

                            147  

Cash paid during the period for:

         

Interest

  $ 2     $ 7     $ 76     $ 87     $ 823  

Income taxes

    29       147       469       434       1,988  

See accompanying notes.

 

F-7


Table of Contents

U.S. AUTO PARTS NETWORK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information subsequent to December 31, 2005 and pertaining to September 30, 2006

and the nine months ended September 30, 2005 and 2006 is unaudited)

 

1.   Summary of Significant Accounting Policies and Nature of Operations

U.S. Auto Parts Network, Inc. (including its subsidiaries, the “Company”) is a distributor of aftermarket auto parts and accessories and was established in 1995. The Company entered the e-commerce sector by launching its first website in 2000 and currently derives the majority of its revenues from online sales channels. The Company’s websites provide customers with a comprehensive selection of products. The Company sells its products to individual consumers through a network of websites and online marketplaces. The Company’s flagship websites are located at www.partstrain.com and www.autopartswarehouse.com , and the corporate website is located at www.usautoparts.com .

The Company’s products consist of body parts, engine parts and accessories. Body parts include bumpers, doors, fenders, grills, hoods, lamps, mirrors, tailgates and wheels. Engine parts consists of brakes, clutches, cooling/climate control products, electrical parts, exhaust systems, fuel injection parts, mechanical parts, steering, suspension and transmissions. Accessories include bed liners, car covers, carpet, gauges, seats, spoilers, among others. The Company also offers performance versions of many of these parts.

The Company is a Delaware C corporation and is headquartered in Carson, California. The Company also has employees located in Trenton, New Jersey, as well as in the Philippines.

Unaudited Interim Financial Statements

The financial statements pertaining to September 30, 2006 and for the nine months ended September 30, 2005 and 2006 are unaudited. The unaudited financial statements have been prepared on the same basis as the audited financial statements and, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments necessary to state fairly the financial information set forth therein, in accordance with generally accepted accounting principles.

The results of operations for the interim period ended September 30, 2006 are not necessarily indicative of the results which may be reported for any other interim period or for the year ending December 31, 2006.

Principles of Consolidation

On June 30, 2005, the Company acquired MBS Marketing, Inc. (“MBS”), which provided Internet marketing services to support the Company’s online marketing program. Prior to June 30, 2005, the Company had no direct ownership interest in MBS but, as the Company was the primary beneficiary of MBS under FASB Interpretation No. 46R, “ Consolidation of Variable Interest Entities” (“FIN 46R”), the financial statements of MBS were consolidated with those of the Company. MBS and the Company were also under common ownership. Effective June 30, 2005, the Company merged MBS into its operations. Pursuant to the merger, all assets, liabilities, rights and obligations of MBS were transferred to, and assumed by, the Company, and the Company issued 3,667,400 shares of its common stock to the stockholders of MBS in exchange for their shares in MBS. The merger was accounted for as entities under common control, whereby the Company recognized the assets and liabilities of MBS at their carryover basis as of the date of the merger. Accordingly, adjustments have been made to combine MBS on a historical basis and all significant intercompany balances and transactions have been eliminated in consolidation.

 

F-8


Table of Contents

U.S. AUTO PARTS NETWORK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information subsequent to December 31, 2005 and pertaining to September 30, 2006

and the nine months ended September 30, 2005 and 2006 is unaudited)

 

In September 2005, the shareholders of the Company established MBS Tek Corporation (“MBS Tek”) to conduct business internationally. As the Company was the primary beneficiary of MBS Tek, it has been consolidated under FIN 46R. All significant inter-company transactions and balances have been eliminated in consolidation. The equity balance of MBS Tek is presented as a noncontrolling interest on the face of the consolidated balance sheet as of December 31, 2005. In September 2006, MBS Tek became a majority-owned subsidiary of the Company and is no longer presented as a noncontrolling interest at September 30, 2006.

On May 19, 2006, U.S. Auto Parts acquired All OEM Parts, Inc., ThePartsBin.com, Inc. and their affiliated companies (collectively “Partsbin”) pursuant to a merger involving a wholly-owned subsidiary of U.S. Auto Parts (the “Merger Sub”). Prior to the acquisition, Partsbin consisted of seven entities accounted for as entities under common control. Upon the consummation of the merger, five of the Partsbin entities merged with and into the Merger Sub, and the sixth entity, a Canadian company, survived as a wholly-owned subsidiary of the Merger Sub. We did not acquire the seventh entity, TPB Real Estate, LLC. Subsequent to the acquisition, the combined financial statements of Merger Sub and the Canadian company, which remains a wholly-owned subsidiary of Merger Sub, are included in the consolidated financial statements of U.S. Auto Parts.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates made by management include, but are not limited to, the valuation of inventory, valuation of deferred tax assets, estimated useful lives of property, equipment and software, valuation of intangible assets, including goodwill, recoverability of software development costs, valuation of sales returns and allowances, and the ultimate collection of accounts receivables. Actual results could differ from these estimates.

Unaudited Pro Forma Stockholders’ Equity Presentation

The unaudited pro forma stockholders’ equity at September 30, 2006 reflects the effect of the automatic conversion of all shares of Series A convertible preferred stock into 11,055,425 shares of common stock as though the completion of the planned initial public offering occurred on September 30, 2006. Shares of common stock issuable in such initial public offering and any related net proceeds are excluded from such pro forma information.

Cash and Cash Equivalents

The Company considers all money market funds and short-term debt securities purchased with original maturities of ninety days or less to be cash equivalents.

Fair Value of Financial Instruments

The carrying value of financial instruments, which include cash and cash equivalents, accounts receivable, accounts payable and borrowings, approximates fair value at December 31, 2004 and 2005 and at September 30, 2006 due to their short-term maturities and the relatively stable interest rate environment.

 

F-9


Table of Contents

U.S. AUTO PARTS NETWORK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information subsequent to December 31, 2005 and pertaining to September 30, 2006

and the nine months ended September 30, 2005 and 2006 is unaudited)

 

Accounts Receivable

Accounts receivable are stated net of allowance for doubtful accounts. At December 31, 2004 and 2005, and at September 30, 2006, amounts due from a single customer were $671,000, $879,000 and $719,000, respectively, representing 58%, 54% and 28% of net accounts receivable, respectively. The allowance for doubtful accounts is determined primarily on the basis of past collection experience and general economic conditions. The Company determines terms and conditions for its customers primarily based on the volume purchased by the customer, customer creditworthiness and past transaction history. The allowance for doubtful accounts totaled $52,000 and $67,000 at December 31, 2004 and 2005, respectively, and $20,000 at September 30, 2006.

Marketable Securities

Marketable securities consist of equity investments and investments in mutual funds that hold both debt and equity securities in various publicly-traded companies and are stated at their fair market value on December 31, 2004. The Company held no marketable securities on December 31, 2005 or September 30, 2006. All marketable securities are considered “available-for-sale.” In accordance with SFAS No. 115, “ Accounting for Certain Investments in Debt and Equity Securities ,” the appreciation and decline in fair market value over cost is reported as “other comprehensive income” on the statement of stockholders’ equity. The cost basis used to calculate gains and losses on securities’ sales is determined using specific identification.

Available-for-sale securities as of December 31, 2004, consisted of the following:

 

     Estimated
Fair Value
   Gains in Accumulated
Other Comprehensive
Income
   Losses in Accumulated
Other Comprehensive
Income
     (in thousands)

Common stock

   $ 519    $ 129    $

Mutual funds

     191      3     
                    

Total securities

   $ 710    $ 132    $
                    

During the years ended December 31, 2003, 2004 and 2005, available-for-sale securities were sold for total proceeds of $20,000, $63,000 and $653,000, respectively. The gross realized gains on these sales totaled $0, $8,000 and $75,000 in 2003, 2004 and 2005, respectively. Net unrealized holding gains on available-for-sale securities in the amount of $70,000 and $71,000 for the years ended December 31, 2003 and 2004, respectively, have been included in accumulated other comprehensive income. No available-for-sale securities transactions took place during the nine months ended September 30, 2006.

Inventory

Inventories consist of finished goods available-for-sale and are stated at the lower of cost or market value, determined using the first in, first out (“FIFO”) method. Long-term inventory is included in other long term assets for the years ended December 31, 2004 and 2005. The Company purchases inventory from suppliers both domestically and internationally. The Company believes that its products are generally

 

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Table of Contents

U.S. AUTO PARTS NETWORK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information subsequent to December 31, 2005 and pertaining to September 30, 2006

and the nine months ended September 30, 2005 and 2006 is unaudited)

 

available from more than one supplier and seeks to maintain multiple sources for its products, both internationally and domestically.

Because of the continued demand for the Company’s products, the Company primarily purchases products in bulk quantities to take advantage of quantity discounts and to assure inventory availability. Inventory is reported net of inventory reserves for slow moving, obsolete or scrap product, which are established based on specific identification of slow moving items and the evaluation of overstock considering anticipated sales levels. Gross inventory, inventory reserves and net inventory classified as current and noncurrent for the years ended December 31, 2004 and 2005 and the nine months ended September 30, 2006 are as follows:

 

     Years Ended December 31,     Nine Months Ended
September 30, 2006
 
         2004             2005        
     (in thousands)  

Gross inventory:

  

Current

   $ 4,974     $ 8,800     $ 7,775  

Noncurrent

     1,259       960       729  

Inventory reserves:

      

Current

     (388 )     (137 )     (184 )

Noncurrent

     (381 )     (823 )     (605 )

Net inventory:

      

Current

     4,586       8,663       7,591  

Noncurrent

     878       137       124  
                        

Total net inventory

   $ 5,464     $ 8,800     $ 7,715  
                        

The following table reconciles the inventory reserve:

 

(In thousands)

   Balance at
beginning
of period
   Charged to
cost or
expenses
    Deductions     Balance at
end of
period

Year Ended December 31, 2003

         

Inventory reserve

   $ 1,238    $ (606 )   $     $ 632

Year Ended December 31, 2004

         

Inventory reserve

     632      137             769

Year Ended December 31, 2005

         

Inventory reserve

     769      221       (30 )     960

Nine Months Ended September 30, 2006

         

Inventory reserve

     960      (87 )     (84 )     789

 

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Table of Contents

U.S. AUTO PARTS NETWORK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information subsequent to December 31, 2005 and pertaining to September 30, 2006

and the nine months ended September 30, 2005 and 2006 is unaudited)

 

Website and Software Development Costs

The Company capitalizes certain costs associated with software developed for internal use according to EITF No. 00-2 (“EITF 00-2”), “ Accounting for Website Development Costs ” and Statement of Position 98-1, “ Accounting for the Costs of Computer Software Developed or Obtained for Internal Use” (“SOP 98-1”). Under the provisions of EITF 00-2 and SOP 98-1, the Company capitalizes certain costs associated with website and software developed for internal use when both the preliminary project design and testing stage are completed and management has authorized further funding for the project, which it deems probable of completion and to be used for the function intended. Capitalized costs include amounts directly related to website and software development such as payroll and payroll-related costs for employees who are directly associated with, and who devote time to, the internal-use software project. Capitalization of such costs ceases when the project is substantially complete and ready for its intended use. The Company capitalized $428,000 and $172,000 during the years ended December 31, 2004 and 2005, respectively, and $141,000 and $225,000 for the nine months ended September 30, 2005 and 2006, respectively. These amounts are amortized on a straight-line basis over two years once the software is placed into use.

Intangibles

During the year ended December 31, 2004, the Company acquired intangibles in the amount of $50,000 relating to Internet domain names. In May 2006, in connection with the acquisition of Partsbin, the Company acquired intangible assets consisting of software assets, domain names, website assets, vendor agreements and goodwill in the amounts of $4.1 million, $2.3 million, $29.0 million and $3.0 million and $13.9 million, respectively (See Note 11). Capitalized amounts are amortized on a straight-line basis over a two to five year period for software assets, five years for website assets, and over a three-year period for the vendor agreements, representing the estimated useful lives. Generally, goodwill and domain names have indefinite lives and are not amortizable. Amortization expense relating to intangibles totaled $8,000, $17,000, $13,000 and $3.0 million for the years ended December 31, 2004 and 2005 and for the nine months ended September 30, 2005 and 2006, respectively. Estimated annual aggregate amortization expense for the years ending December 31, 2006, 2007, 2008, 2009 and 2010 will approximate $5.1 million, $8.2 million, $8.2 million, $6.7 million and $5.8 million, respectively.

Long-lived assets and intangibles

The Company assesses long-lived assets, including intangibles subject to amortization, and indefinite lived intangibles, including goodwill, for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable based on the undiscounted estimated future cash flows expected to result from its use and eventual disposition. Impairments will be recognized in operating results to the extent that the carrying value exceeds the discounted cash flows of future operations. The Company did not recognize any impairment losses for the years ended December 31, 2003, 2004 or 2005 or for the nine months ended September 30, 2005 or 2006.

Revenue Recognition

The Company recognizes revenue from product sales when the following four revenue recognition criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable, and collectibility is reasonably assured.

 

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Table of Contents

U.S. AUTO PARTS NETWORK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information subsequent to December 31, 2005 and pertaining to September 30, 2006

and the nine months ended September 30, 2005 and 2006 is unaudited)

 

The Company evaluates the criteria of EITF 99-19, “Reporting Revenue Gross as a Principal Versus Net as an Agent,” in determining whether it is appropriate to record the gross amount of product sales and related costs or the net amount earned as commissions. Generally, when we are the primary party obligated in a transaction, are subject to inventory risk, have latitude in establishing prices and selecting suppliers, or have several but not all of these indicators, revenue is recorded gross.

Product sales and shipping revenues, net of promotional discounts and return allowances, are recorded when the products are shipped and title passes to customers. Retail items sold to customers are made pursuant to terms and conditions that provide for transfer of both title and risk of loss upon our delivery to the carrier. Return allowances, which reduce product revenue by our best estimate of expected product returns, are estimated using historical experience. We generally require payment by credit card at the point of sale. Amounts received prior to when we ship goods to customers are recorded as deferred revenue.

We periodically provide incentive offers to our customers to encourage purchases. Such offers include current discount offers, such as percentage discounts off current purchases and other similar offers. Current discount offers, when accepted by our customers, are treated as a reduction to the purchase price of the related transaction. Current discount offers and inducement offers are classified as an offsetting amount in “Net sales.”

Sales discounts are recorded in the period in which the related sale is recognized. Sales returns and allowances are estimated based on historical amounts. Credits are issued to customers for returned products. Credits amounted to $3.5 million, $4.2 million and $5.6 million for the years ended December 31, 2003, 2004 and 2005, respectively. Credits amounted to $4.5 million and $7.1 million for the nine months ended September 30, 2005 and 2006, respectively. The Company’s sales returns and allowances reserves totaled $200,000, $200,000 and $170,000 at December 31, 2003, 2004 and 2005, respectively. The Company’s sales returns and allowances reserves totaled $182,000 and $284,000 for the nine months ended September 30, 2005 and 2006, respectively.

Total sales to one customer were 10.8% of net sales for the year ended December 31, 2004. For the nine months ended September 30, 2005 and 2006, sales to this customer represented approximately 10.1% and less than 10% of net sales, respectively. No other customer accounted for more than 10% of the Company’s net sales in the past three years.

 

F-13


Table of Contents

U.S. AUTO PARTS NETWORK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information subsequent to December 31, 2005 and pertaining to September 30, 2006

and the nine months ended September 30, 2005 and 2006 is unaudited)

 

The following table reconciles the reserve for sales returns and the reserve for doubtful accounts:

 

(In thousands)

   Balance at
beginning
of period
   Charged to
revenue,
cost or
expenses
    Deductions     Balance at
end of
period

Year Ended December 31, 2003

         

Reserve for sales returns

   $ 150    $ 50     $     $ 200

Reserve for doubtful accounts

     34      274       (271 )     37

Year Ended December 31, 2004

         

Reserve for sales returns

     200                  200

Reserve for doubtful accounts

     37      14             51

Year Ended December 31, 2005

         

Reserve for sales returns

     200      (30 )           170

Reserve for doubtful accounts

     51      16             67

Nine Months Ended September 30, 2006

         

Reserve for sales returns

     170      114             284

Reserve for doubtful accounts

     67      (36 )     (11 )     20

Other Income

Other income consists of realized gains on available-for-sale investments, as well as commission income received from website licensing fees and other items.

 

     Years Ended December 31,   

Nine Months Ended

September 30,

         2003            2004            2005            2005            2006    
     (in thousands)

Commissions

   $ 33    $ 72    $ 112    $ 85    $ 23

Insurance claim

                         128

Other income

               4      4      4

Realized gains

          8      75      76     
                                  

Total other income

   $ 33    $ 80    $ 191    $ 165    $ 155
                                  

Cost of Goods Sold

Cost of goods sold consists of the direct costs associated with procuring parts from suppliers and delivering products to customers. These costs include direct product costs, purchase discounts, outbound freight and warehouse supplies. The Company includes freight and shipping costs in cost of goods sold. Total freight and shipping expense included in cost of goods sold for the years ended December 31, 2003, 2004 and 2005 was $4.2 million, $5.0 million and $9.0 million, respectively. Total freight and shipping expense included in cost of goods sold for the nine months ended September 30, 2005 and 2006 was $7.0 million and $10.1 million, respectively.

 

F-14


Table of Contents

U.S. AUTO PARTS NETWORK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information subsequent to December 31, 2005 and pertaining to September 30, 2006

and the nine months ended September 30, 2005 and 2006 is unaudited)

 

Marketing

Marketing costs, including advertising, are expensed as incurred. The majority of marketing expense is paid to Internet search engine service providers and Internet commerce facilitators. For the years ended December 31, 2003, 2004 and 2005, the Company recognized advertising costs of $1.2 million, $2.5 million and $3.4 million, respectively. For the nine months ended September 30, 2005 and 2006, advertising costs were $2.5 million and $6.3 million, respectively.

General and Administrative

General and administrative expense consist primarily of administrative payroll and related expenses, merchant processing fees, legal and professional fees, and other administrative costs.

Fulfillment

Fulfillment costs consist primarily of payroll and related costs associated with warehouse employees, facility rent, building maintenance, and other costs associated with inventory management and wholesale operations.

Technology

Technology expense consist primarily of information technology, payroll and related expenses, computer support, software development and connectivity.

Comprehensive Income

The Company reports comprehensive income in accordance with SFAS No. 130, “ Reporting Comprehensive Income .” Accumulated other comprehensive income includes net income, foreign currency translation adjustments related to the Company’s foreign operations and unrealized gains and losses from equity investments and investments in mutual funds that hold both debt and equity securities in various publicly traded companies.

 

     December 31,    September 30,
2006
     2004    2005   
     (in thousands)

Unrealized gain on common stock investments

   $ 129    $    $

Unrealized gain on mutual fund investments

     3          

Foreign currency translation adjustment

               6
                    

Total accumulated other comprehensive income

   $ 132    $    $ 6
                    

Foreign Currency Translation

For each of the Company’s foreign subsidiaries, the functional currency is its local currency. Assets and liabilities of foreign operations are translated into U.S. dollars using the current exchange rates, and revenues and expenses are translated into U.S. dollars using average exchange rates. The effects of the foreign currency translation adjustments are included as a component of accumulated other comprehensive income (loss) in stockholders’ equity.

 

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Table of Contents

U.S. AUTO PARTS NETWORK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information subsequent to December 31, 2005 and pertaining to September 30, 2006

and the nine months ended September 30, 2005 and 2006 is unaudited)

 

Income Taxes

For income tax purposes, until March 2006, the Company was taxed as an S corporation under provisions of the Internal Revenue and California Taxation Codes, which required that the income or loss of the Company be reported on the individual income tax returns of the stockholders; however MBS Marketing, which was consolidated with the Company for financial reporting in all periods presented (see Note 1), was subject to federal income taxes, franchise taxes in California and franchise and excise taxes in Tennessee at statutory rates since its inception. On March 3, 2006, the Company completed a recapitalization which resulted in the revocation of its subchapter S corporation status. The entire Company now operates as a C corporation and is subject to tax in the United States.

The Company accounts for income taxes for MBS Marketing, incorporated as a C corporation, in accordance with SFAS No. 109, “ Accounting for Income Taxes .” Under SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. When appropriate, a valuation reserve is established to reduce deferred tax assets, which include tax credits and loss carryforwards, to the amount that is more likely than not to be realized. The pro forma income tax provision on the face of the statements of income reflects the pro forma effects as if the Company had been established as a C corporation for all periods presented (see Note 7).

Net Income (Loss) Per Share Data

The Company follows EITF Issue No. 03-6, “ Participating Securities and the Two-Class Method ” (“EITF 03-6”), under FASB Statement 128, which established standards regarding the computation of earnings per share by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the Company. EITF 03-6 requires earnings available to common stockholders for the period, after deduction of preferred stock dividends to be allocated between the common and preferred stockholders based on their respective rights to receive dividends. Basic net income (loss) per share is then calculated by dividing income allocable to common stockholders (including the reduction for any undeclared, preferred stock dividends, assuming current income for the period had been distributed) by the weighted-average number of common shares outstanding, net of shares subject to repurchase by the Company, during the period.

Pro forma Net Income Per Share (unaudited)

Pro forma basic net income per share for the latest year end and interim period only has been computed to give effect to the conversion of the Series A convertible preferred stock into common stock upon the closing of the Company’s initial public offering on an if-converted basis.

Pro forma basic and diluted net income per share for all periods presented has also been presented only to give effect to the pro forma provision for income taxes as if the Company had been a C corporation for all periods.

 

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Table of Contents

U.S. AUTO PARTS NETWORK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information subsequent to December 31, 2005 and pertaining to September 30, 2006

and the nine months ended September 30, 2005 and 2006 is unaudited)

 

Share-Based Compensation

The Company accounts for share-based compensation in accordance with SFAS No. 123 (revised 2004), “ Share-Based Payment ” (“SFAS No. 123(R)”), which was adopted on January 1, 2006. No stock options were granted prior to December 31, 2005. All stock options issued to employees are recognized as share-based compensation expense in the financial statements based on their respective grant date fair values, and are recognized within the statement of income as general and administrative, marketing, fulfillment or technology, based on employee departmental classifications.

Under this standard, the fair value of each share-based payment award is estimated on the date of grant using an option pricing model that meets certain requirements. The Company currently uses the Black-Scholes option pricing model to estimate the fair value of share-based payment awards. The determination of the fair value of share-based payment awards utilizing the Black-Scholes model is affected by our stock price and a number of assumptions, including expected volatility, expected life, risk-free interest rate and expected dividends. We do not have a history of market prices of our common stock as we are not a public company, and as such we estimate volatility in accordance with SAB No. 107 using historical volatilities of similar public entities. The expected life of the awards is based on a simplified method which defines the life as the average of the contractual term of the options and the weighted average vesting period for all open tranches. The risk-free interest rate assumption is based on observed interest rates appropriate for the terms of our awards. The dividend yield assumption is based on our expectation of paying no dividends. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

For non-employees, the Company accounts for share-based compensation in accordance with Emerging Issues Task Force No. 96-18, “ Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services .” Equity instruments awarded to non-employees are periodically re-measured as the underlying awards vest unless the instruments are fully vested, immediately exercisable and non-forfeitable on the date of grant.

Segment Data

The Company manages its operations on a consolidated basis for purposes of assessing performance and making operating decisions. Accordingly, the Company operates in one reportable segment.

Recent Accounting Pronouncements

In July 2006, the FASB issued Financial Accounting Standards Board Interpretation No. 48, “ Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109 ” (“FIN 48”). FIN 48 clarifies the recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company will adopt this interpretation as required. The Company is currently evaluating the impact of this interpretation on its consolidated financial statements.

 

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Table of Contents

U.S. AUTO PARTS NETWORK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information subsequent to December 31, 2005 and pertaining to September 30, 2006

and the nine months ended September 30, 2005 and 2006 is unaudited)

 

2.   Property and Equipment, Net

The Company’s fixed assets consisted of computer software (internally developed and purchased), machinery and equipment, furniture and fixtures, and vehicles, and are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are provided for in amounts sufficient to relate the cost of depreciable and amortizable assets to operations over their estimated service lives. Depreciation expense for the years ended December 31, 2003, 2004 and 2005 was $120,000, $130,000 and $181,000, respectively. Depreciation expense for the nine months ended September 30, 2005 and 2006 was $118,000 and $257,000, respectively. Software amortization expense for the years ended December 31, 2004 and 2005 was $317,000 and $1.8 million, respectively. Software amortization expense for the nine months ended September 30, 2005 and 2006 was $1.3 million for each such period. The Company had no software amortization expense for the year ended December 31, 2003. The cost and related accumulated depreciation of assets retired or otherwise disposed of are removed from the accounts and the resultant gain or loss is reflected in earnings. During 2004, the Company purchased $2.9 million of software from a related party, which is included in computer software and equipment, to support its online marketing efforts. The fair value of the software purchase was supported through an independent third-party valuation.

Property and equipment consisted of the following at December 31, 2004 and 2005 and at September 30, 2006:

 

     December 31,    

September 30,
2006

 
     2004     2005    
     (in thousands)  

Machinery and equipment

   $ 561     $ 1,180     $ 1,781  

Computer software and equipment

     3,323       3,546       3,894  

Vehicles

     112       116       144  

Leasehold improvements

     3       52       111  

Furniture and fixtures

     149       40       101  

Construction in process

                 383  
                        
     4,148       4,934       6,414  

Less accumulated depreciation and amortization

     (699 )     (2,675 )     (4,447 )
                        

Property and equipment, net

   $ 3,449     $ 2,259     $ 1,967  
                        

Depreciation of property and equipment is provided using the straight-line method for financial reporting purposes, at rates based on the following estimated useful lives:

 

     Years

Machinery and equipment

   3 – 5

Computer software (purchased and developed)

   2 – 5

Computer equipment

   3 – 5

Vehicles

   3 – 5

Leasehold improvements

   3 – 5

Furniture and fixtures

   5 – 7

 

F-18


Table of Contents

U.S. AUTO PARTS NETWORK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information subsequent to December 31, 2005 and pertaining to September 30, 2006

and the nine months ended September 30, 2005 and 2006 is unaudited)

 

3.   Line of Credit

At December 31, 2004, the Company had a $3.0 million committed line of credit agreement with a bank with interest at 0.25% above the lender’s reference rate, which expired on July 30, 2005. The credit line was extended to May 19, 2007, and was increased to $7.0 million. At December 31, 2004, the Company had $1.5 million outstanding under the line of credit with a weighted-average interest rate of 5.5%. No amounts were outstanding at December 31, 2005 or at September 30, 2006. The credit agreement contains customary covenants that, among other things, requires compliance with certain financial ratios and targets and restricts the incurrence of additional indebtedness. At December 31, 2004 and 2005, the Company was out of compliance with the maximum stockholder distribution covenant, but received a waiver from the bank as of the end of each year. For purposes of complying with our interim (June 30, 2006) loan covenants our note holder amended (as of June 30, 2006 only) our original covenant related to EBITDA to add back share based compensation; however, we are compliant with all of our original loan covenants as of September 30, 2006. The Company was in compliance with all other covenants. There are no compensating balance requirements. All the assets of the Company serve as collateral on the line of credit.

 

4.   Notes Payable

Notes payable consists of the following:

 

    

December 31,

   

Sept. 30,
2006

 
     2004     2005    
     (in thousands)  

Secured debt, payable beginning March 31, 2007, with interest at 4.58% for 12 months, then LIBOR plus 1.5%

   $     $     $ 10,000  

Secured debt, payable beginning June 30, 2007, with interest at LIBOR plus 1.75%, net

                 19,706  

Notes payable to stockholders, payable beginning June 30, 2007, with interest at LIBOR

                 5,000  

Note payable, $96 monthly with interest of 5.00%, due on January 1, 2006

       1,060       96        

Note payable, $50 monthly with imputed interest of 5.00%, due on October 1, 2005

     489              
                        

Total

     1,549       96       34,706  

Less current portion

     (1,549 )     (96 )     (6,889 )
                        

Long-term notes payable

   $     $       —     $ 27,817  
                        

On March 3, 2006, the Company entered into a secured $10.0 million loan agreement with a bank in connection with the recapitalization. The loan bears interest at 4.58% for the first twelve months and LIBOR plus 1.5% thereafter. On May 19, 2006, the Company entered into a secured loan agreement with the same bank to provide financing for the cash portion of the purchase price for the acquisition of Partsbin in the amount of $22.0 million. In August 2006, the Company made an early payment of $2.0 million toward the principal balance of the loan, reducing the balance to $20.0 million. The loan bears interest at

 

F-19


Table of Contents

U.S. AUTO PARTS NETWORK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information subsequent to December 31, 2005 and pertaining to September 30, 2006

and the nine months ended September 30, 2005 and 2006 is unaudited)

 

LIBOR plus 1.75% and is interest only until April 2007. The term of each loan is four years with monthly payment of principal and interest required after the first year. The loans are also required to be paid off with the proceeds of a qualified initial public offering, as defined in such agreements. The loans are secured by substantially all of the assets of the Company.

As a component of the purchase price for the acquisition of Partsbin, the Company entered into promissory notes in the aggregate principal amount of $5.0 million with the stockholders of Partsbin. The notes bear interest at LIBOR and is interest only until June 2007. Beginning in the quarter ending June 30, 2007, the notes are payable in equal quarterly installments until March 31, 2008. The notes will become due and payable upon the consummation of an initial public offering, as defined in such notes. The notes are secured by substantially all the assets of the Company.

The discount on notes payable represents fees paid to the lender plus the fair value of the warrant issued in connection with the loan.

Future maturities of notes payable will be $—, $10.8 million, $11.9 million, $10.7 million and $1.6 million in 2006, 2007, 2008, 2009 and 2010, respectively.

At December 31, 2004 and 2005, the Company had unsecured notes outstanding to a related third party totaling $1.5 million and $96,000, respectively, with a weighted-average interest rate of 5.0%. These notes were paid off during 2006.

 

5.   Series A Convertible Preferred Stock and Stockholders’ Equity

On March 3, 2006, the Company completed a recapitalization. As part of this transaction, the Company sold 11,055,425 shares of Series A convertible preferred stock (the “Preferred Stock”) at a purchase price of $4.07 per share, or $45.0 million in the aggregate. Issuance costs totaled approximately $2.9 million and included the value of the warrants issued. The warrants were valued at $108,000 using the Black-Scholes valuation model using the following assumptions: expected life of 2 years; risk-free interest rate of 4.75%; volatility (based upon historical volatilities of similar public entities) of 31%; and dividend yield of 0%. Total issuance costs were netted against the proceeds received. The Preferred Stock is convertible on a one-to-one basis, at the option of the holders thereof, into shares of common stock. Each share of the Preferred Stock converts automatically into common stock upon completion of a qualified initial public offering, as defined. In the event of a liquidation, dissolution or winding up of the Company, the holders of the Preferred Stock will be entitled to receive, prior to any distribution to the holders of common stock, an amount equal to $4.07 per share. The Preferred Stock is also entitled to receive dividends, when and if declared by the Board of Directors. In addition to the foregoing rights and privileges, the holders of the Preferred Stock are entitled to elect two directors to the Company’s board of directors.

As part of the recapitalization, the stockholders approved a stock split of the Company’s common stock at a ratio of 1,100 shares for every one share previously held. The stock split became effective on March 3, 2006. All share and per share data included in these consolidated financial statements retroactively reflect the stock split.

Share-Based Compensation

The Company adopted the U.S. Auto Parts Network, Inc. 2006 Equity Incentive Plan in March 2006. The Company grants stock options to purchase common stock to employees with exercise prices equal to

 

F-20


Table of Contents

U.S. AUTO PARTS NETWORK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information subsequent to December 31, 2005 and pertaining to September 30, 2006

and the nine months ended September 30, 2005 and 2006 is unaudited)

 

the fair value of the underlying stock, as determined by the Company’s board of directors on the date the option is granted. The board of directors determines the value of the underlying stock by considering a number of factors, including historical and projected financial results, the risks the Company faced at the time, the preferences of the Company’s preferred stock holders and the lack of liquidity of the Company’s common stock.

Under SFAS No. 123(R), the Company recognizes the cost of all employee stock options on a straight-line attribution basis, using their respective grant date fair values, over the vesting periods, net of estimated forfeitures. The Company’s adoption of SFAS No. 123(R) effective January 1, 2006, resulted in the recognition of additional share-based compensation expense and a reduction of net income of $604,000 during the nine months ended September 30, 2006. This share-based compensation expense caused the Company’s basic and diluted net income per share for the nine months ended September 30, 2006 to be reduced by $ 0.03 and $ 0.02, respectively.

The table below sets forth the expected amortization of share-based compensation expense for the entire year of 2006 and for the following four years for all options granted as of September 30, 2006, assuming all employees remain employed by the Company for their remaining vesting periods:

 

     Years Ending December 31,
     2006    2007    2008    2009    2010
     (in thousands)

Amortization of share-based compensation

   $ 971    $ 1,469    $ 1,469    $ 1,414    $ 456

The table below summarizes the stock option activity during the nine months ended September 30, 2006, which resulted in share-based compensation expense:

 

       Nine Months Ended
September 30, 2006
     Shares     Weighted
Average
Exercise Price

Options outstanding, December 31, 2005

       $

Granted

   4,047,740       4.92

Exercised

        

Expired

        

Forfeited

   (20,180 )     5.01
            

Options outstanding, September 30, 2006

   4,027,560     $ 4.92
            

Options exercisable, September 30, 2006

   4,027,560     $ 4.92
            

 

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Table of Contents

U.S. AUTO PARTS NETWORK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information subsequent to December 31, 2005 and pertaining to September 30, 2006

and the nine months ended September 30, 2005 and 2006 is unaudited)

 

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:

 

     Nine Months Ended
September 30, 2006

Expected life

   3– 4 years

Risk-free interest rate

   5%

Expected volatility

   30% – 31%

Expected dividend yield

   0%

Using the Black-Scholes option-pricing model for the estimated weighted average fair value of an option to purchase one share of common stock granted during the nine months ended September 30, 2006, the resulting fair value was $1.55 per share of common stock subject to options. As of September 30, 2006 the Company had 337,780 shares reserved for future grants under the Company’s 2006 Equity Incentive Plan.

The weighted average expected option term for the nine months ended September 30, 2006 reflects the application of the simplified method set out in SAB No. 107. The simplified method defines the life as the average of the contractual term of the options and the weighted average vesting period for all option tranches. Estimated volatility for the nine months ended September 30, 2006 also reflects the application of SAB No. 107 interpretive guidance and, accordingly, incorporates historical volatility of similar entities whose share prices are publicly available.

As of September 30, 2006, there was $5.8 million of unrecognized compensation expense related to stock options granted after January 1, 2006, which expense is expected to be recognized over a weighted-average period of 4.0 years.

Warrants

At September 30, 2006, the Company had outstanding vested warrants to purchase up to 140,554 shares of common stock, which warrants terminate three years after their respective grant dates. The following table summarizes the warrants outstanding at September 30, 2006:

 

Security Issued

Upon Exercise

   No. of
Shares
   Grant Date    Exercise
Price
   Purpose of Grant

Common stock

   110,554    March 3, 2006    $ 4.07    Financial advisory
services

Common stock

   30,000    May 22, 2006    $ 5.50    Lending arrangement
             

Total

   140,554         

The March 3, 2006 warrants were issued in connection with the placement of the Series A convertible preferred stock to the placement agent as a portion of their fee. The warrants are immediately exercisable, and fully vested. The fair value of these warrants has been netted against the proceeds of the private placement and recorded as a reduction to the preferred stock. The May 22, 2006 warrants were issued as part of the $22.0 million secured debt financing associated with the Partsbin acquisition and was recorded as a discount on notes payable. Both issuances increased additional paid-in-capital on common stock.

 

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Table of Contents

U.S. AUTO PARTS NETWORK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information subsequent to December 31, 2005 and pertaining to September 30, 2006

and the nine months ended September 30, 2005 and 2006 is unaudited)

 

The Company determined the fair value of the warrants at the date of grant using the Black-Scholes option pricing model based on the estimated fair value of the underlying common stock, a volatility rate ranging from 30% to 31%, zero dividends, a risk-free interest rate ranging from 4.75% to 5.00%, and an expected life of two years.

 

6.   Net Income Per Share

EITF No. 03-6 does not require the presentation of basic and diluted net income per share for securities other than common stock. Therefore, the following net income per share amounts only pertain to the Company’s common stock. The Company calculates diluted net income per share under the if-converted method unless the conversion of the preferred stock is anti-dilutive to basic net income per share. To the extent preferred stock is anti-dilutive, the Company calculates diluted net income per share under the two-class method. The following table sets forth the computation of basic and diluted net income per share:

 

     Years Ended December 31,    Nine Months Ended
September 30,
     2003    2004    2005        2005            2006    
     (in thousands, except share and per share data)

Historical Net Income Per Share

              

Numerator:

              

Net income

   $ 3,771    $ 7,133    $ 6,819    $ 4,758    $ 3,535

Denominator:

              

Weighted-average common shares outstanding (basic)

     18,794,793      22,000,000      22,000,000      22,000,000      23,634,781

Common equivalent shares from conversion of preferred stock

                         8,585,165

Common equivalent shares from common stock options and warrants

                         50,369
                                  

Weighted-average common shares outstanding (diluted)

     18,794,793      22,000,000      22,000,000      22,000,000      32,270,315

Basic net income per share

   $ 0.17    $ 0.32    $ 0.31    $ 0.22    $ 0.15

Diluted net income per share

   $ 0.17    $ 0.32    $ 0.31    $ 0.22    $ 0.11
                                  

Proforma Net Income Per Share for Provision for Income Taxes (unaudited)

              

Income before income taxes

   $ 4,249    $ 7,461    $ 6,656    $ 4,559    $ 4,074

Proforma provision for income taxes (unaudited)

     1,729      2,964      2,657      1,822      1,728
                                  

Proforma net income (unaudited)

   $ 2,520    $ 4,497    $ 3,999    $ 2,737    $ 2,346
                                  

Proforma basic net income per share (unaudited)

   $ 0.13    $ 0.20    $ 0.18    $ 0.12    $ 0.10

Proforma diluted net income per share (unaudited)

   $ 0.13    $ 0.20    $ 0.18    $ 0.12    $ 0.07

 

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Table of Contents

U.S. AUTO PARTS NETWORK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information subsequent to December 31, 2005 and pertaining to September 30, 2006

and the nine months ended September 30, 2005 and 2006 is unaudited)

 

Potentially dilutive securities not included in the calculation of diluted net income per share because to do so would be anti-dilutive are as follows (in common equivalent shares):

 

     Years Ended December 31,   

Nine Months Ended

September 30,

     2003    2004    2005    2005    2006

Convertible preferred stock

     —      —      —      —   

Common and preferred stock warrants

     —      —      —      —   

Options to purchase common stock

     —             2,780,441

Shares of common stock subject to repurchase

     —            
                        

Total

     —      —      —      —    2,780,441
                        

Pro Forma Net Income Per Share for Conversion of Preferred Shares (unaudited)

The following table sets forth the computation of pro forma basic net income per share (in thousands, except share and per share amounts):

 

    Year Ended
December 31,
2005
 

Nine Months Ended
September 30,

2006

Numerator:

   

Net income

  $ 6,819   $ 3,535

Denominator:

   

Weighted average common shares outstanding (basic)

    22,000,000     23,634,781

Add: Adjustment to reflect the assumed conversion of convertible preferred stock from January 1, 2005 (unaudited)

    11,055,425     11,055,425
           

Denominator for basic pro forma calculation (unaudited)

    33,055,425     34,690,206

Pro forma basic net income per common share (unaudited)

  $ 0.21   $ 0.10

 

7.   Income Taxes

From inception to March 2, 2006, the Company operated as an S corporation. Deferred tax assets and liabilities are recognized for the tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A deferred tax asset valuation allowance will be recorded if it is more likely than not that all or a portion of the recorded deferred tax assets will not be realized.

For informational purposes, the combined statements of operations include a pro forma adjustment for income taxes that would have been recorded if the Company had been a C corporation from inception, calculated in accordance with FAS No. 109, “ Accounting for Income Taxes .”

 

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Table of Contents

U.S. AUTO PARTS NETWORK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information subsequent to December 31, 2005 and pertaining to September 30, 2006

and the nine months ended September 30, 2005 and 2006 is unaudited)

 

Income tax expense as it relates to the Company’s consolidated entity which was a C corporation for the years ended December 31, 2003, 2004 and 2005 consists of the following:

 

     Years Ended December 31,    

Nine Months Ended

September 30,

 
         2003             2004            2005             2005             2006      
     (in thousands)  

Current:

           

Federal tax

   $ 357     $ 80    $ (209 )   $ (209 )   $ 1,859  

State tax

     155       134      148       90       501  
                                       

Total current taxes

     512       214      (61 )     (119 )     2,360  
                                       

Deferred:

           

Federal tax

     (32 )     85      (54 )     (54 )     (1,433 )

State tax

     (2 )     29      (48 )     (26 )     (388 )
                                       

Total deferred taxes

     (34 )     114      (102 )     (80 )     (1,821 )
                                       

Income tax expense (benefit), consolidated

   $ 478     $ 328    $ (163 )   $ (199 )   $ 539  
                                       

Income tax expense differs from the amount that would result from applying the federal statutory rate as follows:

 

     Years Ended December 31,    

Nine Months Ended

September 30,

 
         2003            2004            2005             2005             2006      
     (in thousands)  

Income tax at U.S. federal statutory rate:

            

U.S. Auto Parts Network

   $    $    $     $     $ 670  

MBS Marketing

     325      165      (3 )     (3 )      

Share-based compensation

                           99  

State income tax, net of federal tax effect

     153      163      115       79       240  

Change in rate for deferred tax assets

               (275 )     (275 )     (457 )

Other

                           (13 )
                                      

Effective tax provision (benefit)

   $ 478    $ 328    $ (163 )   $ (199 )   $ 539  
                                      

 

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Table of Contents

U.S. AUTO PARTS NETWORK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information subsequent to December 31, 2005 and pertaining to September 30, 2006

and the nine months ended September 30, 2005 and 2006 is unaudited)

 

Deferred tax assets and deferred tax liabilities at December 31, 2004 and 2005 and at September 30, 2005 and 2006 consisted of the following:

 

     December 31,   

Nine Months Ended

September 30,

     2003    2004     2005        2005            2006    
     (in thousands)

Deferred tax assets:

             

Inventory reserve

   $ 3    $ 5     $ 14    $ 19    $ 339

Share-based compensation

                          152

Amortization

                          1,130

Deferred California tax deduction

     32      48                 24

Other

     5      4       8      7      390
                                   

Total deferred tax assets

     40      57       22      26      2,035

Deferred tax liability:

             

Tax over book depreciation

     1      103            2      78

Tax over book goodwill amortization

                          114

Accrual to cash adjustment

          30                
                                   

Total deferred tax liability

     1      133            2      192
                                   

Net consolidated deferred tax assets (liabilities)

   $ 39    $ (76 )   $ 22    $ 24    $ 1,843
                                   

Current portion of deferred tax assets is included in other current assets. Included in accrued expenses is income taxes payable in the amount of $609,000, $0 and $377,000 for the years ended December 31, 2004 and 2005 and for the nine months ended September 30, 2006, respectively.

 

8.   Related-Party Transactions

Prior to November 2003, the Company leased its corporate headquarters and primary warehouse facility from one of the stockholders of the Company. Lease payments and expense under this arrangement totaled $271,000 for the year ended December 31, 2003. Beginning in November 2003, the Company leased its corporate headquarters and primary warehouse from Nia Chloe, LLC, (“Nia Chloe”) a related party with ownership which mirrored the ownership of the Company. Lease payments and expenses associated with this related party arrangement totaled $106,000, $420,000 and $475,000, respectively, for the years ended December 31, 2003, 2004 and 2005 and $352,000, and $415,000, respectively, for the nine months ended September 30, 2005 and 2006. The Company had guaranteed Nia Chloe’s loans from two banks in the aggregate amount of $3.4 million with respect to the property that it leases from Nia Chloe. Such guarantees were terminated in March 2006. An unsecured, non-interest bearing receivable totaling $76,000 was due from Nia Chloe as of December 31, 2003. This balance was repaid to the Company in 2004. An unsecured, non-interest bearing loan of $94,000 was due to Nia Chloe and payable upon demand as of December 31, 2004. This loan was repaid in 2005. The Company has evaluated its relationship with Nia Chloe with regard to FIN 46R, “ Consolidation of Variable Interest Entities ”. The Company has determined that Nia Chloe does not meet the criteria for consolidation under FIN 46R and therefore this entity is not consolidated in the Company’s financial statements.

 

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Table of Contents

U.S. AUTO PARTS NETWORK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information subsequent to December 31, 2005 and pertaining to September 30, 2006

and the nine months ended September 30, 2005 and 2006 is unaudited)

 

In the year ended December 31, 2004, the Company paid $83,000 to one of its directors and officers for the purchase of equipment.

Prior to the merger of MBS into the Company in June 2005 (see Note 1), MBS provided marketing services to the Company and received an aggregate of $10,000, $498,000 and $338,000 from the Company in the years ended December 31, 2003, 2004 and 2005, respectively. The ownership of MBS, prior to the merger, mirrored the ownership of the Company.

In September 2006, MBS Tek was recapitalized and became a majority-owned subsidiary of the Company. The Company owns all of the outstanding shares of MBS Tek except for five shares in the aggregate, representing approximately 0.1% of the total outstanding shares of MBS Tek, of which two of the Company’s officers each hold one share. Prior to September 2006, MBS Tek was owned by certain stockholders of the Company and mirrored the ownership of the Company. For the year ended December 31, 2005 and for the nine months ended September 30, 2006, the Company paid MBS Tek an aggregate of $398,000 and $759,000, respectively, in connection with marketing, software development, sales and customer service.

In September 2002, the landlord of a related party filed a lawsuit in Los Angeles Superior Court alleging certain breaches of a lease relating to a property located in Los Angeles, California. The Company was sub-lessee to the property and was added as a co-defendant in the lawsuit, which was settled in March 2003. In October 2004, a lawsuit was filed against the Company and an officer, director and stockholder of the Company in connection with another business that had been owned by the related party. The Company was dismissed from the lawsuit in October 2005. The Company paid approximately $29,000, $84,000 and $118,000 during the years ended December 31, 2003, 2004 and 2005, respectively, to defend and settle these lawsuits.

During 2004, the Company purchased, through MBS, $2.9 million in software from a related party, to support its online marketing efforts. The Company supported the fair value of the software purchase through an independent third-party valuation. At December 31, 2004 and 2005, the Company had unsecured notes payable outstanding for this software purchase, totaling $1.5 million and $96,000, respectively, with an interest rate of 5.0% per annum. These notes were repaid during the nine months ended September 30, 2006. Since the software purchases in 2004, the Company has continued to purchase software and other products and services from the related party. The Company’s payments to the related party for such services and products in 2003, 2004 and 2005 totaled $665,000, $827,000 and $23,000, respectively.

From time to time, the Company has purchased inventory from an entity partially owned by the Company’s Chairman. During the years ended December 31, 2003, 2004 and 2005 and the nine months ended September 30, 2006, the Company purchased inventory totaling $253,000, $185,000, $415,000 and $336,000, respectively, which the Company believes to be at fair market value.

In addition, the Company purchased office and warehouse supplies during the year ended December 31, 2005 and the nine months ended September 30, 2006 from a related party in the amount of $114,000 and $97,000, respectively, which the Company believes was the fair market value of the supplies.

Since 2004, a related party has used a portion of the Company’s facility located in Nashville, Tennessee. For the years ended December 31, 2004 and 2005, the related party paid to the Company $41,000 and $36,000, respectively, as payment for its use of such portion of the Company’s Tennessee facility.

 

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Table of Contents

U.S. AUTO PARTS NETWORK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information subsequent to December 31, 2005 and pertaining to September 30, 2006

and the nine months ended September 30, 2005 and 2006 is unaudited)

 

The Company paid a related party consulting fees which totaled $120,000 for the year ended December 31, 2005, and $30,000 during the nine months ended September 30, 2006. The Company terminated this arrangement in April 2006.

A related entity also provides printing services for the Company. For the years ended December 31, 2003, 2004 and 2005, the Company paid this entity $62,000, $120,000 and $101,000, respectively, for such services.

A family member of a director, officer and stockholder of the Company received wages from the Company totaling approximately $61,000, $69,000 and $79,000 in 2003, 2004 and 2005, respectively, as an employee in the Company’s sales department.

In 2004, the Company recorded, as non-interest bearing loans, certain amounts associated with capital account balance adjustments resulting from certain S corporation tax distributions the Company made to the Company’s stockholders in those periods. The total amounts of the loans recorded were $165,000 and $356,000 in 2003 and 2004, respectively. As of September 30, 2006, no amounts associated with these loan entries were due or payable.

In March 2006, concurrently with the Company’s recapitalization and the termination of the Company’s S corporation status, the Company distributed to the Company’s stockholders an aggregate of $51.7 million in cash, in proportion to their ownership of the Company’s company. Those stockholders are also directors and officers of the Company.

In connection with the Company’s acquisition of Partsbin in May 2006, the Company issued to a stockholder of Partsbin a promissory note in the principal amount of approximately $1.9 million, which bears interest at LIBOR, all of which was outstanding as of September 30, 2006. The stockholder currently serves as a director and officer of the Company. The Company intends to repay the note in full upon consummation of this offering.

The Company has entered into indemnification agreements with the Company’s directors and executive officers. These agreements require the Company to indemnify these individuals to the fullest extent permitted under law against liabilities that may arise by reason of their service to the Company, and to advance expenses incurred as a result of any proceeding against them as to which they could be indemnified. The Company also intends to enter into indemnification agreements with the Company’s future directors and executive officers.

 

9.   Commitments and Contingencies

The Company’s corporate headquarters and primary warehouse facilities are under a five-year noncancelable operating lease expiring in December 2008. The rent for the facilities is increased annually by the greater of 2% or the increase in the U.S. Consumer Price Index. During 2003, the Company had a two-year noncancelable operating lease which was converted to the above agreement.

The Company also leases warehouse space adjacent to its primary facility in Carson, California from a third party under an agreement that expired August 31, 2006. This lease was renewed through August 31, 2008. Additionally, the Company leases warehouse space in Tennessee from a third party under an agreement that expired December 31, 2005, and office space in Marina del Rey, California from a third

 

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Table of Contents

U.S. AUTO PARTS NETWORK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information subsequent to December 31, 2005 and pertaining to September 30, 2006

and the nine months ended September 30, 2005 and 2006 is unaudited)

 

party under an agreement that expires November 30, 2006, with monthly payments of $2,368. The Company also leases office space internationally, with minimal lease cost, to help support its Internet marketing and administrative functions.

As part of the Partsbin acquisition on May 19, 2006, the Company acquired a lease for office space in Trenton, New Jersey with monthly payments of $10,517 and additional rent for common area maintenance charges, real estate taxes, water, sewer and utilities. This lease expires in October 2009.

Facility rent expense, inclusive of amounts paid to Nia Chloe for the years ended December 31, 2003, 2004 and 2005, were $513,000, $663,000 and $790,000, respectively, and for the nine months ended September 30, 2005 and 2006 were $613,000 and $664,000, respectively.

Future minimum facility lease payments required under the above operating leases as of December 31, 2005 are:

 

     Related
Parties
   Unrelated
Parties
   Total

Year Ending December 31,

   (in thousands)

2006

   $ 499    $ 195    $ 694

2007

     509           509

2008

     520           520
                    

Total

   $ 1,528    $ 195    $ 1,723
                    

Obligations Under Capital Leases

The Company finances certain equipment under capital leases. Assets held under capital leases totaled $241,000 and $710,000 for the years ended December 31, 2004 and 2005, respectively, and totaled $252,000 for the nine months ended September 30, 2006. Accumulated depreciation for assets held under capital leases totaled $121,000 and $208,000 for the years ended December 31, 2004 and 2005, respectively, and was $60,000 for the nine months ended September 30, 2006. Depreciation of assets held under capital leases is included in depreciation expense and was $38,000, $42,000 and $95,000 for the years ended December 31, 2003, 2004 and 2005, respectively, and was $61,000 and $41,000 for the nine months ended September 30, 2005 and 2006, respectively. Capitalized leases bear interest ranging from a nominal rate to 10.68%.

 

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Table of Contents

U.S. AUTO PARTS NETWORK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information subsequent to December 31, 2005 and pertaining to September 30, 2006

and the nine months ended September 30, 2005 and 2006 is unaudited)

 

Future minimum lease payments under capital leases as of December 31, 2005 are:

 

Year Ending December 31,

   (in thousands)  

2006

   $ 203  

2007

     184  

2008

     128  

2009

     70  

2010

     7  
        

Total minimum payment

     592  

Less amounts representing interest

     (65 )
        

Total obligation under capital leases

     527  

Less current portion

     (170 )
        

Long-term obligation

   $ 357  
        

Legal Matters

On December 2, 2005, Ford Global Technologies, LLC (“Ford”) filed a complaint with the United States International Trade Commission (“USITC”) against the Company and five other named respondents, including four Taiwan-based manufacturers. On December 12, 2005, Ford filed an amended complaint. Both the complaint and the amended complaint charge the Company and the other respondents with infringement of 14 design patents that Ford alleges cover eight parts on the 2004-2005 Ford F-150 truck (the “Ford Design Patents”). Ford has asked the USITC to issue a permanent general exclusion order excluding from entry into the United States all automotive parts that infringe the Ford Design Patents and that are imported into the United States, sold for importation in the United States, or sold within the United States after importation. Ford also seeks a permanent order directing the Company and the other respondents to cease and desist from, among other things, selling, marketing, advertising, distributing and offering for sale imported automotive parts that infringe the Ford Design Patents. The Company filed its response to the complaint with the USITC in January 2006 denying, among other things, that any of the Ford Design Patents is valid and/or enforceable and, accordingly, denying each and every allegation of infringement. The Company also asserted several affirmative defenses, any of which, if successful, would preclude the USITC from granting any of Ford’s requested relief. Some of these defenses were struck by the Administrative Law Judge (“ALJ”) in response to a motion by Ford, but we expect that these interlocutory rulings will eventually be reviewed by the USITC Commissioners following the ALJ’s ruling on the overall investigation. Additionally, the ALJ has recently granted Ford’s request to drop four patents from the investigation. A hearing before the ALJ occurred in August 2006, and the deadline for the ALJ’s ruling is December 4, 2006. The deadline for a determination by the USITC is March 5, 2007. The Company will continue to vigorously defend this action. To date, the Company’s sales of these parts have been minimal, but as the design for the 2004 model is incorporated into later year models of the F-150 and these trucks have been on the road longer, sales of aftermarket replacement parts for these trucks may increase substantially. If the USITC were to uphold each of the remaining ten design patents in question, it is not anticipated that the loss of sales of these parts over time would be materially adverse to the financial condition or results of operations of the Company. However, depending upon the nature and extent of any adverse ruling, other car manufacturers may attempt to assert similar allegations based upon design patents

 

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Table of Contents

U.S. AUTO PARTS NETWORK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information subsequent to December 31, 2005 and pertaining to September 30, 2006

and the nine months ended September 30, 2005 and 2006 is unaudited)

 

on a significant number of parts for several of their models, which over time could have a material adverse impact on the entire aftermarket parts industry.

 

10.   Employee Retirement Plan

Effective February 17, 2006, the Company adopted a 401(k) defined contribution retirement plan covering all full time employees who have completed one month of service. Participants may contribute up to 15% of their annual compensation to the plan. The Company may, at its sole discretion, match fifty cents per dollar up to 6% of each participating employee’s salary. The Company’s contributions vest in annual installments over three years. Discretionary contributions made by the Company totaled $54,000 for the nine months ended September 30, 2006.

 

11.   Recent Acquisition

On May 19, 2006, the Company acquired all of the assets of Partsbin, an online retailer of auto parts primarily selling engine parts, performance parts, and accessories to DIY consumers. The acquisition has been accounted for as a purchase in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, “ Business Combinations ,” and accordingly, the acquired assets and liabilities have been recorded at fair value. Because of this, different bases of accounting have been used to prepare the Company and Partsbin consolidated financial statements. In the future, the primary differences are expected to relate to additional interest expense on the new debt and amortization of the intangibles recorded at the date of the acquisition. The following preliminary allocation of the purchase price to assets acquired and liabilities assumed and various finite and indefinite lived intangible assets as well as goodwill is based on a preliminary independent valuation study.

The total purchase price for the acquisition was $50.6 million and consisted of $25.0 million in cash, $5.0 million in notes payable to the former stockholders of Partsbin and 3,305,529 fully vested shares of the Company’s common stock. In addition, the Company incurred $551,000 of direct transaction costs related to the acquisition. In addition to the purchase price, the Company issued to the former stockholders of Partsbin options exercisable for 1.9 million shares of the Company’s common stock, which will vest over four years. The options vest with respect to 25% of the shares one year after the grant date with the remaining shares vesting in 36 monthly installments. In accordance with EITF Issue No. 95-8, “ Accounting for Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase Business Combination ,” these options will be recorded as compensation expense in the period in which they are earned, as the vesting of shares is directly linked to continued employment with the Company. The notes payable require payment of principal and accrued interest on or before June 30, 2007. Interest expense on the notes payable was accrued in the accompanying consolidated statement of operations.

 

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U.S. AUTO PARTS NETWORK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information subsequent to December 31, 2005 and pertaining to September 30, 2006

and the nine months ended September 30, 2005 and 2006 is unaudited)

 

The results of operations of Partsbin and the estimated fair market values of the acquired assets and liabilities have been included in the consolidated financial statements from the date of the acquisition. The components of the aggregate cost of the transaction are as follows (in thousands):

 

Cash

   $ 25,000

Notes payable

     5,000

Common stock

     20,000

Transaction costs

     551
      

Total

   $ 50,551
      

The purchase price for the Partsbin transaction was preliminarily allocated to assets purchased and liabilities assumed based on their estimated fair values determined by management with the assistance of a third party valuation expert as follows (in thousands) and is subject to change pending the completion of the valuation report:

 

          

Estimated

Amortizable Life

Tangible assets:

    

Cash

   $ 1,097    

Inventory

     604    

Fixed assets:

    

Computers and software

     218     2-5 years

Machinery and equipment

     35     3-5 years

Vehicles

     16     3-5 years

Furniture and fixtures

     2     3-5 years

Other assets — current

     108    

Other assets — long term

     28    

Intangible assets:

    

Websites

     28,988     5 years

Software

     4,089     3 years

Vendor relationships

     2,996     3 years

Domain names

     2,345    

Goodwill

     13,929    
          

Total assets

     54,455    

Liabilities:

    

Accounts payable and accrued expenses

     (3,022 )  

Other current liabilities

     (867 )  

Note payable — current

     (8 )  

Note payable — long term

     (7 )  
          

Total liabilities

     (3,904 )  
          

Total purchase price

   $ 50,551    
          

Goodwill is comprised of the residual amount of the purchase price over the fair value of acquired tangible and intangible assets.

 

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U.S. AUTO PARTS NETWORK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Information subsequent to December 31, 2005 and pertaining to September 30, 2006

and the nine months ended September 30, 2005 and 2006 is unaudited)

 

In accordance with the purchase method of accounting, the operating results of Partsbin have been included in the Company’s consolidated operating results since the acquisition date, May 19, 2006. If the operating results of Partsbin had been included since the beginning of the period for years ended December 31, 2005 and the nine months ended September 30, 2006, the pro forma results of operations of the Company would be as follows:

 

    

Year Ended

December 31,

2005

   

Nine Months Ended

September 30, 2006

           (unaudited)
    

(in thousands, except share and

per share data)

Net sales

   $ 97,993     $ 107,524

Net income (loss)

     (3,092 )     1,316

Basic net income (loss) per share

   $ (0.12 )   $ 0.05

Diluted net income (loss) per share

   $ (0.12 )   $ 0.04

Weighted average shares used in computing basic net income (loss) per common share

     25,305,529       25,317,816

Weighted average shares used in computing diluted net income (loss) per common share

     25,305,529       33,953,350

 

12.   Quarterly Information (Unaudited)

The following quarterly information includes all adjustments which management considers necessary for a fair presentation of such information. For interim quarterly financial statements, the provision for income taxes is estimated using the best available information for projected results for the entire year.

 

    Three Months Ended
    March 31,
2005
 

June 30,

2005

  Sept. 30,
2005
 

Dec. 31,

2005

 

March 31,

2006

 

June 30,

2006

 

Sept. 30,

2006

    (in thousands, except share and per share data)

Consolidated Statement of Income Data:

             

Net sales

  $ 14,186   $ 15,238   $ 14,555   $ 15,719   $ 18,005   $ 26,966   $ 38,694

Gross profit

    6,326     5,828     5,949     6,766     7,746     9,349     12,791

Income from operations

    1,949     1,114     1,399     2,109     2,440     1,278     1,156

Income before income taxes

    2,012     1,139     1,407     2,098     2,549     964     561

Net income

  $ 1,978   $ 1,395   $ 1,383   $ 2,063   $ 2,712   $ 539     284

Basic net income per share

  $ 0.09   $ 0.06   $ 0.06   $ 0.09   $ 0.12   $ 0.02   $ 0.01

Diluted net income per share

  $ 0.09   $ 0.06   $ 0.06   $ 0.09   $ 0.11   $ 0.02   $ 0.01

Shares used in computation of basic net income per share

    22,000,000     22,000,000     22,000,000     22,000,000     22,000,000     23,534,919     25,332,801

Shares used in computation of diluted net income per share

    22,000,000     22,000,000     22,000,000     22,000,000     25,637,235     34,620,713     36,461,475

 

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Table of Contents

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

Stockholders/Members

All OEM Parts, Inc. and Affiliates

We have audited the accompanying combined balance sheets of All OEM Parts, Inc. and Affiliates as of December 31, 2004 and 2005, and the related combined statements of operations, stockholders’/members’ equity (deficiency) and cash flows for each of the years in the three-year period ended December 31, 2005. These combined financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these combined financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of All OEM Parts, Inc. and Affiliates as of December 31, 2004 and 2005 and their combined results of operations and cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.

/s/ J.H. COHN LLP

Lawrenceville, New Jersey

March 10, 2006, except for Note 9

which is as of May 19, 2006

 

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Table of Contents

ALL OEM PARTS, INC. AND AFFILIATES

COMBINED BALANCE SHEETS

(in thousands, except share data)

 

     December 31,     March 31,  
     2004     2005     2006  
                 (unaudited)  

Assets

      

Current assets:

      

Cash and cash equivalents

   $ 558     $ 328     $ 1,061  

Inventory

     134       264       383  

Other current assets

     131       212       204  
                        

Total current assets

     823       804       1,648  

Property and equipment, net

     247       779       781  

Intangible assets, net

     40       125       125  

Notes receivable from stockholders

     340       631       639  

Other noncurrent assets

     119       27       27  
                        

Total assets

   $ 1,569     $ 2,366     $ 3,220  
                        

Liabilities and Stockholders’/Members’ Equity (Deficiency)

      

Current liabilities:

      

Accounts payable and accrued expenses

   $ 1,543     $ 1,953     $ 1,958  

Line of credit

           20        

Notes payable

     9       10       8  

Other current liabilities

     235       526       574  
                        

Total current liabilities

     1,787       2,509       2,540  

Notes payable less current portion

     21       355       353  
                        

Total liabilities

     1,808       2,864       2,893  
                        

Commitments and contingencies

      

Stockholders’/members’ equity (deficiency):

      

Common stock:

      

No par value, 12,500 shares authorized; 500 issued and outstanding

     43       43       43  

Retained earnings (accumulated deficit)

     (281 )     (473 )     345  

Members’ deficiency

     (1 )     (68 )     (61 )
                        

Total stockholders’/members’ equity (deficiency)

     (239 )     (498 )     327  
                        

Total liabilities and stockholders’/members’ equity

   $ 1,569     $ 2,366     $ 3,220  
                        

See accompanying notes.

 

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ALL OEM PARTS, INC. AND AFFILIATES

COMBINED STATEMENTS OF OPERATIONS

(in thousands)

 

     Years Ended December 31,     Three Months Ended
March 31,
 
     2003     2004     2005         2005             2006      
                       (unaudited)  

Net sales

   $ 17,763     $ 23,679     $ 38,295     $ 7,470     $ 13,665  

Cost of sales

     13,596       18,148       29,398       5,746       10,255  
                                        

Gross profit

     4,167       5,531       8,897       1,724       3,410  
                                        

Operating expenses:

          

General and administrative

     1,189       1,480       3,111       665       998  

Marketing

     2,417       3,804       5,172       1,077       1,332  

Fulfillment

     31       36       50       13       11  

Technology

     318       319       563       113       238  
                                        

Total operating expenses

     3,955       5,639       8,896       1,868       2,579  
                                        

Income (loss) from operations

     212       (108 )     1       (144 )     831  

Other income (expense):

          

Loss from disposition of assets

     (9 )                        

Interest income

     2       2       2              

Interest expense

     (1 )     (2 )     (11 )     (1 )     (6 )
                                        

Total other income (expense)

     (8 )           (9 )     (1 )     (6 )
                                        

Income (loss) before income taxes

     204       (108 )     (8 )     (145 )     825  

Income tax provision

                              
                                        

Net income (loss)

   $ 204     $ (108 )   $ (8 )   $ (145 )   $ 825  
                                        

See accompanying notes

 

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Table of Contents

ALL OEM PARTS, INC. AND AFFILIATES

COMBINED STATEMENTS OF STOCKHOLDERS’/MEMBERS’

EQUITY (DEFICIENCY)

(in thousands, except share data)

 

     Common Stock    Retained
Earnings
(Accumulated
Deficit)
    Total
Stockholders’
Equity
(Deficiency)
   

Total

Members’
Equity
(Deficiency)

    Total  
     Shares    Amount         

Balance, December 31, 2002

   500    $ 22    $ (380 )   $ (358 )   $     $ (358 )

Net income (loss)

             205       205       (1 )     204  

Members’ contributions

                         2       2  
                                            

Balance, December 31, 2003

   500      22      (175 )     (153 )     1       (152 )

Net loss

             (106 )     (106 )     (2 )     (108 )

Stockholders’ contributions

        21            21             21  
                                            

Balance, December 31, 2004

   500      43      (281 )     (238 )     (1 )     (239 )

Net income (loss)

             59       59       (67 )     (8 )

Distributions to stockholders

             (251 )     (251 )           (251 )

Members’ contribution

                                
                                            

Balance, December 31, 2005

   500      43      (473 )     (430 )     (68 )     (498 )

Net income (unaudited)

             818       818       7       825  
                                            

Balance, March 31, 2006 (unaudited)

   500    $ 43    $ 345     $ 388     $ (61 )   $ 327  
                                            

See accompanying notes

 

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ALL OEM PARTS, INC. AND AFFILIATES

COMBINED STATEMENTS OF CASH FLOWS

(in thousands)

 

     Years Ended December 31,     Three Months Ended
March 31,
 
         2003             2004             2005             2005             2006      
                      

(unaudited)

 

Operating activities

          

Net income (loss)

   $ 204     $ (108 )   $ (8 )   $ (145 )   $ 825  

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

          

Depreciation and amortization

     35       66       122       24       34  

Loss on sale of assets

     9                          

Changes in operating assets and liabilities:

          

Inventory

     (125 )     58       (130 )     (149 )     (120 )

Other current assets

     (25 )     (101 )     (81 )     (31 )     8  

Other noncurrent assets

     (92 )     (9 )                  

Accounts payable and accrued expenses

     165       643       430       302       6  

Other current liabilities

     107       23       291       132       48  
                                        

Net cash provided by operating activities

     278       572       624       133       801  
                                        

Investing activities

          

Purchase of property, equipment and intangibles

     (52 )     (236 )     (323 )     (78 )     (35 )

Advances to stockholders

     (98 )     (224 )     (290 )     (42 )     (9 )
                                        

Net cash used in investing activities

     (150 )     (460 )     (613 )     (120 )     (44 )
                                        

Financing activities

          

Borrowings (payments) on line of credit

                 20       45       (20 )

Payments on notes payable

     (1 )     (11 )     (10 )     (2 )     (4 )

Distribution to stockholders

                 (251 )            

Capital contributions

     1       21                    
                                        

Net cash provided by (used in) financing activities

           10       (241 )     43       (24 )
                                        

Net increase (decrease) in cash and cash equivalents

     128       122       (230 )     56       733  

Cash and cash equivalents at beginning of period

     308       436       558       558       328  
                                        

Cash and cash equivalents at end of period

   $ 436     $ 558     $ 328     $ 614     $ 1,061  
                                        

Supplemental disclosure of noncash investing and financing activities:

        

Property and equipment acquired under note payable

   $ 22     $ 21     $ 345     $     $  

Purchase of intangible assets included in accounts payable

           20                    

Cash paid during the period for:

          

Interest

   $ 1     $ 2     $ 11     $ 1     $ 6  

Income taxes

     1       3       5             4  

See accompanying notes.

 

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Table of Contents

ALL OEM PARTS, INC. AND AFFILIATES

NOTES TO COMBINED FINANCIAL STATEMENTS

 

1.   Summary of Significant Accounting Policies and Nature of Operations

Principles of Combination and Business

The combined financial statements include the accounts of All OEM Parts, Inc., The Parts Bin.Com, Inc., Everything Internet, LLC, Auto Parts Web Solutions, Inc., Auto Parts Online Canada, Inc., Web Chat Solutions and TPB Real Estate, LLC (collectively, the “Company”), which are combined on the basis of common ownership and control. All material intercompany accounts and transactions have been eliminated in combination. The Company is primarily engaged in the distribution of automobile parts, primarily to car enthusiasts and repair specialists, via the Internet.

Unaudited Interim Financial Statements

The combined financial statements pertaining to March 31, 2006 and for the three months ended March 31, 2005 and 2006 are unaudited. The unaudited combined financial statements have been prepared on the same basis as the audited combined financial statements and, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary to state fairly the financial information set forth therein, in accordance with accounting principles generally accepted in the United States of America.

The results of operations for the three months ended March 31, 2006 are not necessarily indicative of the results which may be reported for any other interim period or for the year ending December 31, 2006.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.

Impairment of Long-Lived Assets

The Company follows Statement of Financial Accounting Standards (“SFAS”) No. 144, “ Accounting for the Impairment or Disposal of Long-Lived Assets. ” The Company reviews its long-lived assets, including property and equipment and capitalized software development costs, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. To determine the recoverability of its long-lived assets, the Company evaluates the probability that future undiscounted net cash flows, without interest charges, will be less than the carrying amount of the assets. If the estimated undiscounted cash flows are determined to be less than the carrying value of the long-lived asset, an impairment charge is recorded for the difference between the fair value as determined by discounting the anticipated future cash flows and the carrying value of the asset.

Cash Equivalents and Concentration of Credit Risk

The Company considers all highly liquid short-term investments with original maturities of 90 days or less to be cash equivalents. At times, the Company maintains cash and cash equivalent balances in excess of federally insured limits.

Inventory

Inventory is stated at the lower of cost (determined by the specific identification method) or market.

 

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Table of Contents

ALL OEM PARTS, INC. AND AFFILIATES

NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)

 

Property and Equipment

Property and equipment are stated at cost. Depreciation is generally computed on a straight-line basis and over the estimated useful lives of the assets. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful life of the asset.

Intangible Assets

The Company has adopted SFAS No. 142, “ Goodwill and Other Intangible Assets ” (“SFAS 142”). Under SFAS 142, intangible assets with indefinite useful lives are subject to reduction only when their carrying amounts exceed their estimated fair values based on impairment tests established by SFAS 142 that must be made at least annually. There was no impairment of intangible assets as a result of the annual impairment test completed during the fourth quarters of 2004 and 2005. Intangible assets are comprised of domain names which have indefinite lives and, as such, are not amortized.

Capitalized Software

The Company capitalizes payroll and payroll related costs for employees incurred in developing computer software for internal use, once certain criteria are met. In accordance with Statement of Position 98-1, “ Accounting for the Costs of Computer Software Developed or Obtained for Internal Use ” (“SOP 98-1”), costs incurred prior to the establishment of a substantive plan are charged to general and administrative expenses. Such internal use software is included in property and equipment and is amortized over a five year period.

Website Development Costs

The Company accounts for website development costs in accordance with Emerging Issues Task Force (“EITF”) Issue No. 00-2, “ Accounting for Website Development Costs ,” and SOP 98-1. All costs incurred in the planning stage of developing a website are expensed as incurred as are internal and external training costs and maintenance costs.

External and internal costs, excluding general and administrative costs and overhead costs, incurred during the applicable development stage of internally-used website software are capitalized. Such costs include external direct costs of materials and services consumed in development or obtaining website software, payroll and payroll related costs for employees who are directly associated with and who devote time to developing website software, and interest costs incurred while developing website software. Upgrades and enhancements that result in additional functionality to the website software, which enable it to perform tasks that it was previously incapable of performing, are also capitalized.

Capitalized internally-used website development costs are amortized on a straight-line basis over their estimated useful life of five years. Amortization begins when all substantial testing of the website is completed and the website is ready for its intended use.

Revenue Recognition

The Company recognizes revenue, net of sales returns, in accordance with accounting principles generally accepted in the United States and with SEC Staff Accounting Bulletin No. 104, “ Revenue Recognition ,” and in accordance with EITF Issue No. 99-19, “ Reporting Revenue Gross as a Principal Versus Net as an Agent ” (“EITF 99-19”). Recognition occurs when there is persuasive evidence of an

 

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Table of Contents

ALL OEM PARTS, INC. AND AFFILIATES

NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)

 

arrangement, the product is shipped to the customer, the fees are fixed and determinable and collection is reasonably assured. In general, revenue is recognized when the product is received by the customer. Deferred revenue represents cash receipts on orders that are in transit to the customer.

Advertising

Advertising costs are expensed as the Internet advertising takes place and amounted to $713,000 and $1.0 million for the three months ended March 31, 2005 and 2006, respectively. Advertising costs were $1.1 million, $2.4 million and $4.8 million for the years ended December 31, 2003, 2004 and 2005, respectively. Included in prepaid expenses and other receivables at March 31, 2005 and 2006 is $100,000 and $148,000, respectively, of prepaid advertising costs, which are being expensed in the period in which the advertising is used. Amounts were $14,000, $90,000 and $142,000 for the years ended December 31, 2003, 2004 and 2005 respectively.

Income Taxes

All OEM Parts, Inc., The Parts Bin.Com, Inc., Auto Parts Web Solutions, Inc. and Auto Parts Online Canada, Inc., with the consent of their stockholders, have elected to be treated as S corporations under the applicable sections of the Internal Revenue Code and various state regulations. Under these sections, corporate income or loss, in general, is taxable to the stockholders in proportion to their respective interests. In those states where S corporation status is not recognized, the Company will continue to be liable for those taxes.

Everything Internet, LLC and TPB Real Estate, LLC have elected to be treated as partnerships under the applicable sections of the Internal Revenue Code and various state regulations. The accompanying consolidated financial statements do not contain a provision or credit for income taxes related to Everything Internet, LLC and TPB Real Estate, LLC since the proportionate share of the income or loss is included in the tax returns of the members.

Web Chat Solutions, Inc. accounts for income taxes pursuant to the asset and liability method which requires deferred income tax assets and liabilities to be computed annually for differences between financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. No deferred taxes resulting from these differences are provided as the amount is considered insignificant.

 

2.   Vendor Concentrations

As of December 31, 2003, the Company had purchases from two vendors, which represented approximately 82% of total purchases. At December 31, 2003, $537,000 of accounts payable was due to these vendors. As of December 31, 2004, the Company had purchases from two vendors, which represented approximately 81% of total purchases. At December 31, 2004, $585,000 of accounts payable was due to these vendors. As of December 31, 2005, the Company had purchases from three vendors, which represented approximately 79% of total purchases. At December 31, 2005, $1.1 million of accounts payable was due to these vendors. During the three months ended March 31, 2005 and 2006, the Company had purchases from three vendors which represented approximately 88% and 74%, respectively, of total purchases. At March 31, 2005 and 2006, $933,000 and $891,000, respectively, of accounts payable was due to these vendors.

 

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ALL OEM PARTS, INC. AND AFFILIATES

NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)

 

3.   Notes Receivable — Stockholders

Notes receivable from stockholders are non-interest bearing with no specific repayment terms.

 

4.   Property and Equipment

Property and equipment consists of the following:

 

    

Estimated

Useful Lives

   As of December 31,     As of March 31,  
            2004             2005         2006  
          (in thousands)  

Condominium

   30 years    $     $ 460     $ 460  

Leasehold improvements

   life of lease      13       13       13  

Furniture and fixtures

   5-7 years      28       62       62  

Equipment

   3 years      46       92       95  

Capitalized software

   5 years      14       14       14  

Website development

   5 years      120       212       231  

Computers and software

   3-5 years      83       105       119  

Automobiles

   5 years      58       59       59  
                           
        362       1,017       1,053  

Less accumulated depreciation and amortization

        (115 )     (238 )     (272 )
                           

Property and equipment, net

      $    247     $ 779     $ 781  
                           

Depreciation and amortization expense was $35,000, $66,000 and $122,000 for the years ended December 31, 2003, 2004 and 2005, respectively. Amounts were $24,000 and $34,000 for the three months ended March 31, 2005 and 2006, respectively.

 

5.   Line of Credit

On May 30, 2003, the Company entered into a $100,000 line of credit agreement with PNC Bank (the “Bank”) which expired in May 2005, but was subsequently extended through May 31, 2006. Borrowings are secured by the Company’s cash deposits with the Bank. Borrowings under the line of credit bear interest at the prime rate plus 1.5% (6.75%, 8.75%, 7.25% and 9.25% at December 31, 2004 and 2005 and March 31, 2005 and 2006, respectively). As of December 31, 2004 and March 31, 2006, there were no borrowings under the line of credit.

 

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ALL OEM PARTS, INC. AND AFFILIATES

NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)

 

6.   Notes Payable

Notes payable consists of the following:

 

    

As of December 31,

  

As of March 31,

           2004                2005          2006
     (in thousands)

Mortgage(A)

   $    $ 345    $ 345

Other(B)

     30      20      16
                    
     30      365      361

Less current portion

     9      10      8
                    

Long-term portion

   $ 21    $ 355    $ 353
                    

(A)   The mortgage requires monthly interest-only (9%) payments of $2,587 until November 2010, at which time the payment increases to $2,894, including both interest and principal through October 2035. The mortgage is secured by the property with a net book value of approximately $455,000 and $451,000 at December 31, 2005 and March 31, 2006, respectively.

 

(B)   The notes are payable in monthly installments through January 2009 and are collateralized by automobiles.

Principal payment requirements on the above obligations in each of the years subsequent to December 31, 2005 and March 31, 2006, respectively, are as follows:

 

    

As of
December 31,
2005

  

As of
March 31,
2006

    

(in thousands)

2005

   $    $

2006

     10     

2007

     5      8

2008

     5      5

2009

          3

2010

     1     

2011

          2

 

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ALL OEM PARTS, INC. AND AFFILIATES

NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)

 

7.   Stockholders’/Members’ Equity (Deficiency )

Common stock at December 31, 2004 and 2005 and at March 31, 2006 consisted of the following:

 

     Number of Shares   

Amount

     Authorized   

Issued and

Outstanding

  
               (in thousands)

All OEM Parts, Inc.

   2,500    100    $ 7

The Parts Bin.Com, Inc.

   2,500    100      15

Auto Parts Web Solutions, Inc.

   2,500    100      10

Auto Parts Online Canada, Inc.

   2,500    100      10

Web Chat Solutions, Inc.

   2,500    100      1
            

Total

         $ 43
            

Everything Internet, LLC was formed as a limited liability company, for which the members are not personally liable for any of its liabilities. The initial term of Everything Internet, LLC runs through 2032, but it may be dissolved upon a sale of assets, unanimous consent of the members or upon the bankruptcy of a member.

TPB Real Estate, LLC was formed as a limited liability company, for which the members are not personally liable for any of its liabilities. The initial term of TPB Real Estate, LLC runs through 2032, but it may be dissolved upon a sale of assets, unanimous consent of the members or upon the bankruptcy of a member.

 

8.   Lease Commitments

The Company leases facilities under operating leases which expire through October 2009. The Company also rents another facility on a month-to-month basis. The leases contain certain other conditions and requirements which include payment of additional rent for common area maintenance charges, real estate taxes, water, sewer and utilities. Related rent expense was $84,000, $89,000 and $122,000 for the years ended December 31, 2003, 2004 and 2005, respectively, and $29,000 and $31,000, respectively, for the three months ended March 31, 2005 and 2006. Minimum annual lease payments in each of the years subsequent to December 31, 2005 and March 31, 2006 are as follows:

 

    

As of
December 31,
2005

  

As of
March 31,
2006

     (in thousands)

2005

   $    $

2006

     81     

2007

     81      81

2008

     81      81

2009

     68      81

2010

          47
             

Total

   $ 311    $ 290
             

 

9.   Subsequent Event

On May 19, 2006, an unrelated entity acquired 100% of the equity interests in All OEM Parts, Inc. and Affiliates, with the exception of one combined entity, TPB Real Estate, LLC.

 

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Through and including                     , 2007 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

                     Shares

LOGO

Common Stock

 

 


PRICE $             PER SHARE

 


 

 

 

RBC C APITAL  M ARKETS   T HOMAS  W EISEL  P ARTNERS  LLC

 

 

P IPER  J AFFRAY   JMP S ECURITIES

 


PROSPECTUS

 


                    , 2006

 



Table of Contents

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

 

Item   13. Other Expenses of Issuance and Distribution

The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable in connection with the sale and distribution of the securities being registered. All amounts are estimated except the SEC and NASD registration fees. All of the expenses below will be paid by us.

 

Item     

SEC Registration fee

   $ 10,700

NASD filing fee

     10,500

Nasdaq Global Market listing fee

  

Blue sky fees and expenses

  

Printing and engraving expenses

  

Legal fees and expenses

  

Accounting fees and expenses

  

Transfer Agent and Registrar fees

  

Insurance premiums

  

Miscellaneous

  
      

Total

   $  
      

 

Item   14. Indemnification of Directors and Officers

Under Section 145 of the Delaware General Corporation Law, we can indemnify our directors and officers against liabilities they may incur in such capacities, including liabilities under the Securities Act of 1933, as amended (the “Securities Act”). Our bylaws (Exhibit 3.4 to this registration statement) provide that we will indemnify our directors and officers to the fullest extent permitted by law and require us to advance litigation expenses upon our receipt of an undertaking by the director or officer to repay such advances if it is ultimately determined that the director or officer is not entitled to indemnification. Our bylaws further provide that rights conferred under such bylaws do not exclude any other right such persons may have or acquire under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise.

Our certificate of incorporation (Exhibit 3.2 to this registration statement) provides that, pursuant to Delaware law, our directors shall not be liable for monetary damages for breach of the directors’ fiduciary duty of care to us and our stockholders. This provision in the certificate of incorporation does not eliminate the duty of care, and in appropriate circumstances equitable remedies such as injunctive or other forms of non-monetary relief will remain available under Delaware law. In addition, each director will continue to be subject to liability for breach of the director’s duty of loyalty to us or our stockholders, for acts or omissions not in good faith or involving intentional misconduct or knowing violations of law, for actions leading to improper personal benefit to the director, and for payment of dividends or approval of stock repurchases or redemptions that are unlawful under Delaware law. The provision also does not affect a director’s responsibilities under any other law, such as the federal securities laws or state or federal environmental laws.

In addition, our certificate of incorporation provides that we shall indemnify our directors and officers if such persons acted (i) in good faith, (ii) in a manner reasonably believed to be in or not opposed to our best interests, and (iii) with respect to any criminal action or proceeding, with reasonable cause to believe such conduct was lawful. The certificate of incorporation also provides that, pursuant to Delaware law, our

 

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directors shall not be liable for monetary damages for breach of the directors’ fiduciary duty of care to us and our stockholders. This provision in the certificate of incorporation does not eliminate the duty of care, and in appropriate circumstances equitable remedies such as injunctive or other forms of non-monetary relief will remain available under Delaware law. In addition, each director will continue to be subject to liability for breach of the director’s duty of loyalty to us for acts or omissions not in good faith or involving intentional misconduct, for knowing violations of law, for actions leading to improper personal benefit to the director, and for payment of dividends or approval of stock repurchases or redemptions that are unlawful under Delaware law. The provision also does not affect a director’s responsibilities under any other law, such as the federal securities laws or state or federal environmental laws. The certificate of incorporation further provides that we are authorized to indemnify our directors and officers to the fullest extent permitted by law through the bylaws, agreement, vote of stockholders or disinterested directors, or otherwise. We intend to obtain directors’ and officers’ liability insurance in connection with this offering.

In addition to the indemnification provided for in the certificate of incorporation and bylaws, we have entered into or intend to enter into agreements to indemnify our directors and certain of our officers. These agreements will, among other things, indemnify our directors and some of our officers for certain expenses (including attorneys fees), judgments, fines and settlement amounts incurred by such person in any action or proceeding, including any action by or in our right, on account of services by that person as a director or officer of U.S. Auto Parts or as a director or officer of any of our subsidiaries, or as a director or officer of any other company or enterprise that the person provides services to at our request.

The underwriting agreement (Exhibit 1.1 to this registration statement) provides for indemnification by the underwriters of us and our officers and directors, and by us of the underwriters, for certain liabilities arising under the Securities Act or otherwise in connection with this offering.

 

Item   15. Recent Sales of Unregistered Securities

The following is a summary of our transactions since December 31, 2002, involving sales of our securities that were not registered under the Securities Act of 1933, as amended:

(1) In June 2005, we merged MBS Marketing, Inc. into us and issued an aggregate of 3,667,400 shares of our common stock to the stockholders of MBS. All outstanding shares of MBS capital stock were cancelled in connection with such merger.

(2) In March 2006, we completed a private placement of our Series A convertible preferred stock and issued 11,055,425 shares of our Series A convertible preferred stock to Oak Investment Partners XI, L.P. for a purchase price of $4.07 per share or an aggregate purchase price of $45.0 million.

(3) In May 2006, we acquired Partsbin in a stock for stock and cash transaction. As partial consideration for all of the outstanding capital stock of Partsbin, we issued an aggregate of 3,305,529 shares of our common stock to the stockholders of Partsbin.

(4) From March 2006 to June 2006, we granted options to purchase an aggregate of 4,047,740 shares of common stock to our employees and directors under our stock option plan at exercise prices ranging from $4.07 to $5.50 per share. Of the options granted, as of September 30, 2006, options to purchase 4,027,560 shares were outstanding, no shares of common stock have been purchased pursuant to exercises of stock options and 20,180 shares have been cancelled and returned to the stock option plan pool.

(5) In June 2006, we issued and sold 27,272 shares of our common stock under the 2006 Equity Incentive Plan at a purchase price of $5.50 per share or an aggregate purchase price of $150,000.

 

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All options and securities granted or issued under our equity incentive plans were granted or issued under Rule 701 promulgated under the Securities Act or Section 4(2) of the Securities Act. All other sales and issuances of our common stock were to accredited investors, did not involve any general solicitation or advertising and were deemed exempt from registration under Section 4(2) of the Securities Act or Rule 506 promulgated thereunder. Appropriate legends are affixed to the stock certificates issued in such transactions.

 

Item   16. Exhibits and Financial Statement Schedules

The following Exhibits are attached hereto and incorporated herein by reference.

 

Exhibit No.     

Description

1.1*      Form of Underwriting Agreement
3.1*      Amended and Restated Certificate of Incorporation of U.S. Auto Parts Network, Inc.
3.2*      Bylaws of U.S. Auto Parts Network, Inc.
4.1*      Specimen common stock certificate
5.1*      Opinion of Dorsey & Whitney LLP
10.1+      U.S. Auto Parts Network, Inc. 2006 Equity Incentive Plan
10.2+      Form of Stock Option Agreement under the U.S. Auto Parts Network, Inc. 2006 Equity Incentive Plan
10.3+      Form of Notice of Grant of Stock Option under the U.S. Auto Parts Network, Inc. 2006 Equity Incentive Plan
10.4+      Form of Acceleration Addendum to Stock Option Agreement under the U.S. Auto Parts Network, Inc. 2006 Equity Incentive Plan
10.5+ *    U.S. Auto Parts Network, Inc. 2006 Omnibus Plan
10.6      Investors’ Rights Agreement dated March 3, 2006 by and between U.S. Auto Parts Network, Inc. and Oak Investment Partners XI, L.P.
10.7      Note and Security Agreement dated May 19, 2006 by and among U.S. Auto Parts Network, Inc., Richard Pine, Lowell Mann, Brian Tinari and Todd Daugherty
10.8+      Offer Letter of Employment dated May 19, 2006 by and between U.S. Auto Parts Network, Inc. and Richard Pine
10.9+      Non-Competition Agreement dated May 19, 2006 by and among U.S. Auto Parts Network, Inc. and Richard Pine, Lowell Mann, Brian Tinari and Todd Daugherty
10.10      Shareholder’s Release dated May 19, 2006 by and between U.S. Auto Parts Network, Inc. and Richard Pine
10.11      Business Loan Agreement dated February 24, 2006 by and between U.S. Auto Parts Network, Inc. and East West Bank
10.12      Promissory Note dated February 24, 2006 by U.S. Auto Parts Network, Inc. in favor of East West Bank
10.13      Teletransmission Agreement dated February 24, 2006 by and between U.S. Auto Parts Network, Inc. and East West Bank

 

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Exhibit No.   

Description

10.14    Business Loan Agreement dated February 24, 2006 by and between U.S. Auto Parts Network, Inc. and East West Bank
10.15    Changes in Terms Agreement dated February 24, 2006 by and between U.S. Auto Parts Network, Inc. and East West Bank
10.16    Loan Agreement dated May 18, 2006 by and between U.S. Auto Parts Network, Inc. and East West Bank
10.17    Secured Promissory Note dated May 18, 2006 by U.S. Auto Parts Network, Inc. in favor of East West Bank
10.18    Collateral Assignment Agreement dated May 18, 2006 by and between U.S. Auto Parts Network, Inc. and East West Bank
10.19    Collateral Assignment Agreement dated May 18, 2006 by and between PartsBin, Inc. and East West Bank
10.20    Security Agreement dated May 18, 2006 by and between U.S. Auto Parts Network, Inc. and East West Bank
10.21    Security Agreement dated May 18, 2006 by and between PartsBin, Inc. and East West Bank
10.22    Amendment to Existing Agreements dated May 18, 2006 by and between U.S. Auto Parts Network, Inc. and East West Bank
10.23*    Commercial Lease Agreement dated January 1, 2004 by and between U.S. Auto Parts Network, Inc. and Nia Chloe Enterprises, LLC
10.24*    Standard Industrial/Commercial Multi-Tenant Lease — Gross dated October 1, 2006 by and between U.S. Auto Parts Network, Inc. and Margay 2003, LLC
10.25*    Standard Industrial/Commercial Multi-Tenant Lease — Gross dated July 12, 2004 by and between U.S. Auto Parts Network, Inc. and Isadore Socransky
10.26*    Lease dated November 30, 2004 by and between U.S. Auto Parts Network, Inc. and William Coats
10.27*    Lease dated November 28, 2005 by and between U.S. Auto Parts Network, Inc. and Marina Airport Building Ltd.
10.28*    Employment Agreement dated October     , 2006 by and between U.S. Auto Parts Network, Inc. and Michael McClane
21.1    Subsidiaries of U.S. Auto Parts Network, Inc.
23.1    Consent of Ernst & Young LLP
23.2    Consent of Stonefield Josephson, Inc.
23.3    Consent of J.H. Cohn LLP
23.4*    Consent of Dorsey & Whitney LLP (included in Exhibit 5.1)
24.1    Power of Attorney (included on signature pages hereto)

*   To be filed by amendment.

 

+   Indicates management contract or compensatory plan.

 

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(b) Financial Statement Schedules

Schedules have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto.

 

Item 17.   Undertakings

The 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 of 1933 may be permitted to directors, officers and controlling persons of U.S. Auto Parts pursuant to the foregoing provisions, or otherwise, U.S. Auto Parts 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 U.S. Auto Parts of expenses incurred or paid by a director, officer or controlling person of U.S. Auto Parts 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, U.S. Auto Parts 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 of 1933, the information omitted from the form of prospectus as filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by U.S. Auto Parts pursuant to Rule 424(b) (1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and this 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, U.S. Auto Parts Network, Inc. has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Carson, State of California, on the 1 st day of November, 2006.

 

U.S. Auto Parts Network, Inc.
By:   

/s/    M EHRAN N IA        

 

Mehran Nia

Chief Executive Officer and President

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, the undersigned hereby constitute and appoint Mehran Nia and Michael J. McClane and each of them, his true and lawful attorney-in-fact and agent, each with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, or any related registration statement filed pursuant to Rule 462(b) under the Securities Act of 1933, 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 or necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each of said attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this Amendment to the Registration Statement on Form S-1 has been signed by the following persons in the capacities and on the dates indicated:

 

Signature

  

Title

 

Date

/s/    M EHRAN N IA        

Mehran Nia

  

Chief Executive Officer, President and Director (principal executive officer)

  November 1, 2006

/s/    M ICHAEL J. M C C LANE        

Michael J. McClane

  

Chief Financial Officer, Executive Vice President of Finance, Secretary and Treasurer (principal financial and accounting officer)

 

November 1, 2006

/s/    S OL K HAZANI        

Sol Khazani

  

Chairman of the Board

 

November 1, 2006

/s/    M ASSOUD E NTEKHABI        

Massoud Entekhabi

  

Director

 

November 1, 2006

/s/    F REDRIC W. H ARMAN        

Fredric W. Harman

  

Director

 

November 1, 2006

 

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Signature

  

Title

 

Date

/s/    R ICHARD P INE        

Richard Pine

   Vice President, East Coast Operations and Director   November 1, 2006

/s/    W ARREN B. R ILEY        

Warren B. Riley

   Director   November 1, 2006

 

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EXHIBIT INDEX

 

Exhibit No.   

Description

      1.1*    Form of Underwriting Agreement
      3.1*    Amended and Restated Certificate of Incorporation of U.S. Auto Parts Network, Inc.
      3.2*    Bylaws of U.S. Auto Parts Network, Inc.
      4.1*    Specimen common stock certificate
      5.1*    Opinion of Dorsey & Whitney LLP
    10.1+    U.S. Auto Parts Network, Inc. 2006 Equity Incentive Plan
    10.2+    Form of Stock Option Agreement under the U.S. Auto Parts Network, Inc. 2006 Equity Incentive Plan
    10.3+    Form of Notice of Grant of Stock Option under the U.S. Auto Parts Network, Inc. 2006 Equity Incentive Plan
    10.4+    Form of Acceleration Addendum to Stock Option Agreement under the U.S. Auto Parts Network, Inc. 2006 Equity Incentive Plan
    10.5+*    U.S. Auto Parts Network, Inc. 2006 Omnibus Plan
    10.6    Investors’ Rights Agreement dated March 3, 2006 by and between U.S. Auto Parts Network, Inc. and Oak Investment Partners XI, L.P.
    10.7    Note and Security Agreement dated May 19, 2006 by and among U.S. Auto Parts Network, Inc., Richard Pine, Lowell Mann, Brian Tinari and Todd Daugherty
    10.8+    Offer Letter of Employment dated May 19, 2006 by and between U.S. Auto Parts Network, Inc. and Richard Pine
    10.9+    Non-Competition Agreement dated May 19, 2006 by and among U.S. Auto Parts Network, Inc. and Richard Pine, Lowell Mann, Brian Tinari and Todd Daugherty
    10.10    Shareholder’s Release dated May 19, 2006 by and between U.S. Auto Parts Network, Inc. and Richard Pine
    10.11    Business Loan Agreement dated February 24, 2006 by and between U.S. Auto Parts Network, Inc. and East West Bank
    10.12    Promissory Note dated February 24, 2006 by U.S. Auto Parts Network, Inc. in favor of East West Bank
    10.13    Teletransmission Agreement dated February 24, 2006 by and between U.S. Auto Parts Network, Inc. and East West Bank
    10.14    Business Loan Agreement dated February 24, 2006 by and between U.S. Auto Parts Network, Inc. and East West Bank
    10.15    Changes in Terms Agreement dated February 24, 2006 by and between U.S. Auto Parts Network, Inc. and East West Bank
    10.16    Loan Agreement dated May 18, 2006 by and between U.S. Auto Parts Network, Inc. and East West Bank
    10.17    Secured Promissory Note dated May 18, 2006 by U.S. Auto Parts Network, Inc. in favor of East West Bank


Table of Contents
Exhibit No.   

Description

    10.18    Collateral Assignment Agreement dated May 18, 2006 by and between U.S. Auto Parts Network, Inc. and East West Bank
    10.19    Collateral Assignment Agreement dated May 18, 2006 by and between PartsBin, Inc. and East West Bank
    10.20    Security Agreement dated May 18, 2006 by and between U.S. Auto Parts Network, Inc. and East West Bank
    10.21    Security Agreement dated May 18, 2006 by and between PartsBin, Inc. and East West Bank
    10.22    Amendment to Existing Agreements dated May 18, 2006 by and between U.S. Auto Parts Network, Inc. and East West Bank
    10.23*    Commercial Lease Agreement dated January 1, 2004 by and between U.S. Auto Parts Network, Inc. and Nia Chloe Enterprises, LLC
    10.24*    Standard Industrial/Commercial Multi-Tenant Lease — Gross dated October 1, 2006 by and between U.S. Auto Parts Network, Inc. and Margay 2003, LLC
    10.25*    Standard Industrial/Commercial Multi-Tenant Lease — Gross dated July 12, 2004 by and between U.S. Auto Parts Network, Inc. and Isadore Socransky
    10.26*    Lease dated November 30, 2004 by and between U.S. Auto Parts Network, Inc. and William Coats
    10.27*    Lease dated November 28, 2005 by and between U.S. Auto Parts Network, Inc. and Marina Airport Building Ltd.
    10.28*    Employment Agreement dated October     , 2006 by and between U.S. Auto Parts Network, Inc. and Michael McClane
    21.1    Subsidiaries of U.S. Auto Parts Network, Inc.
    23.1    Consent of Ernst & Young LLP
    23.2    Consent of Stonefield Josephson, Inc.
    23.3    Consent of J.H. Cohn LLP
    23.4*    Consent of Dorsey & Whitney LLP (included in Exhibit 5.1)
    24.1    Power of Attorney (included on signature pages hereto)

*   To be filed by amendment.

 

+   Indicates management contract or compensatory plan.

Exhibit 10.1

U.S. AUTO PARTS NETWORK, INC.

2006 EQUITY INCENTIVE PLAN

(as amended May 19, 2006)

ARTICLE ONE

GENERAL PROVISIONS

 

  I. PURPOSE OF THE PLAN

This 2006 Equity Incentive Plan is intended to promote the interests of U.S. Auto Parts Network, Inc., a Delaware corporation, by providing eligible persons in the Corporation’s employ or service with the opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Corporation as an incentive for them to continue in such employ or service.

Capitalized terms herein shall have the meanings assigned to such terms in the attached Appendix.

 

  II. STRUCTURE OF THE PLAN

A.     The Plan shall be divided into two (2) separate equity programs:

(i)    the Option Grant Program under which eligible persons may, at the discretion of the Plan Administrator, be granted options to purchase shares of Common Stock, and

(ii)    the Stock Issuance Program under which eligible persons may, at the discretion of the Plan Administrator, be issued shares of Common Stock directly, either through the immediate purchase of such shares or as a bonus for services rendered the Corporation (or any Parent or Subsidiary).

B.     The provisions of Articles One and Four shall apply to both equity programs under the Plan and shall accordingly govern the interests of all persons under the Plan.

 

  III. ADMINISTRATION OF THE PLAN

A.    The Plan shall be administered by the Board. However, any or all administrative functions otherwise exercisable by the Board may be delegated to the Committee. Members of the Committee shall serve for such period of time as the Board may determine and shall be subject to removal by the Board at any time. The Board may also at any time terminate the functions of the Committee and reassume all powers and authority previously delegated to the Committee.


B.    The Plan Administrator shall have full power and authority (subject to the provisions of the Plan) to establish such rules and regulations as it may deem appropriate for proper administration of the Plan and to make such determinations under, and issue such interpretations of, the Plan and any outstanding options or stock issuances thereunder as it may deem necessary or advisable. Decisions of the Plan Administrator shall be final and binding on all parties who have an interest in the Plan or any option grant or stock issuance thereunder.

 

  IV. ELIGIBILITY

A.    The persons eligible to participate in the Plan are as follows:

(i)    Employees,

(ii)    non-employee members of the Board or the non-employee members of the board of directors of any Parent or Subsidiary, and

(iii)    consultants and other independent advisors who provide services to the Corporation (or any Parent or Subsidiary).

B.    The Plan Administrator shall have full authority to determine, (i) with respect to the grants made under the Option Grant Program, which eligible persons are to receive such grants, the time or times when those grants are to be made, the number of shares to be covered by each such grant, the status of the granted option as either an Incentive Option or a Non-Statutory Option, the time or times when each option is to become exercisable, the vesting schedule (if any) applicable to the option shares and the maximum term for which the option is to remain outstanding, and (ii) with respect to stock issuances made under the Stock Issuance Program, which eligible persons are to receive such issuances, the time or times when those issuances are to be made, the number of shares to be issued to each Participant, the vesting schedule (if any) applicable to the issued shares and the consideration to be paid by the Participant for such shares.

C.    The Plan Administrator shall have the absolute discretion either to grant options in accordance with the Option Grant Program or to effect stock issuances in accordance with the Stock Issuance Program.

 

  V. STOCK SUBJECT TO THE PLAN

A.    The stock issuable under the Plan shall be shares of authorized but unissued or reacquired Common Stock. The maximum number of shares of Common Stock which may be issued over the term of the Plan shall not exceed Four Million Three Hundred Sixty-Five Thousand Three Hundred Forty (4,365,340) shares. 1


1 As amended on May 19, 2006.

 

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B.    Shares of Common Stock subject to outstanding options shall be available for subsequent issuance under the Plan to the extent (i) the options expire or terminate for any reason prior to exercise in full or (ii) the options are cancelled in accordance with the cancellation-regrant provisions of Article Two. Unvested shares issued under the Plan and subsequently repurchased by the Corporation, at a price per share not greater than the option exercise or direct issue price paid per share, pursuant to the Corporation’s repurchase rights under the Plan shall be added back to the number of shares of Common Stock reserved for issuance under the Plan and shall accordingly be available for reissuance through one or more subsequent option grants or direct stock issuances under the Plan.

C.    Should any change be made to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation’s receipt of consideration, appropriate adjustments shall be made to (i) the maximum number and/or class of securities issuable under the Plan, including the number of shares by which the maximum number of shares may be increased annually, and the per individual limitations on the number of shares of Common Stock that may be issued and (ii) the number and/or class of securities and the exercise price per share in effect under each outstanding option in order to prevent the dilution or enlargement of benefits thereunder. The adjustments determined by the Plan Administrator shall be final, binding and conclusive. In no event shall any such adjustments be made in connection with the conversion of one or more outstanding shares of the Corporation’s preferred stock into shares of Common Stock.

 

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ARTICLE TWO

OPTION GRANT PROGRAM

 

  I. OPTION TERMS

Each option shall be evidenced by one or more documents in the form approved by the Plan Administrator; provided , however , that each such document shall comply with the terms specified below. Each document evidencing an Incentive Option shall, in addition, be subject to the provisions of the Plan applicable to such options.

A.     Exercise Price .

1.    The exercise price per share shall be fixed by the Plan Administrator in accordance with the following provisions:

(i)    The exercise price per share shall not be less than one hundred percent (100%) of the Fair Market Value per share of Common Stock on the option grant date.

(ii)    Until such time as the Common Stock is first registered under Section 12 of the 1934 Act, if the person to whom the option is granted is a 10% Stockholder, then the exercise price per share shall not be less than one hundred ten percent (110%) of the Fair Market Value per share of Common Stock on the option grant date.

2.    The exercise price shall become immediately due upon exercise of the option and shall, subject to the provisions of Section I of Article Four and the documents evidencing the option, be payable in cash or check made payable to the Corporation. Should the Common Stock be registered under Section 12 of the 1934 Act at the time the option is exercised, then the exercise price may also be paid as follows:

(i)    in shares of Common Stock held for the requisite period necessary to avoid a charge to the Corporation’s earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date, or

(ii)    to the extent the option is exercised for vested Option Shares and unless prohibited by Section 402 of the Sarbanes Oxley Act of 2002, through payment in accordance with a brokerage transaction as permitted under the provisions of Regulation T applicable to cashless exercises promulgated by the Federal Reserve Board out of the sale proceeds available on the settlement date of sufficient funds to cover the aggregate exercise price payable for the purchased shares plus all applicable income and employment taxes required to be withheld by the Corporation by reason of such exercise and the Optionee shall concurrently provide irrevocable instructions to the Corporation to deliver the

 

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certificates for the purchased shares directly to a brokerage firm in order to complete the sale.

Except to the extent such sale and remittance procedure is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date.

B.     Exercise and Term of Options . Each option shall be exercisable at such time or times, during such period and for such number of shares as shall be determined by the Plan Administrator and set forth in the documents evidencing the option grant. However, no option shall have a term in excess of ten (10) years measured from the option grant date.

C.     Effect of Termination of Service .

1.    The following provisions shall govern the exercise of any options held by the Optionee at the time of cessation of Service or death:

(i)    Should the Optionee cease to remain in Service for any reason other than death, Disability or Misconduct, then the Optionee shall have a period of thirty (30) days following the date of such cessation of Service during which to exercise each outstanding option held by such Optionee.

(ii)    Should Optionee’s Service terminate by reason of Disability, then the Optionee shall have a period of six (6) months following the date of such cessation of Service during which to exercise each outstanding option held by such Optionee.

(iii)    If the Optionee dies while holding an outstanding option, then the personal representative of his or her estate or the person or persons to whom the option is transferred pursuant to the Optionee’s will or the laws of inheritance or the Optionee’s designated beneficiary or beneficiaries of that option shall have a six (6)-month period following the date of the Optionee’s death to exercise such option.

(iv)    Under no circumstances, however, shall any such option be exercisable after the specified expiration of the option term.

(v)    During the applicable post-Service exercise period, the option may not be exercised in the aggregate for more than the number of vested shares for which the option is exercisable on the date of the Optionee’s cessation of Service. Upon the expiration of the applicable exercise period or (if earlier) upon the expiration of the option term, the option shall terminate and cease to be outstanding for any vested shares for which the option has not been exercised. However, the option shall, immediately upon the Optionee’s cessation of Service, terminate and cease to be outstanding with respect to any and all option shares for which the option is not otherwise at the time exercisable or in which the Optionee is not otherwise at that time vested.

 

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(vi)    Should Optionee’s Service be terminated for Misconduct or should Optionee otherwise engage in Misconduct while holding one or more outstanding options under the Plan, then all those options shall terminate immediately and cease to remain outstanding.

2.    The Plan Administrator shall have the discretion, exercisable either at the time an option is granted or at any time while the option remains outstanding, to:

(i)    extend the period of time for which the option is to remain exercisable following Optionee’s cessation of Service or death from the limited period otherwise in effect for that option to such greater period of time as the Plan Administrator shall deem appropriate, but in no event beyond the expiration of the option term, and/or

(ii)    permit the option to be exercised, during the applicable post-Service exercise period, not only with respect to the number of vested shares of Common Stock for which such option is exercisable at the time of the Optionee’s cessation of Service but also with respect to one or more additional installments in which the Optionee would have vested under the option had the Optionee continued in Service.

D.     Stockholder Rights . The holder of an option shall have no stockholder rights with respect to the shares subject to the option until such person shall have exercised the option, paid the exercise price and become the recordholder of the purchased shares.

E.     Exercisability and Unvested Shares . Options shall be exercisable at such time or times and subject to such waiting periods, exercise dates, restrictions on exercise and other terms and conditions as shall be determined by the Plan Administrator at or after the time of grant. The Plan Administrator shall have the discretion to grant options which are exercisable for unvested shares of Common Stock. A Participant shall vest separately in each Option granted hereunder in accordance with a schedule determined by the Plan Administrator, in its sole discretion. The Plan Administrator may provide, in its discretion, that any option shall be exercisable only in installments, and the Plan Administrator may waive such installment exercise provisions at any time in whole or in part based on such factors as the Plan Administrator may determine in its sole discretion. Should the Optionee cease Service while holding such unvested shares, the Corporation shall have the right to repurchase any or all of those unvested shares at a price per share equal to the Fair Market Value per share of Common Stock at the time of Optionee’s cessation of Service. The terms upon which such repurchase right shall be exercisable (including the period and procedure for exercise and the appropriate vesting schedule for the purchased shares) shall be established by the Plan Administrator and set forth in the document evidencing such repurchase right. Until such time as the Common Stock is first registered under Section 12 of the 1934 Act, the Plan Administrator may not impose a vesting schedule upon any option grant or the shares of Common Stock subject to that option which is more restrictive than twenty percent (20%) per year vesting, with the initial vesting to occur not later than one (1) year after the option grant date. However, such limitation shall not

 

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be applicable to any option grants made to individuals who are officers of the Corporation, non-employee Board members or independent consultants.

F.      First Refusal Rights . Until such time as the Common Stock is first registered under Section 12 of the 1934 Act, the Corporation shall have the right of first refusal with respect to any proposed disposition by the Optionee (or any successor in interest) of any shares of Common Stock issued under the Plan. Such right of first refusal shall be exercisable in accordance with the terms established by the Plan Administrator and set forth in the document evidencing such right.

G.     Individual Limit . In any calendar year, no Participant may receive options that relate to more than Two Million (2,000,000) shares. The foregoing limitation will be adjusted proportionately in connection with any change in the Corporation’s capitalization as described in Section V.C. of Article I. If an option is cancelled in the same calendar year in which it was granted (other than in connection with a Change of Control) the cancelled option will be counted against the limit set forth in this subsection G. For this purpose, if the exercise price of an option is reduced, the transaction will be treated as a cancellation of the option and the grant of a new option. This subsection G applies only with respect to option grants that are made at the end of the transition period prescribed by the regulations under Code Section 162(m).

H.     Limited Transferability of Options . An Incentive Stock Option shall be exercisable only by the Optionee during his or her lifetime and shall not be assignable or transferable other than by will or by the laws of inheritance following the Optionee’s death. If permitted by applicable law and if the Agreement so provides, a Non-Statutory Option may be transferred by an Optionee to the Optionee’s family members as a gift, whether directly or indirectly, or by means of a trust or partnership or otherwise, or pursuant to a qualified domestic relations order as defined in the Code or Title 1 of the Employee Retirement Income Security Act of 1974, as amended, provided , that , if the Corporation is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, then as otherwise permitted pursuant to General Instructions A.1(a)(5) to Form S-8 under the Securities Act of 1933, as amended, or any successor thereto. For purposes of this Plan, unless otherwise determined by the Plan Administrator, “ family member ” shall have the meaning given to such term in Rule 701 promulgated under the Securities Act, provided , that , if the Corporation is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, then it shall have the meaning given to such term in General Instructions A.1(a)(5) to Form S-8 under the Securities Act of 1933, as amended, or any successor thereto. The assigned portion may only be exercised by the person or persons who acquire a proprietary interest in the Non-Statutory Option pursuant to the assignment. The terms applicable to the assigned portion shall be the same as those in effect for the option immediately prior to such assignment and shall be set forth in such documents issued to the assignee as the Plan Administrator may deem appropriate. Notwithstanding the foregoing, the Optionee may also designate one or more persons as the beneficiary or beneficiaries of his or her outstanding options under the Plan, and those options shall, in accordance with such designation, automatically be transferred to such beneficiary or beneficiaries upon the Optionee’s death while holding those options. Such beneficiary or

 

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beneficiaries shall take the transferred options subject to all the terms and conditions of the applicable agreement evidencing each such transferred option, including (without limitation) the limited time period during which the option may be exercised following the Optionee’s death.

 

  II. INCENTIVE OPTIONS

The terms specified below shall be applicable to all Incentive Options. Except as modified by the provisions of this Section II, all the provisions of Articles One, Two and Four shall be applicable to Incentive Options. Options which are specifically designated as Non-Statutory Options shall not be subject to the terms of this Section II.

A.     Eligibility . Incentive Options may only be granted to Employees.

B.     Exercise Price . The exercise price per share shall not be less than one hundred percent (100%) of the Fair Market Value per share of Common Stock on the option grant date; provided , however , that if the person to whom the option is granted is a 10% Stockholder, then the exercise price per share shall not be less than one hundred ten percent (110%) of the Fair Market Value per share of Common Stock on the option grant date.

C.     Dollar Limitation . The aggregate Fair Market Value of the shares of Common Stock (determined as of the respective date or dates of grant) for which one or more options granted to any Employee under the Plan (or any other option plan of the Corporation or any Parent or Subsidiary) may for the first time become exercisable as Incentive Options during any one (1) calendar year shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the Employee holds two (2) or more such options which become exercisable for the first time in the same calendar year, the foregoing limitation on the exercisability of such options as Incentive Options shall be applied on the basis of the order in which such options are granted.

D.     10% Stockholder . If any Employee to whom an Incentive Option is granted is a 10% Stockholder, then the option term shall not exceed five (5) years measured from the option grant date.

 

  III. CHANGE IN CONTROL

A.    In the event of a pending or threatened Change of Control, the Plan Administrator may, in its sole and absolute discretion, and to the extent the acceleration of options is not subject to other limitations imposed by the Plan Administrator at the time of the option grant or otherwise in accordance with the terms of the Plan, take any one or more of the following actions:

(i)    provide that some or all of the options outstanding under the Plan at the time of a Change in Control shall automatically vest in full so that each such option shall, immediately prior to the effective date of the Change in Control, become exercisable for all of the shares of Common Stock at the time

 

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subject to that option and may be exercised for any or all of those shares as fully-vested shares of Common Stock; or

(ii)    provide that some or all of the outstanding options previously granted under the Plan, whether or not then exercisable, shall terminate as of a date before or at the time of the Change of Control without any payment to the holder of the option, provided the Plan Administrator gives prior written notice to the Participants of such termination and gives such Participants the right to exercise their outstanding options before such date to the extent then exercisable; or

(iii)    provide that some or all of the options will be assumed by the successor corporation (or parent thereof) or otherwise continued in full force and effect pursuant to the terms of the Change in Control transaction in effect; or

(iv)    provide that at or immediately following the consummation of the Change in Control, some or all outstanding options shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof) or otherwise continued in effect pursuant to the terms of the Change in Control transaction; or

(v)    provide that some or all outstanding options are to be replaced with a cash incentive program of the Corporation or any successor corporation which preserves the spread existing on the unvested option shares at the time of the Change in Control and provides for subsequent payout of that spread in accordance with the same vesting schedule applicable to those unvested option shares; or

(vi)    provide that before or at the time of the Change of Control some or all outstanding options previously granted under the Plan shall terminate, whether or not then exercisable, in consideration of payment to the holder of the option, with respect to each share of Common Stock for which the option is then exercisable, of the excess, if any, of the Fair Market Value on such date of the Common Stock subject to the exercisable portion of the option over the exercise price of such option; or

(vii)    provide that upon the occurrence of a Change in Control, some or all outstanding options previously granted under the Plan shall be subject to the terms of any applicable agreement of merger or reorganization relating to such Change in Control.

B.    In the event of a pending or threatened Change of Control, the Plan Administrator may, in its sole and absolute discretion, and to the extent the treatment of outstanding repurchase rights are not subject to other limitations imposed by the Plan Administrator at the time the repurchase right is issued or otherwise in accordance with the terms of the Plan, take any one or more of the following actions:

 

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(i)    provide that some or all outstanding repurchase rights shall terminate automatically, and the shares of Common Stock subject to those terminated rights shall immediately vest in full, in the event of any Change in Control; or

(ii)    provide that some or all of the shares of Common Stock subject to outstanding repurchase rights shall be exchanged or otherwise converted into the right to receive cash or other adequate consideration (including, without limitation, such consideration as received by other stockholders of the Company in connection with the Change in Control); or

(iii)    provide that some or all repurchase rights are assigned to the successor corporation (or parent thereof) or otherwise continue in full force and effect pursuant to the terms of the Change in Control transaction; or

(iv)    provide that some or all unvested shares will be repurchased before or on the Control Change Date pursuant to the Corporation’s right of repurchase; or

(v)    provide that upon the occurrence of a Change in Control, some or all of the shares of Common Stock subject to outstanding repurchase rights shall be subject to the terms of any applicable agreement of merger or reorganization relating to such Change in Control.

C.    If applicable, each option which is assumed in connection with a Change in Control or otherwise continued in effect shall be appropriately adjusted, immediately after such Change in Control, to apply to the number and class of securities which would have been issuable to the Optionee in consummation of such Change in Control, had the option been exercised immediately prior to such Change in Control. Appropriate adjustments shall also be made to (i) the number and class of securities available for issuance under the Plan following the consummation of such Change in Control and (ii) the exercise price payable per share under each outstanding option, provided the aggregate exercise price payable for such securities shall remain the same. To the extent the actual holders of the Corporation’s outstanding Common Stock receive cash consideration for their Common Stock in consummation of the Change in Control, the successor corporation may, in connection with the assumption of the outstanding options under this Plan, substitute one or more shares of its own common stock with a fair market value equivalent to the cash consideration paid per share of Common Stock in such Change in Control.

D.    The Plan Administrator shall have the discretion, exercisable either at the time the option is granted or at any time while the option remains outstanding, to structure one or more options so that those options shall automatically accelerate and vest in full (and any repurchase rights of the Corporation with respect to the unvested shares subject to those options shall immediately terminate) upon the occurrence of a Change in Control, whether or not those options are to be assumed in the Change in Control or otherwise continued in effect.

 

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E.    The Plan Administrator shall also have full power and authority, exercisable either at the time the option is granted or at any time while the option remains outstanding, to structure such option so that the shares subject to that option will automatically vest on an accelerated basis should the Optionee’s Service terminate by reason of an Involuntary Termination within a designated period (not to exceed eighteen (18) months) following the effective date of any Change in Control in which the option is assumed or otherwise continued in effect and the repurchase rights applicable to those shares do not otherwise terminate. Any option so accelerated shall remain exercisable for the fully-vested option shares until the expiration or sooner termination of the option term. In addition, the Plan Administrator may provide that one or more of the Corporation’s outstanding repurchase rights with respect to shares held by the Optionee at the time of such Involuntary Termination shall immediately terminate on an accelerated basis, and the shares subject to those terminated rights shall accordingly vest at that time.

F.    The portion of any Incentive Option accelerated in connection with a Change in Control shall remain exercisable as an Incentive Option only to the extent the applicable One Hundred Thousand Dollar ($100,000) limitation is not exceeded. To the extent such dollar limitation is exceeded, the accelerated portion of such option shall be exercisable as a Non-Statutory Option under the Federal tax laws.

G.    The grant of options under the Plan shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets.

 

  IV. CANCELLATION AND REGRANT OF OPTIONS

The Plan Administrator shall have the authority to effect, at any time and from time to time, with the consent of the affected option holders, the cancellation of any or all outstanding options under the Plan and to grant in substitution therefor new options covering the same or different number of shares of Common Stock but with an exercise price per share based on the Fair Market Value per share of Common Stock on the new option grant date.

 

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ARTICLE THREE

STOCK ISSUANCE PROGRAM

 

  I. STOCK ISSUANCE TERMS

Shares of Common Stock may be issued under the Stock Issuance Program through direct and immediate issuances without any intervening option grants. Each such stock issuance shall be evidenced by a Stock Issuance Agreement which complies with the terms specified below.

A.     Purchase Price .

1.    The purchase price per share shall be fixed by the Plan Administrator but shall not be less than eight-five percent (85%) of the Fair Market Value per share of Common Stock on the issue date. However, the purchase price per share of Common Stock issued to a 10% Stockholder shall not be less than one hundred percent (100%) of such Fair Market Value.

2.    Subject to the provisions of Section I of Article Four, shares of Common Stock may be issued under the Stock Issuance Program for any of the following items of consideration which the Plan Administrator may deem appropriate in each individual instance:

(i)    cash or check made payable to the Corporation, or

(ii)    past services rendered to the Corporation (or any Parent or Subsidiary).

B.     Vesting Provisions .

1.    Shares of Common Stock issued under the Stock Issuance Program may, in the discretion of the Plan Administrator, be fully and immediately vested upon issuance or may vest in one or more installments over the Participant’s period of Service or upon attainment of specified performance objectives. Until such time as the Common Stock is first registered under Section 12 of the 1934 Act, the Plan Administrator may not impose a vesting schedule upon any stock issuance effected under the Stock Issuance Program which is more restrictive than twenty percent (20%) per year vesting, with initial vesting to occur not later than one (1) year after the issuance date. Such limitation shall not apply to any Common Stock issuances made to the officers of the Corporation, non-employee Board members or independent consultants.

2.    Any new, substituted or additional securities or other property (including money paid other than as a regular cash dividend) which the Participant may have the right to receive with respect to the Participant’s unvested shares of Common Stock by reason of any stock dividend, stock split, recapitalization, combination of shares, exchange of shares or

 

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other change affecting the outstanding Common Stock as a class without the Corporation’s receipt of consideration shall be issued subject to (i) the same vesting requirements applicable to the Participant’s unvested shares of Common Stock and (ii) such escrow arrangements as the Plan Administrator shall deem appropriate.

3.    The Participant shall have full stockholder rights with respect to any shares of Common Stock issued to the Participant under the Stock Issuance Program, whether or not the Participant’s interest in those shares is vested. Accordingly, the Participant shall have the right to vote such shares and to receive any regular cash dividends paid on such shares.

4.    Should the Participant cease to remain in Service while holding one or more unvested shares of Common Stock issued under the Stock Issuance Program or should the performance objectives not be attained with respect to one or more such unvested shares of Common Stock, then those shares shall be immediately surrendered to the Corporation for cancellation, and the Participant shall have no further stockholder rights with respect to those shares. To the extent the surrendered shares were previously issued to the Participant for consideration paid in cash or cash equivalent (including the Participant’s purchase-money indebtedness), the Corporation shall repay to the Participant the cash consideration paid for the surrendered shares and shall cancel the unpaid principal balance of any outstanding purchase-money note of the Participant attributable to such surrendered shares.

5.    The Plan Administrator may in its discretion waive the surrender and cancellation of one or more unvested shares of Common Stock (or other assets attributable thereto) which would otherwise occur upon the non-completion of the vesting schedule applicable to those shares. Such waiver shall result in the immediate vesting of the Participant’s interest in the shares of Common Stock as to which the waiver applies. Such waiver may be effected at any time, whether before or after the Participant’s cessation of Service or the attainment or non-attainment of the applicable performance objectives.

C.     First Refusal Rights . Until such time as the Common Stock is first registered under Section 12 of the 1934 Act, the Corporation shall have the right of first refusal with respect to any proposed disposition by the Participant (or any successor in interest) of any shares of Common Stock issued under the Stock Issuance Program. Such right of first refusal shall be exercisable in accordance with the terms established by the Plan Administrator and set forth in the document evidencing such right.

 

  II. CHANGE IN CONTROL

A.    In the event of a pending or threatened Change of Control, the Plan Administrator may, in its sole and absolute discretion, and to the extent the treatment of repurchase rights is not subject to other limitations imposed by the Plan Administrator at the time of issuance of the repurchase right or otherwise in accordance with the terms of the Plan, take any one or more of the following actions:

 

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(i)    provide that upon the occurrence of a Change in Control, some or all outstanding repurchase rights under the Stock Issuance Program shall terminate automatically, and the shares of Common Stock subject to those terminated rights shall immediately vest in full; or

(ii)    provide that upon the occurrence of a Change in Control, some or all of the shares of Common Stock subject to outstanding repurchase rights under the Stock Issuance Program shall be exchanged or otherwise converted into the right to receive cash or other adequate consideration (including, without limitation, such consideration as received by other stockholders of the Company in connection with the Change in Control; or

(iii)    provide that those repurchase rights are assigned to the successor corporation (or parent thereof) or otherwise continued in full force and effect pursuant to the terms of the Change in Control transaction; or

(iv)    provide that some or all shares subject to the Corporation’s right of repurchase will be repurchased before or at the time of the Change of Control; or

(v)    provide that upon the occurrence of a Change in Control, some or all of the shares of Common Stock subject to outstanding repurchase rights under the Stock Issuance Program shall be subject to the terms of any applicable agreement of merger or reorganization relating to such Change in Control.

B.    The Plan Administrator shall have the discretionary authority, exercisable either at the time the unvested shares are issued or any time while the Corporation’s repurchase rights with respect to those shares remain outstanding, to provide that those rights shall automatically terminate on an accelerated basis, and the shares of Common Stock subject to those terminated rights shall immediately vest, in the event the Participant’s Service should subsequently terminate by reason of an Involuntary Termination within a designated period (not to exceed eighteen (18) months) following the effective date of any Change in Control in which those repurchase rights are assigned to the successor corporation (or parent thereof) or otherwise continued in full force and effect.

 

  III. SHARE ESCROW/LEGENDS

Unvested shares may, in the Plan Administrator’s discretion, be held in escrow by the Corporation until the Participant’s interest in such shares vests or may be issued directly to the Participant with restrictive legends on the certificates evidencing those unvested shares.

 

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ARTICLE FOUR

MISCELLANEOUS

 

  I. FINANCING

To the extent permitted by applicable law, the Plan Administrator may permit any Optionee or Participant to pay the option exercise price under the Option Grant Program or the purchase price for shares issued under the Stock Issuance Program by delivering a full-recourse promissory note payable in one or more installments which bears interest at a market rate and is secured by the purchased shares. However, any promissory note delivered by a consultant must be secured by collateral in addition to the purchased shares of Common Stock. In no event may the maximum credit available to the Optionee or Participant exceed the sum of (i) the aggregate option exercise price or purchase price payable for the purchased shares plus (ii) any applicable income and employment tax liability incurred by the Optionee or the Participant in connection with the option exercise or share purchase.

 

  II. EFFECTIVE DATE AND TERM OF PLAN

A.    The Plan shall become effective when adopted by the Board, but no option granted under the Plan may be exercised, and no shares shall be issued under the Plan, until the Plan is approved by the Corporation’s stockholders. If such stockholder approval is not obtained within twelve (12) months after the date of the Board’s adoption of the Plan, then all options previously granted under the Plan shall terminate and cease to be outstanding, and no further options shall be granted and no shares shall be issued under the Plan. Subject to such limitation, the Plan Administrator may grant options and issue shares under the Plan at any time after the effective date of the Plan and before the date fixed herein for termination of the Plan.

B.    The Plan shall terminate upon the earliest of (i) the expiration of the ten (10)-year period measured from the date the Plan is adopted by the Board, (ii) the date on which all shares available for issuance under the Plan shall have been issued as vested shares or (iii) the termination of all outstanding options in connection with a Change in Control. All options and unvested stock issuances outstanding at the time of a clause (i) termination event shall continue to have full force and effect in accordance with the provisions of the documents evidencing those options or issuances.

 

  III. AMENDMENT OF THE PLAN

A.    The Board shall have complete and exclusive power and authority to amend or modify the Plan in any or all respects. However, no such amendment or modification shall adversely affect the rights and obligations with respect to options or unvested stock issuances at the time outstanding under the Plan unless the Optionee or the Participant consents to such amendment or modification. In addition, certain amendments may require stockholder approval pursuant to applicable laws and regulations.

 

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B.    Options may be granted under the Option Grant Program and shares may be issued under the Stock Issuance Program which are in each instance in excess of the number of shares of Common Stock then available for issuance under the Plan, provided any excess shares actually issued under those programs shall be held in escrow until there is obtained stockholder approval of an amendment sufficiently increasing the number of shares of Common Stock available for issuance under the Plan. If such stockholder approval is not obtained within twelve (12) months after the date the first such excess grants or issuances are made, then (i) any unexercised options granted on the basis of such excess shares shall terminate and cease to be outstanding and (ii) the Corporation shall promptly refund to the Optionees and the Participants the exercise or purchase price paid for any excess shares issued under the Plan and held in escrow, together with interest (at the applicable Short Term Federal Rate) for the period the shares were held in escrow, and such shares shall thereupon be automatically cancelled and cease to be outstanding.

 

  IV. USE OF PROCEEDS

Any cash proceeds received by the Corporation from the sale of shares of Common Stock under the Plan shall be used for general corporate purposes.

 

  V. WITHHOLDING

The Corporation’s obligation to deliver shares of Common Stock upon the exercise of any options granted under the Plan or upon the issuance or vesting of any shares issued under the Plan shall be subject to the satisfaction of all applicable income and employment tax withholding requirements.

 

  VI. REGULATORY APPROVALS

The implementation of the Plan, the granting of any options under the Plan and the issuance of any shares of Common Stock (i) upon the exercise of any option or (ii) under the Stock Issuance Program shall be subject to the Corporation’s procurement of all approvals and permits required by regulatory authorities having jurisdiction over the Plan, the options granted under it and the shares of Common Stock issued pursuant to it.

 

  VII. NO EMPLOYMENT OR SERVICE RIGHTS

Nothing in the Plan shall confer upon the Optionee or the Participant any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining such person) or of the Optionee or the Participant, which rights are hereby expressly reserved by each, to terminate such person’s Service at any time for any reason, with or without cause.

 

  VIII. FINANCIAL REPORTS

If required by applicable law, the Corporation shall deliver a balance sheet and an income statement at least annually to each individual holding an outstanding option under the

 

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Plan, unless such individual is a key Employee whose duties in connection with the Corporation (or any Parent or Subsidiary) assure such individual access to equivalent information.

 

  IX. COMPLIANCE WITH SECTION 409A OF THE CODE

The Corporation intends that any option granted under the Plan not be considered to provide for the deferral of compensation under Code Section 409A and that any other stock issuance that does provide for such deferral of compensation shall comply with the requirements of Section 409A of the Code and, accordingly, this Plan shall be so administered and construed. Further, the Corporation may modify the Plan and any option grant or stock issuance to the extent necessary to fulfill this intent. Consistent with the intent of this Section IX, in the event that any provision that is necessary for the Plan to comply with Section 409A is determined by the Plan Administrator, in its sole discretion, to have been omitted, such omitted provision shall be deemed included herein and is hereby incorporated as part of the Plan.

 

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APPENDIX

The following definitions shall be in effect under the Plan:

A. Board shall mean the Corporation’s Board of Directors.

B. Change in Control shall mean a change in ownership or control of the Corporation effected through any of the following transactions:

(i) a merger, consolidation or other reorganization approved by the Corporation’s stockholders, unless securities representing more than fifty percent (50%) of the total combined voting power of the voting securities of the successor corporation are immediately thereafter beneficially owned, directly or indirectly and in substantially the same proportion, by the persons who beneficially owned the Corporation’s outstanding voting securities immediately prior to such transaction, or

(ii) a stockholder-approved sale, transfer or other disposition of all or substantially all of the Corporation’s assets in complete liquidation or dissolution of the Corporation, or

(iii) the acquisition, directly or indirectly by any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation), of beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation’s outstanding securities pursuant to a tender or exchange offer made directly to the Corporation’s stockholders.

In no event shall any public offering of the Corporation’s securities be deemed to constitute a Change in Control.

C. Code shall mean the Internal Revenue Code of 1986, as amended.

D. Committee shall mean a committee of two (2) or more Board members appointed by the Board to exercise one or more administrative functions under the Plan. To the extent that the Plan Administrator determines it is necessary to qualify stock options and/or stock issuances under Section 162(m) of the Code, the Plan will be administered in accordance with the requirements of Section 162(m) of the Code, and, to the extent that the Plan Administrator determines it is desirable to qualify transactions as exempt under Rule 16b-3 of the 1934 Act, transactions will be structured to satisfy the requirements of Rule 16b-3 under the 1934 Act.

E. Common Stock shall mean the Corporation’s common stock.

 

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F. Corporation shall mean U.S. Auto Parts Network, Inc., a Delaware corporation, and any successor corporation to all or substantially all of the assets or voting stock of U.S. Auto Parts Network, Inc. which shall by appropriate action adopt the Plan.

G. Disability shall mean the inability of the Optionee or the Participant to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment and shall be determined by the Plan Administrator on the basis of such medical evidence as the Plan Administrator deems warranted under the circumstances.

H. Employee shall mean an individual who is in the employ of the Corporation (or any Parent or Subsidiary), subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance.

I. Exercise Date shall mean the date on which the Corporation shall have received written notice of the option exercise.

J. Fair Market Value per share of Common Stock on any relevant date shall be determined in accordance with the following provisions:

(i) If the Common Stock is at the time traded on the Nasdaq National Market, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question, as such price is reported by the National Association of Securities Dealers on the Nasdaq National Market and published in The Wall Street Journal . If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists.

(ii) If the Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange and published in The Wall Street Journal . If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists.

(iii) If the Common Stock is at the time neither listed on any Stock Exchange nor traded on the Nasdaq National Market, then the Fair Market Value shall be determined by the Plan Administrator after taking into account such factors as the Plan Administrator shall deem appropriate.

K. Incentive Option shall mean an option which satisfies the requirements of Code Section 422.

 

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L. Involuntary Termination shall mean the termination of the Service of any individual which occurs by reason of:

(i) such individual’s involuntary dismissal or discharge by the Corporation for reasons other than Misconduct, or

(ii) such individual’s voluntary resignation following (A) a change in his or her position with the Corporation which materially reduces his or her duties and responsibilities or the level of management to which he or she reports, (B) a reduction in his or her level of compensation (including base salary, fringe benefits and target bonus under any corporate-performance based bonus or incentive programs) by more than fifteen percent (15%) or (C) a relocation of such individual’s place of employment by more than fifty (50) miles, provided and only if such change, reduction or relocation is effected without the individual’s consent.

M. Misconduct shall mean the commission of any act of fraud, embezzlement or dishonesty by the Optionee or Participant, any unauthorized use or disclosure by such person of confidential information or trade secrets of the Corporation (or any Parent or Subsidiary), or any other intentional misconduct by such person adversely affecting the business or affairs of the Corporation (or any Parent or Subsidiary) in a material manner. The foregoing definition shall not in any way preclude or restrict the right of the Corporation (or any Parent or Subsidiary) to discharge or dismiss any Optionee, Participant or other person in the Service of the Corporation (or any Parent or Subsidiary) for any other acts or omissions, but such other acts or omissions shall not be deemed, for purposes of the Plan, to constitute grounds for termination for Misconduct.

N. 1934 Act shall mean the Securities Exchange Act of 1934, as amended.

O. Non-Statutory Option shall mean an option not intended to satisfy the requirements of Code Section 422.

P. Option Grant Program shall mean the option grant program in effect under the Plan.

Q. Optionee shall mean any person to whom an option is granted under the Plan.

R. Parent shall mean any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation, provided each corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

S. Participant shall mean any person who is issued shares of Common Stock under the Stock Issuance Program.

 

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T. Plan shall mean the Corporation’s 2006 Equity Incentive Plan, as set forth in this document.

U. Plan Administrator shall mean either the Board or the Committee acting in its capacity as administrator of the Plan.

V. Service shall mean the provision of services to the Corporation (or any Parent or Subsidiary) by a person in the capacity of an Employee, a non-employee member of the board of directors or a consultant or independent advisor, except to the extent otherwise specifically provided in the documents evidencing the option grant.

W. Stock Exchange shall mean either the American Stock Exchange or the New York Stock Exchange.

X. Stock Issuance Agreement shall mean the agreement entered into by the Corporation and the Participant at the time of issuance of shares of Common Stock under the Stock Issuance Program.

Y. Stock Issuance Program shall mean the stock issuance program in effect under the Plan.

Z. Subsidiary shall mean any entity in which, directly or indirectly through one or more intermediaries, the Corporation has at least a 50% ownership interest or, where permissible under Code Section 409A, at least a 20% ownership interest.

AA. 10% Stockholder shall mean the owner of stock (as determined under Code Section 424(d)) possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Corporation (or any Parent or Subsidiary).

 

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Exhibit 10.2

U.S. AUTO PARTS NETWORK, INC.

STOCK OPTION AGREEMENT

RECITALS

A. The Board has adopted the Plan for the purpose of retaining the services of selected Employees, non-employee members of the Board or the board of directors of any Parent or Subsidiary and consultants and other independent advisors in the service of the Corporation (or any Parent or Subsidiary).

B. Optionee is to render valuable services to the Corporation (or a Parent or Subsidiary), and this Agreement is executed pursuant to, and is intended to carry out the purposes of, the Plan in connection with the Corporation’s grant of an option to Optionee.

C. All capitalized terms in this Agreement shall have the meaning assigned to them in the attached Appendix.

NOW, THEREFORE , it is hereby agreed as follows:

1. Grant of Option . The Corporation hereby grants to Optionee, as of the Grant Date, an option to purchase up to the number of Option Shares specified in the Grant Notice. The Option Shares shall be purchasable from time to time during the option term specified in Paragraph 2 at the Exercise Price.

2. Option Term . This option shall have a term of ten (10) years measured from the Grant Date and shall accordingly expire at the close of business on the Expiration Date, unless sooner terminated in accordance with Paragraph 5 or 6.

3. Limited Transferability .

(a) This option shall be neither transferable nor assignable by Optionee other than by will or the laws of inheritance following Optionee’s death and may be exercised, during Optionee’s lifetime, only by Optionee. However, Optionee may designate one or more persons as the beneficiary or beneficiaries of this option, and this option shall, in accordance with such designation, automatically be transferred to such beneficiary or beneficiaries upon the Optionee’s death while holding this option. Such beneficiary or beneficiaries shall take the transferred option subject to all the terms and conditions of this Agreement, including (without limitation) the limited time period during which this option may, pursuant to Paragraph 5, be exercised following Optionee’s death.

(b) If this option is designated a Non-Statutory Option in the Grant Notice, then this option may be assigned in whole or in part during Optionee’s lifetime to the Optionee’s family members as a gift, whether directly or indirectly, or by means of a trust or partnership or otherwise, or pursuant to a qualified domestic relations order as defined in the Code or Title 1 of the Employee Retirement Income Security Act of 1974, as amended, provided , that , if the Corporation is subject to the reporting requirements of Section 13 or 15(d) of the


Exchange Act, then as otherwise permitted pursuant to General Instructions A.1(a)(5) to Form S-8 under the Securities Act of 1933, as amended, or any successor thereto. For purposes of this Agreement, unless otherwise determined by the Plan Administrator, “ family member ” shall have the meaning given to such term in Rule 701 promulgated under the Securities Act, provided , that , if the Corporation is subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, then it shall have the meaning given to such term in General Instructions A.1(a)(5) to Form S-8 under the Securities Act of 1933, as amended, or any successor thereto. The assigned portion shall be exercisable only by the person or persons who acquire a proprietary interest in the option pursuant to such assignment. The terms applicable to the assigned portion shall be the same as those in effect for this option immediately prior to such assignment.

4. Dates of Exercise . This option shall become exercisable for the Option Shares in one or more installments as specified in the Grant Notice. As the option becomes exercisable for such installments, those installments shall accumulate, and the option shall remain exercisable for the accumulated installments until the Expiration Date or sooner termination of the option term under Paragraph 5 or 6.

5. Cessation of Service . The option term specified in Paragraph 2 shall terminate (and this option shall cease to be outstanding) prior to the Expiration Date should any of the following provisions become applicable:

(a) Should Optionee cease to remain in Service for any reason (other than death, Disability or Misconduct) while this option is outstanding, then Optionee (or any person or persons to whom this option is transferred pursuant to a permitted transfer under Paragraph 3) shall have a period of thirty (30) days (commencing with the date of such cessation of Service) during which to exercise this option, but in no event shall this option be exercisable at any time after the Expiration Date.

(b) Should Optionee die while this option is outstanding, then the personal representative of Optionee’s estate or the person or persons to whom the option is transferred pursuant to Optionee’s will or the laws of inheritance following Optionee’s death or to whom the option is transferred during Optionee’s lifetime pursuant to a permitted transfer under Paragraph 3 shall have the right to exercise this option. However, if Optionee dies while holding this option and has an effective beneficiary designation in effect for this option at the time of his or her death, then the designated beneficiary or beneficiaries shall have the exclusive right to exercise this option following Optionee’s death. Any such right to exercise this option shall lapse, and this option shall cease to be outstanding, upon the earlier of (i) the expiration of the six (6)-month period measured from the date of Optionee’s death or (ii) the Expiration Date.

(c) Should Optionee cease Service by reason of Disability while this option is outstanding, then Optionee (or any person or persons to whom this option is transferred pursuant to a permitted transfer under Paragraph 3) shall have a period of six (6) months (commencing with the date of such cessation of Service) during which to exercise this option. In no event shall this option be exercisable at any time after the Expiration Date.

Note : Exercise of this option on a date later than three (3)

 

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months following cessation of Service due to Disability will result in loss of favorable Incentive Option treatment, unless such Disability constitutes Permanent Disability. In the event that Incentive Option treatment is not available, this option will be taxed as a Non-Statutory Option upon exercise.

(d) During the limited period of post-Service exercisability, this option may not be exercised in the aggregate for more than the number of Option Shares in which Optionee is, at the time of Optionee’s cessation of Service, vested pursuant to the Vesting Schedule specified in the Grant Notice or the special vesting acceleration provisions of Paragraph 6. Upon the expiration of such limited exercise period or (if earlier) upon the Expiration Date, this option shall terminate and cease to be outstanding for any vested Option Shares for which the option has not been exercised. To the extent Optionee is not vested in one or more Option Shares at the time of Optionee’s cessation of Service, this option shall immediately terminate and cease to be outstanding with respect to those shares.

(e) Should Optionee’s Service be terminated for Misconduct or should Optionee otherwise engage in Misconduct while this option is outstanding, then this option shall terminate immediately and cease to remain outstanding.

6. Change of Control Assumption .

(a) If this option is assumed in connection with a Change in Control or otherwise continued in effect, then this option shall be appropriately adjusted, immediately after such Change in Control, to apply to the number and class of securities which would have been issuable to Optionee in consummation of such Change in Control had the option been exercised immediately prior to such Change in Control, and appropriate adjustments shall also be made to the Exercise Price, provided the aggregate Exercise Price shall remain the same. To the extent that the actual holders of the Corporation’s outstanding Common Stock receive cash consideration for their Common Stock in consummation of the Change in Control, the successor corporation may, in connection with the assumption of this option, substitute one or more shares of its own common stock with a fair market value equivalent to the cash consideration paid per share of Common Stock in such Change in Control.

(b) This Agreement shall not in any way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets.

7. Adjustment in Option Shares . Should any change be made to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation’s receipt of consideration, appropriate adjustments shall be made to (i) the total number and/or class of securities subject to this option and (ii) the Exercise Price in order to reflect such change and thereby preclude a dilution or enlargement of benefits hereunder.

 

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8. Stockholder Rights . The holder of this option shall not have any stockholder rights with respect to the Option Shares until such person shall have exercised the option, paid the Exercise Price and become the record holder of the purchased shares.

9. Market Stand-Off . In connection with any underwritten public offering by the Corporation of its equity securities pursuant to an effective registration statement filed under the 1933 Act, including the Corporation’s initial public offering, Optionee shall not sell or otherwise 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, of any Common Stock (or other securities) of the Corporation held by Optionee (other than those included in the registration) during a period as requested by the Corporation (not to exceed one hundred ninety eight (198) days) following the effective date of the Corporation’s public offering (the “ Market Stand-Off” ) , provided , that : (i) all officers and directors of the Corporation and holders of at least one percent (1%) of the Corporation’s voting securities are bound by and have entered into similar agreements (ii) such agreement shall provide that any discretionary waiver or termination of the restrictions of such agreements by the Corporation or underwriters shall apply to all persons pro rata based on the number of shares of Common Stock subject to such agreements and (iii) the Market Stand-Off shall in no event be applicable to any underwritten public offering effected more than two (2) years after the effective date of the Corporation’s initial public offering. The obligations described in this 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. The Corporation may impose stop-transfer instructions and may stamp each such certificate with a legend with respect to the shares of Common Stock (or other securities) subject to the foregoing restriction until the end of such lock up period. If requested by the Corporation and an underwriter of Common Stock (or other securities) of the Corporation, each Optionee agrees to execute a market stand-off agreement with said underwriters in customary form consistent with the provisions of this Section 9.

10. Manner of Exercising Option .

(a) In order to exercise this option with respect to all or any part of the Option Shares for which this option is at the time exercisable, Optionee (or any other person or persons exercising the option) must take the following actions:

(i) Execute and deliver to the Corporation a Purchase Agreement for the Option Shares for which the option is exercised.

(ii) Pay the aggregate Exercise Price for the purchased shares in one or more of the following forms:

(A) cash or check made payable to the Corporation; or

 

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(B) a promissory note payable to the Corporation, but only to the extent authorized by the Plan Administrator in accordance with Paragraph 14.

Should the Common Stock be registered under Section 12 of the 1934 Act at the time the option is exercised, then the Exercise Price may also be paid as follows:

(C) in shares of Common Stock held by Optionee (or any other person or persons exercising the option) for the requisite period necessary to avoid a charge to the Corporation’s earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date; or

(D) to the extent the option is exercised for vested Option Shares and unless prohibited by Section 402 of the Sarbanes Oxley Act of 2002, through payment in accordance with a brokerage transaction as permitted under the provisions of Regulation T applicable to cashless exercises promulgated by the Federal Reserve Board out of the sale proceeds available on the settlement date of sufficient funds to cover the aggregate exercise price payable for the purchased shares plus all applicable income and employment taxes required to be withheld by the Corporation by reason of such exercise and the Optionee (or any other person or persons exercising the option) shall concurrently provide irrevocable instructions to the Corporation to deliver the certificates for the purchased shares directly to a brokerage firm in order to complete the sale.

(iii) Furnish to the Corporation appropriate documentation that the person or persons exercising the option (if other than Optionee) have the right to exercise this option.

(iv) Execute and deliver to the Corporation such written representations as may be requested by the Corporation in order for it to comply with the applicable requirements of applicable securities laws.

(v) Make appropriate arrangements with the Corporation (or Parent or Subsidiary employing or retaining Optionee) for the satisfaction of all applicable income and employment tax withholding requirements applicable to the option exercise.

(b) As soon as practical after the Exercise Date, the Corporation shall issue to or on behalf of Optionee (or any other person or persons exercising this option) a certificate for the purchased Option Shares, with the appropriate legends affixed thereto.

 

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11. REPURCHASE RIGHTS . ALL OPTION SHARES ACQUIRED UPON THE EXERCISE OF THIS OPTION SHALL BE SUBJECT TO CERTAIN RIGHTS OF THE CORPORATION AND ITS ASSIGNS TO REPURCHASE THOSE SHARES IN ACCORDANCE WITH THE TERMS SPECIFIED IN THE PURCHASE AGREEMENT.

12. Compliance with Laws and Regulations .

(a) The exercise of this option and the issuance of the Option Shares upon such exercise shall be subject to compliance by the Corporation and Optionee with all applicable requirements of law relating thereto and with all applicable regulations of any stock exchange (or the Nasdaq National Market, if applicable) on which the Common Stock may be listed for trading at the time of such exercise and issuance.

(b) The inability of the Corporation to obtain approval from any regulatory body having authority deemed by the Corporation to be necessary to the lawful issuance and sale of any Common Stock pursuant to this option shall relieve the Corporation of any liability with respect to the non-issuance or sale of the Common Stock as to which such approval shall not have been obtained. The Corporation, however, shall use its best efforts to obtain all such approvals.

13. Successors and Assigns . Except to the extent otherwise provided in Paragraphs 3 and 6, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the Corporation and its successors and assigns and Optionee, Optionee’s assigns and the legal representatives, heirs and legatees of Optionee’s estate.

14. Notices . Any notice required to be given or delivered to the Corporation under the terms of this Agreement shall be in writing and addressed to the Corporation at its principal corporate offices. Any notice required to be given or delivered to Optionee shall be in writing and addressed to Optionee at the address indicated below Optionee’s signature line on the Grant Notice. All notices shall be deemed effective upon personal delivery or upon deposit in the U.S. mail, postage prepaid and properly addressed to the party to be notified.

15. Financing . The Plan Administrator may, in its absolute discretion and without any obligation to do so, permit Optionee to pay the Exercise Price for the purchased Option Shares by delivering a full-recourse promissory note bearing interest at a market rate and secured by those Option Shares. The payment schedule in effect for any such promissory note shall be established by the Plan Administrator in its sole discretion.

Note : If the Optionee is a consultant, then the promissory note delivered in payment of the Exercise Price must be secured by collateral other than the purchased Option Shares.

16. Construction . This Agreement and the option evidenced hereby are made and granted pursuant to the Plan and are in all respects limited by and subject to the terms of the Plan. All decisions of the Plan Administrator with respect to any question or issue arising under

 

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the Plan or this Agreement shall be conclusive and binding on all persons having an interest in this option.

17. Governing Law . The interpretation, performance and enforcement of this Agreement shall be governed by the laws of the State of California without resort to that State’s conflict-of-laws rules.

18. Stockholder Approval . If the Option Shares covered by this Agreement exceed, as of the Grant Date, the number of shares of Common Stock which may be issued under the Plan as last approved by the stockholders, then this option shall be void with respect to such excess shares, unless stockholder approval of an amendment sufficiently increasing the number of shares of Common Stock issuable under the Plan is obtained in accordance with the provisions of the Plan.

19. Additional Terms Applicable to an Incentive Option . In the event this option is designated an Incentive Option in the Grant Notice, the following terms and conditions shall also apply to the grant:

(a) This option shall cease to qualify for favorable tax treatment as an Incentive Option if (and to the extent) this option is exercised for one or more Option Shares: (i) more than thirty (30) days after the date Optionee ceases to be an Employee for any reason other than death or Permanent Disability or (ii) more than six (6) months after the date Optionee ceases to be an Employee by reason of Permanent Disability.

(b) This option shall not become exercisable in the calendar year in which granted if (and to the extent) the aggregate Fair Market Value (determined at the Grant Date) of the Common Stock for which this option would otherwise first become exercisable in such calendar year would, when added to the aggregate value (determined as of the respective date or dates of grant) of the Common Stock and any other securities for which one or more other Incentive Options granted to Optionee prior to the Grant Date (whether under the Plan or any other option plan of the Corporation or any Parent or Subsidiary) first become exercisable during the same calendar year, exceed One Hundred Thousand Dollars ($100,000) in the aggregate. To the extent the exercisability of this option is deferred by reason of the foregoing limitation, the deferred portion shall become exercisable in the first calendar year or years thereafter in which the One Hundred Thousand Dollar ($100,000) limitation of this Paragraph 19(b) would not be contravened, but such deferral shall in all events end immediately prior to the effective date of a Change in Control in which this option is not to be assumed or otherwise continued in effect, whereupon the option shall become immediately exercisable as a Non-Statutory Option for the deferred portion of the Option Shares.

(c) Should Optionee hold, in addition to this option, one or more other options to purchase Common Stock which become exercisable for the first time in the same calendar year as this option, then the foregoing limitations on the exercisability of such options as Incentive Options shall be applied on the basis of the order in which such options are granted.

 

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APPENDIX

The following definitions shall be in effect under the Agreement:

A. Agreement shall mean this Stock Option Agreement.

B. Board shall mean the Corporation’s Board of Directors.

C. Change in Control shall mean a change in ownership or control of the Corporation effected through any of the following transactions:

(i) a merger, consolidation or other reorganization approved by the Corporation’s stockholders, unless securities representing more than fifty percent (50%) of the total combined voting power of the voting securities of the successor corporation are immediately thereafter beneficially owned, directly or indirectly and in substantially the same proportion, by the persons who beneficially owned the Corporation’s outstanding voting securities immediately prior to such transaction, or

(ii) a stockholder-approved sale, transfer or other disposition of all or substantially all of the Corporation’s assets in complete liquidation or dissolution of the Corporation, or

(iii) the acquisition, directly or indirectly by any person or related group of persons (other than the Corporation or a person that directly or indirectly controls, is controlled by, or is under common control with, the Corporation), of beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation’s outstanding securities pursuant to a tender or exchange offer made directly to the Corporation’s stockholders.

In no event shall any public offering of the Corporation’s securities be deemed to constitute a Change in Control.

D. Code shall mean the Internal Revenue Code of 1986, as amended.

E. Common Stock shall mean the Corporation’s common stock.

F. Corporation shall mean U.S. Auto Parts Network, Inc., a Delaware corporation, and any successor corporation to all or substantially all of the assets or voting stock of U.S. Auto Parts Network, Inc. which shall by appropriate action assume this option.

G. Disability shall mean the inability of Optionee to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment and shall be determined by the Plan Administrator on the basis of such medical

 

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evidence as the Plan Administrator deems warranted under the circumstances. Disability shall be deemed to constitute Permanent Disability in the event that such Disability is expected to result in death or has lasted or can be expected to last for a continuous period of twelve (12) months or more.

H. Employee shall mean an individual who is in the employ of the Corporation (or any Parent or Subsidiary), subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance.

I. Exercise Date shall mean the date on which the option shall have been exercised in accordance with Paragraph 9 of the Agreement.

J. Exercise Price shall mean the exercise price payable per Option Share as specified in the Grant Notice.

K. Expiration Date shall mean the date on which the option expires as specified in the Grant Notice.

L. Fair Market Value per share of Common Stock on any relevant date shall be determined in accordance with the following provisions:

(i) If the Common Stock is at the time traded on the Nasdaq National Market, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question, as the price is reported by the National Association of Securities Dealers on the Nasdaq National Market and published in The Wall Street Journal . If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists.

(ii) If the Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange and published in The Wall Street Journal . If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists.

(iii) If the Common Stock is at the time neither listed on any Stock Exchange nor traded on the Nasdaq National Market, then the Fair Market Value shall be determined by the Plan Administrator after taking into account such factors as the Plan Administrator shall deem appropriate.

M. Grant Date shall mean the date of grant of the option as specified in the Grant Notice.

 

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N. Grant Notice shall mean the Notice of Grant of Stock Option accompanying the Agreement, pursuant to which Optionee has been informed of the basic terms of the option evidenced hereby.

O. Incentive Option shall mean an option which satisfies the requirements of Code Section 422.

P. Misconduct shall mean the commission of any act of fraud, embezzlement or dishonesty by Optionee, any unauthorized use or disclosure by Optionee of confidential information or trade secrets of the Corporation (or any Parent or Subsidiary), or any other intentional misconduct by Optionee adversely affecting the business or affairs of the Corporation (or any Parent or Subsidiary) in a material manner. The foregoing definition shall not in any way preclude or restrict the right of the Corporation (or any Parent or Subsidiary) to discharge or dismiss Optionee or any other person in the Service of the Corporation (or any Parent or Subsidiary) for any other acts or omissions, but such other acts or omissions shall not be deemed, for purposes of the Plan or this Agreement, to constitute grounds for termination for Misconduct.

Q. 1934 Act shall mean the Securities Exchange Act of 1934, as amended.

R. Non-Statutory Option shall mean an option not intended to satisfy the requirements of Code Section 422.

S. Option Shares shall mean the number of shares of Common Stock subject to the option.

T. Optionee shall mean the person to whom the option is granted as specified in the Grant Notice.

U. Parent shall mean any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation, provided each corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.

V. Plan shall mean the Corporation’s 2006 Equity Incentive Plan.

W. Plan Administrator shall mean either the Board or a committee of the Board acting in its capacity as administrator of the Plan.

X. Purchase Agreement shall mean the stock purchase agreement in substantially the form of Exhibit C to the Grant Notice.

Y. Service shall mean the Optionee’s performance of services for the Corporation (or any Parent or Subsidiary) in the capacity of an Employee, a non-employee member of the board of directors or an independent consultant.

 

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Z. Stock Exchange shall mean the American Stock Exchange or the New York Stock Exchange.

AA. Subsidiary shall mean any entity in which, directly or indirectly through one or more intermediaries, the Corporation has at least a 50% ownership interest or, where permissible under Code Section 409A, at least a 20% ownership interest.

BB. Vesting Schedule shall mean the vesting schedule specified in the Grant Notice pursuant to which the Optionee is to vest in the Option Shares in a series of installments over his or her period of Service.

 

A-4

Exhibit 10.3

U.S. AUTO PARTS NETWORK, INC.

NOTICE OF GRANT OF STOCK OPTION

Notice is hereby given of the following option grant (the “ Option ”) to purchase shares of the Common Stock of U.S. Auto Parts Network, Inc. (the “ Corporation ”):

Optionee :                                                                                                                                                                    

Grant Date :                                                                                                                                                                

Vesting Commencement Date :                                                                                                                                    

Exercise Price : $         per share

Number of Option Shares :                                                   shares of Common Stock

Expiration Date :                                                                                                                                                            

Type of Option :              Incentive Stock Option

                                          Non-Statutory Stock Option

Date Exercisable : Immediately Exercisable

Vesting Schedule : The Option Shares shall initially be unvested and subject to repurchase by the Corporation at the Fair Market Value per share at the time of Optionee’s cessation of Service. Optionee shall acquire a vested interest in, and the Corporation’s repurchase right shall accordingly lapse with respect to, (i) twenty-five percent (25%) of the Option Shares upon Optionee’s completion of one (1) year of Service measured from the Vesting Commencement Date and (ii) the balance of the Option Shares in a series of thirty-six (36) successive equal monthly installments upon Optionee’s completion of each additional month of Service over the thirty-six (36) month period measured from the first anniversary of the Vesting Commencement Date. In no event shall any additional Option Shares vest after Optionee’s cessation of Service.

Optionee understands and agrees that the Option is granted subject to and in accordance with the terms of the U.S. Auto Parts Network, Inc. 2006 Equity Incentive Plan (the “ Plan ”). Optionee hereby acknowledges receipt of a copy of the Plan in the form attached hereto as Exhibit A. Optionee further agrees to be bound by the terms of the Plan and the terms of the Option as set forth in the Stock Option Agreement attached hereto as Exhibit B.

Optionee understands that any Option Shares purchased under the Option will be subject to the terms set forth in the Stock Purchase Agreement attached hereto as Exhibit C.


REPURCHASE RIGHTS . OPTIONEE HEREBY AGREES THAT ALL OPTION SHARES ACQUIRED UPON THE EXERCISE OF THE OPTION SHALL BE SUBJECT TO CERTAIN REPURCHASE RIGHTS AND RIGHTS OF FIRST REFUSAL EXERCISABLE BY THE CORPORATION AND ITS ASSIGNS. THE TERMS OF SUCH RIGHTS ARE SPECIFIED IN THE ATTACHED STOCK PURCHASE AGREEMENT.

At Will Employment . Nothing in this Notice or in the attached Stock Option Agreement or Plan shall confer upon Optionee any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining Optionee) or of Optionee, which rights are hereby expressly reserved by each, to terminate Optionee’s Service at any time for any reason, with or without cause.

Definitions . All capitalized terms in this Notice shall have the meaning assigned to them in this Notice or in the attached Stock Option Agreement.

DATED:                                              

 

U.S. AUTO PARTS NETWORK, INC.
By:  

 

  Mehran Nia
Title:   Chief Executive Officer
 

 

  OPTIONEE

Attachments:

Exhibit A - 2006 Equity Incentive Plan

Exhibit B - Stock Option Agreement

Exhibit C - Stock Purchase Agreement

 

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Exhibit 10.4

ADDENDUM

TO

STOCK OPTION AGREEMENT

The following provisions are hereby incorporated into, and are hereby made a part of, that certain Stock Option Agreement (the “ Option Agreement ”) by and between U.S. Auto Parts Network, Inc. (the “ Corporation ”) and                          (“ Optionee ”) evidencing the stock option (the “ Option ”) granted on this date to Optionee under the terms of the Corporation’s 2006 Equity Incentive Plan, and such provisions shall be effective immediately. All capitalized terms in this Addendum, to the extent not otherwise defined herein, shall have the meanings assigned to them in the Option Agreement.

INVOLUNTARY TERMINATION FOLLOWING

A CHANGE IN CONTROL

1. If the Option is to be assumed by the successor corporation (or the parent thereof) in connection with a Change in Control or is otherwise to be continued in full force and effect pursuant to the terms of the Change in Control transaction, then none of the Option Shares shall vest on an accelerated basis upon the occurrence of that Change in Control, and Optionee shall accordingly continue, over his or her period of Service following the Change in Control, to vest in the Option Shares in one or more installments in accordance with the provisions of the Option Agreement. However, upon an Involuntary Termination of Optionee’s Service within twelve (12) months following such Change in Control, all the Option Shares at the time subject to the Option shall automatically vest in full on an accelerated basis so that the Option shall immediately become exercisable for all the Option Shares as fully-vested shares and may be exercised for any or all of those Option Shares as vested shares. The Option shall remain so exercisable until the earlier of (i) the Expiration Date or (ii) the expiration of the one (1)-year period measured from the date of the Involuntary Termination.

2. For purposes of this Addendum, an Involuntary Termination shall mean the termination of Optionee’s Service by reason of:

(i) Optionee’s involuntary dismissal or discharge by the Corporation for reasons other than for Misconduct, or

(ii) Optionee’s voluntary resignation following (A) a change in Optionee’s position with the Corporation (or Parent or Subsidiary employing Optionee) which materially reduces Optionee’s duties and responsibilities or the level of management to which he or she reports, (B) a reduction in Optionee’s level of compensation (including base salary, fringe benefits and target bonus under any corporate-performance based incentive programs) by more than fifteen percent (15%) or (C) a relocation of Optionee’s place of employment by more than fifty (50) miles, provided and only if such change, reduction or relocation is effected by the Corporation without Optionee’s consent.


3. The provisions of Paragraph 1 of this Addendum shall govern the period for which the Option is to remain exercisable following the Involuntary Termination of Optionee’s Service within twelve (12) months after the Change in Control and shall supersede any provisions to the contrary in Paragraph 5 of the Option Agreement.

IN WITNESS WHEREOF , U.S. Auto Parts Network, Inc. has caused this Addendum to be executed by its duly authorized officer as of the Effective Date specified below.

 

U.S. AUTO PARTS NETWORK, INC.
By:  

 

Title:  

 

EFFECTIVE DATE:                     

 

2.

Exhibit 10.6

U.S. AUTO PARTS NETWORK, INC.

INVESTORS’ RIGHTS AGREEMENT

March 3, 2006


TABLE OF CONTENTS

 

          Page
Section 1 Definitions    1

1.1

   Certain Definitions    1

Section 2 Registration Rights

   4

2.1

   Requested Registration    4

2.2

   Company Registration    6

2.3

   Registration on Form S-3    8

2.4

   Expenses of Registration    8

2.5

   Registration Procedures    9

2.6

   Indemnification    10

2.7

   Information by Holder    13

2.8

   Restrictions on Transfer    13

2.9

   Rule 144 Reporting    15

2.10

   Market Stand-Off Agreement    15

2.11

   Delay of Registration    16

2.12

   Transfer or Assignment of Registration Rights    16

2.13

   Limitations on Subsequent Registration Rights    16

2.14

   Termination of Registration Rights    16

Section 3 Information Covenants of the Company

   17

3.1

   Basic Financial Information and Inspection Rights    17

3.2

   Confidentiality    17

3.3

   Termination of Covenants    17

Section 4 Right of First Refusal

   18

4.1

   Right of First Refusal to Significant Holders    18

Section 5 Miscellaneous

   21

5.1

   Amendment    21

5.2

   Notices    21

5.3

   Governing Law    21

5.4

   Successors and Assigns    21

5.5

   Entire Agreement    22

5.6

   Delays or Omissions    22

5.7

   Severability    22

5.8

   Titles and Subtitles    22

5.9

   Counterparts    22

5.10

   Telecopy Execution and Delivery    22

5.11

   Jurisdiction; Venue    23

 

- 1 -


5.12

  Further Assurances    23

5.13

  Termination Upon Change of Control    23

5.14

  Conflict    23

5.15

  Attorneys’ Fees    23

 

- 2 -


U.S. AUTO PARTS NETWORK, INC.

INVESTORS’ RIGHTS AGREEMENT

This Investors’ Rights Agreement (this “Agreement”) is made as of March 3, 2006, by and among U.S. Auto Parts Network, Inc., a Delaware corporation (the “Company”), and Oak Investment Partners XI, Limited Partnership, a Delaware limited partnership (the “Investor”). Unless otherwise defined herein, capitalized terms used in this Agreement have the meanings ascribed to them in Section 1.

RECITALS

WHEREAS: The Investors are parties to the Series A Preferred Stock Purchase Agreement of even date herewith, among the Company, the Investor and the other parties named therein (the “Purchase Agreement”), and it is a condition to the closing of the sale of the Series A Preferred Stock to the Investor that the Investors and the Company execute and deliver this Agreement.

NOW, THEREFORE: In consideration of the mutual promises and covenants set forth herein, and other consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto agree as follows:

Section 1

Definitions

1.1 Certain Definitions. As used in this Agreement, the following terms shall have the meanings set forth below:

(a) “Commission” shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act.

(b) “Common Stock” means the common stock of the Company.

(c) “Conversion Stock” shall mean shares of Common Stock issued upon conversion of the Series A Preferred Stock.

(d) “Convertible Securities” shall have the meaning assigned to such term in the Restated Certificate.

(e) “Deemed Liquidation” shall have the meaning assigned to such term in the Restated Certificate.

(f) “Exchange Act” shall mean the Securities Exchange Act of 1934, as amended, or any similar successor federal statute and the rules and regulations thereunder, all as the same shall be in effect from time to time.

(g) “Holder” shall mean any Investor who holds Registrable Securities and any holder of Registrable Securities to whom the registration rights conferred by this Agreement have been duly and validly transferred in accordance with Section 2.12 of this Agreement.

 

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(h) “Indemnified Party” shall have the meaning set forth in Section 2.6(c) hereto.

(i) “Indemnifying Party” shall have the meaning set forth in Section  2.6(c) hereto.

(j) “Initial Closing” shall mean the date of the initial sale of shares of the Company’s Series A Preferred Stock pursuant to the Purchase Agreement.

(k) “Initial Public Offering” shall mean the closing of the Company’s first firm commitment underwritten public offering of the Company’s Common Stock registered under the Securities Act.

(l) “Initiating Holders” shall mean any Holder or Holders who in the aggregate hold more than fifty percent (50%) of the outstanding Registrable Securities.

(m) “Investors” shall mean the persons and entities (each, an “Investor” and collectively, the “Investors”) listed on Exhibit A .

(n) “New Securities” shall have the meaning set forth in Section  4.1(a)  hereto.

(o) “Options” shall have the meaning assigned such term in the Restated Certificate.

(p) “Other Selling Stockholders” shall mean persons other than Holders who, by virtue of agreements with the Company, are entitled to include their Other Shares in certain registrations hereunder.

(q) “Other Shares” shall mean shares of Common Stock, other than Registrable Securities (as defined below) with respect to which registration rights have been granted.

(r) “Purchase Agreement” shall have the meaning set forth in the Recitals hereto.

(s) “Qualified Public Offering” means an Initial Public Offering in which all outstanding Series A Preferred Stock converts to Common Stock.

(t) “Registrable Securities” shall mean (i) shares of Common Stock issued or issuable pursuant to the conversion of the Shares and (ii) any Common Stock issued as a dividend or other distribution with respect to or in exchange for or in replacement of the shares referenced in (i) above; provided , however , that Registrable Securities shall not include any shares of Common Stock described in clause (i) or (ii) above which have previously been registered or which have been sold to the public either pursuant to a registration statement or Rule 144, or which have been sold in a private transaction in which the transferor’s rights under this Agreement are not validly assigned in accordance with this Agreement.

 

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(u) The terms “register,” “registered” and “registration” shall refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act and applicable rules and regulations thereunder, and the declaration or ordering of the effectiveness of such registration statement.

(v) “Registration Expenses” shall mean all expenses incurred in effecting any registration pursuant to this Agreement, including, without limitation, all registration, qualification, and filing fees, printing expenses, escrow fees, fees and disbursements of counsel for the Company, blue sky fees and expenses, and expenses of any regular or special audits incident to or required by any such registration, up to $10,000 per registration for one special counsel for the selling Holders, and the compensation of regular employees of the Company for time spent on registration-related activities. Registration Expenses shall not include Selling Expenses, fees and disbursements of other counsel for the Holders.

(w) “Restated Certificate” shall mean the Company’s Amended and Restated Certificate of Incorporation, as in effect at the time of the original issuance of Series A Preferred Stock to the Investor.

(x) “Restricted Securities” shall mean any Registrable Securities required to bear the first legend set forth in Section 2.8(c) hereof.

(y) “Rule 144” shall mean Rule 144 as promulgated by the Commission under the Securities Act, as such Rule may be amended from time to time, or any similar successor rule that may be promulgated by the Commission.

(z) “Rule 145” shall mean Rule 145 as promulgated by the Commission under the Securities Act, as such Rule may be amended from time to time, or any similar successor rule that may be promulgated by the Commission

(aa) “Rule 415” shall mean Rule 415 as promulgated by the Commission under the Securities Act, as such Rule may be amended from time to time, or any similar successor rule that may be promulgated by the Commission.

(bb) “Securities Act” shall mean the Securities Act of 1933, as amended, or any similar successor federal statute and the rules and regulations thereunder, all as the same shall be in effect from time to time.

(cc) “Selling Expenses” shall mean all underwriting discounts, selling commissions and stock transfer taxes applicable to the sale of Registrable Securities and fees and disbursements of counsel for any Holder (other than the fees and disbursements of one special counsel to the selling Holders included in Registration Expenses).

(dd) “Series A Preferred Stock” shall mean the shares of Series A Preferred Stock issued pursuant to the Purchase Agreement.

(ee) “ Shares ” shall mean the Company’s Series A Preferred Stock.

 

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(ff) “ Significant Holders ” shall have the meaning set forth in Section 3.1 hereof.

(gg) “Withdrawn Registration” shall mean a forfeited demand registration under Section 2.1 in accordance with the terms and conditions of Section 2.4.

Section 2

Registration Rights

2.1 Requested Registration.

(a) Request for Registration . Subject to the conditions set forth in this Section 2.1, if the Company shall receive from Initiating Holders a written request signed by such Initiating Holders that the Company effect any registration with respect to all or a part of the Registrable Securities (such request shall state the number of shares of Registrable Securities to be disposed of and the intended methods of disposition of such shares by such Initiating Holders), the Company will:

(i) promptly give written notice of the proposed registration to all other Holders; and

(ii) as soon as practicable, file and use good best efforts to effect such registration (including, without limitation, filing post-effective amendments, appropriate qualifications under applicable blue sky or other state securities laws, and appropriate compliance with the Securities Act) and to permit or facilitate the sale and distribution of all or such portion of such Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any Holder or Holders joining in such request as are specified in a written request received by the Company within twenty (20) days after such written notice from the Company is mailed or delivered.

(b) Limitations on Requested Registration . The Company shall not be obligated to effect, or to take any action to effect, any such registration pursuant to this Section 2.1:

(i) Prior to the earlier of (A) the 18-month anniversary of the date of this Agreement or (B) six months following the effective date of the Initial Public Offering;

(ii) If the Initiating Holders, together with the holders of any other securities of the Company entitled to inclusion in such registration statement, propose to sell Registrable Securities and such other securities (if any) at an aggregate offering price to the public of less than $10,000,000;

(iii) In any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, qualification, or compliance, unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act;

 

4


(iv) After the Company has initiated two such registrations pursuant to this Section 2.1 (counting for these purposes only (x) registrations which have been declared or ordered effective and pursuant to which securities have been sold, and (y) Withdrawn Registrations);

(v) During the period starting with the date sixty (60) days prior to the Company’s good faith estimate of the date of filing of, and ending on a date one hundred eighty (180) days after the effective date of, a Company-initiated registration; provided that the Company is actively employing in good faith commercially reasonable efforts to cause such registration statement to become effective; or

(vi) If the Initiating Holders propose to dispose of shares of Registrable Securities which may be immediately registered on Form S-3 pursuant to a request made under Section 2.3 hereof.

(c) Deferral . If (i) in the good faith judgment of the Board of Directors of the Company, the filing of a registration statement covering the Registrable Securities would be materially detrimental to the Company and the Board of Directors of the Company concludes, as a result, that it is in the best interests of the Company to defer the filing of such registration statement at such time, and (ii) the Company shall furnish to such Holders a certificate signed by the President of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be materially detrimental to the Company for such registration statement to be filed in the near future and that it is, therefore, in the best interests of the Company to defer the filing of such registration statement, then (in addition to the limitations set forth in Section 2.1(b)(v) above) the Company shall have the right to defer such filing for a period of not more than ninety (90) days after receipt of the request of the Initiating Holders, and, provided further, that the Company shall not defer its obligation in this manner more than once in any twelve month period.

(d) Other Shares . The registration statement filed pursuant to the request of the Initiating Holders may, subject to the provisions of Section 2.1(e), include Other Shares, and may include securities of the Company being sold for the account of the Company.

(e) Underwriting . 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 2.1 and the Company shall include such information in the written notice given pursuant to Section 2.1(a)(i). In such event, the right of any Holder to include all or any portion of its Registrable Securities in such registration pursuant to this Section 2.1 shall be conditioned upon such Holder’s participation in such underwriting and the inclusion of such Holder’s Registrable Securities to the extent provided herein. If the Company shall request inclusion in any registration pursuant to Section 2.1 of securities being sold for its own account, or if other persons shall request inclusion in any registration pursuant to Section 2.1, the Initiating Holders shall, on behalf of all Holders, offer to include such securities in the underwriting and such offer shall be conditioned upon the participation of the Company or such other persons in such underwriting and the inclusion of the Company’s and such person’s other securities of the Company and their acceptance of the further applicable provisions of this Section 2 (including Section 2.10 ). The Company shall (together

 

5


with all Holders and other persons proposing to distribute their securities through such underwriting) enter into an underwriting agreement in customary form with the representative of the underwriter or underwriters selected for such underwriting by a majority in interest of the Initiating Holders, which underwriters are reasonably acceptable to the Company.

Notwithstanding any other provision of this Section 2.1, if the underwriters advise the Initiating Holders in writing that marketing factors require a limitation on the number of shares to be underwritten, the number of Registrable Securities and Other Shares that may be so included shall be allocated as follows: (i) first, among all Holders requesting to include Registrable Securities in such registration statement based on the pro rata percentage of Registrable Securities held by such Holders and Other Selling Stockholders; (ii) second, to the Other Selling Stockholders; and (iii) third, to the Company, which the Company may allocate, at its discretion, for its own account, or for the account of other holders or employees of the Company.

If a person who has requested inclusion in such registration as provided above does not agree to the terms of any such underwriting, such person shall be excluded therefrom by written notice from the Company, the underwriter or the Initiating Holders. The securities so excluded shall also be withdrawn from registration. Any Registrable Securities or other securities excluded or withdrawn from such underwriting shall also be withdrawn from such registration. If shares are so withdrawn from the registration and if the number of shares to be included in such registration was previously reduced as a result of marketing factors pursuant to this Section 2.1(e) , then the Company shall then offer to all Holders who have retained rights to include securities in the registration the right to include additional Registrable Securities in the registration in an aggregate amount equal to the number of shares so withdrawn, with such shares to be allocated among such Holders requesting additional inclusion as set forth above.

2.2 Company Registration .

(a) Company Registration . If the Company shall determine to register any of its securities either for its own account or the account of a security holder or holders, other than a registration pursuant to Section 2.1 or 2.3, a registration relating solely to employee benefit plans, a registration relating to the offer and sale of debt securities, a registration relating to a corporate reorganization or other Rule 145 transaction, or a registration on any registration form that does not permit secondary sales, the Company will:

(i) promptly give written notice of the proposed registration to all Holders; and

(ii) use good faith commercially reasonable efforts to include in such registration (and any related qualification under blue sky laws or other compliance), except as set forth in Section 2.2(b) below, and in any underwriting involved therein, all of such Registrable Securities as are specified in a written request or requests made by any Holder or Holders received by the Company within ten (10) days after such written notice from the Company is mailed or delivered. Such written request may specify all or a part of a Holder’s Registrable Securities.

 

6


(b) Underwriting . If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given pursuant to Section 2.2(a)(i). In such event, the right of any Holder to registration pursuant to this Section 2.2 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 (together with the Company and the Other Selling Stockholders other holders of securities of the Company with registration rights to participate therein distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the representative of the underwriter or underwriters selected by the Company.

Notwithstanding any other provision of this Section 2.2, if the underwriters advise the Company in writing that marketing factors require a limitation on the number of shares to be underwritten, the underwriters may (subject to the limitations set forth below) limit the number of Registrable Securities to be included in, the registration and underwriting subject to the limitation in Section 2.2(a)(ii). The Company shall so advise all holders of securities requesting registration, and the number of shares of securities that are entitled to be included in the registration and underwriting shall be allocated, as follows: (i) first, to the Company for securities being sold for its own account, (ii) second, to the Holders requesting to include Registrable Securities in such registration statement based on the pro rata percentage of Registrable Securities held by such Holders, and (iii) third, to the Other Selling Stockholders requesting to include Other Shares in such registration statement based on the pro rata percentage of Other Shares held by such Other Selling Stockholders, assuming conversion. Notwithstanding the foregoing, in no event shall the number of Registrable Securities included in such registration be reduced below 20% of the total number of shares included in such registration, except in case of a Qualified Public Offering, in which case the number of Registrable Securities included in such registration may be reduced to zero pursuant to this paragraph.

If a person who has requested inclusion in such registration as provided above does not agree to the terms of any such underwriting, such person shall also be excluded therefrom by written notice from the Company or the underwriter. The Registrable Securities or other securities so excluded shall also be withdrawn from such registration. Any Registrable Securities or other securities excluded or withdrawn from such underwriting shall be withdrawn from such registration. If shares are so withdrawn from the registration and if the number of shares of Registrable Securities to be included in such registration was previously reduced as a result of marketing factors pursuant to Section 2.2(b), the Company shall then offer to all persons who have retained the right to include securities in the registration the right to include additional securities in the registration in an aggregate amount equal to the number of shares so withdrawn, with such shares to be allocated among the persons requesting additional inclusion, in the manner set forth above.

(c) Right to Terminate Registration . The Company shall have the right to terminate or withdraw any registration initiated by it under this Section 2.2 prior to the effectiveness of such registration whether or not any Holder has elected to include securities in such registration.

 

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2.3 Registration on Form S-3.

(a) Request for Form S-3 Registration . After the Company becomes subject to the reporting obligations of Section 13 of the Exchange Act, the Company shall use good faith commercially reasonable efforts to qualify for registration on Form S-3 or any comparable or successor form or forms. After the Company has qualified for the use of Form S-3, in addition to the rights contained in the foregoing provisions of this Section 2 and subject to the conditions set forth in this Section 2.3, if the Company shall receive from a Holder or Holders of Registrable Securities a written request that the Company effect any registration on Form S-3 or any similar short form registration statement with respect to all or part of the Registrable Securities (such request shall state the number of shares of Registrable Securities to be disposed of and the intended methods of disposition of such shares by such Holder or Holders), the Company will take all such action with respect to such Registrable Securities as required by Section 2.1(a)(i) and (ii).

(b) Limitations on Form S-3 Registration . The Company shall not be obligated to effect, or take any action to effect, any such registration pursuant to this Section 2.3:

(i) In the circumstances described in either Sections 2.1(b)(i), 2.1(b)(iii) or 2.1(b)(v);

(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) on Form S-3 at an aggregate price to the public of less than $5,000,000; or

(iii) If, in a given twelve-month period, the Company has effected two (2) such registrations in such period.

(c) Deferral . The provisions of Section 2.1(c) shall apply to any registration pursuant to this Section 2.3.

(d) Underwriting . If the Holders of Registrable Securities requesting registration under this Section 2.3 intend to distribute the Registrable Securities covered by their request by means of an underwriting, the provisions of Sections 2.1(e) shall apply to such registration. Notwithstanding anything contained herein to the contrary, registrations effected pursuant to this Section 2.3 shall not be counted as requests for registration or registrations effected pursuant to Section 2.1.

2.4 Expenses of Registration. All Registration Expenses incurred in connection with registrations pursuant to Sections 2.1, 2.2 and 2.3 hereof shall be borne by the Company; provided , however , that the Company shall not be required to pay for any expenses of any registration proceeding begun pursuant to Sections 2.1 and 2.3 if the registration request is subsequently withdrawn at the request of the Holders of a majority of the Registrable Securities to be registered or because a sufficient number of Holders shall have withdrawn so that the minimum offering conditions set forth in Sections 2.1 and 2.3 are no longer satisfied (in which case all participating Holders shall bear such expenses pro rata among each other based on the number of Registrable Securities requested to be so registered), unless the Holders of a majority

 

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of the Registrable Securities agree to forfeit their right to a demand registration pursuant to Section 2.1; provided , however , in the event that a withdrawal by the Holders is based upon material adverse information relating to the Company that is different from the information known or available (upon request from the Company or otherwise) to the Holders requesting registration at the time of their request for registration under Section 2.1, such registration shall not be treated as a counted registration for purposes of Section 2.1 hereof, even though the Holders do not bear the Registration Expenses for such registration. All Selling Expenses relating to securities registered on behalf of the Holders shall be borne by the holders of securities included in such registration pro rata among each other on the basis of the number of Registrable Securities so registered.

2.5 Registration Procedures. In the case of each registration effected by the Company pursuant to Section 2, the Company will keep each Holder advised in writing as to the initiation of each registration and as to the completion thereof. At its expense, the Company will use good faith commercially reasonable efforts to:

(a) Keep such registration effective for a period of ending on the earlier of the date which is one hundred twenty (120) days from the effective date of the registration statement or such time as the Holder or Holders have completed the distribution described in the registration statement relating thereto;

(b) Prepare and file with the Commission 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) Furnish such number of prospectuses, including any preliminary prospectuses, and other documents incident thereto, including any amendment of or supplement to the prospectus, as a Holder from time to time may reasonably request;

(d) Register and qualify the securities covered by such registration statement under such other securities or blue sky laws of such jurisdiction 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 unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act;

(e) Notify each seller 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 or incomplete in light of the circumstances then existing, and following such notification promptly prepare and furnish to such seller a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such shares, such prospectus shall not include an untrue statement

 

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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 or incomplete in light of the circumstances then existing;

(f) 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 reasonably satisfactory to a majority in interest of the Holders requesting registration of Registrable Securities and (ii) a “comfort” 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;

(g) Provide a transfer agent and registrar for all Registrable Securities registered pursuant to such registration statement and a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration;

(h) Comply with all applicable rules and regulations of the Commission, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months, but not more than eighteen months, beginning with the first month after the effective date of the Registration Statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act;

(i) Cause all such Registrable Securities registered pursuant hereunder to be listed on each securities exchange on which similar securities issued by the Company are then listed; and

(j) In connection with any underwritten offering pursuant to a registration statement filed pursuant to Section 2.1 hereof, enter into an underwriting agreement in form reasonably necessary to effect the offer and sale of Common Stock, provided such underwriting agreement contains reasonable and customary provisions, and provided further, that each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement.

2.6 Indemnification.

(a) To the extent permitted by law, the Company will indemnify and hold harmless each Holder, each of its officers, directors, agents and employees and each person controlling such Holder within the meaning of Section 15 of the Securities Act, with respect to which registration, qualification, or compliance has been effected pursuant to this Section 2, and each underwriter, if any, of the Registrable Shares and each person who controls within the meaning of Section 15 of the Securities Act any such underwriter, against all expenses, claims, losses, damages, and liabilities (or actions, proceedings, or settlements in respect thereof) arising out of or based on: (i) any untrue statement (or alleged untrue statement) of a material fact contained or incorporated by reference in any prospectus, offering circular, or other document (including any related registration statement, notification, or the like) incident to any such

 

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registration, qualification, or compliance, (ii) any 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, any state securities laws or any rule or regulation thereunder applicable to the Company and relating to action or inaction required of the Company in connection with any offering covered by such registration, qualification, or compliance, and the Company will reimburse each such Holder, each of its officers, directors, agents and employees and each person controlling such Holder, each such underwriter, and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating and defending or settling any such claim, loss, damage, liability, or action; provided that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability, or action arises out of or is based on any untrue statement or omission based upon written information furnished to the Company by such Holder, any of such Holder’s officers, directors, agents and employees, any person controlling such Holder, such underwriter or any person who controls any such underwriter and stated to be specifically for use therein; and provided , further that, the indemnity agreement contained in this Section 2.6(a) shall not apply to (x) in the case of a sale directly by such holder of Registrable Shares (including a sale of such Registrable Shares through any underwriter retained by such holder of Registrable Shares to engage in a distribution solely on behalf of such holder of Registrable Shares), such untrue statement or alleged untrue statement or omission or alleged omission was contained in a preliminary prospectus and corrected in a final or amended prospectus, and (A) such holder of Registrable Shares (or underwriter) failed to deliver a copy of the final or amended prospectus at or prior to the confirmation of the sale of the Registrable Shares to the person asserting any such loss, claim, damage or liability in any case where such delivery is required by the Securities Act or any state securities laws and (B) the Company complied with its obligations under Section 2.5 hereunder with respect to such final or amended prospectus, or (y) 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).

(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, qualification, or compliance is being effected, indemnify and hold harmless the Company, each of its directors, officers, agents and employees, and each underwriter, if any, of the Company’s securities covered by such a registration statement, each person who controls the Company or such underwriter within the meaning of Section 15 of the Securities Act, each other such Holder, and each of their officers, directors, and partners, and each person controlling such Holder, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on: (i) any untrue statement (or alleged untrue statement) of a material fact contained or incorporated by reference in any such registration statement, prospectus, offering circular, or other document, or (ii) any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company and such Holders, directors, officers, partners, legal counsel, and accountants, persons, underwriters, or control persons for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability, or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular, or other document in reliance upon and in conformity with written information

 

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furnished to the Company by such Holder and stated to be specifically for use therein; provided , however , that the obligations of such Holder hereunder shall not apply to amounts paid in settlement of any such claims, losses, damages, or liabilities (or actions in respect thereof) if such settlement is effected without the consent of such Holder (which consent shall not be unreasonably withheld) unless such settlement includes as an unconditional term thereof the giving by the claimant or plaintiff to such Holder of a release from all liability in respect to such claim or litigation; and provided that in no event shall any indemnity under this Section 2.6 exceed the net proceeds from the offering received by such Holder.

(c) Each party entitled to indemnification under this Section 2.6 (the “Indemnified Party”) shall give notice to the party required to provide indemnification (the “Indemnifying Party”) promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of such claim or any litigation resulting therefrom; provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or any litigation resulting therefrom, shall be approved by the Indemnified Party (whose approval shall not be unreasonably withheld), and the Indemnified Party may participate in such defense at such party’s expense; and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 2.6, to the extent such failure is not prejudicial. 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 that 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. Each Indemnified Party shall furnish such information regarding itself or the claim in question as an Indemnifying Party may reasonably request in writing and as shall be reasonably required in connection with defense of such claim and litigation resulting therefrom.

(d) If the indemnification provided for in this Section 2.6 is held by a court of competent jurisdiction to be unavailable to an Indemnified Party with respect to any loss, liability, claim, damage, or expense referred to herein, then the Indemnifying Party, in lieu of indemnifying such Indemnified Party hereunder, shall contribute to the amount paid or payable by such Indemnified Party as a result of such loss, liability, claim, damage, or expense in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party on the one hand and of the Indemnified Party on the other in connection with the statements or omissions that resulted in such loss, liability, claim, damage, or expense as well as any other relevant equitable considerations. The relative fault of the Indemnifying Party and of the Indemnified Party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the Indemnifying Party or by the Indemnified Party and the parties’ relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. In no event shall any contribution by a Holder under this Section 2.6(d), when aggregated by any indemnity paid by such Holder under this Section 2.6, exceed the net proceeds from the offering received by such Holder.

(e) Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in

 

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connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control.

2.7 Information by Holder. Each Holder of Registrable Securities shall furnish to the Company such information regarding such Holder and the distribution proposed by such Holder as the Company may reasonably request in writing and as shall be reasonably required in connection with any registration, qualification, or compliance referred to in this Section  2 . Any such information so provided by such Holder, including any such information regarding such Holder’s plan of distribution, included in any prospectus, offering circular, or other document (including any related registration statement, notification, or the like) incident to any such registration, qualification, or compliance shall be considered for purposes of Sections 2.6(a) and (b)  written information furnished to the Company by such Holder that is stated to be specifically for use in any prospectus, offering circular, or other document (including any related registration statement, notification, or the like) incident to any such registration, qualification, or compliance.

2.8 Restrictions on Transfer.

(a) The holder of each certificate representing Registrable Securities by acceptance thereof agrees to comply in all respects with the provisions of this Section 2.8 . Each Holder agrees not to make any sale, assignment, transfer, pledge or other disposition of all or any portion of the Restricted Securities, or any beneficial interest therein, unless and until, (x) other than in connection with sales pursuant to an effective registration statement or sales or transfers pursuant to Rule 144, the transferee thereof has agreed in writing for the benefit of the Company to take and hold such Restricted Securities subject to, and to be bound by, the terms and conditions set forth in this Agreement, including, without limitation, this Section 2.8 and Section 2.10, and, (y) except with respect to permitted transfers under Section 2.8(b) :

(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) Such Holder shall have given prior written notice to the Company of such Holder’s intention to make such disposition and shall have furnished the Company with a detailed description of the manner and circumstances of the proposed disposition, and, if requested by the Company, such Holder shall have furnished the Company, at its expense, with an opinion of counsel, reasonably satisfactory to the Company, to the effect that such disposition will not require registration of such Restricted Securities under the Securities Act.

(b) Permitted transfers include (i) a transfer not involving a change in beneficial ownership, or (ii) in transactions involving the distribution without consideration of Restricted Securities by any Holder to (x) a parent, subsidiary or other affiliate of Holder that is a Corporation, or (y) any of its partners, members or other equity owners, or retired partners, retired members or other equity owners, or to the estate of any of its partners, members or other equity owners or retired partners, retired members or other equity owners, or (iii) transfers in compliance with Rule 144(k), as long as the Company is furnished with satisfactory evidence of compliance with such Rule; provided , in each case, that the Holder thereof shall give written notice to the Company of such Holder’s intention to effect such disposition and shall have

 

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furnished the Company with a detailed description of the manner and circumstances of the proposed disposition.

(c) Each certificate representing Registrable Securities shall (unless otherwise permitted by the provisions of this Agreement) be stamped or otherwise imprinted with a legend 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, AS AMENDED (THE “ACT”), OR UNDER THE SECURITIES LAWS OF CERTAIN STATES. THESE SECURITIES MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED EXCEPT AS PERMITTED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS PURSUANT TO REGISTRATION OR AN EXEMPTION THEREFROM. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER THAT SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION OTHERWISE COMPLIES WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS.

THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO (1) RESTRICTIONS ON TRANSFERABILITY AND RESALE, INCLUDING A LOCK-UP PERIOD OF UP TO 180 DAYS IN THE EVENT OF A PUBLIC OFFERING, AS SET FORTH IN AN INVESTOR RIGHTS AGREEMENT, AND (2) VOTING RESTRICTIONS AS SET FORTH IN A VOTING AGREEMENT AMONG THE COMPANY AND THE ORIGINAL HOLDERS OF THESE SHARES, COPIES OF WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE COMPANY.

The Holders consent to the Company making a notation on its records and giving instructions to any transfer agent of the Restricted Securities in order to implement the restrictions on transfer established in this Section 2.8.

(d) The first legend referring to federal and state securities laws identified in Section 2.8(c) hereof stamped on a certificate evidencing the Restricted Securities and the stock transfer instructions and record notations with respect to such Restricted Securities shall be removed and the Company shall issue a certificate without such legend to the holder of such Restricted Securities if (i) such securities are registered under the Securities Act, or (ii) such holder provides the Company with an opinion of counsel reasonably acceptable to the Company to the effect that a public sale or transfer of such securities may be made without registration under the Securities Act, or (iii) such holder provides the Company with reasonable assurances, which may, at the option of the Company, include an opinion of counsel satisfactory to the Company, that such securities can be sold pursuant to Section (k) of Rule 144 under the Securities Act.

 

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2.9 Rule 144 Reporting. With a view to making available the benefits of certain rules and regulations of the Commission that may permit the sale of the Restricted Securities to the public without registration, the Company agrees to use good faith commercially reasonable efforts to:

(a) Make and keep public information regarding the Company available as those terms are understood and defined in Rule 144 under the Securities Act, at all times from and after ninety (90) days following the effective date of the first registration under the Securities Act filed by the Company for an offering of its securities to the general public;

(b) File with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act after it has become subject to such reporting requirements, for so long as the Company remains subject to such reporting requirements; and

(c) So long as a Holder owns any Restricted Securities and the Company remains subject to the reporting requirements of the Securities Act and the Exchange Act, furnish to the Holder forthwith upon written request a written statement by the Company as to its compliance with the reporting requirements of Rule 144 (at any time from and after ninety (90) days following the effective date of the first registration statement filed by the Company for an offering of its securities to the general public), and of the Securities Act and 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, and such other reports and documents so filed as a Holder may reasonably request in availing itself of any rule or regulation of the Commission allowing a Holder to sell any such securities without registration.

2.10 Market Stand-Off Agreement. Each Holder hereby agrees that such Holder shall not sell or otherwise 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, of any Common Stock (or other securities) of the Company held by such Holder (other than those included in the registration) during a period as requested by the Company (not to exceed one hundred eighty (180) days) following the effective date of the Company’s Initial Public Offering, provided that: (i) 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 and (ii) such agreement shall provide that any discretionary waiver or termination of the restrictions of such agreements by the Company or underwriters shall apply to all persons pro rata based on the number of shares of Common Stock subject to such agreements. The obligations described in this Section 2.10 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. The Company may impose stop-transfer instructions and may stamp each such certificate with the second legend set forth in Section 2.8(c) hereof with respect to the shares of Common Stock (or other securities) subject to the foregoing restriction until the end of such one hundred eighty (180) day period. If requested by the Company and an underwriter of Common Stock (or other securities) of the Company, each Holder agrees to execute a market standoff agreement with said underwriters in customary form consistent with the provisions of this Section 2.10.

 

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2.11 Delay of Registration . No Holder shall have any right to take any action to restrain, enjoin, or otherwise delay any registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 2.

2.12 Transfer or Assignment of Registration Rights . The rights to cause the Company to register securities granted to a Holder by the Company under this Section 2 may be transferred or assigned by a Holder only to a transferee or assignee (i) of not less than 100,000 shares of Registrable Securities (as presently constituted and subject to subsequent adjustments for stock splits, stock dividends, reverse stock splits, and the like) or (ii) to a partner, retired partner, member, retired member or affiliate of the Holder (without restriction as to minimum share holdings); provided that (a) such transfer or assignment of Registrable Securities is effected in accordance with the terms of Section 2.8 hereof and applicable securities laws, (b) the Company is given written notice prior to said transfer or assignment, stating the name and address of the transferee or assignee and identifying the securities with respect to which such registration rights are intended to be transferred or assigned and (c) the transferee or assignee of such rights assumes in writing the obligations of such Holder under this Agreement, including without limitation the obligations set forth in Section 2.10.

2.13 Limitations on Subsequent Registration Rights . From and after the date of this Agreement, the Company shall not, without the prior written consent of a majority in interest of the Holders, enter into any agreement with any holder or prospective holder of any securities of the Company giving such holder or prospective holder any registration rights the terms of which are pari passu with or senior to the registration rights granted to the Holders hereunder; provided , however , (i) without such consent, at any time after the consummation of the Initial Public Offering, the Company may enter into an agreement with any holder or prospective holder of any securities of the Company giving such holder or prospective holder any registration rights the terms of which are pari passu with the registration rights granted to the Holders hereunder, (ii) at any time after the date that is two years after consummation of the Initial Public Offering, this Section 2.13 will not apply to any such agreements with any holder or prospective holder of any securities of the Company, and (iii) this Section 2.13 will terminate at such time as all Holders’ registration rights have terminated pursuant to Section 2.14. Further, the Company agrees to use best efforts to ensure that all future issuances of capital stock shall be subject to a market stand off provision at least as restrictive as those set forth in Section 2.10.

2.14 Termination of Registration Rights. The right of any Holder to request registration or inclusion in any registration pursuant to Section 2.1, 2.2 or 2.3 shall terminate on the earlier of, (i) with respect to any Holder, on such date, on or after the closing of the Company’s first registered public offering of Common Stock, on which all shares of Registrable Securities held or entitled to be held upon conversion by such Holder total, the aggregate, less than 1% of the outstanding shares of Common Stock of the Company and such Holder receives an opinion of counsel, reasonably acceptable to such Holder, that such Holder can sell all of its shares immediately under Rule 144(k), and (ii) five (5) years after the closing of the Company’s Initial Public Offering.

 

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Section 3

Additional Covenants of the Company

The Company hereby covenants and agrees, as follows:

3.1 Basic Financial Information and Inspection Rights.

(a) Basic Financial Information . The Company will furnish the following reports to the Investor and each Holder who, with its affiliates, owns at least 2,000,000 shares of Series A Preferred Stock (as presently constituted and subject to subsequent adjustments for stock splits, stock dividends, reverse stock splits, and the like) (each, a “Significant Holder”):

(i) As soon as practicable after the end of each fiscal year of the Company, and in any event within one hundred twenty (120) days after the end of each fiscal year of the Company, a consolidated balance sheet of the Company and its subsidiaries, if any, as at the end of such fiscal year, and consolidated statements of income and cash flows of the Company and its subsidiaries, if any, for such year, prepared in accordance with U.S. generally accepted accounting principles consistently applied, certified by independent public accountants of recognized national standing selected by the Company and certified by the Chief Financial Officer of the Company;

(ii) 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 after the end of the first, second, and third quarterly accounting periods in each fiscal year of the Company, an unaudited consolidated balance sheet of the Company and its subsidiaries, if any, as of the end of each such quarterly period, and unaudited consolidated statements of income and cash flows of the Company and its subsidiaries, if any, for such period, prepared in accordance with U.S. generally accepted accounting principles consistently applied, subject to changes resulting from normal year-end audit adjustments;

(iii) As soon as practicable after the end of each fiscal year of the Company, and in any event within sixty (60) days after the end of each fiscal year of the Company, an annual budget and business plan.

3.2 Inspection Rights. The Company will afford to each Significant Holder and to such Significant Holder’s accountants and counsel, upon prior reasonable notice, reasonable access during normal business hours to all of the Company’s respective properties, books and records. Each such Significant Holder shall have such other access to management and information as is necessary for it to comply with applicable laws and regulations and reporting obligations.

3.3 Confidentiality. Anything in this Agreement to the contrary notwithstanding, no Holder by reason of this Agreement shall have access to any trade secrets or classified information of the Company. Each Holder acknowledges that the information received by them pursuant to this Agreement may be confidential and for its use only, and it will not use such confidential information in violation of the Exchange Act or reproduce, disclose or disseminate such information to any other person (other than its employees, agents, attorneys, affiliates, limited partners and general partners) and except in connection with the exercise of rights under

 

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this Agreement, unless the Company has made such information available to the public generally or such Holder is required to disclose such information by a governmental authority.

3.4 D&O Insurance. The Company will, within ninety days of the first issuance of Shares of Series A Preferred Stock pursuant to the Purchase Agreement, obtain director and officer’s insurance in an amount of at least $2 million on terms acceptable to the Investor.

3.5 Option Awards. All option grants or similar awards to persons who are Common Holders (or trustees thereof) (as defined in the Purchase Agreement) will be approved (i) by a Compensation Committee, the majority of the members of which are not executive officers or former executive officers of the Company or (ii) the Preferred Directors, as such term is defined in the Restated Certificate.

3.6 Termination of Covenants. The covenants set forth in this Section 3 shall terminate and be of no further force and effect after the earlier of (i) closing of the Company’s Initial Public Offering and (ii) closing of a Deemed Liquidation.

Section 4

Right of First Refusal

4.1 Right of First Refusal to Significant Holders. The Company hereby grants to each Significant Holder, the right of first refusal to purchase its Pro Rata Share (as defined in the next sentence) of New Securities (as defined in this Section 4.1(a)) which the Company may, from time to time, propose to sell and issue after the date of this Agreement. A Significant Holder’s “Pro Rata Share,” for purposes of this right of first refusal, is equal to the ratio of (a) the number of shares of Common Stock owned by such Significant Holder immediately prior to the issuance of New Securities (assuming full conversion of the Shares and exercise of all outstanding convertible securities, rights, options and warrants, directly or indirectly, into Common Stock held by said Significant Holder) to (b) the total number of shares of Common Stock outstanding immediately prior to the issuance of New Securities (assuming full conversion of the Shares and exercise of all outstanding convertible securities, rights, options and warrants, directly or indirectly, held by all of the Significant Holders).

(a) “New Securities” shall mean any capital stock (including Common Stock) of the Company whether now authorized or not, and Options or Convertible Securities; provided that the term “New Securities” does not include:

(i) securities of the Company issued or issuable to officers, directors and employees of, or consultants to, the Company pursuant to stock grants, option plans, purchase plans or other employee stock incentive programs or arrangements approved by the Board of Directors, or upon exercise of options or warrants granted to such parties pursuant to any such plan or arrangement;

(ii) securities of the Company issued upon the exercise or conversion of Options or Convertible Securities outstanding as of the Original Issue Date (as such term is defined in the Restated Certificate);

 

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(iii) securities of the Company issued or issuable as a Distribution (as such term is defined in the Restated Certificate) on the Series A Preferred Stock or pursuant to any event for which adjustment is made pursuant to Section 4(e), 4(f) or 4(g) of the Restated Certificate;

(iv) Common Stock issued in an Initial Public Offering;

(v) securities of the Company issued to a bona fide third party pursuant to the acquisition of another corporation by the Company by merger, purchase of substantially all of the assets or other reorganization or to a joint venture agreement, provided, that such issuances are approved by the Board of Directors, and that such issuance is approved by at least one of the Preferred Directors (as such term is defined in the Restated Certificate, the “ Preferred Directors ”) or that the primary purpose of the issuance is not the raising of capital;

(vi) securities of the Company issued to bona fide third party banks, equipment lessors or other financial institutions pursuant to a debt financing or commercial leasing transaction approved by the Board of Directors, and that such issuance is approved by at least one Preferred Director or that the primary purpose of the issuance is not the raising of capital;

(vii) securities of the Company issued or issuable to bona fide third parties in connection with any settlement of any action, suit, proceeding or litigation approved by the Board of Directors, and that such issuance is approved by at least one Preferred Director or that the primary purpose of the issuance is not the raising of capital;

(viii) securities of the Company issued or issuable to bona fide third parties in connection with sponsored research, collaboration, technology license, development, OEM, marketing or other similar agreements or strategic partnerships approved by the Board of Directors, and that such issuance is approved by at least one Preferred Director or that the primary purpose of the issuance is not the raising of capital;

(ix) securities of the Company issued or issuable to bona fide third party suppliers or bona fide third party service providers in connection with the provision of goods or services pursuant to transactions approved by the Board of Directors, and that such issuance is approved by at least one Preferred Director or that the primary purpose of the issuance is not the raising of capital;

(x) securities of the Company which are otherwise excluded by the affirmative vote or consent of the holders of a majority of the shares of Series A Preferred Stock of the Company then outstanding; and

(xi) any right, option or warrant to acquire any security convertible into the securities excluded from the definition of New Securities pursuant to subsections (i) through (x) above.

(b) In the event the Company proposes to undertake an issuance of New Securities, it shall give each Significant Holder written notice of its intention, describing the type of New Securities, and their price and the general terms upon which the Company proposes to

 

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issue the same. Each Significant Holder shall have ten (10) days after any such notice is mailed or delivered to agree to purchase such Holder’s pro rata share of such New Securities for the price and upon the terms specified in the notice by giving written notice to the Company, in substantially the form attached hereto as Schedule 1 , and stating therein the quantity of New Securities to be purchased.

(c) In the event the Significant Holders fail to exercise fully the right of first refusal rights within said ten (10) day period (the “ Election Period ”), the Company shall have ninety (90) days thereafter to sell or enter into an agreement (pursuant to which the sale of New Securities covered thereby shall be closed, if at all, within ninety (90) days from the date of said agreement) to sell that portion of the New Securities with respect to which the Significant Holders’ right of first refusal option set forth in this Section 4.1 was not exercised, at a price and upon terms no more favorable to the purchasers thereof than specified in the Company’s notice to Significant Holders delivered pursuant to Section 4.1(b). In the event the Company has not sold within such ninety (90) day period following the Election Period, or such ninety (90) day period following the date of said agreement, the Company shall not thereafter issue or sell any New Securities, without first again offering such securities to the Significant Holders in the manner provided in this Section 4.1.

(d) If at any time (i) the Company creates a direct or indirect subsidiary that is not a wholly owned subsidiary (either directly or indirectly) (other than de minimis ownership to the extent required by applicable laws outside of the United States), (ii) any direct or indirect subsidiary of the Company sells or transfers any shares of capital stock to any entity other than the Company or a direct or indirect wholly owned subsidiary of the Company (other than de minimis ownership to the extent required by applicable laws outside of the United States), (iii) any direct or indirect subsidiary of the Company merges, consolidates or takes any other action that results in such subsidiary not remaining a wholly owned subsidiary of the Company (either directly or indirectly) (other than de minimis ownership to the extent required by applicable laws outside of the United States), or (iv) any direct or indirect subsidiary of the Company sells all or substantially all of its assets to any person or entity other than the Company or a direct or indirect wholly owned subsidiary of the Company, then in each case the Company shall cause such subsidiary (or the surviving or successor entity or purchaser of assets) (each, a “ Spin-out Entity ”) to provide each Significant Holder a right of first offer (the “ Spin-out Preemptive Rights ”) to purchase up to its Pro Rata Portion of any Common Stock, Preferred Stock or any other security of the Spin-out Entity, including but not limited to, rights, options, or warrants to purchase such Common Stock, Preferred Stock or other security (“ Spin-out Shares ”) offered by the Spin-out Entity for financing purposes. The manner and procedure of such Spin-out Preemptive Rights shall be substantially similar to those described in Section 4.1(a)-(c). The Company shall use commercially reasonable efforts to cause, or exert such influence it may have to cause, the organizational documents of the Spin-out Entity (i) to provide for voting rights and preferences equivalent to the voting rights and preferences of the Series A Preferred Stock and (ii) to contain provisions similar to this Section 4.1.

4.2 The rights of the Investor under this Section 4 shall expire upon, and shall not be applicable to the first to occur of (x) immediately before the closing of a Qualified Public Offering (or any other public offering of the Company’s Common Stock registered under the Securities Act consummated in satisfaction of a requested registration pursuant to Section 2.1 (a)

 

20


hereof, an “ Investor-Requested Initial Public Offering ”) and (y) immediately before closing of a Deemed Liquidation.

Section 5

Miscellaneous

5.1 Amendment. Except as expressly provided herein, neither this Agreement nor any term hereof may be amended, waived, discharged or terminated other than by a written instrument referencing this Agreement and signed by the Company and the holders of a majority of the Registrable Securities. Any such amendment, waiver, discharge or termination effected in accordance with this paragraph shall be binding upon each Holder and each future holder of all such securities of Holder.

5.2 Notices. All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by registered or certified mail, postage prepaid, sent by facsimile or otherwise delivered by hand or by messenger addressed:

(a) if to the Investor, to Oak Investment Partners XI, Limited Partnership, 525 University Avenue, Suite 1300, Palo Alto, California 94301, facsimile number (650) 328-6345, attn: Fredric W. Harman and Virginia Eddington, or at such other address and facsimile number as the Investor shall have furnished to the Company, with a copy to Hughes & Luce LLP, 1717 Main Street, Dallas, Texas, 75201, facsimile number (214) 939-5849, attn: Benjamin D. Nelson;

(b) if to any Holder, at such Holder’s address and facsimile number as shown in the Company’s records, or, until any such Holder so furnishes an address and facsimile number to the Company, then to and at the address of the last Holder of such shares for which the Company has contact information in its records; or

(c) if to the Company, one copy should be sent to 17150 South Margay Avenue, Carson, CA, 90746, facsimile (310) 735-0088, Attn: Chief Executive Officer, or at such other address and facsimile number as the Company shall have furnished to the Investor and Holders, with a copy to Thomas J. Poletti of Kirkpatrick & Lockhart Nicholson Graham LLP located at 10100 Santa Monica Blvd, 7 th Floor, Los Angeles, California, facsimile number (310) 552-5001;

Each such notice or other communication shall for all purposes of this Agreement be treated as effective or having been given when delivered if delivered personally, or, if sent by mail, at the earlier of its receipt or 72 hours after the same has been deposited in a regularly maintained receptacle for the deposit of the United States mail, addressed and mailed as aforesaid or, if sent by facsimile, upon confirmation of facsimile transfer when directed to the facsimile number provided as aforesaid.

5.3 Governing Law. This Agreement shall be governed in all respects by the internal laws of the State of California as applied to agreements entered into among California residents to be performed entirely within California, without regard to principles of conflicts of law.

5.4 Successors and Assigns. This Agreement, and any and all rights, duties and obligations hereunder, shall not be assigned, transferred, delegated or sublicensed by the

 

21


Company without the prior written consent of the Investor, and any attempt by the Company without such permission to assign, transfer, delegate or sublicense any rights, duties or obligations that arise under this Agreement shall be void; provided , however , for avoidance of doubt, nothing in this on Section 5.4 shall prohibit the Company from consummating a Deemed Liquidation. Subject to the foregoing and except as otherwise provided herein, the provisions of this Agreement shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto.

5.5 Entire Agreement. This Agreement and the exhibits hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof. No party hereto shall be liable or bound to any other party in any manner with regard to the subjects hereof or thereof by any warranties, representations or covenants except as specifically set forth herein.

5.6 Delays or Omissions. Except as expressly provided herein, no delay or omission to exercise any right, power or remedy accruing to any party to this Agreement upon any breach or default of any other party under this Agreement shall impair any such right, power or remedy of such non-defaulting party, nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring, nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any land or character on the part of any party of any breach or default under this Agreement, or any waiver on the part of any party of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any party to this Agreement, shall be cumulative and not alternative.

5.7 Severability. If any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, portions of such provision, or such provision in its entirety, to the extent necessary, shall be severed from this Agreement, and such court will replace such illegal, void or unenforceable provision of this Agreement with a valid and enforceable provision that will achieve, to the extent possible, the same economic, business and other purposes of the illegal, void or unenforceable provision. The balance of this Agreement shall be enforceable in accordance with its terms.

5.8 Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. All references in this Agreement to sections, paragraphs and exhibits shall, unless otherwise provided, refer to sections and paragraphs hereof and exhibits attached hereto.

5.9 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be enforceable against the parties that execute such counterparts, and all of which together shall constitute one instrument.

5.10 Telecopy Execution and Delivery. A facsimile, telecopy or other reproduction of this Agreement may be executed by one or more parties hereto and delivered by such party by facsimile or any similar electronic transmission device pursuant to which the signature of or on

 

22


behalf of such party can be seen. Such execution and delivery shall be considered valid, binding and effective for all purposes. At the request of any party hereto, all parties hereto agree to execute and deliver an original of this Agreement as well as any facsimile, telecopy or other reproduction hereof.

5.11 Jurisdiction; Venue. With respect to any disputes arising out of or related to this Agreement, the parties consent to the exclusive jurisdiction of, and venue in, the state courts in Santa Clara County in the State of California (or in the event of exclusive federal jurisdiction, the courts of the Northern District of California).

5.12 Further Assurances. Each party hereto agrees to execute and deliver, by the proper exercise of its corporate, limited liability company, partnership or other powers, all such other and additional instruments and documents and do all such other acts and things as may be necessary to more fully effectuate this Agreement.

5.13 Termination Upon Change of Control. Notwithstanding anything to the contrary herein, this Agreement (excluding any then-existing obligations) shall terminate upon consummation of a Deemed Liquidation.

5.14 Conflict. In the event of any conflict between the terms of this Agreement and the Company’s Restated Certificate or its Bylaws, the terms of the Company’s Restated Certificate or its Bylaws, as the case may be, will control.

5.15 Attorneys’ Fees. In the event that any suit or action is instituted to enforce any provision in this Agreement, the 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 prevailing party under or with respect to this Agreement, including, without limitation, all fees, costs and expenses of appeals.

[Remainder of Page Intentionally Left Blank]

 

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IN WITNESS WHEREOF, the parties hereto have executed this Investors’ Rights Agreement effective as of the day and year first above written.

 

U.S. AUTO PARTS NETWORK, INC.
a Delaware corporation
By:   /s/ Mehran Nia
Name:   Mehran Nia
Title:   CEO/President

 

OAK INVESTMENT PARTNERS XI,

LIMITED PARTNERSHIP

a Delaware limited partnership

  By:  

Oak Associates XI, LLC,

its General Partner

  By:   /s/ Fredric W. Harman
  Name:   Fredric W. Harman
  Title:   Managing Member

[Signature Page to Investors’ Rights Agreement]


S CHEDULE 1

NOTICE AND WAIVER/ELECTION OF

RIGHT OF FIRST REFUSAL

I do hereby waive or exercise, as indicated below, my rights of first refusal under the Investors Rights Agreement dated as of March 3, 2006 (the “Agreement”):

1. Waiver of ten (10)  Days’ Notice Period in Which to Exercise Right of First Offer: (please check only one)

 

  ¨ WAIVE in full, on behalf of all Holders, the 10-day notice period provided to exercise my right of first refusal granted under the Agreement.

 

  ¨ DO NOT WAIVE the notice period described above.

 

2. Issuance and Sale of New Securities: (please check only one)

 

  ¨ WAIVE in full the right of first refusal granted under the Agreement with respect to the issuance of the New Securities.

 

  ¨ ELECT TO PARTICIPATE in $_______ [PLEASE PROVIDE AMOUNT] in New Securities proposed to be issued by U.S. Auto Parts Network, Inc., representing less than my pro rata portion of the aggregate of $_______ in New Securities being offered in the financing.

 

  ¨ ELECT TO PARTICIPATE in $_______ in New Securities proposed to be issued by U.S. Auto Parts Network, Inc., representing my full pro rata portion of the aggregate of $_______ in New Securities being offered in the financing.

 

Date: _______________, 20__    
      
   

Signature of Stockholder or Authorized Signatory

          
   

Title, if applicable

This is neither a commitment to purchase nor a commitment to issue the New Securities described above. Such issuance can only be made by way of definitive documentation related to such issuance. U.S. Auto Parts Network, Inc. will supply you with such definitive documentation upon request or if you indicate that you would like to exercise your first offer rights in whole or in part.

Exhibit 10.7

NOTE AND SECURITY AGREEMENT

NOTE AND SECURITY AGREEMENT, dated as of May 19, 2006, by and among U.S. Auto Parts Network, Inc. (the “ Company ”), on the one hand and Richard Pine, Lowell Mann, Brian Tinari, and Todd Daugherty on the other hand (each a “ Secured Party ” and together the “ Secured Parties ”).

WITNESSETH:

WHEREAS, further to that Acquisition Agreement by and among the Company and PartsBin, Inc. on the one hand, and the Secured Parties and ThePartsBin.com, Inc., All OEM Parts, Inc., Power Host, Inc., Auto Parts Web Solutions, Inc., Auto Parts Online Canada, Inc., Web Chat Solutions, Inc., and Everything Internet, LLC, on the other hand (the “ Acquisition Agreement ”) Secured Parties are being issued secured promissory notes, each in the form annexed hereto as Exhibit A (each a “ Note ” and together the “ Notes ”) in the aggregate amount of FIVE MILLION DOLLARS ($5,000,000);

WHEREAS, the Company has agreed to pledge certain collateral to Secured Parties in order to secure its obligation to repay the Notes; and

WHEREAS, capitalized terms used herein and not otherwise defined shall have the meanings ascribed by the Uniform Commercial Code (the “ Code ”) as in effect from time to time in the State of California; provided, however, if by mandatory provision of law the attachment, perfection, or priority of Secured Parties’ security interest in the Collateral (as hereinafter defined) is governed by the Code of another state such capitalized terms shall be defined as in effect in such other jurisdiction for purposes of provisions thereof relating to such attachment, perfection, or priority.

NOW, THEREFORE, in consideration of the foregoing premises and for other good and valuable consideration, the receipt of which is hereby acknowledged, the Company hereby agrees with Secured Parties as follows:

SECTION 1. The Notes; Funding Date; Disbursement . Further to the terms and conditions of the Acquisition Agreement, Secured Parties have been issued the Notes in an aggregate principal amount of FIVE MILLION DOLLARS ($5,000,000).

SECTION 2. Benefit of Agreement . This Agreement is for the benefit of Secured Parties to secure (a) the full and punctual payment when and as due, whether at maturity, by acceleration, upon the dates set for payment therein, or otherwise of the principal and interest of the Notes; and (b) the full and punctual payment of any costs and expenses incurred by Secured Parties in connection with the preservation or enforcement (including, without limitation, with respect to any action, suit, or proceeding which may be instituted by Secured Parties in connection with the enforcement) of any of its rights under the Notes (including without limitation the reasonable fees and disbursements of Secured Parties’ attorneys and other experts) (all such obligations, collectively, the “ Obligations” ).

SECTION 3. Grant of Security Interest . As collateral security for the prompt and complete payment and performance when due of all the Obligations, and in order to induce


Secured Parties to accept the Notes further to the Acquisition Agreement, the Company grants to Secured Parties a continuing security interest (subject to Section 9(b) below), which will be perfected by an effective UCC filing (made by Secured Parties or its counsel) until the amount due under the Notes, as it relates to the specific Secured Party, is satisfied, in all of the Company’s right, title, and interest in all of the following property now owned, or at any time hereafter acquired, by the Company or in which the Company now has or at any time in the future may acquire any right, title, or interest (all of which being hereinafter collectively called the “ Collateral ”):

(a) all assets of the Company including but not limited to real estate, tangible assets and intangible assets including all intellectual property rights;

(b) all existing and future contracts between the Company and another party;

(c) all existing and future Accounts and General Intangibles now or hereafter owned by the Company including, without limitation, (1) all money due and to become due under any contract, (2) any damages arising out of or for breach or default in respect of any contract or Account, (3) all other amounts from time to time paid or payable under or in connection with any contract or Account, and (4) the right of the Company to terminate any contract or to perform or exercise all remedies thereunder;

(d) all existing and future Equipment;

(e) all existing and future Inventory; and

(f) to the extent not otherwise included, all Proceeds and products of any or all of the foregoing.

SECTION 4. Representations and Warranties of the Company .

The Company hereby represents and warrants as follows:

(a) The Company owns the Collateral free and clear of any lien, security interest, charge, or encumbrance, except for the security interests created or permitted by this Agreement and the security interests outstanding as of the date hereof, including, but not limited to, those granted to East West Bank or its affiliates (together the “Outstanding Liens”);

(b) Assuming Secured Parties take all necessary actions, including making proper financing statements in the proper jurisdictions, this Agreement creates a valid security interest in the Collateral securing the payment of the Obligations and will be enforceable under the Uniform Commercial Code or similar laws.

SECTION 5. Further Assurances .

(a) Delivery of Statements and Documents . The Company agrees from time to time to execute and deliver promptly, at the sole expense of the Company, all further instruments and documents and take all further action that may be reasonably necessary or desirable or that Secured Parties may reasonably request to perfect and protect any security interest granted or

 

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purported to be granted hereby or to enable Secured Parties to exercise and enforce their rights and remedies hereunder with respect to any Collateral.

(b) Financing/Continuation Statements . The Company hereby authorizes Secured Parties to file one or more financing or continuation statements and amendments thereto relative to all or any part of the Collateral without the signature of the Company where permitted by law.

(c) Indemnification . The Company agrees to pay, and to save Secured Parties harmless from, any and all liabilities, costs, and expenses (including, without limitation, reasonable attorneys’ fees and expenses) (i) with respect to, or resulting from, any delay in paying any and all excise, sales, or other taxes which may be payable or determined to be payable with respect to any of the Collateral, (ii) with respect to, or resulting from, any delay in complying with any law or regulation applicable to any of the Collateral, or (iii) in enforcing Secured Parties’ rights and remedies under this Agreement; unless such damages arose from Secured Parties’ willful misconduct or gross negligence.

(d) Limitation on Liens on Collateral . The Company will not create, incur, or permit to exist, and will defend the Collateral against, and will take such other action as is necessary to remove, any lien on or to the Collateral other than the liens created hereby and the Outstanding Liens, and will defend the right, title, and interest of Secured Parties in and to any of the Collateral against the claims and demands of third parties.

SECTION 6. Performance by Secured Parties of The Company’s Obligations . If the Company fails to perform or comply with any of its agreements described herein and such failure to perform or comply constitutes an Event of Default (as defined in the Note), then Secured Parties, to the extent provided for by the terms of this Agreement, and after reasonable prior notice to the Company and opportunity to cure, shall itself perform or comply, or otherwise cause performance or compliance with such agreement. The reasonable expenses of Secured Parties incurred in connection with such performance or compliance shall be payable by the Company to Secured Parties on demand and shall constitute Obligations secured hereby.

SECTION 7. Proceeds . Subject to the rights held by the holders of the Outstanding Liens, if an Event of Default (as defined in the Note) shall occur and be continuing, at the request of Secured Parties:

(a) all Proceeds received by the Company consisting of cash, checks, and other non-cash items shall be held by the Company in trust for Secured Parties, shall be segregated from other funds of the Company and shall forthwith upon receipt by the Company be turned over to Secured Parties in the exact form as received by the Company (duly indorsed by the Company to Secured Parties, if required); and

(b) any and all such Proceeds received by the Company (whether from Secured Parties or otherwise) may, in the sole discretion of Secured Parties, be held by Secured Parties as collateral security for, or at any time thereafter applied in whole or in part by Secured Parties against, all or any part of the Obligations in the manner provided in Section 13. Any balance of such payments held by Secured Parties and remaining after payment in full of all the Obligations then due and owing shall be paid over to the Company in the manner provided in Section 17.

 

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SECTION 8. Covenants of the Company . The Company shall pay promptly when due all property and other taxes, assessments, and governmental charges or levies imposed upon, and all claims including claims for labor, materials, and supplies against, the Collateral, except if the same are being contested in good faith and by appropriate proceedings.

SECTION 9. Negative Covenants of the Company . Subject to the rights held by the holders of the Outstanding Liens, the Company shall not:

(a) sell, assign, or transfer by operation of law or otherwise dispose of any of the Collateral, without the prior written consent of Secured Parties, except in the ordinary course of business, and except the Company may sell, assign, transfer, or dispose of Collateral having an aggregate sale price or consideration of not greater than $500,000;

(b) create or suffer to exist any lien, security interest, or other charge or encumbrance upon or with respect to any of the Collateral, without the prior written consent of Secured Party, except for (i) the security interests created by this Agreement, (ii) the Outstanding Liens, (iii) for taxes, assessments, or governmental charges or levies if the same are being contested in good faith and by appropriate proceedings, or (iv) imposed by law or arising by operation of law, such as carriers’, warehousemen’s, and mechanics’ liens, and other similar liens arising in the ordinary course of business; provided that the Company shall be obligated to cause the removal of the liens set forth in this subparagraph (b) as promptly as possible after notice thereof.

SECTION 10. Remedies . Subject to the rights held by the holders of the Outstanding Liens, if an Event of Default (as defined in the Note) shall occur and be continuing:

(a) Secured Parties may exercise in respect of the Collateral all the rights and remedies of a secured party upon default under the Code in addition to other rights and remedies provided for herein or otherwise available to it, and also may with reasonable notice, except as specified below, sell the Collateral, or any part thereof, in one or more parcels at public or private sale for cash, on credit, or for future delivery, and at such price or prices and upon such other terms as are commercially reasonable;

(b) The Company agrees that to the extent notice of sale shall be required by law at least ten (10) days prior written notice to the Company shall constitute reasonable notification of the time and place of any public sale or the time after which any private sale is to be made. Secured Parties shall not be obligated to make any sale of Collateral regardless of whether notice of sale has been given. Secured Parties may adjourn any public or private sale from time to time by announcement at the time and place fixed therefore, and such sale may without further notice be made at the time and place to which it was so adjourned;

(c) Notwithstanding the foregoing, Secured Parties shall deliver the Collateral to the Company and this Agreement shall terminate as set forth in Section 15 of this Agreement;

(d) All cash proceeds received by Secured Parties in respect of any sale of, collection from, or other realization upon all or any part of the Collateral may, in the discretion of Secured Parties, be held by Secured Parties as collateral for payment of the Obligations, and at any time, after payment out of such proceeds of any expenses payable to Secured Parties pursuant to Section 11.

 

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SECTION 11. Expenses . The Company shall pay to Secured Parties upon demand the amount of any and all reasonable expenses, including the reasonable fees and disbursements of its counsel and of any experts and agents, which Secured Parties may incur in connection with (i) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any of the Collateral or (ii) the exercise or enforcement of any of the rights of Secured Parties hereunder after and during the continuance of an Event of Default.

SECTION 12. Severability . Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.

SECTION 13. No Waiver; Cumulative Remedies; Further Assurances . Secured Parties shall not by any act (except a written instrument pursuant to Section 14 hereof), delay, indulgence, omission, or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any default or Event of Default (as defined in the Note) or in any breach of the terms and conditions hereof. A waiver by Secured Parties of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which Secured Parties would otherwise have had on any future occasion. No failure to exercise nor any delay in exercising on the part of Secured Parties any right, power, or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power, or privilege hereunder preclude any other or future exercise thereof or the exercise of any other right, power, or privilege. The rights and remedies hereunder provided are cumulative and may be exercised singly or concurrently, and are not exclusive of any rights and remedies provided by law. The Company shall do such further acts, including without limitation, signing such documents of transfer that Secured Party may reasonably request to effectuate any sale of Collateral as herein permitted and described.

SECTION 14. Waivers and Amendments; Successors and Assigns .

(a) None of the terms or provisions of this Agreement may be waived, altered, modified, or amended except by a written instrument duly executed by the Company and Secured Parties owed a majority of the then outstanding amounts under the Notes evidencing the Loans.

(b) This Agreement and all obligations of the Company hereunder shall be binding upon the successors and assigns of the Company, and shall together with the rights and remedies of Secured Parties hereunder inure to the benefit of Secured Parties and their successors and assigns, provided that the Company may not assign or transfer any of its rights or obligations hereunder without the prior written consent of the Secured Parties.

SECTION 15. Release of Collateral . Following the date on which all Obligations then due and owing have been paid in full, this Agreement shall terminate. Upon expiration of this Agreement the security interest granted hereby shall terminate, and the Company shall have no further obligations hereunder. Secured Parties, at the request and expense of the Company, will

 

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execute and deliver to the Company such documents as the Company shall reasonably request to evidence such termination and to release the security interest granted pursuant to Section 3.

SECTION 16. Notices . All notices, requests, and other communications to either party hereunder or under the Note shall be in writing and shall be given to the parties hereto at the addresses set forth below:

 

if to the Company:    U.S. Auto Parts Network, Inc.
   17150 South Margay Avenue
   Carson, CA 90749
   Attention: Michael McClane
   Telephone: (310)735-0085
with a copy to:    Kirkpatrick & Lockhart Nicholson Graham, LLP
   10100 Santa Monica Blvd., Suite 700
   Los Angeles, CA 90067
   Attention: Thomas J. Poletti, Esq.
   Telephone: (310)552-5045
   Fax: (310)552-5001
if to Secured Parties:    The PartsBin.Com, Inc.
   92 Youngs Road
   Trenton, NJ
with a copy to:    Lowell E. Mann, Esquire
   Mann Law Associates, P.C.
   One Oxford Valley, Suite 850
   Langhorne, PA 19047

or to such other address as such party may hereafter specify by written notice to the other party hereto. Except as otherwise provided for herein, each such notice, request, or other communication shall be effective (i) if given by facsimile transmission when transmitted to the facsimile transmission number specified in this Section 16 or (ii) if given by mail, three (3) business days after such communication is deposited in the mail by certified mail, return-receipt requested, postage prepaid addressed as aforesaid.

SECTION 17. Counterparts . This Agreement may be executed in one or more counterparts, each of which shall constitute an original and all of which together shall constitute one and the same instrument.

SECTION 18. Governing Law

This Agreement shall be construed pursuant to the laws of the State of California without regard to conflicts of law principals thereof. Any controversy arising hereunder shall be resolved by arbitration from the American Arbitration Association.

 

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IN WITNESS WHEREOF, the undersigned have caused this Agreement to be executed and delivered as of the date first set forth above.

 

THE COMPANY:
U.S. AUTO PARTS NETWORK, INC.
By:   /s/ Mehran Nia
  Mehran Nia, its President & CEO
SECURED PARTIES:
/s/ Richard Pine
Richard Pine

/s/ Lowell Mann

Lowell Mann

/s/ Brian Tinari

Brian Tinari

/s/ Todd Daugherty

Todd Daugherty

[Signature Page for Note and Security Agreement]

 

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Exhibit 10.8

May 19, 2006

RICHARD PINE

85 Cranberry Run

Southampton, New Jersey 08088

RE: OFFER LETTER OF EMPLOYMENT

Dear Mr. Pine:

U.S. Auto Parts Network, Inc. (“we” or the “Company”) is pleased to extend you an offer of employment on the following terms:

 

  1. POSITION. You will serve in the full time position of Vice President of Operations of the Company, reporting to the Chief Executive Officer of the Company, who shall monitor and review your performance and have the ability to terminate your employment.

 

  2. TERM. Your employment shall commence upon May 19, 2006 (the “Commencement Date”) for a period of twenty-four (24) months (the “Term”), unless terminated earlier pursuant to the provisions of Paragraph 7 below. At the end of the Term, your employment with the Company will become “at-will”, which means that you will no longer be employed for any specified period of time and either you or the Company may terminate your employment at any time, with or without cause.

 

  3. CASH COMPENSATION. The Company will pay you a salary at the rate of $200,000 per year, payable in accordance with the Company’s standard payroll schedule. This salary will be subject to adjustment pursuant to the Company’s employee compensation policies in effect from time to time.

 

  4. GRANT OF NON-QUALIFIED OPTIONS. Subject to approval by the Company’s Board of Directors (or its designee) and the closing of the Acquisition contemplated by that certain Acquisition Agreement dated May 19, 2006, to which both the Company and you are parties, upon accepting this offer of employment by signing below, you will receive a five-year option to purchase 498,000 shares of the Company’s common stock (the “Options”). The purchase price per share of the Options shall be the per share price as determined by the Company’s Board of Directors in reliance on an independent appraisal and recent transaction-related valuations. The Options shall be issued pursuant to the Company’s 2006 Equity Incentive Plan (the “Plan”), and shall be subject to the terms and conditions of the Plan and any related option grant documentation.

 

  5. EMPLOYEE BENEFITS. As a regular employee of the Company, you will be eligible to participate in a number of Company-sponsored benefits programs, about which further details will be provided to you upon acceptance of employment, or earlier upon request, all in accordance with the Company’s policies as in effect from time to time.

 

  6. ASSIGNMENT OF RIGHTS, NON-SOLICITATION, CONFIDENTIALITY AND NON DISCLOSURE AGREEMENT. You agree to execute the Confidential Information and Invention Assignment Agreement and any related agreements as shall be provided to you by the Company.

 

  7.

TERMINATION: Employment may be terminated by the Company: (i) for cause, as defined below, in which case you shall be entitled to receive only your base salary earned through the date of termination; (ii) without cause, in which case you shall be entitled to receive, (a) the remainder of your base salary for the Term and (b) should you elect continued medical insurance coverage


 

under COBRA, payment of your COBRA premiums for six months, subject to and in accordance with the provisions of COBRA.

For purposes of this Agreement, the following definitions will apply:

“Cause” shall mean (i) an act of dishonesty in connection with your responsibilities as an executive of the Company; (ii) your conviction of, or plea of nolo contendere to, a felony or a crime involving moral turpitude, (iii) your misconduct which has a material adverse effect on the Company, (iv) your consistent failure to perform your employment duties where such failure is not cured within thirty (30) days after written notice to you by Company, or (v) any violation of the agreement referenced in Paragraph 6 or the terms and conditions of Paragraph 8 herein.

 

  8. OUTSIDE ACTIVITIES. While you render services to the Company, you agree that you will not engage in any other employment, consulting or other business activity without the prior written consent of the Company, which consent shall not be unreasonably withheld. While you render services to the Company, you also will not assist any person or entity in competing with the Company, in preparing to compete with the Company or in hiring any employees or consultants of the Company.

 

  9. WITHHOLDING TAXES. All forms of compensation referred to in this letter agreement are subject to reduction to reflect applicable withholding and payroll taxes and other deductions required by law.

 

  10. ENTIRE AGREEMENT. Except as set forth herein, this letter agreement supersedes and replaces any prior agreements, representations or understandings, whether written, oral or implied, between you and the Company.

 

  11. GOVERNING LAW. This consulting agreement shall be construed, enforced and governed by the internal laws of the State of California (without regard to its choice of law principles).

 

  12. This offer of employment and your continued employment with the Company are expressly contingent upon the Company receiving the following:

 

  a. Acceptable results from a background investigation. Any falsification of employment history or educational background will result in withdrawal of the offer and/or termination of employment.

 

  b. Signed copies of the Company (i) Employee Agreement, (ii) Confidentiality Guidelines, and (iii) Code of Conduct, stating, among other things, that you will keep confidential company information throughout and beyond your employment with the Company.

 

  c. Satisfactory proof of identification and work authorization as required by the Immigration Reform and Control Act of 1990.

 

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We hope that you will find the above terms acceptable. You may indicate your agreement with these terms by signing and dating this letter agreement and returning it to me. By signing this letter agreement, you reconfirm to the Company that you have no contractual commitments or other legal obligations that would prohibit you from performing your duties for the Company. This letter is meant to supersede any and all other letters of employment, if any, by and between you and the Company.

We look forward to working with you very soon.

 

Very truly yours,

/s/ Mehran Nia

Mehran Nia, President and Chief Executive Officer

U.S. Auto Parts Network, Inc.

I have read and accept and agree to the above terms of employment:
/s/ Richard Pine
RICHARD PINE
5/19/2006
Dated

[Signature page for Offer Letter]

 

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Exhibit 10.9

NON-COMPETITION AGREEMENT

THIS NON-COMPETITION AGREEMENT (the “Agreement”) is made and entered into as of May 19, 2006, by and between U.S. Auto Parts Network, Inc., a Delaware corporation, and Richard Pine, Lowell Mann, Brian Tinari, and Todd Daugherty, as individuals (each a “Promisor,” collectively, the “Promisors”).

WITNESSETH:

WHEREAS, the Buyer, PartsBin, Inc., a Delaware corporation and wholly-owned subsidiary of the Buyer (“PartsBin”), on the one hand, and ThePartsBin.com, Inc., a New Jersey corporation, All OEM Parts, Inc., a New Jersey corporation, Auto Parts Web Solutions, Inc., a Pennsylvania corporation, Auto Parts Online Canada, Inc., a New Jersey corporation, Web Chat Solutions, Inc., a Pennsylvania corporation, Power Host, Inc., a Canadian corporation and wholly-owned subsidiary of Auto Parts Online Canada, Inc., and Everything Internet, LLC, a New Jersey limited liability company (each a “Target Company,” and collectively, “the Company”), and the Promisors, on the other hand, have entered into an Acquisition Agreement dated as of May 19, 2006 (the “Acquisition Agreement”), whereby the Buyer and PartsBin will acquire all of the outstanding shares of capital stock and all membership interests of the Company from the Promisors;

WHEREAS, the Acquisition Agreement provides, as a condition to the closing thereunder, that Promisors shall execute and deliver this Agreement;

WHEREAS, the agreements of Promisors hereunder are an important aspect of the transactions under the Acquisition Agreement, and Buyer would not consummate such transactions absent the execution and delivery by Promisors of this Agreement;

WHEREAS, the Company has been and is presently engaged in the online retail of replacement and performance automobile parts (the “Business”) in the United States and Canada (collectively, the “Territory”);

WHEREAS, Promisors and Promisors’ affiliates have substantial financial resources, experience in the Business and the ability to operate a business or businesses that could compete with the Company in the Business following the Closing (as defined in the Acquisition Agreement);

WHEREAS, the agreements of Promisors hereunder are reasonable and necessary, both in scope, geographical extent and duration, to protect the business and goodwill of the Company that will be acquired pursuant to the Acquisition Agreement, and the Company and Buyer would suffer damages, including the loss of profits, if Promisors or any of Promisors’ affiliates engaged, directly or indirectly, in a competing business with the Company or Buyer; and

WHEREAS, pursuant to the transactions contemplated by the Acquisition Agreement, Promisors will enjoy a beneficial change in status and will receive remuneration in the form of the multiple benefits afforded to Promisors thereunder and thereby.

NOW, THEREFORE, for and in consideration of the premises and of the mutual representations, warranties, covenants and agreements contained herein, and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and upon the terms and subject to the conditions hereinafter set forth, the parties do hereby agree as follows:


1. Definitions . Unless otherwise defined herein, capitalized terms used herein shall have the meaning ascribed to them in the Acquisition Agreement.

2. Nondisclosure, Nondisparagement and Noncompetition .

(a) Promisors acknowledge and agree that this Agreement is necessary to protect the confidential and proprietary information and goodwill associated with the acquisition of the Company by Buyer.

(b) Promisors acknowledge and agree that, through their longstanding relationship with the Company, they have gained confidential and proprietary information (the “Confidential Information”) concerning the business of the Company. Confidential Information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. Confidential Information includes, but is not limited to, proprietary technology, operating procedures, financial statements and other financial information, trade secrets, know-how, market studies and forecasts, competitive analyses, pricing policies, the substance of agreements with customers and others, marketing and similar arrangements, servicing and training programs and arrangements, customer lists and any other documents embodying such confidential and proprietary information. Promisors acknowledge and agree that sharing any such Confidential Information with third parties would be detrimental to Buyer and the Company and could place Buyer and the Company at a competitive disadvantage. Promisors agree that they shall not, directly or indirectly, through any form of ownership, in any individual or representative or affiliated capacity whatsoever, except as may be required by law, reveal, divulge, disclose or communicate to any person, firm, association, corporation or other entity in any manner whatsoever information of any kind, nature or description concerning: (i) the names of any prior or present suppliers or customers of the Company or Buyer, (ii) the prices for which the Company or Buyer obtains or has obtained products or services, (iii) the names of the personnel of the Company or Buyer, (iv) the manner of operation of the Company or Buyer, (v) the Confidential Information, or (vi) any other financial, statistical or other information that the Company or Buyer designates or treats as confidential or proprietary. The foregoing restrictions and obligations under this Section 2(b) shall not apply to (i) any Confidential Information that is or becomes generally available to the public other than as a result of a disclosure, directly or indirectly, by Promisors, (ii) any information obtained by Promisors from a third party which Promisors have no reason to believe is violating any obligation of confidentiality to Buyer, (iii) any information Promisors are required by law to disclose or (iv) information disclosed by Promisors to their attorneys or accountants or to any agent of Promisors in connection with their investment in Buyer. Without regard to whether any or all of the foregoing matters would be deemed confidential, material or important, the parties hereto stipulate that as between them, the same are important, material and confidential and gravely affect the effective and successful conduct of the Business and its goodwill.

(c) Promisors acknowledge and agree that, as a result of each Promisor’s stock ownership of, membership interest in and participation in the operation, management and development of the Company, he possesses Confidential Information concerning the business of the Company, he has significantly and uniquely contributed to the development and maintenance of the goodwill of the Company, and he developed during his tenure with the Company the experience and capabilities to own, manage, operate, control or participate in the Business.

(d) For and in consideration of the consideration paid to Promisors pursuant to the Acquisition Agreement, the receipt and sufficiency of which are acknowledged by Promisors, each Promisor agrees not to make any derogatory, defamatory, disparaging or detrimental remarks, statements

 

- 2 -


or communications about the Company (including with respect to any employees, clients, officers or owners of the Company), to any person, entity or organization at any time, and each Promisor agrees not to publicly criticize the Company unless compelled to do so by law or legal duty.

(e) For and in consideration of the consideration paid to Promisors pursuant to the Acquisition Agreement, the receipt and sufficiency of which are acknowledged by Promisors, each Promisor agrees that for the duration of his employment with the Buyer and for a period of two (2) years from the date of termination of such employment, they shall not engage in any or all of the following activities, whether directly or indirectly, as an owner, agent, principal, director, officer, partner or stockholder, or as an employee of or consultant to any person, firm, entity or corporation:

(i) Enter into or engage in the Business anywhere in the Territory, whether through franchising, licensing or direct operations or as part of any other business directly or indirectly competitive with the Company or the Buyer;

(ii) Hire, attempt to hire, contact or solicit with respect to hiring for Promisors or on behalf of any other person any present or future employee of the Company or Buyer in the Business;

(iii) Call upon, solicit, divert, take away or attempt to call upon, solicit, divert or take away any past, existing or potential customers, suppliers, businesses, or accounts of (a) the Company, or (b) the Business in connection with any business substantially similar to the Business in the Territory;

(iv) Give any advice to, lend credit, money or reputation to, or arrange for financing for any person, firm, partnership, association, venture, corporation or other entity for the purpose of establishing or operating a business substantially similar to the Business in the Territory; and

(v) Without limiting the generality of the foregoing provisions, conduct a business substantially similar to the Business, whether or not under the names “ThePartsBin.com,” “All OEM Parts,” “Power Host,” “Auto Parts Web Solutions,” “Auto Parts Online,” “Web Chat Solutions,” “Everything Internet,” or any other trade names, trademarks or service marks used by the Company or Buyer in the Territory.

The covenants in subsections (i) through (v) are intended to restrict Promisors from competing in any manner with the Company, Buyer or the Business in the activities that have heretofore been carried on by the Company and Buyer. The obligations set forth in subsections (i) through (vi) above shall apply to actions by Promisors, through any form of ownership, and whether as principal, officer, director, agent, employee, employer, consultant, shareholder or holder of any equity security (beneficially or as trustee of any trust), lender, partner, joint venturer or in any other individual or representative or affiliated capacity whatsoever. However, none of the foregoing shall prevent Promisors from (A) performing any obligations pursuant to an employment agreement or other arrangement with the Buyer, (B) being the holder of securities of the Buyer, and (C) being the holder of up to 1.0% in the aggregate of any class of securities of any entity engaged in, directly or indirectly, the activities described in subsections (i) through (vi) above, provided that such securities are listed on a national securities exchange.

(f) Promisors further acknowledge that the covenants contained herein are necessary to preserve the existing Confidential Information and goodwill acquired in connection with the Acquisition Agreement.

 

- 3 -


(g) Promisors recognize that their breach of any of the provisions of this Section 2 would result in serious harm to Buyer and the Company for which monetary damages would not be an adequate remedy and that the amount of such damages would be difficult to determine. Therefore, if Promisors breach any provision of this Section 2 , then Buyer and the Company shall be entitled to injunctive relief and specific performance in addition to any other available legal or equitable remedies. Buyer and the Company may recover by appropriate action the amount, if ascertainable, of the actual damage caused to Buyer and the Company by any failure, refusal or neglect of Promisors to perform the agreements herein contained, together with any and all costs incurred by Buyer and the Company, including reasonable attorneys’ fees, in seeking such relief. The remedies provided in this Agreement shall be deemed cumulative and the exercise of one shall not preclude the exercise of any other remedy at law or in equity for the same event or any other event.

(h) It is the express intention of the parties hereto to comply with all laws that may be applicable to this Section 2 . It is the express intention of Buyer to restrict Promisors’ activities only to the extent necessary to protect the legitimate business interests of Buyer and the Company. Should any restriction contained in any part of this Section 2 be found to exceed in time, scope or space the restriction permitted by law, it is expressly agreed that a court of competent jurisdiction shall reform or modify the covenants contained in this Section 2 to effect a lawful and enforceable duration, scope and geographical or customer restriction. The parties further expressly agree that the covenants contained in this Section 2 are severable and if any one or more of the provisions contained in any part of this Section 2 shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement, but this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein.

3. Notices . Any notice, request, instruction, document or other communication to be given hereunder by any party hereto to any other party hereto shall be in writing and validly given if (a) delivered personally, (b) sent by telecopy, (c) delivered by overnight express, or (d) sent by registered or certified mail, postage prepaid, as follows:

If to the Buyer, to:

U.S. AUTO PARTS NETWORK, INC.

17150 South Margay Avenue

Carson, California 90746

Fax: (310) 632-1676

Attn:   Michael McClane, Chief Financial Officer

with a copy to:

Kirkpatrick & Lockhart Nicholson Graham LLP

10100 Santa Monica Blvd, 7th Floor

Los Angeles, California 90067

Telephone (310) 552-5000

Fax (310) 552-5001

Attention:   Thomas J. Poletti, Esq.

 

- 4 -


If to the Promisors, to the respective addresses on the signature page, with a copy to:

Lowell E. Mann, Esquire

Mann Law Associates, P.C.

One Oxford Valley, Suite 850

Langhorne, PA 19047

Fax: (215) 752-0988

or at such other address for a party as shall be specified by like notice. Any notice which is delivered personally, or sent by telecopy or overnight express in the manner provided herein, shall be deemed to have been duly given to the party to whom it is directed upon actual receipt by such party. Any notice which is addressed and mailed in the manner herein provided shall be conclusively presumed to have been given to the party to whom it is addressed at the close of business, local time of the recipient, on the third business day after the day it is so placed in the mail.

4. Entire Agreement . This Agreement and the Acquisition Agreement constitute the entire agreement and supersede all prior agreements and understandings, both written and oral, between the parties hereto with respect to the subject matter hereof, and no party shall be liable or bound to the other in any manner by any representations or warranties not set forth therein.

5. Assignment . This Agreement may not be transferred or assigned by Promisors. Buyer may transfer or assign this Agreement to a company or firm that succeeds to the business of Buyer or the Company.

6. Counterparts . This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original and all of which shall constitute the same instrument.

7. Headings . The headings of the sections of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction hereof.

8. Modification and Waiver . Any of the terms or conditions of this Agreement may be waived in writing at any time by the party which is entitled to the benefits thereof, and this Agreement may be modified or amended by a written instrument executed by all parties hereto. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by all parties to be bound thereby. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision hereof (whether or not similar) nor shall such waiver constitute a continuing waiver.

9. Governing Law . THIS AGREEMENT SHALL BE CONSTRUED, ENFORCED AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF CALIFORNIA (WITHOUT REGARD TO ITS CHOICE OF LAW PRINCIPLES). THE PARTIES HERETO EXPRESSLY CONSENT AND AGREE THAT ANY DISPUTE, CONTROVERSY, LEGAL ACTION OR OTHER PROCEEDING THAT ARISES UNDER, RESULTS FROM, CONCERNS OR RELATES TO THIS AGREEMENT MAY BE BROUGHT BEFORE THE AMERICAN ARBITRATION ASSOCIATION (AAA) IN LOS ANGELES COUNTY, CALIFORNIA, UNDER ITS COMMERCIAL RULES AND ACKNOWLEDGE THAT THEY WILL ACCEPT SERVICE OF PROCESS BY REGISTERED OR CERTIFIED MAIL OR THE EQUIVALENT DIRECTED TO THEIR LAST KNOWN ADDRESS AS DETERMINED BY THE OTHER PARTY IN ACCORDANCE WITH THIS AGREEMENT OR BY WHATEVER OTHER

 

- 5 -


MEANS ARE PERMITTED BY THE AAA. THE PARTIES HERETO HEREBY ACKNOWLEDGE THAT THE AAA HAS JURISDICTION OVER ANY SUCH DISPUTE OR CONTROVERSY, AND THAT THEY HEREBY WAIVE ANY OBJECTION TO PERSONAL JURISDICTION OR VENUE BEFORE THE AAA.

10. Invalid Provisions . If any provision of this Agreement is held to be illegal, invalid or unenforceable under present or future laws, such provision shall be fully severable, this Agreement shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part of this Agreement, and the remaining provisions of this Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or by its severance from this Agreement.

[Signature page to follow.]

 

- 6 -


IN WITNESS WHEREOF, the parties hereto have duly caused this Agreement to be executed as of the day and year first above written.

 

U.S. AUTO PARTS NETWORK, INC.
By:   /s/ Mehran Nia
Name:   Mehran Nia
Title:   President and Chief Executive Officer
PROMISORS:
By:   /s/ Richard Pine
Name:   Richard Pine
Address:  

85 Cranberry Run

Southampton, New Jersey 08088

By:   /s/ Lowell Mann
Name:   Lowell Mann
Address:  

351 Denny Drive

Yardley, Pennsylvania 19067

By:   /s/ Brian Tinari
Name:   Brian Tinari
Address:  

4959 Cabin Run Road

Pipersville, Pennsylvania 18947

By:   /s/ Todd Daugherty
Name:   Todd Daugherty
Address:  

2 Lambs Lane

Manalapan, New Jersey 07726

[Signature Page for Non-Competition Agreement]

 

- 7 -

Exhibit 10.10

FORM OF SHAREHOLDER’S RELEASE

For due and adequate consideration, the receipt and sufficiency of which is hereby acknowledged, the undersigned, being a holder of equity securities (“ Shareholder ”) of the entities listed on Schedule I hereto (collectively referred to herein as the “ Company ”), hereby agrees, in connection with the execution and delivery of that certain Acquisition Agreement, dated as of May 19, 2006 by and among U.S. Auto Parts Network, a Delaware corporation ( “Buyer ”). PartsBin, Inc., a Delaware corporation and wholly-owned subsidiary of the Buyer (“ PartsBin ”). the Company and the holders of all of the outstanding equity interests in the Company (including the Shareholder) (the “ Acquisition Agreement ”), to release and discharge (to the fullest extent permitted by Applicable Law) Buyer, PartsBin and the Company (collectively, the “ Company Entities ”) and all of the present and former officers, directors, affiliates, shareholders, members, partners, attorneys, agents, insurers, employees, or other representatives of, and any predecessors, successors and assigns of, the Company Entities (collectively, the “ Released Parties ”), from any and all claims, suits, demands, damages (including, but not limited to, consequential and exemplary damages), judgments, liens, debts, attorneys’ fees, costs, actions and causes of action of every kind and nature, whether known or unknown, suspected or unsuspected in law or in equity.

The undersigned is aware of and understands the provisions of Section 1542 of the California Civil Code, which states:

“A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.”

The undersigned hereby expressly waives the provisions of Section 1542 of the California Civil Code and the provisions of any other similar applicable statute or rule of law that restricts whatsoever the release of claims that may arise or first become known in the future, even if such claims if known would materially affect the undersigned’s decision to execute this release, and regardless of whether his, her or its lack of knowledge arises from ignorance, oversight, error, negligence or otherwise. The undersigned hereby agrees, represents and warrants to the Released Parties that the undersigned realizes and acknowledges that factual matters now unknown to the undersigned may have given or may hereafter give rise to causes of action, claims, suits, demands, debts, controversies, damages, costs, losses and expenses which are presently unknown, unanticipated and unsuspected, and further agrees, represents and warrants that the release provided hereunder has been negotiated and agreed upon in light of that realization and that the undersigned nevertheless hereby intends to release, discharge and acquit the Released Parties from any such unknown claims. Neither this release, nor any consideration offered in connection herewith, is to be construed as an admission of any liability. Notwithstanding the foregoing, this Shareholder Release shall exclude any liability for obligations explicitly set forth in the Acquisition Agreement or the other Transaction Documents, including, but not limited to, any right to receive cash, shares of the Buyer’s Common Stock, options to purchase the Buyer’s Common Stock, or the Sellers’ Note.


The undersigned represents, warrants and agrees that in executing and entering into this release it is not relying and has not relied upon any representations, promises or statements made by anyone that are not recited, contained or embodied herein.

This release shall be governed by and construed in accordance with the laws of the State of California, without regard to the conflict of laws principles thereof.

This release shall not be amended, altered, modified, changed or rescinded except by an instrument in writing signed by the parties hereto.

Unless the context clearly suggests otherwise, capitalized terms used and not otherwise defined herein shall have the meaning given in the Acquisition Agreement.

[Balance of page intentionally left blank]

 

- 2 -


IN WITNESS WHEREOF, the undersigned has caused this Shareholder Release to be duly executed, delivered and authorized, as of this 19th day of May, 2006.

 

/s/ Richard E. Pine

Signature

Richard E. Pine

Name of Shareholder

    

Authorized Representative (if an institution)

    

Title of Authorized Representative (if applicable)

Signature Page for Shareholder’s Release

 

- 3 -

Exhibit 10.11

BUSINESS LOAN AGREEMENT

 

Principal

$ 10,000,000.00

  

Loan Date

02-24-2006

  

Maturity

03-31-2010

  

Loan No

3000071

   Call/Coll   

Account

Illegible

  

Officer

8110

   Initials
                    

References in the shaded area are for Lender’s use only and do not limit the applicability of this document to any particular loan or item.

Any item above containing ***** has been omitted due to text length limitations.

 

Borrower:        U.S. Auto Parts Network, Inc.    Lender:        East West Bank
   17150 S. Margay Avenue       407 W. Valley Blvd.
   Carson, CA 90746       Alhambra, CA 91803

THIS BUSINESS LOAN AGREEMENT dated February 24, 2006, is made and executed between U.S. Auto Parts Network, Inc. (“Borrower”) and East West Bank (“Lender”) on the following terms and conditions. Borrower has received prior commercial loans from Lender or has applied to Lender for a commercial loan or loans or other financial accommodations, including those which may be described on any exhibit or schedule attached to this Agreement (“Loan”). Borrower understands and agrees that: (A) In granting, renewing, or extending any Loan, Lender is relying upon Borrower’s representations, warranties, and agreements as set forth in this Agreement; (B) the granting, renewing, or extending of any Loan by Lender at all times shall be subject to Lender’s sole judgment and discretion; and (C) all such Loans shall be and remain subject to the terms and conditions of this Agreement.

TERM . This Agreement shall be effective as of February 24, 2006, and shall continue in full force and effect until such time as all of Borrower’s Loans in favor of Lender have been paid in full, including principal, interest, costs, expenses, attorneys’ fees, and other fees and charges, or until such time as the parties may agree in writing to terminate this Agreement.

CONDITIONS PRECEDENT TO EACH ADVANCE . Lender’s obligation to make the Initial Advance and each subsequent Advance under this Agreement shall be subject to the fulfillment to Lender’s satisfaction of all of the conditions set forth in this Agreement and in the Related Documents.

Loan Documents . Borrower shall provide to Lender the following documents for the Loan: (1) the Note; (2) Security Agreements granting to Lender security interests in the Collateral; (3) financing statements and all other documents perfecting Lender’s Security Interests; (4) evidence of insurance as required below; (5) together with all such Related Documents as Lender may require for the Loan; all in form and substance satisfactory to Lender and Lender’s counsel.

Borrower’s Authorization . Borrower shall have provided in form and substance satisfactory to Lender properly certified resolutions, duly authorizing the execution and delivery of this Agreement, the Note and the Related Documents. In addition, Borrower shall have provided such other resolutions, authorizations, documents and instruments as Lender or its counsel, may require.

Payment of Fees and Expenses . Borrower shall have paid to Lender all fees, charges, and other expenses which are then due and payable as specified in this Agreement or any Related Document.

Representations and Warranties . The representations and warranties set forth in this Agreement, in the Related Documents, and in any document or certificate delivered to Lender under this Agreement are true and correct.

No Event of Default . There shall not exist at the time of any Advance a condition which would constitute an Event of Default under this Agreement or under any Related Document.

REPRESENTATIONS AND WARRANTIES . Borrower represents and warrants to Lender, as of the date of this Agreement, as of the date of each disbursement of loan proceeds, as of the date of any renewal, extension or modification of any Loan, and at all times any Indebtedness exists:

Organization . Borrower is a corporation for profit which is, and at all times shall be, duly organized, validly existing, and in good standing under and by virtue of the laws of the State of Delaware. Borrower is duly authorized to transact business in all other states in which Borrower is doing business, having obtained all necessary filings, governmental licenses and approvals for each state in which Borrower is doing business. Specifically, Borrower is, and at all times shall be, duly qualified as a foreign corporation in all states in which the failure to so quality would have a material adverse effect on its business or financial condition. Borrower has the full power and authority to own its properties and to transact the business in which it is presently engaged or presently proposes to engage. Borrower maintains an office at 17150 S. Margay Avenue, Carson, CA 90746. Unless Borrower has designated otherwise in writing, the principal office is the office at which Borrower keeps its books and records including its records concerning the Collateral. Borrower will notify Lender prior to any change in the location of Borrower’s state of organization or any change in Borrower’s name. Borrower shall do all things necessary to preserve and to keep in full force and effect its existence, rights and privileges, and shall comply with all regulations, rules, ordinances, statutes, orders and decrees of any governmental or quasi-governmental authority or court applicable to Borrower and Borrower’s business activities.

Assumed Business Names . Borrower has filed or recorded all documents or filings required by law relating to all assumed business names used by Borrower. Excluding the name of Borrower, the following is a complete list of all assumed business names under which Borrower does business: None.

Authorization . Borrower’s execution, delivery, and performance of this Agreement and all the Related Documents have been duly authorized by all necessary action by Borrower and do not conflict with, result in a violation of, or constitute a default under (1) any provision of (a) Borrower’s articles of incorporation or organization, or bylaws, or (b) any agreement or other instrument binding upon Borrower or (2) any law, governmental regulation, court decree, or order applicable to Borrower or to Borrower’s properties.

Financial Information . Each of Borrower’s financial statements supplied to Lender truly and completely disclosed Borrower’s financial condition as of the date of the statement, and there has been no material adverse change in Borrower’s financial condition subsequent to the date of the most recent financial statement supplied to Lender. Borrower has no material contingent obligations except as disclosed in such financial statements.

Legal Effect . This Agreement constitutes, and any instrument or agreement Borrower is required to give under this Agreement when delivered will constitute legal, valid, and binding obligations or Borrower enforceable against Borrower in accordance with their respective terms.

Properties . Except as contemplated by this Agreement or as previously disclosed in Borrower’s financial statements or in writing to Lender and as accepted by Lender, and except for property tax liens for taxes not presently due and payable, Borrower owns and has good title to all of Borrower’s properties free and clear of all Security Interests, and has not executed any security documents or financing statements relating to such properties. All of Borrower’s properties are titled in Borrower’s legal name, and Borrower has not used or filed a financing statement under any other name for at least the last five (5) years.

Hazardous Substances . Except as disclosed to and acknowledged by Lender in writing, Borrower represents and warrants that: (1) During the period of Borrower’s ownership of the Collateral, there has been no use, generation, manufacture, storage, treatment, disposal, release or threatened release of any Hazardous Substance by any person on, under, about or from any of the Collateral. (2) Borrower has no


BUSINESS LOAN AGREEMENT

(Continued)

 

Loan No: 3000071   Page 2

 

knowledge of, or reason to believe that there has been (a) any breach or violation of any Environmental Laws; (b) any use, generation, manufacture, storage, treatment, disposal, release or threatened release of any Hazardous Substance on, under, about or from the Collateral by any prior owners or occupants of any of the Collateral; or (c) any actual or threatened litigation or claims of any kind by any person relating to such matters. (3) Neither Borrower nor any tenant, contractor, agent or other authorized user of any of the Collateral shall use, generate, manufacture, store, treat, dispose of or release any Hazardous Substance on, under, about or from any of the Collateral; and any such activity shall be conducted in compliance with all applicable federal, state, and local laws, regulations, and ordinances, including without limitation all Environmental Laws. Borrower authorizes Lender and its agents to enter upon the Collateral to make such inspections and tests as Lender may deem appropriate to determine compliance of the Collateral with this section of the Agreement. Any inspections or tests made by Lender shall be at Borrower’s expense and for Lender’s purposes only and shall not be construed to create any responsibility or liability on the part of Lender to Borrower or to any other person. The representations and warranties contained herein are based on Borrower’s due diligence in investigating the Collateral for hazardous waste and Hazardous Substances. Borrower hereby (1) releases and waives any future claims against Lender for indemnity or contribution in the event Borrower becomes liable for cleanup or other costs under any such laws, and (2) agrees to indemnify and hold harmless Lender against any and all claims, losses, liabilities, damages, penalties, and expenses which Lender may directly or indirectly sustain or suffer resulting from a breach of this section of the Agreement or as a consequence of any use, generation, manufacture, storage, disposal, release or threatened release of a hazardous waste or substance on the Collateral. The provisions of this section of the Agreement, including the obligation to indemnify, shall survive the payment of the Indebtedness and the termination, expiration or satisfaction of this Agreement and shall not be affected by Lender’s acquisition of any interest in any of the Collateral, whether by foreclosure or otherwise.

Litigation and Claims . No litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Borrower is pending or threatened, and no other event has occurred which may materially adversely affect Borrower’s financial condition or properties, other than litigation, claims, or other events, if any, that have been disclosed to and acknowledged by Lender in writing.

Taxes . To the best of Borrower’s knowledge, all of Borrower’s tax returns and reports that are or were required to be filed, have been filed, and all taxes, assessments and other governmental charges have been paid in full, except those presently being or to be contested by Borrower in good faith in the ordinary course of business and for which adequate reserves have been provided.

Lien Priority . Unless otherwise previously disclosed to Lender in writing, Borrower has not entered into or granted any Security Agreements, or permitted the filing or attachment of any Security Interests on or affecting any of the Collateral directly or indirectly securing repayment of Borrower’s Loan and Note, that would be prior or that may in any way be superior to Lender’s Security Interests and rights in and to such Collateral.

Binding Effect . This Agreement, the Note, all Security Agreements (if any), and all Related Documents are binding upon the signers thereof, as well as upon their successors, representatives and assigns, and are legally enforceable in accordance with their respective terms.

AFFIRMATIVE COVENANTS . Borrower covenants and agrees with Lender that, so long as this Agreement remains in effect, Borrower will:

Notices of Claims and Litigation . Promptly inform Lender in writing of (1) all material adverse changes in Borrower’s financial condition, and (2) all existing and all threatened litigation, claims, investigations, administrative proceedings or similar actions affecting Borrower or any Guarantor which could materially affect the financial condition of Borrower or the financial condition of any Guarantor.

Financial Records . Maintain its books and records in accordance with GAAP, applied on a consistent basis, and permit Lender to examine and audit Borrower’s books and records at all reasonable times.

Financial Statements . Furnish Lender with the following:

Additional Requirements .

Annual Statements . As soon as available, but in no event later than one hundred twenty (120) days after the end of each fiscal year, Borrower’s balance sheet, income and expense statements, reconciliation of net worth and statement of cash flows, with notes thereto for the year ended, audited by a certified public accountant satisfactory to Lender.

Interim Statements . As soon as available, but in no event later than forty five (45) days after the end of each month, Borrower’s balance sheet, income and expense statements, reconciliation of net worth and statement of cash flows, with notes thereto for the period ended, prepared by Borrower.

Agings . Within thirty (30) days, or sooner, after the end of each quarter, a listing and aging by invoice date of all accounts receivable and all accounts payable in detailed format acceptable to Lender.

Inventory . Within thirty (30) days, or sooner, after the end of each quarter, a listing of inventory in detailed format acceptable to Lender.

Tax Returns . Within ten (10) days of filing, a signed copy of the Federal Income Tax Return of Borrower together with K-1’s and all other schedules pertaining to the Tax Return, or a signed copy of each of the Request for Tax Return Extensions. Tax returns are to be provided no later than nine (9) months after the fiscal year end.

All financial reports required to be provided under this Agreement shall be prepared in accordance with GAAP, applied on a consistent basis, and certified by Borrower as being true and correct.

Additional Information . Furnish such additional information and statements, as Lender may request from time to time.

Financial Covenants and Ratios . Comply with the following covenants and ratios:

Other Requirements . Borrower understands and agrees that while this Agreement is in effect, Borrower will maintain a financial condition indicated by the following ratios at all times, unless otherwise noted:

Tangible Net Worth . Achieve and maintain a Tangible Net Worth (defined as total assets, less intangible assets, loans to shareholders/affiliates/officers/employees minus total liabilities) of not less than $3,000,000.00 as of December 31, 2006 and thereafter.

Debt to EBITDA . Maintain a debt to annualized EBITDA (defined as net profit before total interest expense, taxes, depreciation and amortization) not to exceed 3.0 to 1.0.

Current Ratio . Maintain a Current Ratio (defined as total current assets, less prepaids, divided by total current liabilities) of not less than 1.00 to 1.

Minimum Annualized EBITDA . Maintain a Minimum Annualized EBITDA (defined as net earnings before total interest expense and


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taxes, depreciation and amortization) of $8,000,000.00. Except as provided above, all computations made to determine compliance with the requirements contained in this paragraph shall be made in accordance with generally accepted accounting principles, applied on a consistent basis, and certified by Borrower as being true and correct.

Insurance. Maintain fire and other risk insurance, public liability insurance, and such other insurance as Lender may require with respect to Borrower’s properties and operations, in form, amounts, coverages and with insurance companies acceptable to Lender. Borrower, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least thirty (30) days prior written notice to Lender. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Borrower or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest for the Loans, Borrower will provide Lender with such lender’s loss payable or other endorsements as Lender may require.

Insurance Reports. Furnish to Lender, upon request of Lender, reports on each existing insurance policy showing such information as Lender may reasonably request, including without limitation the following: (1) the name of the insurer; (2) the risks insured; (3) the amount of the policy; (4) the properties insured; (5) the then current property values on the basis of which insurance has been obtained, and the manner of determining those values; and (6) the expiration date of the policy. In addition, upon request of Lender (however not more often than annually), Borrower will have an independent appraiser satisfactory to Lender determine, as applicable, the actual cash value or replacement cost of any Collateral. The cost of such appraisal shall be paid by Borrower.

Other Agreements. Comply with all terms and conditions of all other agreements, whether now or hereafter existing, between Borrower and any other party and notify Lender immediately in writing of any default in connection with any other such agreements.

Loan Proceeds. Use all Loan proceeds solely for Borrower’s business operations, unless specifically consented to the contrary by Lender in writing.

Taxes, Charges and Liens. Pay and discharge when due all of its indebtedness and obligations, including without limitation all assessments, taxes, governmental charges, levies and liens, of every kind and nature, imposed upon Borrower or its properties, income, or profits, prior to the date on which penalties would attach, and all lawful claims that, if unpaid, might become a lien or charge upon any of Borrower’s properties, income, or profits.

Performance. Perform and comply, in a timely manner, with all terms, conditions, and provisions set forth in this Agreement, in the Related Documents, and in all other instruments and agreements between Borrower and Lender. Borrower shall notify Lender immediately in writing of any default in connection with any agreement.

Operations. Maintain executive and management personnel with substantially the same qualifications and experience as the present executive and management personnel; provide written notice to Lender of any change in executive and management personnel; conduct its business affairs in a reasonable and prudent manner.

Environmental Studies. Promptly conduct and complete, at Borrower’s expense, all such investigations, studies, samplings and testings as may be requested by Lender or any governmental authority relative to any substance, or any waste or by-product of any substance defined as toxic or a hazardous substance under applicable federal, state, or local law, rule, regulation, order or directive, at or affecting any property or any facility owned, leased or used by Borrower.

Compliance with Governmental Requirements. Comply with all laws, ordinances, and regulations, now or hereafter in effect, of all governmental authorities applicable to the conduct of Borrower’s properties, businesses and operations, and to the use or occupancy of the Collateral, including without limitation, the Americans With Disabilities Act. Borrower may contest in good faith any such law, ordinance, or regulation and withhold compliance during any proceeding, including appropriate appeals, so long as Borrower has notified Lender in writing prior to doing so and so long as, in Lender’s sole opinion, Lender’s interests in the Collateral are not jeopardized. Lender may require Borrower to post adequate security or a surety bond, reasonably satisfactory to Lender, to protect Lender’s interest.

Inspection . Permit employees or agents of Lender at any reasonable time to inspect any and all Collateral for the Loan or Loans and Borrower’s other properties and to examine or audit Borrower’s books, accounts, and records and to make copies and memoranda of Borrower’s books, accounts, and records. If Borrower now or at any time hereafter maintains any records (including without limitation computer generated records and computer software programs for the generation of such records) in the possession of a third party, Borrower, upon request of Lender, shall notify such party to permit Lender free access to such records at all reasonable times, and to provide Lender with copies of any records it may request, all at Borrower’s expense.

Compliance Certificates. Unless waived in writing by Lender, provide Lender at least annually, with a certificate executed by Borrower’s chief financial officer, or other officer or person acceptable to Lender, certifying that the representations and warranties set forth in this Agreement are true and correct as of the date of the certificate and further certifying that, as of the date of the certificate, no Event of Default exists under this Agreement.

Environmental Compliance and Reports. Borrower shall comply in all respects with any and all Environmental Laws; not cause or permit to exist, as a result of an intentional or unintentional action or omission on Borrower’s part or on the part of any third party, on property owned and/or occupied by Borrower, any environmental activity where damage may result to the environment, unless such environmental activity is pursuant to and in compliance with the conditions of a permit issued by the appropriate federal, state or local governmental authorities; shall furnish to Lender promptly and in any event within thirty (30) days after receipt thereof a copy of any notice, summons, lien, citation, directive, letter or other communication from any governmental agency or instrumentality concerning any intentional or unintentional action or omission on Borrower’s part in connection with any environmental activity whether or not there is damage to the environment and/or other natural resources.

Additional Assurances. Make, execute and deliver to Lender such promissory notes, mortgages, deeds of trust, security agreements, assignments, financing statements, instruments, documents and other agreements as Lender or its attorneys may reasonably request to evidence and secure the Loans and to perfect all Security Interests.

LENDER’S EXPENDITURES. If any action or proceeding is commenced that would materially affect Lender’s interest in the Collateral or if Borrower fails to comply with any provision of this Agreement or any Related Documents, including but not limited to Borrower’s failure to discharge or pay when due any amounts Borrower is required to discharge or pay under this Agreement or any Related Documents, Lender on Borrower’s behalf may (but shall not be obligated to) take any action that Lendor deems appropriate, including but not limited to discharging or Baying all taxes, liens, security interests, encumbrances and other claims, at any time levied or placed on any Collateral and paying all costs for illegible, maintaining and preserving any Collateral. All such expenditures incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Note from the date incurred or paid by Lender to the date of repayment by Borrower. All such expenses will become a part of the indebtedness and, at Lender’s option, will (A) be payable on demand; (B) be added to the balance of the Note and be apportioned among and be payable with any installment payments to become due during either (1) the term of any applicable insurance policy;


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or (2) the remaining term of the Note; or (C) be treated as a balloon payment which will be due and payable at the Note’s maturity.

NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this Agreement is in effect, Borrower shall not, without the prior written consent of Lender:

Indebtedness and Liens. (1) Except for trade debt incurred in the normal course of business and indebtedness to Lender contemplated by this Agreement, create, incur or assume indebtedness for borrowed money, including capital leases, (2) sell, transfer, mortgage, assign, pledge, lease, grant a security interest in, or encumber any of Borrower’s assets (except as allowed as Permitted Liens), or (3) sell with recourse any of Borrower’s accounts, except to Lender.

Continuity of Operations. (1) Engage in any business activities substantially different than those in which Borrower is presently engaged, (2) cease operations, liquidate, merge, transfer, acquire or consolidate with any other entity, change its name, dissolve or transfer or sell Collateral out of the ordinary course of business, or (3) pay any dividends on Borrower’s stock (other than dividends payable in its stock), provided, however that notwithstanding the foregoing, but only so long as no Event of Default has occurred and is continuing or would result from the payment of dividends, if Borrower is a “Subchapter S Corporation” (as defined in the Internal Revenue Code of 1986, as amended), Borrower may pay cash dividends on its stock to its shareholders from time to time in amounts necessary to enable the shareholders to pay income taxes and make estimated income tax payments to satisfy their liabilities under federal and state law which arise solely from their status as Shareholders of a Subchapter S Corporation because of their ownership of shares of Borrower’s stock, or purchase or retire any of Borrower’s outstanding shares or alter or amend Borrower’s capital structure.

Loans, Acquisitions and Guaranties. (1) Loan, invest in or advance money or assets to any other person, enterprise or entity, (2) purchase, create or acquire any interest in any other enterprise or entity, or (3) incur any obligation as surety or guarantor other than in the ordinary course of business.

Agreements. Borrower will not enter into any agreement containing any provisions which would be violated or breached by the performance of Borrower’s obligations under this Agreement or in connection herewith.

CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to Borrower, whether under this Agreement or under any other agreement, Lender shall have no obligation to make Loan Advances or to disburse Loan proceeds if: (A) Borrower or any Guarantor is in default under the terms of this Agreement or any of the Related Documents or any other agreement that Borrower or any Guarantor has with Lender; (B) Borrower or any Guarantor dies, becomes incompetent or becomes insolvent, files a petition in bankruptcy or similar proceedings, or is adjudged a bankrupt; (C) there occurs a material adverse change in Borrower’s financial condition, in the financial condition of any Guarantor, or in the value of any Collateral securing any Loan; or (D) any Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such Guarantor’s guaranty of the Loan or any other loan with Lender; or (E) Lender in good faith deems itself insecure, even though no Event of Default shall have occurred.

RIGHT OF SETOFF. To the extent permitted by applicable law, Lender reserves a right of setoff in all Borrower’s accounts with Lender (whether checking, savings, or some other account). This includes all accounts Borrower holds jointly with someone else and all accounts Borrower may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the indebtedness against any and all such accounts, and, at Lender’s option, to administratively freeze all such accounts to allow Lender to protect Lender’s charge and setoff rights provided in this paragraph.

DEFAULT. Each of the following shall constitute an Event of Default under this Agreement:

Payment Default. Borrower fails to make any payment when due under the Loan.

Other Defaults. Borrower fails to comply with or to perform any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Borrower.

False Statements. Any warranty, representation or statement made or furnished to Lender by Borrower or on Borrower’s behalf under this Agreement or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter.

Insolvency. The dissolution or termination of Borrower’s existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower’s property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower.

Defective Collateralization. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any collateral document to create a valid and perfected security interest or lien) at any time and for any reason.

Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower or by any governmental agency against any collateral securing the Loan. This includes a garnishment of any of Borrower’s accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute.

Events Affecting Guarantor. Any of the preceding events occurs with respect to any Guarantor of any of the indebtedness or any Guarantor dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any Guaranty of the indebtedness. In the event of a death, Lender, at its option, may, but shall not be required to, permit the Guarantor’s estate to assume unconditionally the obligations arising under the guaranty in a manner satisfactory to Lender, and, in doing so, cure any Event of Default.

Change in Ownership. Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower.

Adverse Change. A material adverse change occurs in Borrower’s financial condition, or Lender believes the prospect of payment or performance of the Loan is impaired.

Right to Cure. If any default, other than a default on indebtedness, is curable and if Borrower or Grantor, as the case may be, has not been given a notice of a similar default within the preceding twelve (12) months, it may be cured if Borrower or Grantor, as the case may be, after receiving written notice from Lender demanding cure of such default: (1) cure the default within fifteen (15) days; or (2) if the cure requires more than fifteen (15) days, immediately initiate steps which Lender deems in Lender’s sole discretion to be sufficient to cure the default and thereafter continue and complete all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical.

EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where otherwise provided in this Agreement or the Related


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Documents, all commitments and obligations of Lender under this Agreement or the Related Documents or any other agreement immediately will terminate (including any obligation to make further Loan Advances or disbursements), and, at Lender’s option, all indebtedness immediately will become due and payable, all without notice of any kind to Borrower, except that in the case of an Event of Default of the type described in the “Insolvency” subsection above, such acceleration shall be automatic and not optional. In addition, Lender shall have all the rights and remedies provided in the Related Documents or available at law, in equity, or otherwise. Except as may be prohibited by applicable law, all of Lender’s rights and remedies shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Borrower or of any Grantor shall not affect Lender’s right to declare a default and to exercise its rights and remedies.

INITIAL PUBLIC OFFERING. The proceeds from Initial Public Offering (IPO) must be applied toward repayment of the $10,000,000.00 loan, note number 3000071.

INITIAL HERE /s/

MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement:

Amendments. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters sot forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment.

Attorneys’ Fees; Expenses. Borrower agrees to pay upon demand all of Lender’s costs and expenses, including Lender’s attorneys’ fees and Lender’s legal expenses incurred in connection with the enforcement of this Agreement. Lender may hire or pay someone else to help enforce this Agreement, and Borrower shall pay the costs end expenses of such enforcement. Costs and expenses include Lender’s attorneys’ fees and legal expenses whether or not there is a lawsuit, including attorneys’ fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Borrower also shall pay all court costs and such additional fees as may be directed by the court.

Caption Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement.

Consent to Loan Participation. Borrower agrees and consents to Lender’s sale or transfer, whether now or later, of one or more participation interests in the Loan to one or more purchasers, whether related or unrelated to Lender. Lender may provide, without any limitation whatsoever, to any one or more purchasers, or potential purchasers, any information or knowledge Lender may have about Borrower or about any other matter relating to the Loan, and Borrower hereby waives any rights to privacy Borrower may have with respect to such matters. Borrower additionally waives any and all notices of sale of participation interests, as well as all notices of any repurchase of such participation interests. Borrower also agrees that the purchasers of any such participation interests will be considered as the absolute owners of such interests in the Loan and will have all the rights granted under the participation agreement or agreements governing the sale of such participation interests. Borrower further waives all rights of offset or counterclaim that it may have now or later against Lender or against any purchaser of such a participation interest and unconditionally agrees that either Lender or such purchaser may enforce Borrower’s obligation under the Loan irrespective of the failure or insolvency of any holder of any interest in the Loan. Borrower further agrees that the purchaser of any such participation interests may enforce its interests irrespective of any personal claims or defenses that Borrower may have against Lender.

Governing Law. This Agreement will be governed by federal law applicable to Lender and, to the extent not preempted by federal law, the laws of the State of California without regard to its conflicts of law provisions. This Agreement has been accepted by Lender in the State of California.

No Waiver by Lender. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender’s right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Borrower, or between Lender and any Grantor, shall constitute a waiver of any of Lender’s rights or of any of Borrower’s or any Grantor’s obligations as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender.

Notices. Any notice required to be given under this Agreement shall be given in writing, and shall be effective when actually delivered, when actually received by telefacsimile (unless otherwise required by law), when deposited with a nationally recognized overnight courier, or, if mailed, when deposited in the United States mail, as first class, certified or registered mail postage prepaid, directed to the addresses shown near the beginning of this Agreement. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party’s address. For notice purposes, Borrower agrees to keep Lender informed at all times of Borrower’s current address. Unless otherwise provided or required by law, if there is more than one Borrower, any notice given by Lender to any Borrower is deemed to be notice given to all Borrowers.

Severability. If a court of competent jurisdiction finds any provision of this Agreement to be illegal, invalid, or unenforceable as to any circumstance, that finding shall not make the offending provision illegal, invalid, or unenforceable as to any other circumstance. If feasible, the offending provision shall be considered modified so that it becomes legal, valid and enforceable. If the offending provision cannot be so modified, it shall be considered deleted from this Agreement. Unless otherwise required by law, the illegality, invalidity, or unenforceability of any provision of this Agreement shall not affect the legality, validity or enforceability of any other provision of this Agreement.

Subsidiaries and Affiliates of Borrower. To the extent the context of any provisions of this Agreement makes it appropriate, including without limitation any representation, warranty or covenant, the word “Borrower” as used in this Agreement shall include all of Borrower’s subsidiaries end affiliates. Notwithstanding the foregoing however, under no circumstances shall this Agreement be construed to require Lender to make any Loan or other financial accommodation to any of Borrower’s subsidiaries or affiliates.

Successors and Assigns. All covenants and agreements by or on behalf of Borrower contained in this Agreement or any Related Documents shall bind Borrower’s successors and assigns and shall inure to the benefit of Lender and its successors and assigns. Borrower shall not, however, have the right to assign Borrower’s rights under this Agreement or any interest therein, without the prior written consent of Lender.

Survival of Representations and Warranties. Borrower understands and agrees that in making the Loan, Lender is relying on all representations, warranties, and covenants made by Borrower in this Agreement or in any certificate or other instrument delivered by Borrower to Lender under this Agreement or the Related Documents. Borrower further agrees that regardless of any investigation made by Lender, all such representations, warranties end covenants will survive the making of the Loan and delivery to Lender of the Related


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Documents, shall be continuing in nature, and shall remain in full force and effect until such time as Borrower’s Indebtedness shall be paid in full, or until this Agreement shall be terminated in the manner provided above, whichever is the last to occur.

Time is of the Essence. Time is of the essence in the performance of this Agreement.

Waive Jury. To the extent permitted by applicable law, all parties to this Agreement hereby waive the right to any jury trial in any action, proceeding, or counterclaim brought by any party against any other party.

DEFINITIONS. The following capitalized words and terms shall have the following meanings when used in this Agreement. Unless specifically stated to the contrary, all references to dollar amounts shall mean amounts in lawful money of the United States of America. Words and terms used in the singular shall include the plural, and the plural shall include the singular, as the context may require. Words and terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. Accounting words and terms not otherwise defined in this Agreement shall have the meanings assigned to them in accordance with generally accepted accounting principles as in effect on the date of this Agreement:

Advance. The word “Advance” means a disbursement of Loan funds made, or to be made, to Borrower or on Borrower’s behalf on a line of credit or multiple advance basis under the terms and conditions of this Agreement.

Agreement. The word “Agreement” means this Business Loan Agreement, as this Business Loan Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Business Loan Agreement from time to time.

Borrower. The word “Borrower” means U.S. Auto Parts Network, Inc. and includes all co-signers and co-makers signing the Note and all their successors and assigns.

Collateral. The word “Collateral” means all property and assets granted as collateral security for a Loan, whether real or personal property, whether granted directly or indirectly, whether granted now or in the future, and whether granted in the form of a security interest, mortgage, collateral mortgage, deed of trust, assignment, pledge, crop pledge, chattel mortgage, collateral chattel mortgage, chattel trust, factor’s lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise.

Environmental Laws. The words “Environmental Laws” mean any and all state, federal and local statutes, regulations and ordinances relating to the protection of human health or the environment, including without limitation the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq. (“CERCLA”), the Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499 (“SARA”), the Hazardous Materials Transportation Act, 42 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., Chapters 8.5 through 7.7 of Division 20 of the California Health and Safety Code, Section 25100, et seq., or other applicable state or federal laws, rules, or regulations adopted pursuant thereto.

Event of Default. The words “Event of Default” mean any of the events of default set forth in this Agreement in the default section of this Agreement.

GAAP. The word “GAAP” means generally accepted accounting principles.

Grantor. The word “Grantor” means each and all of the persons or entities granting a Security Interest in any Collateral for the Loan, including without limitation all Borrowers granting such a Security Interest.

Guarantor. The word “Guarantor” means any guarantor, surety, or accommodation party of any or all of the Loan,

Guaranty. The word “Guaranty” means the guaranty from Guarantor to Lender, including without limitation a guaranty of all or part of the Note.

Hazardous Substances. The words “Hazardous Substances” mean materials that, because of their quantity, concentration or physical, chemical or infectious characteristics, may cause or pose a present or potential hazard to human health or the environment when improperly used, treated, stored, disposed of, generated, manufactured, transported or otherwise handled. The words “Hazardous Substances” are used in their very broadest sense and include without limitation any and all hazardous or toxic substances, materials or waste as defined by or listed under the Environmental Laws. The term “Hazardous Substances” also includes, without limitation, petroleum and petroleum by-products or any fraction thereof and asbestos.

Indebtedness. The word “Indebtedness” means the indebtedness evidenced by the Note or Related Documents, including all principal and interest together with all other indebtedness and costs and expenses for which Borrower is responsible under this Agreement or under any of the Related Documents.

Lender. The word “Lender” means East West Bank, its successors and assigns.

Loan. The word “Loan” means any and all loans and financial accommodations from Lender to Borrower whether now or hereafter existing, and however evidenced, including without limitation those loans and financial accommodations described herein or described on any exhibit or schedule attached to this Agreement from time to time.

Note. The word “Note” means the Note executed by U.S. Auto Parts Network, Inc. in the principal amount of $10,000,000.00 dated February 24, 2006, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of, and substitutions for the note or credit agreement.

Permitted Liens. The words “Permitted Liens” mean (1) liens and security interests securing indebtedness owed by Borrower to Lender; (2) liens for taxes, assessments, or similar charges either not yet due or being contested in good faith; (3) liens of materialmen, mechanics, warehousemen, or carriers, or other like liens arising in the ordinary course of business and securing obligations which are not yet delinquent; (4) purchase money liens or purchase money security interests upon or in any property acquired or held by Borrower in the ordinary course of business to secure indebtedness outstanding on the date of this Agreement or permitted to be incurred under the paragraph of this Agreement titled “Indebtedness and Liens”; (5) liens and security interests which, as of the date of this Agreement, have been disclosed to and approved by the Lender in writing; and (6) those liens and security interests which in the aggregate constitute an immaterial and insignificant monetary amount with respect to the net value of Borrower’s assets.

Related Documents. The words “Related Documents” mean all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Loan.

Security Agreement. The words “Security Agreement” mean and include without limitation any agreements, promises, covenants arrangements, understandings or other agreements, whether created by law, contract, or otherwise, evidencing, governing, representing or creating a Security Interest.

Security Interest . The words “Security Interest” mean, without limitation, any and all types of collateral security, present and future,


BUSINESS LOAN AGREEMENT

(Continued)

 

Loan No: 3000071   Page 7

 

whether in the form of a lien, charge, encumbrance, mortgage, deed of trust, security deed, assignment, pledge, crop pledge, chattel mortgage, collateral chattel mortgage, chattel trust, factor’s lien, equipment trust, conditional sale, trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever whether created by law, contract, or otherwise.

BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN AGREEMENT AND BORROWER AGREES TO ITS TERMS. THIS BUSINESS LOAN AGREEMENT IS DATED FEBRUARY 24, 2006.

BORROWER:

 

 

U.S. AUTO PARTS NETWORK, INC.
By:  

/s/ Mehran Nia

  Mehran Yaghoub Nia, CEO of U.S. Auto Parts Network, Inc.

LENDER:

 

EAST WEST BANK
By:  

/s/ Mark H. Lee

  Authorized Signer

Exhibit 10.12

PROMISSORY NOTE

 

Principal

$10,000,000.00

  

Loan Date

02-24-2006

  

Maturity

03-31-2010

  

Loan No

3000071

   Call/Coll   

Account

IE.Abes

  

Officer

8110

   Initials
                    

References in the shaded area are for Lender’s use only and do not limit the applicability of this document to any particular loan or item.

Any item above containing “***” has been omitted due to text length limitations.

 

Borrower:   U.S. Auto Parts Network, Inc.    Lender:   East West Bank
  17150 S. Margay Avenue      407 W. Valley Blvd.
  Carson, CA 90746      Alhambra, CA 91803

 

Principal Amount: $10,000,000.00   Date of Note: February 24, 2006

PROMISE TO PAY. U.S. Auto Parts Network, Inc. (“Borrower”) promises to pay to East West Bank (“Lender”), or order, in lawful money of the United States of America, the principal amount of Ten Million & 00/100 Dollars ($10,000,000.00), together with interest on the unpaid principal balance from February 24, 2006, until paid in full.

PAYMENT. Subject to any payment changes resulting from changes in the index, Borrower will pay this loan in accordance with the following payment schedule: 12 monthly consecutive interest payments, beginning March 31, 2006, with interest calculated on the unpaid principal balances at an interest rate of 4.580%; 35 monthly consecutive principal payments of $277,777.78 each, beginning March 31, 2007, with interest calculated on the unpaid principal balances at an interest rate based on the one month London Interbank offered rate (LIBOR) (currently 4.580%), plus a margin of 1.500 percentage points, resulting in an initial interest rate of 6.080%; 35 monthly consecutive interest payments, beginning March 31, 2007, with interest calculated on the unpaid principal balances at an interest rate based on the one month London Interbank offered rate (LIBOR) (currently 4.580%), plus a margin of 1.600 percentage points, resulting in an initial interest rate of 6.080%; and one principal and interest payment of $280,545.60 on March 31, 2010, with interest calculated on the unpaid principal balances at an interest rate based on the one month London Interbank offered rate (LIBOR) (currently 4.680%), plus a margin of 1.500 percentage points, resulting in an initial interest rate of 6.080%. This estimated final payment is based on the assumption that all payments will be made exactly as scheduled and that the Index does not change; the actual final payment will be for all principal and accrued interest not yet paid, together with any other unpaid amounts under this Note. Unless otherwise agreed or required by applicable law, payments will be applied first to any accrued unpaid interest; then to principal; then to any unpaid collection costs; and then to any late charges. The annual interest rate for this Note is computed on a 365/360 basis; that is, by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. Borrower will pay Lender at Lender’s address shown above or at such other place as Lender may designate in writing.

VARIABLE INTEREST RATE. The interest rate or this Note is subject to change from time to time based on changes in an independent index which is the one month London Interbank offered rate (LIBOR) (the “Index”). The Index is not necessarily the lowest rate charged by Lender on its loans. If the Index becomes unavailable during the term of this loan, Lender may designate a substitute index after notice to Borrower. Lender will tell Borrower the current Index rate upon Borrower’s request. The interest rate change will not occur more often than each month. Borrower understands that Lender may make loans based on other rates as well. The Index currently is 4.580%. The interest rate or rates to be applied to the unpaid principal balance of this Note will be the rate or rates set forth herein in the “Payment” section, Notwithstanding any other provision of this Note, after the first payment stream, the interest rate for each subsequent payment stream will be effective as of the last payment date of the just-ending payment stream. NOTICE: Under no circumstances will the interest rate on this Note be more than the maximum rate allowed by applicable law. Whenever increases occur in the interest rate, Lender, at its option, may do one or more of the following: (A) increase Borrower’s payments to ensure Borrower’s loan will pay off by its original final maturity date, (B) increase Borrower’s payments to cover accruing interest, (C) increase the number of Borrower’s payments, and (D) continue Borrower’s payments at the same amount and increase Borrower’s final payment.

PREPAYMENT; MINIMUM INTEREST CHARGE. Borrower agrees that all loan fees and other prepaid finance charges are earned fully as of the date of the loan and will not be subject to refund upon early payment (whether voluntary or as a result of default), except as otherwise required by law. In any event, even upon full prepayment of this Note, Borrower understands that Lender is entitled to a minimum interest charge of $100.00. Other than Borrower’s obligation to pay any minimum interest charge, Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower’s obligation to continue to make payments under the payment schedule. Rather, early payments will reduce the principal balance due and may result in Borrower’s making fewer payments. Borrower agrees not to send Lender payments marked “paid in full”, “without recourse”, or similar language. If Borrower sends such a payment, Lender may accept it without losing any of Lender’s rights under this Note, and Borrower will remain obligated to pay any further amount owed to Lender. All written communications concerning disputed amounts, including any check or other payment instrument that indicates that the payment constitutes “payment in full” of the amount owed or that is tendered with other conditions or limitations or as full satisfaction of a disputed amount must be mailed or delivered to: East West Bank, Loan Services Department, 407 W. Valley Blvd. Alhambra, CA 91803.

LATE CHARGE. If a payment is 11 days or more late, Borrower will be charged 8.000% of the regularly scheduled payment.

INTEREST AFTER DEFAULT. Upon default, the variable interest rate on this Note shall immediately increase by 5.000 percentage points, if permitted under applicable law.

DEFAULT. Each of the following shall constitute an event of default (“Event of Default”) under this Note:

Payment Default. Borrower fails to make any payment when due under this Note.

Other Defaults. Borrower fails to comply with or to perform any other term, obligation, covenant or condition contained in this Note or in any of the related documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Borrower.

False Statements. Any warranty, representation or statement made or furnished to Lender by Borrower or on Borrower’s behalf under this Note or the related documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter.

Insolvency. The dissolution or termination of Borrower’s existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower’s property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower.

Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower or by any governmental agency against any collateral securing the loan. This includes a garnishment of any of Borrower’s accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or


PROMISSORY NOTE

(Continued)

 

Loan No: 3000071   Page 2

 

a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute.

Events Affecting Guarantor. Any of the preceding events occurs with respect to any guarantor, endorser, surety, or accommodation party of any of the indebtedness or any guarantor, endorser, surety, or accommodation party dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any guaranty of the indebtedness evidenced by this Note. In the event of a death, Lender, at its option, may, but shall not be required to, permit the guarantor’s estate to assume unconditionally the obligations arising under the guaranty in a manner satisfactory to Lender, and, in doing so, cure any Event of Default.

Change In Ownership. Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower.

Adverse Change. A material adverse change occurs in Borrower’s financial condition, or Lender believes the prospect of payment or performance of this Note is impaired.

Insecurity. Lender in good faith believes itself insecure.

Cure Provisions. If any default other than a default in payment is curable and if Borrower has not been given a notice of a breach of the same provision of this Note within the preceding twelve (12) months, it may be cured if Borrower, after receiving written notice from Lender demanding cure of such default: (1) cures the default within fifteen (15) days; or (2) if the cure requires more than fifteen (15) days, immediately initiates steps which Lender deems in Lender’s sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical.

LENDER’S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance on this Note and all accrued unpaid interest immediately due, and then Borrower will pay that amount.

ATTORNEYS’ FEES; EXPENSES. Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower will pay Lender that amount. This includes, subject to any limits under applicable law, Lender’s attorneys’ fees and Lender’s legal expenses, whether or not there is a lawsuit, including attorneys’ fees, expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), and appeals. Borrower also will pay any court costs, in addition to all other sums provided by law.

JURY WAIVER. To the extent permitted by applicable law, Lender and Borrower hereby waive the right to any jury trial in any action, proceeding, or counterclaim brought by either Lender or Borrower against the other.

GOVERNING LAW. This Note will be governed by federal law applicable to Lender and, to the extent not preempted by federal law, the laws of the State of California without regard to its conflicts of law provisions. This Note has been accepted by Lender in the State of California.

DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $18.00 if Borrower makes a payment on Borrower’s loan and the check or preauthorized charge with which Borrower pays is later dishonored.

RIGHT OF SETOFF. To the extent permitted by applicable law, Lender reserves a right of setoff in all Borrower’s accounts with Lender (whether checking, savings, or some other account). This includes all accounts Borrower holds jointly with someone else and all accounts Borrower may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the indebtedness against any and all such accounts, and, at Lender’s option, to administratively freeze all such accounts to allow Lender to protect Lender’s charge and setoff rights provided in this paragraph.

CERTIFICATION OF ACCURACY. Borrower certifies under penalty of perjury that all financial documents provided to Lender, which may include income statements, balance sheets, accounts payable and receivable listings, inventory listings, rents rolls, and tax returns, are the most recent such documents prepared by Borrower, that they give a complete and accurate statement of the financial condition of Borrower, as of the dates of such statements, and that no material change has occurred since such time, except as disclosed to Lender in writing. Borrower agrees to notify Lender immediately of the extent and character of any material adverse change in the Borrower’s financial condition. The financial documents shall constitute continuing representations of Borrower and shall be construed by Lender to be continuing statements of the financial condition of Borrower and to be new and original statement of all assets and liabilities of Borrower with respect to each advance under this Note and every other transaction in which Borrower becomes obligated to Lender until Borrower advises Lender to the contrary. The financial documents are being given to induce Lender to extend credit and Lender is relying upon such documents. Lender may verify with third parties any information contained in financial documents delivered to Lender, obtain information from others, and ask and answer questions and requests seeking credit experience about the undersigned.

SUCCESSOR INTERESTS. The terms of this Note shall be binding upon Borrower, and upon Borrower’s heirs, personal representatives, successors and assigns, and shall inure to the benefit of Lender and its successors and assigns.

GENERAL PROVISIONS. If any part of this Note cannot be enforced, this fact will not affect the rest of the Note. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extant allowed by law, waive any applicable statute of limitations, presentment, demand for payment, and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender’s security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. The obligations under this Note are joint and several.


PROMISSORY NOTE

(Continued)

 

Loan No: 3000071   Page 3

 

PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE.

BORROWER ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS PROMISSORY NOTE.

BORROWER:

 

U.S. AUTO PARTS NETWORK, INC.
By:  

/s/ Mehran Nia

  Mehran Yaghoub Nia CEO of U.S. Auto Parts Network, Inc.

Exhibit 10.13

TELETRANSMISSION AGREEMENT-LINE OF CREDIT

 

Principal

$5,000,000.00

 

Loan Date

02-24-2006

 

Maturity

07-31-2007

 

Loan No

2001689

  Call/Coll  

Account

E.Abes

 

Officer

8110

  Initials
             

References in the shaded area are for Lender’s use only and do not limit the applicability of this document to any particular loan or item.

Any item above containing ***** has been omitted due to text length limitations.

 

Borrower:    U.S. Auto Parts Network, Inc.    Lender:    East West Bank
   17150 S. Margay Avenue       407 W. Valley Blvd.
   Carson, CA 90746       Alhambra, CA 91803

This TELETRANSMISSION AGREEMENT-LINE OF CREDIT is attached to and by this reference is made a part of the Change In Terms Agreement dated February 24, 2006, and executed in connection with a loan or other financial accommodations between EAST WEST BANK and U.S. Auto Parts Network, Inc.

The undersigned Borrower contemplates making loan advance requests and applications for Lender to issue letters of credit and amendments, and instructing Lender to accept discrepant documents, to effect payment under letters of credit and collections and or finance import or export transactions. Borrower recognizes that Lender customarily requires that such advance requests, applications and instructions be completed and executed by Borrower on Lender’s standard forms or approved formats and/or that original signed documents be received.

Borrower, however, desires to apply and to instruct Lender, by means of teletransmissions including but not limited to electronic mail, internet, telex, telefax, facsimile and/or telecopy, to made loan advances, issue letters of credit and amendments, to instruct Lender to accept discrepant documents, to effect payment under letters of credit and collections and/or to finance import or export transactions. Borrower agrees that Lender may act in accordance with such electronically transmitted applications and instructions (“Electronic Instructions”) on the terms and conditions herein provided.

1. Format. Borrower’s Electronic instructions shall be sent to Lender only by means of such teletransmission services in such format(s) as may be approved from time to time by Lender in its sole discretion.

2. Security Procedures. Borrower shall provide to Lender, in writing and duly signed by Borrower, any security, verification procedures reasonably requested by Borrower. In addition, Lender may require additional procedures in its sole discretion and Lender shall notify Borrower of any such additional procedures in advance of their use (hereinafter referred to as “Security Procedures”).

3. Authority. Borrower hereby authorizes and instructs Lender to take all actions requested in any and all Electronic Instructions and agrees that each such Electronic Instruction shall be deemed originals and shall be deemed to incorporate all of the terms and provisions of the Lender’s standard forms and/or any such format(s) approved by Lender. Borrower recognizes and agrees that it shall be obligated for any loan advance request and under any letters of credit or amendment issued and or actions taken by Lender pursuant to Electronic Instruction to the same extent as if such advance request, letter of credit or amendment were issued and or actions taken by Lender pursuant to a Lender’s standard form or Lender approved format(s) signed by Borrower.

4. Indemnity. Borrower agrees to indemnify and hold harmless Lender, its officers, directors, employees and affiliates against any and all liability, loss, cost, damages, attorneys’ fees and other expenses which Lender may incur by reason of or in consequence of Lender’s actions in reliance upon and pursuant to the information contained in any and all of the electronic instructions received by Lender and purported to be sent by Borrower or its representatives or employees. In addition, the parties agree that Lender is not responsible for checking electronic mail on a regular basis, and Borrower is advised to make arrangements to assure electronic mail has been opened, and sent to a current employee, and the employee is in the office. The parties agree that Lender shall not be responsible for delays, errors or omissions resulting from malfunction of equipment or lines or from other conditions beyond the control of Lender. The parties further agree that Lender shall not be responsible for misuse or wrongful access by Borrower’s representative and employees nor for any delay in taking any actions requested by Borrower whether such delay is caused by omission or instructions which Lender deems to be uncertain or unclear or otherwise. Nothing contained herein shall be construed to relieve Lender from responsibility for its own failure to observe the Security Procedures or act in good faith.

5. Verbal or Telephone Instructions. Borrower hereby authorizes the person listed below (“Authorized Representatives”) to give verbal or telephonic instructions in connection with Electronic Instructions. Lender assumes no responsibility for ascertaining the authenticity of any representative or caller giving such verbal or telephonic instruction except to the extent such representative or caller identifies him/herself as an Authorized Representative. Borrower agrees to indemnify and hold harmless and defend Lender from and against any and all actions, claims, liability loss or expenses that may rise out of or occur in connection with any action taken in reliance upon such verbal or telephonic instructions.

6. Borrower’s Authority. Borrower hereby warrants and represents that Borrower and the undersigned officer(s) of Borrower have full power and authority to enter into this Agreement and that all corporate and/or legal actions necessary in connection with Borrower’s execution and delivery of this Agreement have been taken.

 

Borrower’s Authorized Representatives:

 

Michael McClane

   

/s/ Michael McClane

(Print name)                 (Signature)

Robert Hamman

   

/s/ Robert Hamman

(Print name)                 (Signature)

 

   

 

(Print name)                 (Signature)

7. Follow-up Documents. Borrower agrees to mail each original loan advance request or application and or amendment request for letters of credit immediately following its facsimile transmission to East West Bank at 475 Huntington Drive, San Marino, CA 91108, Attn: Loan Services Department. The mailed application and or amendment must be clearly marked “Confirmation”. Minor changes to instructions may be communicated to Lender by telephone. In such case, confirming instructions detailing the changes must be sent by facsimile. Acceptance of discrepancies must be sent by facsimile. Failure by Borrower to follow these instructions does not diminish the provisions of this Agreement.


TELETRANSMISSION AGREEMENT-LINE OF CREDIT

(Continued)

 

Loan No: 2001669   Page 2

 

THIS TELETRANSMISSION AGREEMENT-LINE OF CREDIT IS EXECUTED ON FEBRUARY 24, 2006.

BORROWER:

 

U.S. AUTO PARTS NETWORK, INC.
by:  

/s/ Mehran Nia

  Mehran Yaghoub Nia. CEO of U.S. Auto Parts Network, Inc.

Exhibit 10.14

BUSINESS LOAN AGREEMENT

 

Principal
$5,000,000.00

 

Loan Date

02-24-2006

 

Maturity

07-31-2007

 

Loan No

2001669

  Call/Coll  

Account

Illegible

 

Officer

8110

  Initials
             

References in the shaded area are for Lender’s use only and do not limit the applicability of this document to any particular loan or item.

Any item above containing “***” has been omitted due to text length limitations.

 

Borrower:    U.S. Auto Parts Network, Inc.    Lender:    East West Bank
   17160 S. Margay Avenue       407 W. Valley Blvd.
   Carson, CA 90746       Alhambra, CA 91803

THIS BUSINESS LOAN AGREEMENT dated February 24, 2006, is made and executed between U.S. Auto Parts Network, Inc. (“Borrower”) and East West Bank (“Lender”) on the following terms and conditions. Borrower has received prior commercial loans from Lender or has applied to Lender for a commercial loan or loans or other financial accommodations, including those which may be described on any exhibit or schedule attached to this Agreement (“Loan”). Borrower understands and agrees that: (A) in granting, renewing, or extending any Loan, Lender is relying upon Borrower’s representations, warranties, and agreements as set forth in this Agreement; (B) the granting, renewing, or extending of any Loan by Lender at all times shall be subject to Lender’s sole judgment and discretion; and (C) all such Loans shall be and remain subject to the terms and conditions of this Agreement.

TERM. This Agreement shall be effective as of February 24, 2006, and shall continue in full force and effect until such time as all of Borrower’s Loans in favor of Lender have been paid in full, including principal, interest, costs, expenses, attorneys’ fees, and other fees and charges, or until such time as the parties may agree in writing to terminate this Agreement.

CONDITIONS PRECEDENT TO EACH ADVANCE. Lender’s obligation to make the initial Advance and each subsequent Advance under this Agreement shall be subject to the fulfillment to Lender’s satisfaction of all of the conditions set forth in this Agreement and in the Related Documents.

Loan Documents. Borrower shall provide to Lender the following documents for the Loan: (1) the Note; (2) Security Agreements granting to Lender security interests in the Collateral; (3) financing statements and all other documents perfecting Lender’s Security Interests; (4) evidence of insurance as required below; (5) together with all such Related Documents as Lender may require for the Loan; all in form and substance satisfactory to Lender and Lender’s counsel.

Borrower’s Authorization. Borrower shall have provided in form and substance satisfactory to Lender properly certified resolutions, duly authorizing the execution and delivery of this Agreement, the Note and the Related Documents. In addition, Borrower shall have provided such other resolutions, authorizations, documents and instruments as Lender or its counsel, may require.

Payment of Fees and Expenses. Borrower shall have paid to Lender all fees, charges, and other expenses which are then due and payable as specified in this Agreement or any Related Document.

Representations and Warranties. The representations and warranties set forth in this Agreement, in the Related Documents, and in any document or certificate delivered to Lender under this Agreement are true and correct.

No Event of Default. There shall not exist at the time of any Advance a condition which would constitute an Event of Default under this Agreement or under any Related Document.

REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as of the date of this Agreement, as of the date of each disbursement of loan proceeds, as of the date of any renewal, extension or modification of any Loan, and at all times any indebtedness exists:

Organization. Borrower is a corporation for profit which is, and at all times shall be, duly organized, validly existing, and in good standing under and by virtue of the laws of the State of Delaware. Borrower is duly authorized to transact business in all other states in which Borrower is doing business, having obtained all necessary filings, governmental licenses and approvals for each state in which Borrower is doing business. Specifically, Borrower is, and at all times shall be, duly qualified as a foreign corporation in all states in which the failure to so qualify would have a material adverse effect on its business or financial condition. Borrower has the full power and authority to own its properties and to transact the business in which it is presently engaged or presently proposes to engage. Borrower maintains an office at 17150 S. Margay Avenue, Carson, CA 90746. Unless Borrower has designated otherwise in writing, the principal office is the office at which Borrower keeps its books end records including its records concerning the Collateral. Borrower will notify Lender prior to any change in the location of Borrower’s state of organization or any change in Borrower’s name. Borrower shall do all things necessary to preserve and to keep in full force and effect its existence, rights and privileges, and shall comply with all regulations, rules, ordinances, statutes, orders and decrease of any governmental or quasi-governmental authority or court applicable to Borrower and Borrower’s business activities.

Assumed Business Names. Borrower has filed or recorded all documents or filings required by law relating to all assumed business names used by Borrower. Excluding the name of Borrower, the following is a complete list of all assumed business names under which Borrower does business: None.

Authorization. Borrower’s execution, delivery, and performance of this Agreement and all the Related Documents have been duly authorized by all necessary action by Borrower and do not conflict with, result in a violation of, or constitute a default under (1) any provision of (a) Borrower’s articles of incorporation or organization, or bylaws, or (b) any agreement or other instrument binding upon Borrower or (2) any law, governmental regulation, court decree, or order applicable to Borrower or to Borrower’s properties.

Financial Information. Each of Borrower’s financial statements supplied to Lender truly and completely disclosed Borrower’s financial condition as of the date of the statement, and there has been no material adverse change in Borrower’s financial condition subsequent to the date of the most recent financial statement supplied to Lender. Borrower has no material contingent obligations except as disclosed in such financial statements.

Legal Effect. This Agreement constitutes, and any instrument or agreement Borrower is required to give under this Agreement when delivered will constitute legal, valid, and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms.

Properties. Except as contemplated by this Agreement or as previously disclosed in Borrower’s financial statements or in writing to Lender and as accepted by Lender, and except for property tax liens for taxes not presently due and payable, Borrower owns and has good title to all of Borrower’s properties free and clear of all Security Interests, and has not executed any security documents or financing statements relating to such properties. All of Borrower’s properties are titled in Borrower’s legal name, and Borrower has not used or filed a financing statement under any other name for at least the last five (5) years.

Hazardous Substances. Except as disclosed to and acknowledged by Lender in writing, Borrower represents and warrants that: (1) During the period of Borrower’s ownership of the Collateral, there has been no use, generation, manufacture, storage, treatment, disposal, release or threatened release of any Hazardous Substance by any person on, under, about or from any of the Collateral. (2) Borrower has no


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knowledge of, or reason to believe that there has been (a) any breach or violation of any Environmental laws; (b) any use, generation, manufacture, storage, treatment, disposal, release or threatened release of any Hazardous Substance on, under, about or from the Collateral by any prior owners or occupants of any of the Collateral; or (c) any actual or threatened litigation or claims of any kind by any person relating to such matters. (3) Neither Borrower nor any tenant, contractor, agent or other authorized user of any of the Collateral shall use, generate, manufacture, store, treat, dispose of or release any Hazardous Substance on, under, about or from any of the Collateral; and any such activity shall be conducted in compliance with all applicable federal, state, and local laws, regulations, and ordinances, including without limitation all Environmental Laws. Borrower authorizes Lender and its agents to enter upon the Collateral to make such inspections and tests as Lender may deem appropriate to determine compliance of the Collateral with this section of the Agreement. Any inspections or tests made by Lender shall be at Borrower’s expense and for Lender’s purposes only and shall not be construed to create any responsibility or liability on the part of Lender to Borrower or to any other person. The representations and warranties contained herein are based on Borrower’s due diligence in investigating the Collateral for hazardous waste and Hazardous Substances. Borrower hereby (1) releases and waives any future claims against Lender for indemnity or contribution in the event Borrower becomes liable for cleanup or other costs under any such laws, and (2) agrees to indemnify and hold harmless Lender against any and all claims, losses, liabilities, damages, penalties, and expenses which Lender may directly or indirectly sustain or suffer resulting from a breach of this section of the Agreement or as a consequence of any use, generation, manufacture, storage, disposal, release or threatened release of a hazardous waste or substance on the Collateral. The provisions of this section of the Agreement, including the obligation to indemnify, shall survive the payment of the indebtedness and the termination, expiration or satisfaction of this Agreement and shall not be affected by Lender’s acquisition of any interest in any of the Collateral, whether by foreclosure or otherwise.

Litigation and Claims. No litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Borrower is pending or threatened, and no other event has occurred which may materially adversely affect Borrower’s financial condition or properties, other than litigation, claims, or other events, if any, that have been disclosed to and acknowledged by Lender in writing.

Taxes. To the best of Borrower’s knowledge, all of Borrower’s tax returns and reports that are or were required to be filed, have been filed, and all taxes, assessments and other governmental charges have been paid in full, except those presently being or to be contested by Borrower in good faith in the ordinary course of business and for which adequate reserves have been provided.

Lien Priority. Unless otherwise previously disclosed to Lender in writing, Borrower has not entered into or granted any Security Agreements, or permitted the filing or attachment of any Security interests on or affecting any of the Collateral directly or indirectly securing repayment of Borrower’s Loan and Note, that would be prior or that may in any way be superior to Leader’s Security interests and rights in and to such Collateral.

Binding Effect. This Agreement, the Note, all Security Agreements (if any), and all Related Documents are binding upon the signers thereof, as well as upon their successors, representatives and assigns, and are legally enforceable in accordance with their respective terms.

AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, so long as this Agreement remains in effect, Borrower will:

Notices of Claims and Litigation. Promptly inform Lender in writing of (1) all material adverse changes in Borrower’s financial condition, and (2) all existing and all threatened litigation, claims, investigations, administrative proceedings or similar actions affecting Borrower or any Guarantor which could materially affect the financial condition of Borrower or the financial condition of any Guarantor.

Financial Records. Maintain its books and records in accordance with GAAP, applied on a consistent basis, and permit Lender to examine and audit Borrower’s books and records at all reasonable times.

Financial Statements. Furnish Lender with the following:

Additional Requirements.

Annual Statements . As soon as available, but in no event later than one hundred twenty (120) days after the end of each fiscal year, Borrower’s balance sheet, income and expense statements, reconciliation of net worth and statement of cash flows, with notes thereto for the year ended, audited by a certified public accountant satisfactory to Lender.

Interim Statements. As soon as available, but in no event later than forty-five (45) days after the end of each month, Borrower’s balance sheet, income and expense statements, reconciliation of net worth and statement of cash flows, with notes thereto for the period ended, prepared by Borrower.

Agings. Within thirty (30) days, or sooner, after the end of each quarter, a listing and aging by invoice date of all accounts receivable and all accounts payable in detailed format acceptable to Lender.

Inventory. Within thirty (30) days, or sooner, after the end of each quarter, a listing of inventory in detailed format acceptable to Lender.

Tax Returns. Within ten (10) days of filing, a signed copy of the Federal Income Tex Return of Borrower together with K-1’s and all other schedules pertaining to the Tax Return, or a signed copy of each of the Request for Tax Return Extensions. Tax returns are to be provided no later then nine (9) months after the fiscal year end.

All financial reports required to be provided under this Agreement shall be prepared in accordance with GAAP, applied on a consistent basis, and certified by Borrower as being true and correct.

Additional Information. Furnish such additional information and statements, as Lender may request from time to time.

Financial Covenants and Ratios. Comply with the following covenants and ratios:

Other Requirements. Borrower understands and agrees that while this Agreement is in effect, Borrower will maintain a financial condition indicated by the following ratios measured on a quarterly basis, unless otherwise noted.

Tangible Net Worth. Achieve and maintain a Tangible Net Worth (defined as total assets, less intangible assets, loans to shareholders/affiliates/officers/employees minus total liabilities) of not less than $3,000,000.00 as of December 31, 2006 and thereafter.

Debt to EBITDA. Maintain a debt to annualized EBITDA (defined as net profit before total interest expense, taxes, depreciation and amortization) not to exceed 3.0 to 1.0.

Current Ratio. Maintain a Current Ratio (defined as total current assets, less prepaids, divided by total current liabilities) of not less than 1.00 to 1

Minimum Annualized EBITDA. Maintain a Minimum Annualized EBITDA (defined as net earnings before total interest expense and


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taxes, depreciation and amortization) of $8,000,000.00.

Except as provided above, all computations made to determine compliance with the requirements contained in this paragraph shall be made in accordance with generally accepted accounting principles, applied on a consistent basis, and certified by Borrower as being true and correct.

Insurance. Maintain fire and other risk insurance, public liability insurance, and such other insurance as Lender may require with respect to Borrower’s properties and operations, in form, amounts, coverages and with insurance companies acceptable to Lender. Borrower, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least thirty (30) days prior written notice to Lender. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Borrower or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest for the Loans, Borrower will provide Lender with such lender’s loss payable or other endorsements as Lender may require.

Insurance Reports. Furnish to Lender, upon request of Lender, reports on each existing insurance policy showing such information as Lender may reasonably request, including without limitation the following: (1) the name of the insurer; (2) the risks insured; (3) the amount of the policy; (4) the properties insured; (5) the then current property values on the basis of which insurance has been obtained, and the manner of determining those values; and (6) the expiration date of the policy. In addition, upon request of Lender (however not more often then annually), Borrower will have an independent appraiser satisfactory to Lender determine, as applicable, the actual cash value or replacement cost of any Collateral. The cost of such appraisal shall be paid by Borrower.

Other Agreements. Comply with all terms and conditions of all other agreements, whether now or hereafter existing, between Borrower and any other party and notify Lender immediately in writing of any default in connection with any other such agreements.

Loan Proceeds. Use all Loan proceeds solely for Borrower’s business operations, unless specifically consented to the contrary by Lender in writing.

Taxes, Charges and Liens. Pay and discharge when due all of its indebtedness and obligations, including without limitation all assessments, taxes, governmental charges, levies and liens, of every kind and nature, imposed upon Borrower or its properties, income, or profits, prior to the date on which penalties would attach, and all lawful claims that, if unpaid, might become a lien or charge upon any of Borrower’s properties, income, or profits.

Performance. Perform and comply, in a timely manner, with all terms, conditions, and provisions set forth in this Agreement, in the Related Documents, and in all other instruments and agreements between Borrower and Lender. Borrower shall notify Lender, immediately in writing of any default in connection with any agreement.

Operations. Maintain executive and management personnel with substantially the same qualifications and experience as the present executive and management personnel; provide written notice to Lender of any change in executive and management personnel; conduct its business affairs in a reasonable and prudent manner.

Environmental Studies. Promptly conduct and complete, at Borrower’s expense, all such investigations, studies, samplings and testings as may be requested by Lender or any governmental authority relative to any substance, or any waste or by-product of any substance defined as toxic or a hazardous substance under applicable federal, state, or local low, rule, regulation, order or directive, at or affecting any property or any facility owned, leased or used by Borrower.

Compliance with Governmental Requirements. Comply with all laws, ordinances, and regulations, now or hereafter in effect, of all governmental authorities applicable to the conduct of Borrower’s properties, businesses and operations, and to the use or occupancy of the Collateral, including without limitation, the Americans With Disabilities Act. Borrower may contest in good faith any such law, ordinance, or regulation and withhold compliance during any proceeding, including appropriate appeals, so long as Borrower has notified Lender in writing prior to doing so and so long as, in Lender’s sole opinion, Lender’s interests in the Collateral are not jeopardized. Lender may require Borrower to post adequate security or a surety bond, reasonably satisfactory to Lender, to protect Lender’s interest.

Inspection. Permit employees or agents of Lender at any reasonable time to inspect any and all Collateral for the Loan or Loans and Borrower’s other properties and to examine or audit Borrower’s books, accounts, and records and to make copies and memoranda of Borrower’s books, accounts, and records. If Borrower now or at any time hereafter maintains any records (including without limitation computer generated records and computer software programs for the generation of such records) in the possession of a third party, Borrower, upon request of Lender, shall notify such party to permit Lender free access to such records at all reasonable times and to provide Lender with copies of any records it may request, all at Borrower’s expense.

Environmental Compliance and Reports. Borrower shall comply in all respects with any and all Environmental Laws; not cause or permit to exist, as a result of an intentional or unintentional action or omission on Borrower’s part or on the part of any third party, on property owned and/or occupied by Borrower, any environmental activity where damage may result to the environment, unless such environmental activity is pursuant to and in compliance with the conditions of a permit issued by the appropriate federal, stats or local governmental authorities; shall furnish to Lender promptly and in any event within thirty (30) days after receipt thereof a copy of any notice, summons, lien, citation, directive, letter or other communication from any governmental agency or instrumentality concerning any intentional or unintentional action or omission on Borrower’s part in connection with any environmental activity whether or not there is damage to the environment and/or other natural resources.

Additional Assurances. Make, execute and deliver to Lender such promissory notes, mortgages, deeds of trust, security agreements, assignments, financing statements, instruments, documents and other agreements as Lender or its attorneys may reasonably request to evidence and secure the Loans and to perfect all Security Interests.

LENDER’S EXPENDITURES. If any action or proceeding is commenced that would materially affect Lender’s interest in the Collateral or if Borrower fails to comply with any provision of this Agreement or any Related Documents, including but not limited to Borrower’s failure to discharge or pay when due any amounts Borrower is required to discharge or pay under this Agreement or any Related Documents. Lender on Borrower’s behalf may (but shall not be obligated to) take any action that Lender deems appropriate, including but not limited to discharging or paying all taxes, liens, security interests, encumbrances and other claims, at any time levied or placed on any Collateral and paying all costs for insuring, maintaining and preserving any Collateral. All such expenditures incurred or paid by Lender for such purposes will then bear interest at the rate charged under the Note from the date incurred or paid by Lender to the date of repayment by Borrower. All such expenses will become part of the indebtedness and, at Lender’s option, will (A) be payable on demand; (B) be added to the balance of the Note and be portioned among and be payable with any installment payments to become due during either (1) the term of any applicable insurance policy; (2) the remaining term of the Note; or (C) be treated as a balloon payment which will be due and payable at the Note’s maturity.

NEGATIVE COVENANTS Borrower covenants and agrees with Lender that while this Agreement is in effect, Borrower shall not, without the prior written consent of Lender:


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Indebtedness and Liens. (1) Except for trade debt incurred in the normal course of business and indebtedness to Lender contemplated by this Agreement, create, incur or assume indebtedness for borrowed money, including capital leases, (2) sell, transfer, mortgage, assign, pledge, lease, grant a security interest in, or encumber any of Borrower’s assets (except as allowed as Permitted Liens), or (3) sell with recourse any of Borrower’s accounts, except to Lender.

Continuity of Operations. (1) Engage in any business activities substantially different than those in which Borrower is presently engaged, (2) cease operations, liquidate, merge, transfer, acquire or consolidate with any other entity, change its name, dissolve or transfer or sell Collateral out of the ordinary course of business, or (3) pay any dividends on Borrower’s stock (other than dividends payable in its stock), provided, however that notwithstanding the foregoing, but only so long as no Event of Default has occurred and is continuing or would result from the payment of dividends, if Borrower is a “Subchapter S Corporation” (as defined in the Internal Revenue Code of 1986, as amended), Borrower may pay cash dividends on its stock to its shareholders from time to time in amounts necessary to enable the shareholders to pay income taxes and make estimated income tax payments to satisfy their liabilities under federal and state law which arise solely from their status as Shareholders of a Subchapter S Corporation because of their ownership of shares of Borrower’s stock, or purchase or retire any of Borrower’s outstanding shares or alter or amend Borrower’s capital structure.

Loans, Acquisitions and Guaranties. (1) Loan, invest in or advance money or assets to any other parson, enterprise or entity, (2) purchase, create or acquire any interest in any other enterprise or entity, or (3) incur any obligation as surety or guarantor other than in the ordinary course of business.

Agreements. Borrower will not enter into any agreement containing any provisions which would be violated or breached by the performance of Borrower’s obligations under this Agreement or in connection herewith.

CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to Borrower, whether under this Agreement or under any other agreement, Lender shall have no obligation to make Loan Advances or to disburse Loan proceeds if; (A) Borrower or any Guarantor is in default under the terms of this Agreement or any of the Related Documents or any other agreement that Borrower or any Guarantor has with Lender; (B) Borrower or any Guarantor dies, becomes incompetent or becomes insolvent, files a petition in bankruptcy or similar proceedings, or is adjudged a bankrupt; (C) there occurs a material adverse change in Borrower’s financial condition, in the financial condition of any Guarantor, or in the value of any Collateral securing any Loan; or (D) any Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such Guarantor’s guaranty of the Loan or any other loan with Lender; or (E) Lender in good faith deems itself insecure, even though no Event of Default shall have occurred.

RIGHT OF SETOFF. To the extent permitted by applicable law, Lender reserves a right of setoff in all Borrower’s accounts with Lender (whether checking, savings, or some other account). This includes all accounts Borrower holds jointly with someone else and all accounts Borrower may open in the future. However, this does not include any IRA or Keogh accounts, or any trust accounts for which setoff would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the Indebtedness against any and all such accounts, and, at Lender’s option, to administratively freeze all such accounts to allow Lender to protect Lender’s charge and setoff rights provided in this paragraph.

DEFAULT. Each of the following shall constitute an Event of Default under this Agreement:

Payment Default. Borrower fails to make any payment when due under the Loan.

Other Defaults. Borrower fails to comply with or to perform any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents or to comply with or to perform any term, obligation, covenant or condition contained in any other agreement between Lender and Borrower.

Default in Favor of Third Parties. Borrower or any Grantor defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower’s or any Grantor’s property or Borrower’s or any Grantor’s ability to repay the Loans or perform their respective obligations under this Agreement or any of the Related Documents.

False Statements. Any warranty, representation or statement made or furnished to Lender by Borrower or on Borrower’s behalf under this Agreement or the Related Documents is false or misleading in any material respect, either now or at the time made or furnished or becomes false or misleading at any time thereafter.

Insolvency. The dissolution or termination of Borrower’s existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower’s property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower.

Defective Collateralization. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any collateral document to create a valid and perfected security interest or lien) at any time and for any reason.

Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower or by any governmental agency against any collateral securing the Loan. This includes a garnishment of any of Borrower’s accounts, including deposit accounts, with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding and if Borrower gives Lender written notice of the creditor or forfeiture proceeding and deposits with Lender monies or a surety bond for the creditor or forfeiture proceeding, in an amount determined by Lender, in its sole discretion, as being an adequate reserve or bond for the dispute.

Events Affecting Guarantor. Any of the preceding events occurs with respect to any Guarantor of any of the Indebtedness or any Guarantor dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtedness. In the event of a death, Lender, at its option, may, but shall not be required to, permit the Guarantor’s estate to assume unconditionally the obligations arising under the guaranty in a manner satisfactory to Lender, and, in doing so, cure any Event of Default.

Change in Ownership. Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower.

Adverse Change. A material adverse change occurs in Borrower’s financial condition, or Lender believes the prospect of payment or performance of the Loan is impaired.

Insecurity. Lender in good faith believes itself insecure.

Right to Cure. If any default, other than a default on Indebtedness, is curable and if Borrower or Grantor, as the case may be has not been given a notice of a similar default within the preceding twelve (12) months, it may be cured if Borrower or Grantor, as the case may be, after receiving written notice from Lender demanding cure of such default: (1) cure the default within fifteen (15) days; or (2) if the cure requires more than fifteen (15) days, immediately initiate steps which Lender deems in Lender’s sole discretion to be sufficient to cure the default and thereafter continue and complete all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical.


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EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where otherwise provided in this Agreement or the Related Documents, all commitments and obligations of Lender under this Agreement or the Related Documents or any other agreement immediately will terminate (including any obligation to make further loan Advance or disbursements), and, at Lender’s option, all Indebtedness immediately will become due and payable, all without notice of any kind to Borrower, except that in the case of an Event of Default of the type described in the “Insolvency” subsection above, such acceleration shall be automatic and not optional. In addition, Lender shall have all the rights and remedies provided in the Related Documents or available at law, in equity, or otherwise. Except as may be prohibited by applicable law, all of Lender’s rights and remedies shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Borrower or of any Grantor shall not affect Lender’s right to declare a default and to exercise its rights and remedies.

MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement:

Amendments. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment.

Attorneys’ Fees; Expenses. Borrower agrees to pay upon demand all of Lender’s costs and expenses, including Lender’s attorneys’ fees and Lender’s legal expenses, incurred in connection with the enforcement of this Agreement. Lender may hire or pay someone else to help enforce this Agreement, and Borrower shall pay the costs and expenses of such enforcement. Costs and expenses include Lender’s attorneys’ fees and legal expenses whether or not there is a lawsuit, including attorneys’ fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Borrower also shall pay all court costs and such additional fees as may be directed by the court.

Caption Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement.

Consent to Loan Participation. Borrower agrees and consents to Lender’s sale or transfer, whether now or later, of one or more participation interests in the Loan to one or more purchasers, whether related or unrelated to Lender. Lender may provide, without any limitation whatsoever, to any one or more purchasers, or potential purchasers, any information or knowledge Lender may have about Borrower or about any other matter relating to the Loan, and Borrower hereby waives any rights to privacy Borrower may have with respect to such matters. Borrower additionally waives any and all notices of sale of participation interests, as well as all notices of any repurchase of such participation interests. Borrower also agrees that the purchasers of any such participation interests will be considered as the absolute owners of such interests in the Loan and will have all the rights granted under the participation agreement or agreements governing the sale of such participation interests. Borrower further waives all rights of offset or counterclaim that it may have now or later against Lender or against any purchaser of such a participation interest and unconditionally agrees that either Lender or such purchaser may enforce Borrower’s obligation under the Loan irrespective of the failure or insolvency of any holder of any interest in the Loan. Borrower further agrees that the purchaser of any such participation interests may enforce its interests irrespective of any personal claims or defenses that Borrower may have against Lender.

Governing Law. This Agreement will be governed by federal law applicable to Lender and, to the extent not preempted by federal law, the laws of the State of California without regard to its conflicts of law provisions. This Agreement has been accepted by Lender in the State of California.

No Waiver by Lender. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender’s right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Borrower, or between Lender and any Grantor, shall constitute a waiver of any of Lender’s rights or of any of Borrower’s or any Grantor’s obligations as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withhold in the sole discretion of Lender.

Notices. Any notice required to be given under this Agreement shall be given in writing, and shall be effective when actually delivered, when actually received by telefacsimile (unless otherwise required by law), when deposited with a nationally recognized overnight courier, or, if mailed, when deposited in the United States mail, as first class, certified or registered mail postage prepaid, directed to the addresses shown near the beginning of this Agreement. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party’s address. For notice purposes, Borrower agrees to keep Lender informed at all times of Borrower’s current address. Unless otherwise provided or required by law, if there is more than one Borrower, any notice given by Lender to any Borrower is deemed to be notice given to all Borrowers.

Severability. If a court of competent jurisdiction finds any provision of this Agreement to be illegal, invalid, or unenforceable as to any circumstance, that finding shall not make the offending provision illegal, invalid, or unenforceable as to any other circumstance. If feasible, the offending provision shall be considered modified so that it becomes legal, valid and enforceable. If the offending provision cannot be so modified, it shall be considered deleted from this Agreement. Unless otherwise required by law, the illegality, invalidity, or unenforceability of any provision of this Agreement shall not affect the legality, validity or enforceability of any other provision of this Agreement.

Subsidiaries and Affiliates of Borrower. To the extent the context of any provisions of this Agreement makes it appropriate, including without limitation any representation, warranty or covenant, the word “Borrower” as used in this Agreement shall include all of Borrower’s subsidiaries and affiliates. Notwithstanding the foregoing however, under no circumstances shall this Agreement be construed to require Lender to make any Loan or other financial accommodation to any of Borrower’s subsidiaries or affiliates.

Successors and Assigns. All covenants and agreements by or on behalf of Borrower contained in this Agreement or any Related Documents shall bind Borrower’s successors and assigns and shall inure to the benefit of Lender and its successors and assigns, Borrower shall not, however, have the right to assign Borrower’s rights under this Agreement or any interest therein, without the prior written consent of Lender.

Survival of Representations and Warranties . Borrower understands and agrees that in extending Loan Advances, Lender is relying on all representations, warranties, and covenants made by Borrower in this Agreement or in any certificate or other instrument delivered by Borrower to Lender under this Agreement or the Related Documents. Borrower further agrees that regardless of any investigation made by Lender, all such representations, warranties and covenants will survive the extension of Loan Advances, and delivery to Lender of the Related Documents, shall be continuing in nature, shall be deemed made and redated by Borrower at the time each Loan Advance is made, and shall remain in full force and effect until such time as Borrower’s Indebtedness shall be paid in full, or until this Agreement shall be terminated in the manner provided above, whichever is the last to occur.


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Time is of the Essence. Time is of the essence in the performance of this Agreement.

Waive Jury. To the extent permitted by applicable law, all parties to this Agreement hereby waive the right to any jury trial in any action, proceeding, or counterclaim brought by any party against any other party.

DEFINITIONS. The following capitalized words and terms shall have the following meanings when used in this Agreement. Unless specifically stated to the contrary, all references to dollar amounts shall mean amounts in lawful money of the United States of America. Words and terms used in the singular shall include the plural, and the plural shall include the singular, as the context may require. Words and terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. Accounting words and terms not otherwise defined in this Agreement shall have the meanings assigned to them in accordance with generally accepted accounting principles as in effect on the date of this Agreement:

Advance. The word “Advance” means a disbursement of Loan funds made, or to be made, to Borrower or on Borrower’s behalf on a line of credit or multiple advance basis under the terms and conditions of this Agreement.

Agreement. The word “Agreement” means this Business Loan Agreement, as this Business Loan Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Business Loan Agreement from time to time.

Borrower. The word “Borrower” means U.S. Auto Parts Network, Inc. and includes all co-signers and co-makers signing the Note and all their successors and assigns.

Collateral. The word “Collateral” means all property and assets granted as collateral security for a Loan, whether real or personal property, whether granted directly or indirectly, whether granted now or in the future, and whether granted in the form of a security interest, mortgage, collateral mortgage, deed of trust, assignment, pledge, crop pledge, chattel mortgage, collateral chattel mortgage, chattel trust, factor’s lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or title retention contract, lease or consignment intended as a security device, or any other security or loan interest whatsoever, whether created by law, contract, or otherwise.

Environmental Laws. The words “Environmental Laws” mean any and all state, federal and local statutes, regulations and ordinances relating to the protection of human health or the environment, including without limitation the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et seq. (“CERCLA”), the Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-489 (“SARA”), the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq,. the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., Chapters 6.5 through 7.7 of Division 20 of the California Health and Safety Code, Section 25100, et seq., or other applicable state or federal laws, rules, or regulations adopted pursuant thereto.

Event of Default. The words “Event of Default” mean any of the events of default set forth in this Agreement in the default section of this Agreement.

GAAP. The word “GAAP” means generally accepted accounting principles.

Grantor. The word “Grantor” means each and all of the persons or entities granting a Security Interest in any Collateral for the Loan, including without limitation all Borrowers granting such a Security Interest.

Guarantor. The word “Guarantor” means any guarantor, surety, or accommodation party of any or all of the Loan.

Guaranty. The word “Guaranty” means the guaranty from Guarantor to Lender, including without limitation a guaranty of all or part of the Note.

Hazardous Substances. The words “Hazardous Substances” mean materials that, because of their quantity, concentration or physical, chemical or infectious characteristics, may cause or pose a present or potential hazard to human health or the environment when improperly used, treated, stored, disposed of, generated, manufactured, transported or otherwise handled. The words “Hazardous Substances” are used in their very broadest sense and include without limitation any and all hazardous or toxic substances, materials or waste as defined by or listed under the Environmental Laws. The term “Hazardous Substances” also includes, without limitation, petroleum and petroleum by-products or any fraction thereof and asbestos.

Indebtedness. The word “Indebtedness” means the indebtedness evidenced by the Note or Related Documents, including all principal and interest together with all other indebtedness and costs and expenses for which Borrower is responsible under this Agreement or under any of the Related Documents.

Lender. The word “Lender” means East West Bank, its successors and assigns.

Loan. The word “Loan” means any and all loans and financial accommodations from Lender to Borrower whether now or hereafter existing, and however evidenced, including without limitation those loans and financial accommodations described herein or described on any exhibit or schedule attached to this Agreement from time to time.

Note. The word “Note” means the Note executed by U.S. Auto Parts Network, Inc. in the principal amount of $5,000,000.00 dated February 24, 2006, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of, and substitutions for the note or credit agreement.

Permitted Liens. The words “Permitted Liens” mean (1) liens and security interests securing indebtedness owed by Borrower to Lender; (2) liens for taxes, assessments, or similar charges either not yet due or being contested in good faith; (3) liens of materialmen, mechanics, warehousemen, or carriers, or other like liens arising in the ordinary course of business and securing obligations which are not yet delinquent; (4) purchase money liens or purchase money security interests upon or in any property acquired or held by Borrower in the ordinary course of business to secure Indebtedness outstanding on the date of this Agreement or permitted to be incurred under the paragraph of this Agreement titled “Indebtedness and Liens”; (5) liens and security interests which, as of the date of this Agreement, have been disclosed to and approved by the Lender in writing; and (6) those liens and security interests which in the aggregate constitute an immaterial and insignificant monetary amount with respect to the net value of Borrower’s assets.

Related Documents. The words “Related Documents” mean all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, security deeds, collateral mortgages, and all other instruments agreements and documents, whether now or hereafter existing, executed in connection with the Loan.

Security Agreement. The words “Security Agreement” mean and include without limitation any agreements, promises, covenants, arrangements, understandings or other agreements, whether created by law, contract, or otherwise, evidencing, governing, representing, or creating a Security Interest.

Security Interest. The words “Security Interest” mean, without limitation, any and all types of collateral security, present and future, whether in the form of a lien, charge, encumbrance, mortgage, deed of trust, security deed, assignment, pledge, crop pledge, chattel mortgage, collateral chattel mortgage, chattel trust, factor’s lien, equipment trust, conditional sale , trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatever whether created by law,


BUSINESS LOAN AGREEMENT

(Continued)

 

Loan No: 2001669   Page 7

 

contract, or otherwise.

BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN AGREEMENT AND BORROWER AGREES TO ITS TERMS. THIS BUSINESS LOAN AGREEMENT IS DATED FEBRUARY 24, 2006.

BORROWER:

 

U.S. AUTO PARTS NETWORK, INC.
By:  

/s/ Mahran Yeghoub Nia

  Mahran Yeghoub Nia, CEO of U.S. Auto Parts Network, Inc.
LENDER:
EAST WEST BANK
By:  

/s/ Mark H. Lee

 

Authorized Signer

Exhibit 10.15

CHANGE IN TERMS AGREEMENT

Dated: May 18, 2006

 

Borrower :

U.S. Auto Parts Network, Inc.

17150 S. Margay Avenue

Carson, California 90746

  

Lender :

East West Bank

135 North Los Robles Avenue, 2nd Floor

Pasadena, California 91101

Loan Number: 2001669    Maturity Date: July 31, 2007

DESCRIPTION OF EXISTING INDEBTEDNESS . The Promissory Note dated January 6, 2003 and subsequent Change in Terms Agreements.

DESCRIPTION OF CHANGE IN TERMS . The Principal Amount of the Note is hereby increased to Seven Million and 00/100 Dollars ($7,000,000.00)

CONTINUING VALIDITY . Except as expressly changed by this Agreement or that certain Amendment to Business Loan Agreement of even date herewith, the terms of the original obligation or obligations, including all agreements evidenced or securing the obligation(s), remain unchanged and in full force and effect. Consent by Lender to this Agreement does not waive Lender’s right to strict performance of the obligation(s) as changed, nor obligate Lender to make any future change in terms. Nothing in this Agreement will constitute a satisfaction of the obligation(s). It is the intention of Lender to retain as liable parties all makers and endorsers of the original obligation(s), including accommodation parties, unless a party is expressly released by Lender in writing. Any maker or endorser, including accommodation makers, will not be released by this Agreement. If any person who signed the original obligation does not sign this Agreement below, then all persons signing below acknowledge that this Agreement is given conditionally, based on the representation to Lender that the non-signing party consents to the changes and provisions of this Agreement or otherwise will not be released by it. This waiver applies not only to any initial extension, modification or release, but also to all subsequent actions.

PRIOR TO SIGNING THIS AGREEMENT, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS AGREEMENT. BORROWER AGREES TO THE TERMS OF THE AGREEMENT.

 

BORROWER
U.S. AUTO PARTS NETWORK, INC.
By:   /s/ Mehran Nia
Name:   Mehran Nia
Title:   CEO

Exhibit 10.16

 


EAST WEST BANK

and

U.S. AUTO PARTS NETWORK, INC.

 


LOAN AGREEMENT

 


Dated: May 18, 2006

 



LOAN AGREEMENT

This LOAN AGREEMENT (this “ Agreement ”) is entered into as of May 18, 2006 between EAST WEST BANK (“ Lender ”), and U.S. AUTO PARTS NETWORK, INC. , a Delaware corporation (“ Borrower ”).

WITNESSETH :

WHEREAS, Borrower is an online and wholesale retailer of automotive parts;

WHEREAS, Borrower and Lender have heretofore entered into (a) that certain Business Loan Agreement, dated as of February 24, 2006 (as amended from time to time, the “ Revolving Loan Agreement ”) with respect to a revolving loan facility (Loan Number: 2001669) in the principal amount of $5,000,000.00, and certain other loan documents related thereto (such loan documents as amended from time to time, the “ Revolving Related Documents ”, and together with the Revolving Loan Agreement, the “ Revolving Loan Documents ”); and (b) that certain Business Loan Agreement, dated as of February 24, 2006 (as amended from time to time, the “ Term Loan Agreement ”) with respect to a term loan (Loan Number: 3000071) in the principal amount of $10,000,000.00, and certain other loan documents related thereto (such loan documents as amended from time to time, the “ Term Loan Related Documents ”, and together with the Term Loan Agreement, the “ Term Loan Documents ”);

WHEREAS , at the request of Borrower, Lender has agreed to make a loan to Borrower in the amount of $22,000,000.00 (the “ Loan ”) with respect to the proposed acquisition by Borrower of all outstanding shares of capital stock of the Target Companies as set forth in the Acquisition Agreement;

WHEREAS , concurrently herewith, Borrower and Lender will be executing that certain Amendment to Existing Agreements, of even date herewith, with respect to the modification of the Revolving Loan Documents and the Term Loan Documents (the “ Amendment to Existing Agreements ”); and

WHEREAS , all terms as used in this Agreement shall, unless otherwise defined in the main body of this Agreement, have the meanings given to such terms in Exhibit A attached hereto.

NOW, THEREFORE , in consideration of the premises and for other good and valuable consideration, the receipt of which is hereby acknowledged, Lender and Borrower hereby covenant and agree as follows:

ARTICLE I

LOAN PROVISIONS

Section 1.1 Amount of Loan . Lender shall loan to Borrower a principal amount equal to TWENTY TWO MILLION AND No/100 DOLLARS ($22,000,000.00) as evidenced by the

 

1


secured promissory note in the form of Exhibit B attached hereto (the “ Note ”), and secured by certain of the Loan Documents, subject to the terms and conditions of this Agreement.

Section 1.2 Term of Loan . The Loan shall be for a term commencing on the date hereof and ending on May 30, 2010, as such date may be shortened or extended pursuant to the terms of the Note, or the terms of this Agreement.

Section 1.3 Interest Rate and Payment Terms . The Loan shall be payable as to interest and principal in accordance with the provisions of the Note. The Note also provides for prepayment of the Loan, interest at the Default Rate and late charges.

Section 1.4 Commitment Fee . Concurrently with the funding of the Loan as set forth herein, Borrower shall remit to Lender a commitment fee in the amount of $55,000.00 (the “ Commitment Fee ”).

ARTICLE II

SECURITY FOR THE LOAN

Section 2.1 Security Interest . The Loan shall be evidenced by the Note and secured by the following, all dated as of the date hereof:

(a) a Security Agreement given by each of Borrower and Merger Sub, in the form and substance attached hereto as Exhibit C-1 and Exhibit C-2 , respectively (singly and collectively, the “ Security Agreement ”), granting a security interest in and to any and all properties of Borrower and of Merger Sub including, without limitation, deposit accounts;

(b) UCC-1 Financing Statements sufficient to perfect the security interest granted by the Security Agreement and, to the extent there is inventory or other property of Borrower or Merger Sub held in a warehouse not owned or leased by Borrower or Merger Sub, appropriate warehouseman notices (singly and collectively “ UCC-1 Financing Statement ”);

(c) one or more Deposit Control Agreements executed by each of Borrower and Merger Sub, and the applicable third party depository banks (“ Banks ”), in form and substance reasonably satisfactory to Lender, with respect to the perfection, in accordance with Applicable Law, of Lender’s security interest in all deposit accounts maintained by Borrower or Merger Sub with such Banks (singly and collectively, the “ Control Agreement ”);

(d) a Collateral Assignment by each of Borrower and Merger Sub, in the form and substance attached hereto as Exhibit D-1 and Exhibit D-2 , respectively (singly and collectively, the “ Collateral Assignment ”), assigning to Lender all right, title and interest of Borrower and of Merger Sub in and to any and all properties of Borrower and of Merger Sub to the extent a security interest in such properties may not, or might not, be perfected by the filing of UCC-1 Financing Statements, including without limitation, any and all internet domain names (some of which are specifically identified therein and the rest of which are generally described therein) and leasehold interests; in connection with any collateral assignment of leasehold

 

2


interests, Borrower shall obtain from the appropriate lessors and deliver to Lender written consents to the assignment within sixty (60) days following the Closing; and

(e) in the event any unpaid loan obligations of the Target Companies totaling more than $500,000 are assumed by Merger Sub as a result of the closing of the transactions contemplated by the Acquisition Agreement, Lender, in its reasonable discretion, shall have the right to require a Subordination Agreement to be entered into with Lender of such obligations whereby such lender agrees to subordinate such loan obligations to Borrower’s obligations under the Loan Documents (the “ Subordination Agreement ”).

This Agreement, the Note, the Security Agreement, the UCC-1 Financing Statements, the Control Agreement, the Collateral Assignment, and the Subordination Agreement (if required) and, together with any and all other assignments, pledges, documents and agreements now or hereafter executed by the Borrower, Merger Sub or any other party for the benefit of Lender in connection with, evidencing or securing the Loan are referred to herein collectively as the “ Loan Documents ”. The property encumbered or collaterally assigned by the Loan Documents together with any and all other property securing the obligations of Borrower under the Loan Documents are referred to herein collectively as the “ Collateral ”.

ARTICLE III

DEBT AND OBLIGATIONS SECURED

Section 3.1 Debt . The Loan Documents and the grants, assignments and transfers made thereunder are given for the purpose of securing the following, in such order of priority as Lender may determine in its sole discretion (the “ Debt ”):

(a) the payment of the debt evidenced by the Note;

(b) the payment of interest, default interest, late charges and other sums and amounts, as provided in the Loan Documents; and

(c) the payment of the “Indebtedness”, as such term is defined in the Term Loan Documents and Revolving Loan Documents (the “ Indebtedness ”), in strict accordance with the terms of the Term Loan Documents and Revolving Loan Documents (as the case may be).

Section 3.2 Other Obligations . The Loan Documents and the grants, assignments and transfers made thereunder are also given for the purpose of securing the following (the “ Other Obligations ”):

(a) the performance of each obligation of Borrower and Merger Sub contained in the Loan Documents to which it is a party;

(b) the performance of each obligation of the Borrower and Merger Sub contained in any other agreement to which it is a party given by such parties to Lender for the purpose of further securing the obligations evidenced or secured hereby, and any amendments, modifications and changes thereto;

 

3


(c) the performance of each obligation of Borrower and Merger Sub contained in any renewal, extension, amendment, modification, consolidation, change of, or substitution or replacement for, all or any part of the Loan Documents to which it is a party; and

(d) the performance of all of Borrower’s obligations under the Term Loan Documents and the Revolving Loan Documents.

Section 3.3 Debt and Other Obligations . Borrower’s obligations for the payment of the Debt and the performance of the Other Obligations shall be referred to collectively herein as the “ Obligations ”.

ARTICLE IV

BORROWER’S COVENANTS

Borrower covenants and agrees with Lender that, so long as this Agreement remains in effect, Borrower shall (and Borrower shall cause Merger Sub to comply which such covenants set forth below as are applicable to Merger Sub):

Section 4.1 Payment of the Debt and other Indebtedness . Borrower will pay the Debt at the time and in the manner provided in the Loan Documents, and will pay the Indebtedness in strict accordance with the terms of the Revolving Loan Documents and the Term Loan Documents.

Section 4.2 Compliance with Loan Documents, Revolving Loan Documents and Term Loan Documents . Borrower shall (and, to the extent applicable, shall cause Merger Sub to) perform and comply, as set forth herein and therein, with all terms set forth in the Loan Documents, the Revolving Loan Documents and the Term Loan Documents. Borrower shall (and shall cause Merger Sub to) promptly notify Lender in writing of any default under, or any failure to perform or satisfy any of the obligations of Borrower or Merger Sub (as applicable) under any of the Loan Documents, the Revolving Loan Documents and the Term Loan Documents.

Section 4.3 Compliance with Laws . Borrower shall (and shall cause Merger Sub to) timely comply in all material respects with all Applicable Laws, except where failure to do so would not have a Material Adverse Effect. Borrower shall (and shall cause Merger Sub to) give prompt notice to Lender of the receipt by Borrower (or Merger Sub, as applicable) of any notice related to a material violation of any Applicable Laws and of the commencement or threat of any proceedings, claim or investigations which relate to compliance with Applicable Laws, if the same may have or result in a Material Adverse Effect.

Section 4.4 Books and Records . Borrower will (and shall cause Merger Sub to) keep and maintain, on a fiscal year basis in accordance with Good Accounting Practices, proper and accurate books, records and accounts reflecting all of the financial affairs of Borrower and Merger Sub, respectively, and all items of income and expense of Borrower and Merger Sub, respectively, and all information required to be maintained under the Loan Documents regarding

 

4


the Collateral. Upon ten (10) days’ prior notice to Borrower (or two (2) days’ prior notice if an Event of Default has occurred or is threatened), Lender shall have the right from time to time at all times during normal business hours to examine such books, records and accounts at the office of Borrower, Merger Sub or other Person maintaining such books, records and accounts and to make copies or extracts thereof as Lender shall desire.

Section 4.5 Financial Reports . Borrower shall provide Lender with the following consolidated reports with respect to Borrower and Merger Sub:

(a) Annual Statements. As soon as available, but in no event later than one hundred twenty (120) days after the end of each fiscal year, balance sheet, income and expense statements, reconciliation of net worth and statement of cash flows, with notes thereto for the year ended, audited by a certified public accountant reasonably satisfactory to Lender.

(b) Interim Statements . As soon as available, but in no event later than forty five (45) days after the end of each month, balance sheet, income and expense statements, statements of shareholders’ equity and statement of cash flows, with notes thereto for the month ended.

(c) Agings. Within thirty (30) days, or sooner, after the end of each quarter, a listing and aging by invoice date of all accounts receivable and all accounts payable in detailed format reasonably acceptable to Lender.

(d) Inventory . Within thirty (30) days, or sooner, after the end of each quarter, a listing of inventory in detailed format reasonably acceptable to Lender.

(e) Tax Returns . Within ten (10) days of filing, a signed copy of the federal income tax return of Borrower and Merger Sub (the “ Tax Return ”) together with all schedules pertaining to the Tax Return, or a signed copy of each extension request for the Tax Return. Each Tax Return shall be provided no later than nine (9) months after the fiscal year end.

Each required financial report under this Section 4.5 shall be accompanied by a certificate signed by Borrower’ chief financial officer certifying that, on the date thereof, (i) such report is true, complete and correct to the best of his knowledge, and (ii) either that there does or does not exist an event which constitutes, or which upon notice or lapse of time or both would constitute, a default or an Event of Default under this Agreement, or if such default or Event of Default exists, the nature thereof and the period of time it has existed. Borrower shall furnish to Lender, within ten (10) days after request, or if such ten (10) day period is not reasonable under the circumstances considering the nature of the information requested, thirty (30) days after request, such additional information as may be requested by Lender from time to time.

Section 4.6 Performance of Other Agreements . Borrower shall (and shall cause Merger Sub to) observe and perform each and every term to be observed or performed by Borrower (or Merger Sub) pursuant to the terms of any other material agreements, whether now or hereafter existing between Borrower (or Merger Sub) and any other party, and Borrower shall

 

5


(and shall cause Merger Sub to) notify Lender promptly in writing of any material default of Borrower (or Merger Sub) in connection with any other such material agreements.

Section 4.7 Change in Control . Until such time as Borrower becomes subject to the reporting obligations of Section 13 of the Securities Exchange Act of 1934, as amended (the “ 1934 Act ”) or has a class of securities registered under Section 12 of the 1934 Act, and unless the Debt is paid in full, Borrower shall not engage in a Change of Control Transaction without the prior written consent of Lender, which consent shall not be unreasonably withheld. For purposes of this Section 4.7, a “ Change of Control Transaction ” shall mean the sale or issuance by Borrower, in one transaction or a series of transactions, of shares of its capital stock constituting more than 50% of Borrower’s outstanding common stock on a fully diluted and converted basis and the directors of Borrower who are serving on the board of Borrower immediately prior to such sale(s) or issuance(s) in which 50% of such stock is sold or issued cease to constitute at least half of the numbers of members of the Board of Directors after such sale(s) or issuance(s). All of the shares of capital stock of Merger Sub shall continue to be held by Borrower.

Section 4.8 Notices of Claims and Litigation . Borrower shall give prompt written notice to Lender of any litigation or governmental proceedings pending or threatened against Borrower or Merger Sub, if the same may have a Material Adverse Effect.

Section 4.9 Encumbrance of the Loan . Except in Borrower’s or Merger Sub’s ordinary course of business, no part of the Collateral nor any interest of any nature whatsoever therein nor any direct or indirect interest of any nature whatsoever in Borrower, Merger Sub, or the Collateral shall in any manner be further assigned, encumbered, pledged or hypothecated, or permitted to be further assigned, encumbered, pledged or hypothecated in favor of a third party, unless such third party shall have entered into a subordination agreement (in form and substance satisfactory to Lender) in favor of Lender with respect thereto. Any violation of the provisions of this Section shall constitute an Event of Default.

Section 4.10 Existence; Compliance with Legal Requirements . Borrower shall do or cause to be done all things necessary to preserve, renew and keep in full force and effect its existence, and material rights, licenses, permits and franchises, and shall cause Merger Sub to comply with the foregoing terms of this Section 4.10.

Section 4.11 Title to Collateral . Borrower shall (and shall cause Merger Sub to) warrant and defend (a) the title to the Collateral and every part thereof and (b) the validity and priority of the liens granted to Lender pursuant to the Loan Documents against the claims of all Persons whatsoever. Borrower shall reimburse Lender for any losses, costs, damages or expenses (including attorney’s fees) incurred by Lender if any interest in the Collateral, other than as permitted hereunder, is claimed by another Person.

Section 4.12 Additional Information . Borrower shall (and shall cause Merger Sub to) furnish to Lender, within ten (10) days after request, or if such ten (10) day period is not reasonable under the circumstances considering the nature of the information requested, thirty (30) days after request, such additional information as may be reasonable requested by Lender

 

6


from time to time concerning the Collateral or the performance by Borrower (and Merger Sub) of the Obligations.

Section 4.13 Intentionally omitted.

Section 4.14 Intentionally omitted.

Section 4.15 Expenses . Borrower shall reimburse Lender upon receipt of notice for all costs and expenses (including reasonable attorneys’ fees and disbursements) incurred by Lender in connection with (a) the preparation, negotiation, execution and delivery of the Loan Documents and the consummation of the transactions contemplated thereby and all the costs of furnishing all opinions by counsel for Borrower and its Affiliates, up to a maximum of $40,000.00; (b) Borrower’s, its Affiliates’ and Lender’s ongoing performance under and compliance with the Loan Documents; (c) the negotiation, preparation, execution, delivery and administration of any consents, amendments, waivers or other modifications of or under any Loan Document and any other documents or matters requested by Borrower; (d) filing and recording of any Loan Documents; (e) enforcing or preserving any rights, in response to third party claims or the prosecuting or defending of any action or proceeding or other litigation, in each case against, under or affecting Borrower, Merger Sub, the Loan Documents, the Collateral, or any other security given for the Loan in accordance with the terms of the Loan Documents; and (f) enforcing any obligations of or collecting any payments due from Borrower or Merger Sub under any Loan Document or with respect to the Collateral, or in connection with any refinancing or restructuring of the Loan in the nature of a “work-out”, or any insolvency or bankruptcy proceedings; provided, however, that Borrower shall not be liable for the payment of any such costs and expenses to the extent the same arise by reason of the gross negligence, illegal acts, fraud or willful misconduct of Lender. The obligations and liabilities of Borrower under this Section shall survive the Maturity Date and the exercise by Lender of any of its rights or remedies under the Loan Documents.

Section 4.16 Insurance . Borrower shall (a) maintain fire and other risk insurance, comprehensive liability insurance, and such other insurance with respect to Borrower’s properties and operations in form, amounts, coverages and with insurance companies with similar rating as are currently in effect as of the date hereof, (b) obtain and maintain, from time to time, such additional insurance coverages in such amounts as may be appropriate with respect to additional properties, assets and business operations of Borrower; and (c) cause Merger Sub to deliver within thirty (30) after the Closing, Merger Sub’s policies or certificates of insurance, in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least thirty (30) days prior written notice to Lender. In connection with all policies covering the Collateral, Borrower will provide Lender with such Lender’s loss payable or other endorsements as Lender may require. Borrower shall cause Merger Sub to comply with the provisions of this Section 4.16.

Section 4.17 Insurance Reports . Borrower shall furnish to Lender, upon request of Lender, reports on each existing insurance policy showing such information as Lender may reasonably request, including without limitation the following: (a) the name of the insurer; (b) the risks insured; (c) the amount of the policy; (d) the properties insured; (e) the then current

 

7


property values on the basis of which insurance has been obtained, and the manner of determining those values; and (f) the expiration date of the policy. Borrower shall cause Merger Sub to comply with the provisions of this Section 4.17.

Section 4.18 Taxes, Charges and Liens . Borrower shall (and shall cause Merger Sub to) pay and discharge when due all of its indebtedness and obligations, including without limitations all Taxes, imposed upon Borrower (or Merger Sub), the Collateral, Borrower’s (or Merger Sub’s) properties, income, or profits, prior to the date on which penalties would attach, and all lawful claims that, if unpaid, might become a lien or charge upon any of the Collateral, or Borrower’s (or Merger Sub’s) properties, income or profits, except for such Taxes and claims as are being contested in good faith by Borrower (or Merger Sub), provided that Borrower (or Merger Sub) shall have posted any required bond in connection therewith.

Section 4.19 Inspection . Upon ten (10) days’ prior notice to Borrower (or two (2) days’ prior notice if an Event of Default has occurred or is threatened), Borrower shall permit employees or agents of Lender to inspect, during normal business hours, any and all Collateral and Borrower’s other properties and to examine, audit and copy Borrower’s books and records. If Borrower now or at any time hereafter maintains any records (including without limitation of computer generated records and computer software programs for the generation of such records) in the possession of a third party, Borrower, upon request of Lender, shall notify such party to permit Lender free access to such records at all reasonable times and to provide Lender with copies of any records it may request, all at Borrower’s expense. Borrower shall cause Merger Sub to comply with the terms of this Section 4.19.

Section 4.20 Intentionally omitted .

Section 4.21 Environmental Compliance and Reports . Borrower shall (and shall cause Merger Sub to) (a) comply in all respects with any and all Environmental Laws, except where failure to do so would not have a Material Adverse Effect; (b) not cause or permit to exist, as a result of an intentional or unintentional action or omission on Borrower’s part or on the part of Merger Sub, on property owned and/or occupied by Borrower or Merger Sub, any environmental activity where material damage may result to the environment, unless such environmental activity is pursuant to and in compliance with the conditions of a permit issued by the appropriate federal, state or local governmental authorities; and (c) furnish to Lender, promptly after receipt thereof, a copy of any notice, summons, lien, citation, directive, letter or other communication from any governmental agency or instrumentality concerning any intentional or unintentional action or omission on Borrower’s (or Merger Sub’s) part in connection with any environmental activity whether or not there is damage to the environment and/or natural resources, if the same may have a Material Adverse Effect.

Section 4.22 Additional Assurances . Borrower shall (and cause Merger Sub to) make, execute and deliver to Lender’s such promissory notes, mortgages, deeds of trusts, security agreements, assignments, financing statements, instruments, documents and other agreements as Lender or its attorneys may reasonably request to evidence and/or secure the Loan and/or to perfect Lender’s security interest in the Collateral. Without limiting the generality of the foregoing, Borrower shall (and shall cause Merger Sub to) execute and deliver, for the benefit of

 

8


Lender, Control Agreements with respect to any new accounts hereafter opened by Borrower (or Merger Sub) with third party banks or financial institutions, within sixty (60) days of the Closing.

Section 4.23 Financial Covenants and Ratios . Borrower shall comply with the following financial covenants and ratios:

(a ) Debt to EBITDA : Borrower shall maintain a funded debt to annualized EBITDA (defined as net earnings before total interest expense, taxes, depreciation and amortization) not to exceed 3.50 to 1.00;

(b) Minimum Annualized EBITDA : Borrower shall maintain a minimum annualized EBITDA of $12,000,000.00.

(c) Minimum Annualized DSCR : Borrower shall maintain a Debt Service Coverage Ratio, defined as annualized EBITDA divided by CPLTD, of not less than 1.25 to 1.00.

All computations made to determine compliance with the requirements contained in this Agreement shall be made in accordance with Good Accounting Practices.

Section 4.24 Initial Public Offering . A portion of the proceeds from Borrower’s initial public offering shall be applied towards repayment of the Debt, other than for that portion of the Debt attributable to the Indebtedness under the Revolving Loan Documents, so long as no Event of Default has occurred thereunder.

Section 4.25 Indebtedness and Liens . Unless the Lender obtains an executed Subordination Agreement whereby any other creditor, lender or interestholder contemplated within this Section agrees to subordinate its rights to Lender, Borrower shall not (and shall not permit Merger Sub to) (a) except for trade debt incurred in the normal course of business and indebtedness to Lender contemplated by this Agreement, create, incur or assume indebtedness for borrowed money (other than with respect to the Sellers’ Note), including capitalized leases (provided that Borrower may incur capitalized leases not to exceed $1,000,000.00 in the aggregate for the year ended December 31, 2006), (b) sell, transfer, mortgage, assign, pledge, lease, grant security interest in, or encumber any of Borrower’s (or Merger Sub’s) assets (except as expressly permitted under the Loan Documents) or (c) sell with recourse any of Borrower’s accounts, except to Lender.

Section 4.26 Use of Proceeds . Proceeds of the Loan will be used by Borrower and Merger Sub exclusively for business purposes, and not for personal or household use.

ARTICLE V

CLOSING

Section 5.1 Conditions to Closing . The obligation of Lender to close hereunder is expressly subject to the following conditions precedent, each and every one of which is for the benefit of Lender and may be waived by Lender in its sole discretion:

 

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(a) All conditions precedent to the closing of the transactions contemplated by the Acquisition Agreement have been satisfied or waived and the parties thereto are in a position to close thereunder.

(b) Each of the Loan Documents (and any other documents, instruments or agreements described in Section 2.1 hereof) shall have been executed by the appropriate parties thereto (other than Lender) and delivered to Lender.

(c) Borrower and Merger Sub shall have provided to Lender certified resolutions, in form and substance satisfactory to Lender, duly authorizing the execution and delivery of the Loan Documents, the Amendment to Existing Agreements by Borrower and Merger Sub with respect to such agreements to which Borrower and Merger Sub are a party.

(d) The Amendment to Existing Agreements shall have been executed by Borrower and delivered to Lender.

(e) Any and all due diligence documents, information and materials reasonably requested by Lender have been delivered to Lender and Lender has approved the same in its sole discretion (“ Due Diligence Materials ”).

(f) Counsel for Borrower and Merger Sub has executed and delivered a legal opinion in favor of Lender in the form attached hereto as Exhibit “E ” with respect to the Loan Documents, the Revolving Loan Documents and the Term Loan Documents.

(g) The representations and warranties of Borrower and Merger Sub hereunder shall be true and correct when made on the Closing Date.

(h) There is no uncured default of Borrower hereunder or under the Revolving Loan Documents or the Term Loan Documents.

(i) Borrower shall have paid the Commitment Fee and has paid or reimbursed Lender for all fees, costs and expenses, including without limitation, any and all legal and escrow fees and costs, incurred by Lender in connection with the negotiation and documentation of the Loan Documents and the Amendment to Existing Agreements, up to a maximum of $40,000.00.

Section 5.2 Closing . Upon satisfaction of all conditions precedent to Lender’s obligation to close hereunder (or waiver thereof by Lender in its sole discretion), but in no event later than June 16, 2006 (the “ Closing Date ”), the transactions contemplated herein shall close as follows. On the Closing Date: (a) Lender shall execute and deliver to Borrower counterparts of those Loan Documents to which Lender is a signatory and the Amendment to Existing Agreements; and (b) Lender shall fund the net proceeds of the Loan by depositing such monies in same day funds into Borrower’s General Operating Account with Lender, Account No. 83101576.

 

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ARTICLE VI

REPRESENTATIONS AND WARRANTIES

Except as set forth on the Schedule of Exceptions attached hereto, the Borrower represents and warrants to Lender as of the Closing Date as follows:

Section 6.1 Organization . Each of Borrower and Merger Sub has been duly organized and is validly existing and in good standing under the laws of the State of Delaware with requisite power and authority to own its property and to transact the business in which it is now engaged. Each of Borrower and Merger Sub is duly qualified to do business and is in good standing in each other jurisdiction (or has made application to qualify to do business and will diligently complete the qualification process) where it is required to be so qualified in connection with its properties, businesses and operations, except where the failure to so qualify would not have a Material Adverse Effect. Each of Borrower and Merger Sub possesses all material rights, licenses, permits and authorizations, governmental or otherwise, necessary to entitle it to own its properties and to transact the businesses in which it is now engaged.

Section 6.2 Authorizations . Each of Borrower and Merger Sub has taken all necessary action to authorize the execution, delivery and performance of each of the Loan Agreements to which it is party. The Loan Documents to which Borrower and Merger Sub are a party have been duly executed and delivered by or on behalf of Borrower and Merger Sub, and constitute the legal, valid and binding obligations Borrower and Merger Sub, enforceable against each of them in accordance with their respective terms.

Section 6.3 No Violation or Conflict. The execution, delivery and performance by each of Borrower and Merger Sub of the Loan Documents to which it is a party will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under or violation of (a) any provision of (i) such party’s articles of incorporation or organization, or bylaws, or (ii) any material agreement or other instrument binding upon such party, or (b) any material Applicable Laws, applicable to Borrower, Merger Sub, or the Collateral.

Section 6.4 Assumed Business Names. Each of Borrower and Merger Sub has filed or recorded all documents or filings required by law relating to all assumed business names used by Borrower and Merger Sub, except where failure to do so would not have a Material Adverse Effect. Excluding the name of Borrower and Merger Sub, Schedule 6.4 attached hereto sets forth all assumed business names under which each of Borrower and Merger Sub does business.

Section 6.5 Properties . Except as contemplated by this Agreement or as previously disclosed in Borrower’s financial statements or in writing to Lender, and except for property tax liens for Taxes not presently due and payable, each of Borrower and Merger Sub owns and has good title to all of Borrower’s and Merger Sub’s respective properties, free and clear of all security interests, encumbrances and other liens, and has not executed any security documents or financing statements relating to such properties, except for such security interests, security documents or financing statements in favor of Lender.

 

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Section 6.6 Hazardous Substances . Except as disclosed to Lender in writing or if the following may not result in a Material Adverse Effect, Borrower represents and warrants that: (a) during the period of Borrower’s and Merger Sub’s ownership of the Collateral, there has been no use, generation, manufacture, storage, treatment, disposal, release or threatened release of any Hazardous Substance by any person on, under, about or from any of the Collateral, except in compliance with Applicable Laws; (b) Borrower has no knowledge of or reason to believe that there has been (i) any breach or violation of any Environmental Laws; (ii) any use, generation, manufacture, storage, treatment, disposal, release or threatened release of any Hazardous Substance on, under, about or from the Collateral by any prior owners or occupants of any of the Collateral, except in accordance with Applicable Laws; or (iii) any actions, suits or proceedings at law or in equity now pending or threatened, of any kind by any person relating to such matters; (c) Neither Borrower nor Merger Sub shall (or knowingly permit any tenant, contractor, agent or other authorized user of any of the Collateral to) use, generate, manufacture, store, treat, dispose of or release any Hazardous Substance on, under, about or from any of the Collateral; and any such activity shall be conducted in compliance with all Applicable Laws, including without limitation all Environmental Laws. Borrower authorizes Lender and its agents to enter upon Borrower’s and Merger Sub’s business premises to make such inspections and tests as Lender may reasonably deem appropriate to determine compliance of the Collateral with this section of the Agreement. Any inspections or tests made by Lender shall be at Borrower’s or Merger Sub (as applicable) expense and for Lender’s purposes only and shall not be construed to create any responsibility or liability on the part of the Lender to Borrower, Merger Sub or to any other person. Borrower hereby (i) releases and waives any future claims against Lender for indemnity, contribution or other claim in the event Borrower or Merger Sub becomes liable for cleanup or other costs under any such laws, and (ii) agrees to indemnify and hold harmless Lender, and defend with counsel satisfactory to Lender against any and all claims, losses, liabilities, damages, penalties, and expenses which Lender may directly or indirectly sustain or suffer resulting from a breach of this section of the Agreement or as a consequence of any use, generation, manufacture, storage, treatment, disposal, release or threatened release of a hazardous waster or substance on the Borrower’s or Merger Sub’s business premises. The provisions of this section of the Agreement, including the obligation to indemnify, shall survive the payment of the Debt and the termination, expiration or satisfaction of this Agreement and shall not be affected by Lender’s acquisition of any interest in any of the Collateral, whether by foreclosure or otherwise; provided, however, that nothing in this Section 6.6 will obligate Borrower to indemnify or defend Lender for claims, losses, liabilities, damages, penalties, and expenses which Lender may directly or indirectly sustain or suffer arising from any action or lack thereof occurring during any period in which Borrower and Merger Sub is dispossessed of any and all right, title and interest (including any right to use) in and to the Collateral or the business premises by Lender in accordance with the applicable Loan Document.

Section 6.7 Legal Actions and Claims . Except as set forth on Schedule 6.7 attached hereto, there are no actions, suits or proceedings at law or in equity by or before any Governmental Authority or other agency now pending or, to the best of Borrower’s knowledge, threatened in writing against or affecting Borrower, Merger Sub or the Collateral, which if adversely determined would be reasonably likely to materially adversely affect the condition (financial or otherwise) or business of Borrower, or Merger Sub or materially adversely affect the condition or ownership of the Collateral.

 

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Section 6.8 Compliance with Laws . Each of Borrower, Merger Sub and the Target Companies is in compliance with all Applicable Laws, except to the extent that any noncompliance would not have a Material Adverse Effect, including, but not limited to, all Applicable Laws of the United States of America and any country or territory in which it or they conduct business that prohibits unfair, fraudulent or corrupt business practices in the performance of business activities, including, but not limited to, the following prohibitions: (a) making any expenditures other than for lawful purposes or directly or indirectly offering, giving, promising to give or authorizing the payment or the gift of any money, or anything of value, to any entity or individual, while knowing or having reason to know that all or a portion of such money or thing of value will be given or promised, directly or indirectly, to any government official, official of an international organization, officer or employee of a foreign government or anyone acting in an official capacity for a foreign government, for the purpose of (i) influencing any action, inaction or decision of such official in a manner contrary to his or her position or creating an improper advantage; or (ii) inducing such official to influence any government or instrumentality thereof to effect or influence any act or decision of such government or instrumentality; (b) conducting any activity or any failure to conduct any activity, if such action or inaction constitutes a money laundering crime, including any money laundering crime prohibited under the International Money Laundering Abatement and Anti-Terrorist Financing Act (“Patriot Act”) and any amendments or successors thereto; (c) disclosing, sublicensing or selling any of the information or rights to any person, or any government agency of any nation, if such disclosure, sublicense or sale would be regarded by any governmental agency or department of the United States as a breach of the Foreign Assets Control Regulations, 31 C.F.R. Section 500 et seq. (1988), or the Transaction Control Regulations, 31 C.F.R. Section 505 et seq. (1988).

Section 6.9 ERISA . Borrower is not an “employee benefit plan,” as defined in Section 3(3) of ERISA, subject to Title I of ERISA, and none of the assets of Borrower constitutes or, as a result of the Loan, will constitute “plan assets” of one or more such plans within the meaning of 29 C.F.R. Section 2510.3-101.

Section 6.10 Margin Stock . No part of the proceeds of the Loan will be used for the purpose of purchasing or acquiring any “margin stock” within the meaning of Regulation U of the Board of Governors of the Federal Reserve System or for any other purpose which would be inconsistent with such Regulation U or any other Regulations of such Board of Governors, or for any purposes prohibited by Applicable Law or by the terms and conditions of this Agreement or the Loan Documents.

Section 6.11 Lender’s Security Interest . The Loan Documents are not subject to any right of rescission, set-off, counterclaim or defense by Borrower or Merger Sub, including the defense of usury, nor would the exercise of any of the terms of the Loan Documents, or the exercise of any right thereunder, render the Loan Documents unenforceable, and neither of Borrower or Merger Sub has asserted any right of rescission, set-off, counterclaim or defense with respect thereto.

 

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Section 6.12 Investment Company . Neither of Borrower or Merger Sub is (a) an “investment company” or a company “controlled” by an “investment company,” within the meaning of the Investment Company Act of 1940, as amended; (b) a “holding company” or a “subsidiary company” of a “holding company” or an “affiliate” of either a “holding company” or a “subsidiary company” within the meaning of the Public Utility Holding Company Act of 1935, as amended; or (c) subject to any other Applicable Law which purports to restrict or regulate their ability to borrow money in any manner that would be violated by their obligations hereunder.

Section 6.13 Insolvency . Neither of Borrower or Merger Sub has entered into the Loan with the intent to hinder, delay, or defraud any creditor, and each of Borrower and Merger Sub has received reasonably equivalent value in exchange for its obligations under the Loan Documents to which it is a party. Neither of Borrower or Merger Sub does intend and does believe that it will, incur debts and liabilities (including contingent liabilities and other commitments) beyond its ability to pay such debts as they mature (taking into account the timing and amounts to be payable on or in respect of obligations of Borrower and Merger Sub). Neither of Borrower or Merger Sub is contemplating either the filing of a petition under any state or federal bankruptcy or insolvency laws or the liquidation of all or a major portion of Borrower’s or Merger Sub’s assets or the Collateral, and neither of Borrower or Merger Sub has any knowledge of any Person contemplating the filing of any such petition against Borrower.

Section 6.14 Misleading or Untrue Statements or Omissions . No statement of fact made by Borrower or by or regarding Merger Sub in the Loan Documents contains any untrue statement of a material fact or omits to state any material fact necessary to make statements contained herein or therein not misleading.

Section 6.15 Financial Information . Borrower has previously furnished to Lender the audited consolidated balance sheets of the Borrower as of December 31, 2005, and the related consolidated statements of operations, stockholders’ equity and cash flows for the three (3) fiscal years then ended, as audited by the Borrower’s auditors (collectively, the “ Financial Statements ”). The Financial Statements were prepared in accordance with Good Accounting Practices and fairly present the consolidated financial condition of Borrower as at the respective dates and the consolidated results of operations and cash flows of Borrower for the periods indicated. Since the delivery of such data, except as otherwise disclosed in writing to Lender, there has been no material adverse change in the financial position of Borrower or the Collateral, or in the results of operations of Borrower. Borrower has not incurred any obligation or liability, contingent or otherwise, not reflected in such financial data which might materially adversely affect Borrower’s business operations or the Collateral.

Section 6.16 Taxes . To the best of Borrower’s knowledge, all of Borrower’s Tax Returns and reports that are or were required to be filed, have been filed, and all Taxes set forth in such returns have been paid in full, except those presently being or to be contested by Borrower in good faith in the ordinary course of business and for which adequate reserves have been provided.

 

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Borrower agrees that all of the representations and warranties set forth in this Article VI and elsewhere in this Agreement and in the other Loan Documents shall survive for so long as any amount remains owing to Lender under any of the Loan Documents by Borrower.

ARTICLE VII

DEFAULTS; REMEDIES

Section 7.1 Events of Default . The term “ Event of Default ” as used in this Agreement shall mean the occurrence of any one or more of the following events (without a timely cure as provided herein):

(a) If Borrower shall continue to be in default under any of the provisions of this Agreement, any other Loan Documents, any Revolving Loan Documents or any Term Loan Documents (i) for five (5) days (unless otherwise specified therein) after written notice from Lender in the case of any default which can be cured by the payment of a sum of money (other than regularly scheduled payments of principal and interest under the Note), or (ii) for thirty (30) days (unless otherwise specified therein) after written notice from Lender in the case of any other default if such default is curable;

(b) If any portion of the Debt is not paid when due, or if the entire Debt is not paid on or before the Maturity Date;

(c) If any representation or warranty of Borrower or Merger Sub made herein or in any Loan Documents shall have been false or misleading in any material respect when made; notwithstanding the foregoing, if such false or misleading representation or warranty was made unintentionally, Borrower or Merger Sub (as the case may be) shall have 30 days after written notice thereof from Lender to cure, or cause the cure of, such default; or

(d) If (i) Borrower or Merger Sub shall commence any case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization, conservatorship or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian, conservator or other similar official for it or for all or any substantial part of its assets, or any of Borrower or Merger Sub shall make a general assignment for the benefit of its creditors; or (ii) there shall be commenced against any of Borrower or Merger Sub any case, proceeding or other action of a nature referred to in clause (i) above which (A) results in the entry of an order for relief or any such adjudication or appointment or (B) remains undismissed, undischarged or unbonded for a period of ninety (90) days; or (iii) there shall be commenced against any of Borrower or Merger Sub any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets which results in the entry of any order for any such relief which shall not have been vacated, discharged, or stayed or bonded pending appeal within ninety (90) days from the entry thereof; or (iv) any of Borrower or Merger Sub shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clause (i),

 

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(ii), or (iii) above; or (v) any of Borrower or Merger Sub shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due.

Section 7.2 Remedies .

(a) Upon the occurrence and during the continuance of any Event of Default, Borrower agrees that Lender may take such action, without notice or demand, as it deems advisable to protect and enforce its rights against Borrower and/or Merger Sub and/or in and to the Collateral, including, but not limited to, the following actions, each of which may be pursued concurrently or otherwise, at such time and in such order as Lender may determine, in its sole discretion, without impairing or otherwise affecting the other rights and remedies of Lender:

(i) declare the entire unpaid Debt to be immediately due and payable;

(ii) institute proceedings, judicial or otherwise, for the enforcement of its rights hereunder, under the Loan Documents, the Revolving Loan Documents and/or the Term Loan Documents, or under any Applicable Law, including, without limitation, to dispose of all or any part of the Collateral in satisfaction of the Debt;

(iii) institute an action, suit or proceeding in equity for the specific performance of any covenant, condition or agreement contained herein, or in any other Loan Documents, Revolving Loan Documents or Term Loan Documents;

(iv) recover judgment on the Note either before, during or after any proceedings for the enforcement of this Agreement or the other Loan Documents, Revolving Loan Documents or Term Loan Documents;

(v) exercise any and all rights and remedies with respect to the Collateral granted to a secured party upon default under the Uniform Commercial Code;

(vi) pursue such other remedies as Lender may have under Applicable Law or at equity;

(b) The proceeds and avails of any disposition of the Collateral, or any part thereof, or any other sums collected by Lender pursuant to the Note, this Agreement or any of the other Loan Documents, Revolving Loan Documents or Term Loan Documents, may be applied by Lender to the payment of the Debt in such priority and proportions as Lender in its sole discretion shall deem appropriate.

(c) Upon the occurrence and during the continuance of any Event of Default, Lender may, but without any obligation to do so and without notice to or demand on Borrower and without releasing Borrower from any obligation hereunder, make or do the same in such manner and to such extent as Lender may deem necessary to protect the security hereof. Lender is authorized to enter upon the Borrower’s business premises for such purposes, or appear in, defend, or bring an action or proceeding to protect its beneficial interest in the Collateral or to collect the Debt, and the cost and expense thereof (including reasonable attorneys’ fees to the

 

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extent permitted by law), with interest as provided in this Section 7.2, shall constitute a portion of the Debt and shall be due and payable to Lender upon demand. All such costs and expenses incurred by Lender in remedying such Event of Default or such failed payment or act or in appearing in, defending, or bringing any such action or proceeding shall bear interest at the Default Rate commencing upon the date such cost or expense was incurred to the date of payment to Lender. All such costs and expenses incurred by Lender together with interest thereon calculated at the Default Rate shall be deemed to constitute a portion of the Debt and be secured by the Loan Documents and shall be due and payable immediately upon demand by Lender therefor.

(d) The failure of Lender to insist upon strict performance of any term hereof shall not be deemed to be a waiver of any term of this Agreement. Borrower shall not be relieved of Borrower’s obligations hereunder by reason of (i) the failure of Lender to comply with any request of Borrower or Merger Sub to take any action to enforce any of the provisions hereof or of the Note or the Loan Documents, (ii) the release, regardless of consideration, of the whole or any part of the Collateral, or of any Person liable for the Debt or any portion thereof, or (iii) any agreement or stipulation by Lender extending the time of payment or otherwise modifying or supplementing the terms of the Note, this Agreement or any of the Loan Documents. Lender may resort for the payment of the Debt to any security held by Lender in such order and manner as Lender, in its sole discretion, may elect. Lender may take action to recover the Debt, or any portion thereof, or to enforce any covenant hereof without prejudice to the right of Lender thereafter to recover against the Collateral under the Loan Documents. The rights of Lender under this Agreement shall be separate, distinct and cumulative and none shall be given effect to the exclusion of the others. No act of Lender shall be construed as an election to proceed under any one provision herein to the exclusion of any other provision. Lender shall not be limited exclusively to the rights and remedies herein stated but shall be entitled to every right and remedy now or hereafter afforded at law or in equity.

ARTICLE VIII

MISCELLANEOUS

Section 8.1 Intentionally Omitted.

Section 8.2 Construction of Agreement . The titles and headings of the paragraphs of this Agreement have been inserted for convenience of reference only and are not intended to summarize or otherwise describe the subject matter of such paragraphs and shall not be given any consideration in the construction of this Agreement.

Section 8.3 Parties Bound, etc. The provisions of this Agreement shall be binding upon and inure to the benefit of Borrower, Merger Sub, Lender and their respective successors and assigns (except as otherwise prohibited by this Agreement).

Section 8.4 Waivers . Lender may at any time and from time to time waive any one or more of the conditions contained herein, but any such waiver shall be deemed to be made in pursuance hereof and not in modification thereof, and any such waiver in any instance or under

 

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any particular circumstance shall not be effective unless in writing and shall not be considered a waiver of such condition in any other instance or any other circumstance. To the extent permitted by Applicable Law, Borrower waives (a) any right to require Lender to (i) proceed against any Person, (ii) proceed against or exhaust any Collateral, or (iii) pursue any other remedy in its power; (b) any defense arising by reason of any disability or other defense of Borrower or any other Person, or by reason of the cessation from any cause whatsoever of the liability of Borrower or any other Person; and (c) all rights and remedies that Borrower may have or be able to assert pertaining to the rights and remedies of sureties and guarantors. Until the Debt shall have been paid in full, Borrower shall not have any right to subrogation, and Borrower waives any right to enforce any remedy that Lender now has or may hereafter have against Borrower or against any other Person and waives any benefit of and any right to participate in any Collateral or security whatsoever now or hereafter held by Lender.

Section 8.5 Governing Law .

(a) THE VALIDITY OF THIS AGREEMENT, ITS CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT, AND THE RIGHTS OF THE PARTIES HERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.

(b) BORROWER AGREES TO SUBMIT TO EXCLUSIVE PERSONAL JURISDICTION IN THE STATE OF CALIFORNIA IN ANY ACTION, CASE OR PROCEEDING ARISING OUT OF THIS AGREEMENT AND, IN FURTHERANCE OF SUCH AGREEMENT, BORROWER HEREBY AGREES AND CONSENTS THAT WITHOUT LIMITING OTHER METHODS OF OBTAINING JURISDICTION, PERSONAL JURISDICTION OVER BORROWER IN ANY SUCH ACTION, CASE OR PROCEEDING MAY BE OBTAINED WITHIN OR WITHOUT THE JURISDICTION OF ANY COURT LOCATED IN CALIFORNIA AND THAT ANY PROCESS OR NOTICE OF MOTION OR OTHER APPLICATION TO ANY SUCH COURT IN CONNECTION WITH ANY SUCH ACTION, CASE OR PROCEEDING MAY BE SERVED UPON BORROWER BY REGISTERED OR CERTIFIED MAIL TO OR BY PERSONAL SERVICE AT THE LAST KNOWN ADDRESS OF BORROWER, WHETHER SUCH ADDRESS BE WITHIN OR WITHOUT THE JURISDICTION OF ANY SUCH COURT. BORROWER ALSO AGREES THAT THE EXCLUSIVE VENUE OF ANY LITIGATION ARISING IN CONNECTION WITH THE DEBT OR IN RESPECT OF ANY OF THE OBLIGATIONS OF BORROWER UNDER THIS AGREEMENT SHALL BE IN LOS ANGELES COUNTY, CALIFORNIA. NOTWITHSTANDING THE FOREGOING PROVISIONS, HOWEVER, LENDER MAY BRING ANY ACTION OR OTHER PROCEEDING FOR ANY PROVISIONAL REMEDIES (INCLUDING, WITHOUT LIMITATION, TEMPORARY RESTRAINING ORDER, INJUNCTIVE RELIEF, WRIT OF ATTACHMENT OR RECEIVERSHIP) AND/OR ANY ACTION OR OTHER PROCEEDING TO FORECLOSE UPON LENDER’S SECURITY INTEREST IN ANY OF THE COLLATERAL, IN ANY COURT HAVING SUBJECT MATTER AND PERSONAL JURISDICTION, AND WITH RESPECT TO ANY SUCH ACTION OR OTHER PROCEEDING, BORROWER HEREBY AGREES TO SUBMIT TO

 

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PERSONAL JURISDICTION IN SUCH JURISDICTION AND TO VENUE IN ANY SUCH COURT.

Section 8.6 Severability . If any term, covenant or provision of this Agreement shall be held to be invalid, illegal or unenforceable in any respect, this Agreement shall be construed without such term, covenant or provision.

Section 8.7 Notices . Any notice, request, demand, statement, authorization, approval, consent or acceptance made hereunder shall be in writing and shall be hand delivered or sent by Federal Express or other reputable courier service and designated for next business day delivery, or by registered or certified mail, return receipt requested, or by facsimile transmission at the following addresses and shall be deemed given (a) when actually received if hand delivered, (b) on the next business day if sent by Federal Express or other reputable courier service, (c) three (3) business days after being postmarked and addressed as follows if sent by registered or certified mail, return receipt requested or (d) on the date such facsimile transmission is confirmed as successfully sent, provided that it is sent during the recipient’s business hours (and if not, on the next business day):

If to Lender:

East West Bank

135 N. Los Robles Ave., 2nd Floor

Pasadena, California 91101

Attn: Mark H. Lee

          Douglas P. Krause

Tel:   (626) 768-6800

Fax:  (626) 817-8863

With a copy to:

Lim, Ruger & Kim, LLP

1055 West Seventh Street, Suite 2800

Los Angeles, California 90017

Tel:   (213) 955-9500

Fax:  (213) 955-9511

Attn:  Richard M. Ruger, Esq.

          Sung H. Shin, Esq.

 

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If to Borrower:

U.S. Auto Parts Network, Inc.

17150 S. Margay Avenue

Carson, California 90746

Attn:  Michael McClane, Chief Financial Officer

Tel:   (310) 735-0085

Fax:  (310) 632-1676

With a copy to:

Kirkpatrick & Lockhart Nicholson Graham LLP.

10100 Santa Monica Blvd, 7th Floor

Los Angeles, California 90067

Telephone  (310) 552-5000

Facsimile:  (310) 552-5001

Attention:  Thomas J. Poletti, Esq.

Each party may designate a change of address by notice to the other party, given at least five (5) business days before such change of address is to become effective.

Section 8.8 Fees and Expenses . Borrower shall pay to Lender, upon demand, all expenses incurred by Lender in connection with the collection of the Debt after an Event of Default, or, if the Lender is the prevailing party, the enforcement of the Loan Documents and in curing any defaults under the Loan Documents (including, without limitation, reasonable attorneys’ fees), with interest thereon (calculated for the actual number of days elapsed on the basis of a 360-day year) at the Default Rate, provided that such interest rate shall in no event exceed the maximum interest rate which Borrower may by law pay, from the date incurred by Lender to the date of repayment to Lender, which sums and interest shall be secured by the Loan Documents.

Section 8.9 Modification . This Agreement may not be modified, amended or terminated, except by an agreement in writing executed by the parties hereto. Borrower acknowledges that the Loan Documents set forth the entire agreement and understanding of Lender and Borrower with respect to the Loan and that no oral or other agreements, understandings, representations or warranties exist with respect to the Loan other than those set forth in the Loan Documents.

Section 8.10 Usury Laws . This Agreement and the Note are subject to the express condition that at no time shall Borrower be obligated or required to pay interest on the Principal Balance due under the Note at a rate which could subject the holder of the Note to either civil or criminal liability as a result of being in excess of the maximum interest rate which Borrower is permitted by law to contract or agree to pay. If by the terms of this Agreement or the Note, Borrower is at any time required or obligated to pay interest on the Principal Balance due under the Note at a rate in excess of such maximum rate, the rate of interest under the Note shall be deemed to be immediately reduced to such maximum rate and the interest payable shall be

 

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computed at such maximum rate and all prior interest payments in excess of such maximum rate shall be applied and shall be deemed to have been payments in reduction of the Principal Balance of the Note.

Section 8.11 Sole Discretion of Lender . Except as may otherwise be expressly provided to the contrary, wherever pursuant to the Note, this Agreement, or any other document or instrument now or hereafter executed and delivered in connection therewith or otherwise with respect to the loan secured hereby, Lender exercises any right given to it to consent or not consent, or to approve or disapprove, or any arrangement or term is to be satisfactory to Lender, the decision of Lender to consent or not consent, or to approve or disapprove or to decide that arrangements or terms are satisfactory or not satisfactory, shall be in the sole and absolute discretion of Lender and shall be final and conclusive.

Section 8.12 Intentionally omitted.

Section 8.13 Incorporation of Provisions . The Note and the other Loan Documents are subject to the conditions, stipulations, agreements and covenants contained in this Agreement to the same extent and effect as if fully set forth therein until this Agreement is terminated by the payment in full of the Debt.

Section 8.14 Absolute and Unconditional Obligation . Borrower acknowledges that Borrower’s obligation to pay the Debt in accordance with the provision of the Note and this Agreement is and shall at all times continue to be absolute and unconditional in all respects, and shall at all times be valid and enforceable irrespective of any other agreements or circumstances of any nature whatsoever which might otherwise constitute a defense to the Note or this Agreement or the obligation of Borrower thereunder to pay the Debt or the obligations of any other person relating to the Note or this Agreement or the obligations of Borrower under the Note or this Agreement or otherwise with respect to the loan secured hereby, and Borrower absolutely, unconditionally and irrevocably waives any and all right to assert any defense, setoff, counterclaim or crossclaim of any nature whatsoever with respect to the obligation of Borrower to pay the Debt in accordance with the provisions of the Note and this Agreement or the obligations of any other person relating to the Note or this Agreement or obligations of Borrower under the Note or this Agreement or otherwise with respect to the Loan in any action or proceeding brought by Lender to collect the Debt, or any portion thereof, or to enforce, foreclose and realize upon the lien and security interest created by this Agreement or any other document or instrument securing repayment of the Debt, in whole or in part.

Section 8.15 Relationship . The relationship of Lender to Borrower hereunder is strictly and solely that of lender and borrower and nothing contained in the Note, this Agreement, or any other document or instrument now or hereafter executed and delivered in connection therewith or otherwise in connection with the loan secured hereby is intended to create, or shall in any event or under any circumstance be construed as creating, a partnership, joint venture, tenancy-in-common, joint tenancy or other relationship of any nature whatsoever between Lender and Borrower other than as lender and borrower.

 

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Section 8.16 Brokers and Financial Advisors . Borrower and Lender each hereby represents to the other that it has dealt with no financial advisors, brokers, underwriters, placement agents, agents or finders in connection with the transactions contemplated by this Agreement. Borrower and Lender each agrees to indemnify and hold the other harmless from and against any and all claims, liabilities, costs and expenses arising by reason of a breach by such party of its representation in the preceding sentence. The provisions of this Section 8.16 shall survive the expiration and termination of this Agreement and the repayment of the Debt.

Section 8.17 Waiver of Jury Trial . BORROWER HEREBY WAIVES THE RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, OR RELATED TO, THE SUBJECT MATTER OF THIS AGREEMENT, THE NOTE AND/OR ANY OF THE LOAN DOCUMENTS. BORROWER SHALL NOT SEEK TO CONSOLIDATE ANY SUCH ACTION IN WHICH A JURY TRIAL HAS BEEN WAIVED, WITH ANY OTHER ACTION IN WHICH A JURY CANNOT OR HAS NOT BEEN WAIVED. THIS WAIVER IS KNOWINGLY, INTENTIONALLY AND VOLUNTARILY MADE BY BORROWER, AND BORROWER ACKNOWLEDGES THAT NEITHER LENDER NOR ANY PERSON ACTING ON BEHALF OF LENDER HAS MADE ANY REPRESENTATIONS OF FACT TO INDUCE THIS WAIVER OF JURY TRIAL. BORROWER ACKNOWLEDGES THAT 1) IT BARGAINED AT ARM’S LENGTH AND IN GOOD FAITH, WITHOUT DURESS, 2) THAT THE PROVISIONS HEREOF SHALL BE SUBJECT TO NO EXCEPTIONS WHATEVER, 3) THAT IT HAS BEEN REPRESENTED (OR HAS HAD THE OPPORTUNITY TO BE REPRESENTED) IN THE SIGNING OF THIS AGREEMENT AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL, SELECTED OF ITS OWN FREE WILL AND 4) THAT IT HAD THE OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL. BORROWER SPECIFICALLY ACKNOWLEDGES THAT NO PARTY HAS IN ANY WAY AGREED WITH OR REPRESENTED TO ANY OTHER PARTY THAT THE PROVISIONS OF THIS SECTION WILL NOT BE FULLY ENFORCED IN ALL INSTANCES. BORROWER FURTHER ACKNOWLEDGES THAT IT HAS READ AND UNDERSTANDS THE MEANING AND RAMIFICATIONS OF THIS WAIVER PROVISION.

Section 8.18 Advice of Counsel . Borrower hereby agrees, represents and warrants that Borrower has had advice of counsel of its own choosing in negotiations for and the preparation of this Agreement, including the foregoing waiver, that Borrower has read the provisions of this Agreement, including the foregoing waiver, that Borrower has had the foregoing waiver fully explained by such counsel, and that Borrower is fully aware of its contents and legal effect.

Section 8.19 Attorney Fees . Should either party hereto institute any action or proceeding to enforce this Agreement or any provisions hereof or for a declaration of rights under this Agreement, or for arbitration of any dispute arising under this Agreement, the prevailing party in any such action, proceeding or arbitration shall be entitled to receive from the other party all costs and expenses, including without limitation reasonable attorneys’ fees, incurred by the prevailing party in connection with such action, proceeding or arbitration.

 

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Section 8.20 Lender’s Right to Publicize . Lender shall have the right to publish a tombstone or similar advertising or marketing announcement describing the Obligations upon Closing, at Lender’s expenses.

IN WITNESS WHEREOF , Lender and Borrower have duly executed this Agreement the day and year first above written.

 

Lender ”:     Borrower ”:
EAST WEST BANK    

U.S. AUTO PARTS NETWORK, INC.

a Delaware corporation

By:   /s/ Mark H. Lee     By:   /s/ Mehran Nia
Name:   Mark H. Lee     Name:   Mehran Nia
Title:   FUP     Title:   CEO

 

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List of Exhibits and Schedules

 

Exhibit A    Definitions of Certain Terms
Exhibit B    Secured Promissory Note
Exhibit C-1    Borrower’s Security Agreement
Exhibit C-2    Merger Sub’s Security Agreement
Exhibit D-1    Borrower’s Collateral Assignment
Exhibit D-2    Merger Sub’s Collateral Assignment
Exhibit E    Legal Opinion of Borrower’s and Merger Sub’s Counsel

Exceptions to Representations and Warranties

 

Schedule 6.4    Assumed Business Names
Schedule 6.7    Legal Actions and Claims

 

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Exhibit A

DEFINITIONS OF CERTAIN TERMS

Acquisition Agreement : The term “ Acquisition Agreement ” as used in this Agreement shall mean that certain Acquisition Agreement, dated as of May 19, 2006, among the Borrower and PartsBin, Inc., on one hand, and Thepartsbin.com, Inc., All OEM Parts, Inc., Power Host, Inc., Auto Parts Web Solutions, Inc., Auto Parts Online Canada, Inc., Web Chat Solutions, Inc., Everything Internet, LLC, Richard Pine, Lowell Mann, Brian Tinari, and Todd Daugherty, on the other hand.

Affiliates: The term “ Affiliates ” as used in this Agreement shall mean any person or entity which controls, is controlled by or is under common control with Borrower, Merger Sub, or any of their respective members, partners, shareholders, managers, principals, directors, officers, parents or subsidiaries.

Applicable Laws : The term “ Applicable Laws ” as used in this Agreement shall mean all existing and future federal, state and local laws, regulations, orders, codes, ordinances, rules, statutes and policies, restrictive covenants and other title encumbrances, permits and approvals, leases, and other rental agreements, regulations or court orders affecting or which may be interpreted to affect any Person, its business, operations, properties, or the use thereof.

Collateral : The term “ Collateral ” as used in this Agreement shall have the meaning provided in Section 2.1 hereof.

CPLTD : The term “ CPLTD ” as used in this Agreement shall mean net current portion of long term debt and capitalized leases.

Debt : The term “ Debt ” as used in this Agreement shall have the meaning provided in Section 3.1 hereof.

Default Rate : The term “ Default Rate ” as used in this Agreement shall have the meaning provided in the Note.

EBITDA : The term “ EBITDA ” as used in this Agreement shall mean net earnings before total interest expense, taxes, depreciation and amortization.

Environmental Requirement : The term “ Environmental Requirement ” as used in this Agreement shall mean any local, state, federal or other governmental authority, statute, ordinance, code, order, decree, law, rule or regulation pertaining to or imposing liability or standards of conduct concerning the protection of human health, environmental regulation, contamination or clean-up including, without limitation, the following, as now existing or hereafter amended: the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. §9601, et seq.; the Resource Conservation and Recovery Act, 42 U.S.C. §6901, et seq.; the Hazardous Materials Transportation Act, 49 U.S.C. §1801, et seq.; the Federal Water Pollution

 

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Control Act, 33 U.S.C. §1251, et seq.; Safe Drinking Water Act (21 U.S.C. §394,42 U.S.C. §§201, 300f) Toxic Substances Control Act (15 U.S.C. §2601 et seq .), Clean Air Act (42 U.S.C. §7401 et seq .), Federal Insecticide, Fungicide, and Rodenticide Act, 7 U.S.C. §§136 et seq ., Emergency Planning and Community Right-to-Know Act, 42 U.S.C. §§11001 et seq ., Occupational Safety and Health Act, 29 U.S.C. §§651 et seq ., Pollution prevention Act, 42 U.S.C. §§13101 et seq ., Oil Pollution Act §§33 U.S.C., §§2701 et seq ., California Clean Air Act, Cal. Health & Safety Code §§39000 et seq ., Toxic Air Contaminants Law, Cal. Health & Safety Code §§39650 et seq ., Air Toxics “Hot Spots” Information and Assessment Act, Cal. Health & Safety Code §§44300 et seq ., Hazardous Waste Control Act, Cal. Health & Safety Code §§25100 et seq ., Hazardous Substance Account Act., Cal. Health & Safety Code §§25300 et seq ., Underground Storage of Hazardous Substances, Cal. Health & Safety Code §§25280 et seq ., Aboveground Petroleum Storage Act, Cal Health & Safety Code §§25270 et seq ., Porter-Cologne Water Quality Control Act, Cal. Water Code §§13000, Safe Drinking Water Act, Cal. Health & Safety Code §§4010 et seq ., Hazardous Materials Release Response Plans and Inventory, Cal. Health & Safety Code §§6300 et seq ., California Occupational Safety and Health Act., Cal Labor Code §§6300 et seq ., California Safe Drinking Water and Toxic Enforcement Act, Cal. Health & Safety Code §§25249.5 et seq ., Asbestos Notification, Cal. Health & Safety Code §§25915 et seq ., California Hazardous Substances Act., Cal. Health & Safety Code §§28740 et seq ., Lempert-Keene Seastrand Oil Spill Prevention and Response Act, Cal. Pub. Resources Code §§8750 et seq ., Transportation of Hazardous Materials, Cal. Vehicle Code §§32000 et seq ., Used Oil Recycling Act., Cal. Pub. Resources Code §§3460 et seq ., California Integrated Waste Management Act, Cal. Pub. Resources Code §§40000 et seq ., or any other similar federal, state or local law, statute, ordinance, rule or regulation of similar effect.

Events of Default : The term “ Event of Default ” as used in this Agreement shall have the meaning provided in Section 7.1 hereof.

Good Accounting Practices : The term “ Good Accounting Practices ” as used in this Agreement shall mean such accounting practice as conforms at the time to United States generally accepted accounting principles, consistently applied. Generally accepted accounting principles mean those principles and practices which are generally accepted and recognized as such by the Financial Accounting Standards Board.

Governmental Authorities : The term “ Governmental Authorities ” as used in this Agreement shall mean the Federal government, or any state or other political subdivision thereof, or any agency, court or body of the Federal government, any state or other political subdivision thereof, exercising executive, legislative, judicial, regulatory or administrative functions.

Hazardous Substance : The term “ Hazardous Substance ” as used in this Agreement shall mean (a) hazardous and/or toxic, dangerous and/or regulated, substances, solvents, wastes, materials, pollutants or contaminants, petroleum, tremolite, anthlophylie or actinolite or polychlorinated biphenyls (including, without limitation, any raw materials which include hazardous constituents) and any other substances, solvents, wastes, materials, pollutants or contaminants which (i) are included under or regulated by Environmental Requirements, (ii) pose a hazard to the Premises or to persons on or about the Premises or (iii) cause the Premises to be in violation of any Environmental Requirements; (b) asbestos in any form which is friable or which is

 

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deemed hazardous under any Applicable Law, urea formaldehyde foam insulation, transformers or other equipment which contain dielectric fluid containing levels of polychlorinated biphenyls, or radon gas; (c) chemical, material or substance defined as or included in the definition of “hazardous substances”, “hazardous wastes”, “hazardous materials”, “extremely hazardous waste”, “pollutants”, or “toxic substances” or words of similar import under any applicable Environmental Requirement; (d) other chemical, material or substance, exposure to which is prohibited, limited or regulated by any governmental authority which would pose a hazard to the health and safety of the occupants of the Premises or the owners and/or occupants of property adjacent to or surrounding the Premises, or any other Person coming upon the Premises or adjacent property; and (e) other chemical, materials or substance which would pose a hazard to the environment.

Loan : The term “ Loan ” as used in this Agreement shall have the meaning provided in the Recitals to this Agreement.

Loan Agreement : The term “ Loan Agreement ” as used in this Agreement shall have the meaning provided in Section 2.1 hereof.

Loan Documents : The term “ Loan Documents ” as used in this Agreement shall have the meaning provided in Section 2.1 hereof.

Material Adverse Effect . The term “Material Adverse Effect” as used in this Agreement shall mean a material adverse effect on the condition (financial or other) of the Borrower and its subsidiaries, taken as a whole, business, properties or results of operations of Borrower and its subsidiaries, taken as a whole.

Maturity Date : The term “ Maturity Date ” as used in this Agreement shall have the meaning provided in the Note.

Merger Sub : The term “ Merger Sub ” as used in this Agreement shall mean PartsBin, Inc., a Delaware corporation.

Obligations : The term “ Obligations ” as used in this Agreement shall have the meaning provided in Section 3.3 hereof.

Other Obligations : The term “ Other Obligations ” as used in this Agreement shall have the meaning provided in Section 3.2 hereof.

Person : The term “ Person ” as used in this Agreement shall mean a natural person, a joint venture, a corporation, a trust, an unincorporated organization and a government and any department or agency thereof.

Sellers’ Note : The term “ Sellers’ Note ” as used in this Agreement shall mean that certain promissory note, dated May 19, 2006, issued by Borrower to the Shareholders, in connection with Borrower’s acquisition of all outstanding shares of capital stock of the Target Companies pursuant to the Acquisition Agreement.

 

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Shareholders : The term “ Shareholders ” as used in this Agreement means Richard Pine, Lowell Mann, Brian Tinari, and Todd Daugherty.

Target Companies : The term “ Target Companies ” means Thepartsbin.com, Inc., All OEM Parts, Inc., Power Host, Inc., Auto Parts Web Solutions, Inc., Auto Parts Online Canada, Inc., Web Chat Solutions, Inc., and Everything Internet, LLC.

Taxes : The term “ Taxes ” as used in this Agreement shall mean any and all assessments, taxes, governmental charges, levies, liens, and duties of every kind and nature, imposed upon a Person, its properties, income, or profits.

 

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Exhibit 10.17

SECURED PROMISSORY NOTE

 

$22,000,000.00    May 18, 2006

FOR VALUE RECEIVED, the undersigned, U.S. AUTO PARTS NETWORK, INC. , a Delaware corporation whose address is 17150 S. Margay Avenue, Carson, California 90746, (“ Maker ”) promises to pay to the order of EAST WEST BANK (“ Lender ”), at its address set forth below, or at such other place as Lender from time to time may designate in writing, the principal sum of TWENTY TWO MILLION AND No/100 DOLLARS ($22,000,000.00) advanced to Maker hereunder in accordance with that certain Loan Agreement among Maker and Lender of even date herewith (as amended from time to time, the “ Loan Agreement ”) plus interest thereon (the “ Loan ”) in accordance with the terms of this secured promissory note (the “ Note ”). Capitalized terms used herein and not expressly defined shall have the meaning ascribed such terms in the Loan Agreement.

1. Interest Rate : The outstanding principal of this Note shall bear interest at a variable rate (the “ Interest Rate ”) equal to the one (1) month LIBOR (defined below) plus 1.75% . The Interest Rate shall be computed on a 365/360 basis; that is, by applying the ratio of the applicable Interest Rate, on a per annum basis, over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding.

The Interest Rate is subject to change from time to time based on changes in an independent index which is the one (1) month LIBOR (the “ Index ”). The Index is not necessarily the lowest rate charged by Lender on its loans. If the Index becomes unavailable during the term of the Loan, Lender may designate a substitute index after notice to Maker. Lender will tell Maker the current Index rate upon Maker’s request. The Interest Rate change will not occur more often than each month. Maker understands that Lender may make loans based on other rates as well. The Index is currently 5.081%. The Interest Rate (or rates) to be applied to the unpaid principal balance of this Note will be as set forth herein. Notwithstanding any other provision of this Note, after the first payment stream, the Interest Rate for each subsequent payment stream will be effective as of the last payment date of the just-ending payment stream. NOTICE: Under no circumstances will the interest rate on this Note be more than the maximum rate allowed by applicable law. Whenever increases occur in the Interest Rate, Lender, at its option, may do one or more of the following: (a) increase Maker’s payments to ensure Maker’s loan will pay off by its original maturity date, (b) increase Maker’s payments to cover accruing interest, (c) increase the number of Maker’s payments, and (d) continue Maker’s payments at the same amount and increase Maker’s final payment.

For purposes hereof, the term “ one (1) month LIBOR ” shall mean the one (1) month London Interbank offered rate in effect on the first (1 st ) business day of the monthly period during which interest is accruing, as published in the Western Edition of The Wall Street Journal.

 

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2. Payment Schedule : Maker shall pay the Loan in accordance with the following payment schedule:

(a) Twelve (12) consecutive monthly interest payments, beginning June 30, 2006 and continuing on the last day of each successive month during such twelve (12) month period, with interest calculated on the unpaid principal balances of the Loan at the Interest Rate; and

(b) Thirty-five (35) consecutive monthly principal payments, beginning June 30, 2007 and continuing on the last day of each successive month during such thirty-five (35) month period, each equal to $611,111.00 plus interest calculated on the unpaid principal balances of the Loan at the Interest Rate.

3. Maturity Date : The entire outstanding principal balance plus accrued, unpaid interest and any additional amounts due hereunder shall be due and payable on May 30, 2010 (the “ Maturity Date ”), subject to (a) earlier mandatory repayment pursuant to Section 4.24 of the Loan Agreement in the event of Maker’s initial public offering, and (b) acceleration pursuant to Section 6 hereof.

4. Prepayments : Maker agrees that all loan fees and other prepaid finance charges are earned fully as of the date of the Loan and will not be subject to refund upon early payment (whether voluntary or as a result of default), except as otherwise required by law. In any event, even upon full prepayment of this Note, Maker understands that Lender is entitled to a minimum interest charge of $100.00. Other than Maker’s obligation to pay any minimum interest charge, Maker may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Maker of Maker’s obligation to continue to make payments under the payment schedule. Rather, early payments will reduce the principal balance due and may result in Maker’s making fewer payments. Maker agrees not to send Lender payments marked “paid in full”, “without recourse”, or similar language. If Maker sends such a payment, Lender may accept it without losing any of Lender’s rights under this Note, and Maker will remain obligated to pay any further amount owed to Lender. All written communications concerning disputed amounts, including any check or other payment instrument that indicates that the payment constitutes “payment in full” of the amount owed or that is tendered with other conditions or limitations or as full satisfaction of a disputed amount must be mailed or delivered to: East West Bank, Loan Services Department, 407 W. Valley Blvd., Alhambra, CA 91803.

5. Late Charge; Default Rate : If Maker fails to make any payment hereunder within ten (10) days after it becomes due and payable, Maker agrees to pay to Lender a late charge (the “ Late Charge ”) equal to six percent (6%)  of such delinquent payment as well as interest on such delinquent payment at an annual rate equal to the Interest Rate plus five percent (5%)  per annum (the “ Default Rate ”) from the date the payment becomes due until Maker pays in full such delinquent payment. From and after the Maturity Date, whether by acceleration or otherwise, all sums then due and payable under this Note, including all principal, all accrued, unpaid interest, Late Charges and additional amounts due hereunder, shall bear interest until paid in full at the Default Rate.

 

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6. Events of Default : If there occurs an “Event of Default” as set forth in Section 7.1 of the Loan Agreement, the balance of all principal and interest under this Note shall, at the Lender’s option, exercisable in its sole and absolute discretion, become immediately due and payable without notice of default, presentment or demand for payment, protest, notice of nonpayment or dishonor, or any other notice or demand of any kind or character.

7. Attorney Fees : Should any party hereto institute any action or proceeding to enforce this Note or any provisions hereof or for a declaration of rights under this Note, or for arbitration of any dispute arising under this Note, the prevailing party in any such action, proceeding or arbitration shall be entitled to receive from the other party all costs and expenses, including without limitation reasonable attorneys’ fees, incurred by the prevailing party in connection with such action, proceeding or arbitration. In all other situations, Maker agrees to pay all of Lender’s costs and expenses, including reasonable attorneys’ fees, which may be incurred in enforcing or protecting Lender’s rights or interests. From the time(s) incurred until paid in full to Lender, the sum of all such costs and expenses shall bear interest at the Default Rate.

8. Governing Law; Jurisdiction : THE VALIDITY OF THIS NOTE, ITS CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT, AND THE RIGHTS OF THE PARTIES HERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.

MAKER AGREES TO SUBMIT TO EXCLUSIVE PERSONAL JURISDICTION IN THE STATE OF CALIFORNIA IN ANY ACTION, CASE OR PROCEEDING ARISING OUT OF THIS NOTE AND, IN FURTHERANCE OF SUCH AGREEMENT, MAKER HEREBY AGREES AND CONSENTS THAT WITHOUT LIMITING OTHER METHODS OF OBTAINING JURISDICTION, PERSONAL JURISDICTION OVER MAKER IN ANY SUCH ACTION, CASE OR PROCEEDING MAY BE OBTAINED WITHIN OR WITHOUT THE JURISDICTION OF ANY COURT LOCATED IN CALIFORNIA AND THAT ANY PROCESS OR NOTICE OF MOTION OR OTHER APPLICATION TO ANY SUCH COURT IN CONNECTION WITH ANY SUCH ACTION, CASE OR PROCEEDING MAY BE SERVED UPON MAKER BY REGISTERED OR CERTIFIED MAIL TO OR BY PERSONAL SERVICE AT THE LAST KNOWN ADDRESS OF MAKER, WHETHER SUCH ADDRESS BE WITHIN OR WITHOUT THE JURISDICTION OF ANY SUCH COURT. MAKER ALSO AGREES THAT THE EXCLUSIVE VENUE OF ANY LITIGATION ARISING IN CONNECTION WITH THE LOAN OR IN RESPECT OF ANY OF THE OBLIGATIONS OF MAKER UNDER THIS NOTE SHALL BE IN LOS ANGELES COUNTY, CALIFORNIA. NOTWITHSTANDING THE FOREGOING PROVISIONS, HOWEVER, LENDER MAY BRING ANY ACTION OR OTHER PROCEEDING FOR ANY PROVISIONAL REMEDIES (INCLUDING, WITHOUT LIMITATION, TEMPORARY RESTRAINING ORDER, INJUNCTIVE RELIEF, WRIT OF ATTACHMENT OR RECEIVERSHIP) AND/OR ANY ACTION OR OTHER PROCEEDING TO FORECLOSE UPON LENDER’S SECURITY INTEREST IN ANY OF THE COLLATERAL, IN ANY COURT HAVING SUBJECT MATTER AND PERSONAL JURISDICTION, AND WITH RESPECT TO ANY SUCH ACTION OR OTHER PROCEEDING, MAKER HEREBY AGREES TO SUBMIT TO

 

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PERSONAL JURISDICTION IN SUCH JURISDICTION AND TO VENUE IN ANY SUCH COURT.

9. Waiver of Jury Trial : MAKER HEREBY WAIVES THE RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, OR RELATED TO, THE SUBJECT MATTER OF THIS NOTE AND/OR ANY OF THE LOAN DOCUMENTS. MAKER SHALL NOT SEEK TO CONSOLIDATE ANY SUCH ACTION IN WHICH A JURY TRIAL HAS BEEN WAIVED, WITH ANY OTHER ACTION IN WHICH A JURY CANNOT OR HAS NOT BEEN WAIVED. THIS WAIVER IS KNOWINGLY, INTENTIONALLY AND VOLUNTARILY MADE BY MAKER, AND MAKER ACKNOWLEDGES THAT NEITHER LENDER NOR ANY PERSON ACTING ON BEHALF OF LENDER HAS MADE ANY REPRESENTATIONS OF FACT TO INDUCE THIS WAIVER OF JURY TRIAL. MAKER ACKNOWLEDGES THAT 1) IT BARGAINED AT ARM’S LENGTH AND IN GOOD FAITH, WITHOUT DURESS, 2) THAT THE PROVISIONS HEREOF SHALL BE SUBJECT TO NO EXCEPTIONS WHATEVER, 3) THAT IT HAS BEEN REPRESENTED (OR HAS HAD THE OPPORTUNITY TO BE REPRESENTED) IN THE SIGNING OF THIS NOTE AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL, SELECTED OF ITS OWN FREE WILL AND 4) THAT IT HAD THE OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL. MAKER SPECIFICALLY ACKNOWLEDGES THAT NO PARTY HAS IN ANY WAY AGREED WITH OR REPRESENTED TO ANY OTHER PARTY THAT THE PROVISIONS OF THIS SECTION WILL NOT BE FULLY ENFORCED IN ALL INSTANCES. MAKER FURTHER ACKNOWLEDGES THAT IT HAS READ AND UNDERSTANDS THE MEANING AND RAMIFICATIONS OF THIS WAIVER PROVISION.

10. Miscellaneous Provisions :

(a) All amounts payable under this Note are payable in lawful money of the United States. Checks constitute payment only when collected. Unless otherwise agreed or required by applicable law, payments will be applied first to any accrued unpaid interest; then to principal; then to any unpaid collection costs; then to any Late Charges.

(b) Maker agrees that Lender may accept additional or substitute security for this Note, or release any security or any party liable for this Note, or extend or renew this Note, all without notice to Maker and without affecting the liability of Maker.

(c) If Lender delays in exercising, or fails to exercise, any of its rights under this Note, such delay or failure shall not constitute a waiver of any of Lender’s rights, or of any breach, default or failure of condition of or under this Note. No waiver by Lender of any of its rights, or of any such breach, default or failure of condition shall be effective, unless the waiver is expressly stated in a writing signed by Lender. All of Lender’s remedies in connection with this Note or under applicable law shall be cumulative, and Lender’s exercise of any one or more of those remedies shall not constitute an election of remedies. Maker hereby waives notice of default, presentment or demand for payment, protest, notice of nonpayment or dishonor, or any other notice or

 

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demand of any kind or character, and all other requirements necessary to charge or hold Maker on any obligation.

(d) This Note inures to and binds the heirs, legal representatives, successors and assigns of Maker and Lender; provided , however , that Lender in its sole discretion may assign or transfer all or any portion of this Note, all without notice to, or the consent of, Maker.

(e) Time is of the essence with respect to every provision contained herein in which time is a factor.

(f) This Note is subject to the express condition that at no time shall Maker be obligated or required to pay interest on the principal balance due under this Note at a rate which could subject the holder of the Note to either civil or criminal liability as a result of being in excess of the maximum interest rate which Maker is permitted by law to contract or agree to pay. If by the terms of this Note, Maker is at any time required or obligated to pay interest on the principal balance due hereunder at a rate in excess of such maximum rate, the rate of interest under this Note shall be deemed to be immediately reduced to such maximum rate and the interest payable shall be computed at such maximum rate and all prior interest payments in excess of such maximum rate shall be applied and shall be deemed to have been payments in reduction of the principal balance of this Note.

(g) In case any one or more provisions contained in this Note shall, for any reason, be held invalid, illegal, or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provision hereof and this Note shall be construed as if such invalid, illegal, or unenforceable provision had not been contained herein.

(h) By acceptance of this Note executed by Maker, Lender hereby agrees to be bound by the provisions hereof which, by their terms, may be applicable to Lender.

IN WITNESS WHEREOF , the undersigned has duly executed this Secured Promissory Note as of the date first above written.

 

MAKER

U.S. AUTO PARTS NETWORK, INC.

a Delaware corporation

By: 

 

/s/ Mehran Nia

Name: 

 

Mehran Nia

Title:

 

CEO

 

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Exhibit 10.18

COLLATERAL ASSIGNMENT

This COLLATERAL ASSIGNMENT (the “ Agreement ”) is executed as of May 18, 2006 by U.S. AUTO PARTS NETWORK, INC ., a Delaware corporation (the Assignor ”) in favor of EAST WEST BANK (the “ Lender ”), with reference to the following:

WHEREAS, Assignor and Lender have heretofore entered into (a) that certain Business Loan Agreement, dated as of February 24, 2006, with respect to a revolving loan facility (Loan Number: 2001669) in the principal amount of $5,000,000.00; and (b) that certain Business Loan Agreement, dated as of February 24, 2006, with respect to a term loan (Loan Number: 3000071) in the principal amount of $10,000,000.00;

WHEREAS , concurrently herewith, Assignor and Lender are entering into a Loan Agreement of even date herewith (the “ Loan Agreement ”; capitalized terms used herein and not expressly defined shall have the meaning ascribed such terms in the Loan Agreement), with respect to the Loan to be made by Lender in connection with the proposed acquisition by Assignor of all outstanding shares of capital stock of the Target Companies pursuant to the Acquisition Agreement; and

WHEREAS, pursuant to the Loan Agreement, Assignor has agreed to assign to Lender the right, title and interest of Assignor in and to any and all properties of Assignor to the extent a security interest in such properties may not be perfected by the filing of UCC-1 Financing Statements including, without limitation, all internet domain names and any leasehold interests, and Lender has agreed that Lender shall have no right to use, sell or transfer the Collateral (as defined in Section 2.1 below) prior to and upon the occurrence of an Event of Default as set forth in the Loan Agreement.

NOW, THEREFORE , in consideration of the premises and for other good and valuable consideration, the receipt of which is hereby acknowledged, Assignor and Lender hereby covenant and agree as follows:

1. GENERAL DEFINITIONS .

1.1 As used herein, “ UCC ” means the Uniform Commercial Code as in effect from time to time in the State of California.

1.2 All capitalized terms contained in this Agreement, but not specifically defined in this Agreement or the Loan Agreement, shall have the meanings provided by the UCC to the extent the same are used or defined therein.

2. ASSIGNMENT .

2.1 Assignment of Property . Assignor hereby assigns, conveys, and transfers to Lender all of Assignor’s right, title, and interest in, all intangible personal property of Assignor, whether now owned and existing or hereafter acquired or arising, and wherever located, including without limitation the following (collectively, the “ Collateral ”):

 

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(a) The real and personal property leases described on Schedule 2.1(a) attached hereto and made a part hereof; and

(b) The internet domain names described on Schedule 2.1(b) attached hereto and made a part hereof.

2.2 Assignment Absolute . All rights of Lender hereunder and all obligations of Assignor hereunder, shall be absolute and unconditional irrespective of (i) any lack of validity or enforceability of this Agreement or any other Loan Document, any other agreement with respect to any of the Obligations or any other agreement or instrument relating to any of the foregoing, (ii) any change in the time, manner or place of payment of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or consent to any departure from the Loan Agreement, any other Loan Document or any other agreement or instrument, (iii) any exchange, release, lapse in perfection, or non-perfection of any other collateral, or any release or amendment or waiver of, or consent to or departure from any guarantee, for all or any of the Obligations, or (iv) any other circumstance which might otherwise constitute a defense available to, or discharge of Assignor, and/or any other obligor in respect of the Obligations, or in respect of this Agreement.

2.3 Use of Collateral . Prior to an Event of Default under any of the Loan Documents, including this Agreement, there shall be no restriction on Assignor’s ability and right to use the Collateral, in the ordinary course of Assignor’s business, consistent with past practice. Lender acknowledges and agrees that Lender shall have no right to use, sell or transfer the Collateral prior to en Event of Default as set forth in the Loan Agreement.

3. REPRESENTATIONS AND WARRANTIES . Except as set forth on the Schedules of Exceptions attached hereto, Assignor represents and warrants to Lender that:

3.1 Authority . Assignor has full power and authority to execute, deliver, and perform its obligations in accordance with the terms of this Agreement, without the consent or approval of any other person except as may have been specifically disclosed to Lender in writing.

3.2 Absence of Other Encumbrances; Legal Actions and Claims . Except as set forth on Schedule 3.2 hereto (a) the Collateral is free and clear of all liens and adverse claims other than the Security Interest, which shall be a first lien on the Collateral, and (b) there are no actions, suits or proceedings at law or in equity now pending or, to the best of Assignor’s knowledge, threatened against or affecting the Collateral in any material respect.

3.3 Information Regarding Names . Schedule 3.3 attached hereto sets forth Assignor’s exact legal name, and a true and complete list of all prior or current names and trade names used by the Assignor.

3.4 No Previous Assignment . Assignor has not previously assigned, transferred or conveyed any of its interest in the Collateral to any party other than Lender.

 

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3.5 Location of Collateral and Principal Place of Business . All Collateral and all related books and records related to the Collateral are located solely at Assignor’s principal place of business, at 17150 S. Margay Avenue, Carson, California 90746, except as set forth on Schedule 3.5 attached hereto.

4. COVENANTS AND AGREEMENTS OF ASSIGNOR . Assignor covenants and agrees as follows:

4.1 Records and Inspection . Assignor shall keep and cause to be kept accurate and complete records of the Collateral and its proceeds at its principal place of business. Upon ten (10) days’ prior notice to Assignor (or two (2) days’ prior notice if an Event of Default has occurred or is threatened), Lender shall have the right from time to time, during normal business hours, to examine such books, records and accounts at the office of Assignor, or other Person maintaining such records and to make copies or extracts thereof as Lender shall desire.

4.2 Restrictions on Removal of Collateral . Assignor shall not remove the Collateral or any related books and records from its principal place of business except in the ordinary course of Assignor’s business, consistent with past practice.

4.3 Restriction on Changing State of Organization or Chief Executive Office . Assignor shall not change the state of its incorporation, or convert into a different type of entity. Assignor shall not change its chief executive office unless 30 days prior written notice has been provided to Lender.

4.4 Duty of Care . Assignor shall be responsible for preserving and maintaining the Collateral and Lender shall have no duty of care with respect to the Collateral, except that Lender shall have an obligation to exercise reasonable care with respect to Collateral in its possession; provided that (i) Lender shall be deemed to have exercised reasonable care if the Collateral in its possession is accorded treatment substantially comparable to that which the Lender accords its own property or treatment substantially in accordance with actions requested by Assignor in writing, although Lender shall not be obligated to comply with any such requests and (ii) Lender shall not be obligated to take steps to preserve rights against any other parties or property.

4.7 Taxes . Except for those presently being or to be contested by Assignor in good faith in the ordinary course of business, Assignor shall pay when due all Taxes upon the Collateral.

4.8 Further Assurances and Authority of Lender . Assignor shall from time to time execute, deliver, file and record all such further agreements, instruments, financing statements, third party notices and other documents (collectively, “ Supplemental Documentation ”) as may be requested by Lender to preserve Lender’s rights and interests in the Collateral, or otherwise to carry out the intent of this Agreement. If any amount payable under or in connection with any of the Collateral shall be or become evidenced by any Instrument, Certificated Security or Chattel Paper, such Instrument, Certificated Security or Chattel Paper shall be immediately delivered to the Lender, duly indorsed in a manner satisfactory to Lender.

 

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5. RIGHT TO SATISFY OTHER CLAIMS AND TAXES . Except to the extent Assignor is reasonably contesting any of the following Taxes or claims, if Assignor fails to pay any Taxes when due, or fails to pay any claims secured by any lien against any Collateral when due, Assignor shall so advise Lender in writing and Lender may, without waiving or releasing any obligations of Assignor or any Event of Default, in its sole discretion (and without any obligation to do so), make such payment or any part thereof or obtain such discharge and take any other action with respect thereto that Lender deems advisable.

6. EVENTS OF DEFAULT . The occurrence or existence of an Event of Default under any Loan Document, Revolving Loan Documents, or Term Loan Documents shall constitute an Event of Default by the Assignor.

7. RIGHTS AND REMEDIES OF LENDER UPON EVENT OF DEFAULT .

7.1 Effect of Event of Default . If any Event of Default described in Section 7.1 of the Loan Agreement shall occur, Lender may declare the Obligations secured by this Agreement to be due and payable, whereupon such Obligations shall become immediately due and payable, all without notice of any kind. Lender shall promptly advise Assignor of any such declaration, but failure to do so shall not impair the effect of such declaration. Upon the occurrence of an Event of Default, Assignor’s permitted use of the Collateral pursuant to Section 2.3 above shall immediately terminate, and Lender may use, sell, lease, transfer or otherwise dispose of the Collateral as Lender shall determine in its sole and absolute discretion. Assignor hereby irrevocably makes, constitutes and appoints Lender and all persons designated by Lender true and lawful attorney (and agent-in-fact) upon and after the occurrence of an Event of Default for the purposes set forth in this Agreement.

7.2 Application of Proceeds . Any proceeds received by Lender in respect of any sale of collection from, or other realization upon all or any part of the Collateral following the occurrence of an Event of Default may, in the discretion of Lender, be held by Lender as collateral for, and/or then or at any time thereafter applied by Lender to the payment of the Obligations, or otherwise, as Lender may determine in its sole and absolute discretion. Payments received from any third party on account of disposition of Collateral shall not reduce the Obligations until paid in cash to Lender. The application of proceeds by Lender shall be without prejudice to Lender’s rights as against Assignor or other persons with respect to any Obligations which may remain unpaid. Any such deficiency shall be paid forthwith to Lender by the Assignor.

8. ASSIGNMENT BY LENDER . Assignor agrees that Lender may assign or otherwise transfer this Agreement and, subject to the terms hereof, may deliver all or any of the Collateral to the transferee(s), who shall thereupon become vested with all the powers and rights in respect thereto given to Lender herein transferred, and Lender shall thereafter be fully discharged from any liability or responsibility with respect thereto, all without prejudice to the retention by Lender of all rights and powers hereby given with respect to instruments, rights or property not so transferred.

 

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9. EXPENSES, INCLUDING ATTORNEY’S FEES . Assignor agrees to be bound by and comply in all respects with the terms of Section 4.15 of the Loan Agreement, which are hereby incorporated in this Agreement.

10. REMEDIES NOT EXCLUSIVE . No right or remedy hereunder is exclusive of any other right or remedy. Each and every right and remedy shall be cumulative and shall be in addition to and without prejudice to every other remedy given hereunder, under any other agreement between or among Assignor, Merger Sub and Lender or now or hereafter existing at law or in equity, and may be exercised from time to time as often as deemed expedient, separately or concurrently. The giving, taking or enforcement of or execution against any other or additional security, collateral, or guaranty for the payment of the Obligations shall not operate to prejudice, waive or affect any rights, powers or remedies hereunder, nor shall Lender be required to first look to, enforce, exhaust or execute against such other or additional security, or guarantees prior to so acting against the Collateral.

11. WAIVERS . The failure or delay of Lender to insist in any instances upon the performance of any of the terms, covenants or conditions of this Agreement or the Loan Documents, or to exercise any right, remedy or privilege herein or therein conferred, shall not impair or be construed as thereafter waiving any such covenants, remedies, conditions or provisions, but every such term, condition and covenant shall continue and remain in full force and effect; nor shall any waiver of an Event of Default suspend, waive or affect any other Event of Default, whether the same is prior or subsequent thereto and whether of the same or of a different type.

12. SEVERABILITY . Wherever possible, each provision of this Agreement shall be interpreted in such a manner as to be effective. If any provision of this Agreement shall be held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Agreement.

13. TERMINATION . Upon payment in full and performance of all Obligations owed by Assignor to Lender, this Agreement shall be terminated; otherwise it shall remain in full force and effect.

14. NOTICE . All notices, demands and communications hereunder shall be given and deemed received or delivered in accordance with the provisions of Section 8.7 of the Loan Agreement.

15. GOVERNING LAW; JURISDICTION . THE VALIDITY OF THIS AGREEMENT, ITS CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT, AND THE RIGHTS OF THE PARTIES HERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.

ASSIGNOR AGREES TO SUBMIT TO EXCLUSIVE PERSONAL JURISDICTION IN THE STATE OF CALIFORNIA IN ANY ACTION, CASE OR PROCEEDING ARISING OUT

 

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OF THIS AGREEMENT AND, IN FURTHERANCE OF SUCH AGREEMENT, ASSIGNOR HEREBY AGREES AND CONSENTS THAT WITHOUT LIMITING OTHER METHODS OF OBTAINING JURISDICTION, PERSONAL JURISDICTION OVER ASSIGNOR IN ANY SUCH ACTION, CASE OR PROCEEDING MAY BE OBTAINED WITHIN OR WITHOUT THE JURISDICTION OF ANY COURT LOCATED IN CALIFORNIA AND THAT ANY PROCESS OR NOTICE OF MOTION OR OTHER APPLICATION TO ANY SUCH COURT IN CONNECTION WITH ANY SUCH ACTION, CASE OR PROCEEDING MAY BE SERVED UPON ASSIGNOR BY REGISTERED OR CERTIFIED MAIL TO OR BY PERSONAL SERVICE AT THE LAST KNOWN ADDRESS OF ASSIGNOR, WHETHER SUCH ADDRESS BE WITHIN OR WITHOUT THE JURISDICTION OF ANY SUCH COURT. ASSIGNOR ALSO AGREES THAT THE EXCLUSIVE VENUE OF ANY LITIGATION ARISING IN CONNECTION WITH THE DEBT OR IN RESPECT OF ANY OF THE OBLIGATIONS OF ASSIGNOR UNDER THIS AGREEMENT SHALL BE IN LOS ANGELES COUNTY, CALIFORNIA. NOTWITHSTANDING THE FOREGOING PROVISIONS, HOWEVER, LENDER MAY BRING ANY ACTION OR OTHER PROCEEDING FOR ANY PROVISIONAL REMEDIES (INCLUDING, WITHOUT LIMITATION, TEMPORARY RESTRAINING ORDER, INJUNCTIVE RELIEF, WRIT OF ATTACHMENT OR RECEIVERSHIP) AND/OR ANY ACTION OR OTHER PROCEEDING TO FORECLOSE UPON LENDER’S SECURITY INTEREST IN ANY OF THE COLLATERAL, IN ANY COURT HAVING SUBJECT MATTER AND PERSONAL JURISDICTION, AND WITH RESPECT TO ANY SUCH ACTION OR OTHER PROCEEDING, ASSIGNOR HEREBY AGREES TO SUBMIT TO PERSONAL JURISDICTION IN SUCH JURISDICTION AND TO VENUE IN ANY SUCH COURT.

16. WAIVER OF JURY TRIAL . ASSIGNOR HEREBY WAIVES THE RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, OR RELATED TO, THE SUBJECT MATTER OF THIS AGREEMENT. ASSIGNOR SHALL NOT SEEK TO CONSOLIDATE ANY SUCH ACTION IN WHICH A JURY TRIAL HAS BEEN WAIVED, WITH ANY OTHER ACTION IN WHICH A JURY CANNOT OR HAS NOT BEEN WAIVED. THIS WAIVER IS KNOWINGLY, INTENTIONALLY AND VOLUNTARILY MADE BY ASSIGNOR, AND ASSIGNOR ACKNOWLEDGES THAT NEITHER LENDER NOR ANY PERSON ACTING ON BEHALF OF LENDER HAS MADE ANY REPRESENTATIONS OF FACT TO INDUCE THIS WAIVER OF JURY TRIAL. ASSIGNOR ACKNOWLEDGES THAT 1) IT BARGAINED AT ARM’S LENGTH AND IN GOOD FAITH, WITHOUT DURESS, 2) THAT THE PROVISIONS HEREOF SHALL BE SUBJECT TO NO EXCEPTIONS WHATEVER, 3) THAT IT HAS BEEN REPRESENTED (OR HAS HAD THE OPPORTUNITY TO BE REPRESENTED) IN THE SIGNING OF THIS AGREEMENT AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL, SELECTED OF ITS OWN FREE WILL AND 4) THAT IT HAD THE OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL. ASSIGNOR SPECIFICALLY ACKNOWLEDGES THAT NO PARTY HAS IN ANY WAY AGREED WITH OR REPRESENTED TO ANY OTHER PARTY THAT THE PROVISIONS OF THIS SECTION WILL NOT BE FULLY ENFORCED IN ALL INSTANCES. ASSIGNOR FURTHER ACKNOWLEDGES THAT IT HAS READ AND UNDERSTANDS THE MEANING AND RAMIFICATIONS OF THIS WAIVER PROVISION.

 

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17. ATTORNEYS’ FEES AND OTHER COSTS . Should either party hereto institute any action or proceeding to enforce this Agreement or any provisions hereof or for a declaration of rights under this Agreement, or for arbitration of any dispute arising under this Agreement, the prevailing party in any such action, proceeding or arbitration shall be entitled to receive from the other party all costs and expenses, including without limitation reasonable attorneys’ fees, incurred by the prevailing party in connection with such action, proceeding or arbitration.

18. INDEMNIFICATION . Assignor hereby agrees to indemnify and hold harmless Lender and its directors, officers, employees and agents against and from any and all claims, actions, liabilities, costs and expenses of any kind or nature whatsoever (including reasonable fees and disbursements of counsel) that may be imposed on, incurred by, or asserted against any of them, in any way relating to or arising out of this Agreement, any exercise of remedies hereunder or any other action taken or omitted by them hereunder, except to the extent a court holds in final and nonappealable judgment that such claims, actions, liabilities, costs and expenses directly resulted from the gross negligence or willful misconduct of such indemnified Persons.

19. WAIVERS BY ASSIGNOR . Except as otherwise expressly provided in this Agreement or the Loan Agreement, Assignor waives to the fullest extent allowable by law (i) presentment, demand, and protest and notice of presentment, protest, default, non-payment, maturity, release, compromise, settlement, extension, or renewal of the Loan Documents or the Note under or pursuant to which Assignor may in any way be liable and hereby ratifies and confirms whatever Lender may do in this regard; (ii) notice prior to taking possession or control of Collateral; (iii) the benefit of all valuation, appraisement, and exemption laws; (iv) any right to require Lender to proceed against any other Person or collateral held from any other person; (v) any right to require Lender to pursue any other remedy in Lender’s power whatsoever; or (vi) any defense arising out of any election by Lender to exercise or not exercise any right or remedy it may have against Assignor, any other person or any security held by it, even though such election operates to impair or extinguish any right of reimbursement to subrogation or other right or remedy of Assignor against any other person or any such security.

20. MISCELLANEOUS . Assignor agrees that the following shall govern the interpretation and enforcement of this Agreement:

20.1 Binding on Successors . This Agreement shall be binding upon Assignor, the executors, administrators, successors and assigns of Assignor, and shall inure to the benefit of and be enforceable by Lender, its successors, transferees and assigns.

20.2 Modifications . This Agreement may not be modified, amended or terminated, except by an agreement in writing executed by the parties hereto.

20.3 Section Titles . The section titles contained in this Agreement are merely for convenience and shall be without substantive meaning or content.

20.4 Construction . The word “including” shall have the inclusive meaning represented by the phrase “including without limitation.” Unless the context of this Agreement clearly otherwise requires, the word “or” shall have the meaning represented by the phrase “and/or,” references to the plural include the singular and references to the singular include the plural.

 

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IN WITNESS WHEREOF , this Agreement has been executed and delivered as of the date first set forth above.

 

Lender ”:     Assignor ”:
EAST WEST BANK    

U.S. AUTO PARTS NETWORK, INC.

a Delaware corporation

By: 

 

/s/ Mark H. Lee

   

By: 

 

/s/ Mehran Nia

Name: 

 

Mark H. Lee

   

Name: 

 

Mehran Nia

Title: 

 

FUP

   

Title: 

 

CEO

 

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Exhibit 10.19

COLLATERAL ASSIGNMENT

This COLLATERAL ASSIGNMENT (the “ Agreement ”) is executed as of May 18, 2006 by PARTSBIN, INC ., a Delaware corporation (the Assignor ”) in favor of EAST WEST BANK (the “ Lender ”), with reference to the following:

WHEREAS , U.S. Auto Parts Network, Inc., a Delaware corporation and the sole shareholder of Assignor (the “ Borrower ”) and Lender are entering into a Loan Agreement of even date herewith (the “ Loan Agreement ”; capitalized terms used herein and not expressly defined shall have the meaning ascribed such terms in the Loan Agreement), with respect to the Loan to be made to Borrower by Lender in connection with the proposed acquisition by Assignor of all outstanding shares of capital stock of the Target Companies pursuant to the Acquisition Agreement (the “ Acquisition ”);

WHEREAS , as a condition to the making of the Loan, Lender has required that all assets of Borrower and Assignor be pledged to Lender to secure the Loan including, without limitation, such assets to be acquired by Assignor as a result of the Acquisition; and

WHEREAS, in connection with the making of the Loan, the proceeds of which will be used to consummate the Acquisition, Assignor has agreed to assign to Lender the right, title and interest of Assignor in and to any and all properties of Assignor to the extent a security interest in such properties may not be perfected by the filing of UCC-1 Financing Statements including, without limitation, all internet domain names and any leasehold interests, and Lender has agreed that Lender shall have no right to use, sell or transfer the Collateral (as defined in Section 2.1 below) prior to and upon the occurrence of an Event of Default as set forth in the Loan Agreement.

NOW, THEREFORE , in consideration of the premises and for other good and valuable consideration, the receipt of which is hereby acknowledged, Assignor and Lender hereby covenant and agree as follows:

1. GENERAL DEFINITIONS .

1.1 As used herein, “ UCC ” means the Uniform Commercial Code as in effect from time to time in the State of California.

1.2 All capitalized terms contained in this Agreement, but not specifically defined in this Agreement or the Loan Agreement, shall have the meanings provided by the UCC to the extent the same are used or defined therein.

2. ASSIGNMENT .

2.1 Assignment of Property . Assignor hereby assigns, conveys, and transfers to Lender all of Assignor’s right, title, and interest in, all intangible personal property of

 

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Assignor, whether now owned and existing or hereafter acquired or arising, and wherever located, including without limitation the following (collectively, the “ Collateral ”):

(a) The real and personal property leases described on Schedule 2.1(a) attached hereto and made a part hereof; and

(b) The internet domain names described on Schedule 2.1(b) attached hereto and made a part hereof.

2.2 Assignment Absolute . All rights of Lender hereunder and all obligations of Assignor hereunder, shall be absolute and unconditional irrespective of (i) any lack of validity or enforceability of this Agreement or any other Loan Document, any other agreement with respect to any of the Obligations or any other agreement or instrument relating to any of the foregoing, (ii) any change in the time, manner or place of payment of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or consent to any departure from the Loan Agreement, any other Loan Document or any other agreement or instrument, (iii) any exchange, release, lapse in perfection, or non-perfection of any other collateral, or any release or amendment or waiver of, or consent to or departure from any guarantee, for all or any of the Obligations, or (iv) any other circumstance which might otherwise constitute a defense available to, or discharge of Assignor, and/or any other obligor in respect of the Obligations, or in respect of this Agreement.

2.3 Use of Collateral . Prior to an Event of Default under any of the Loan Documents, including this Agreement, there shall be no restriction on Assignor’s ability and right to use the Collateral, in the ordinary course of Assignor’s business, consistent with past practice. Lender acknowledges and agrees that Lender shall have no right to use, sell or transfer the Collateral prior to an Event of Default as set forth in the Loan Agreement.

3. REPRESENTATIONS AND WARRANTIES . Except as set forth on the Schedules of Exceptions attached hereto, Assignor represents and warrants to Lender that:

3.1 Authority . Assignor has full power and authority to execute, deliver, and perform its obligations in accordance with the terms of this Agreement, without the consent or approval of any other person except as may have been specifically disclosed to Lender in writing.

3.2 Absence of Other Encumbrances; Legal Actions and Claims . Except as set forth on Schedule 3.2 hereto (a) the Collateral is free and clear of all liens and adverse claims other than the Security Interest, which shall be a first lien on the Collateral, and (b) there are no actions, suits or proceedings at law or in equity now pending or, to the best of Assignor’s knowledge, threatened against or affecting the Collateral in any material respect.

3.3 Information Regarding Names . Schedule 3.3 attached hereto sets forth Assignor’s exact legal name, and a true and complete list of all prior or current names and trade names used by the Assignor.

 

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3.4 No Previous Assignment . Assignor has not previously assigned, transferred or conveyed any of its interest in the Collateral to any party other than Lender.

3.5 Location of Collateral and Principal Place of Business . All Collateral and all related books and records related to the Collateral are located solely at Assignor’s principal place of business, at 92 Youngs Road, Trenton, New Jersey 08618, except as set forth on Schedule 3.5 attached hereto.

4. COVENANTS AND AGREEMENTS OF ASSIGNOR . Assignor covenants and agrees as follows:

4.1 Records and Inspection . Assignor shall keep and cause to be kept accurate and complete records of the Collateral and its proceeds at its principal place of business. Upon ten (10) days’ prior notice to Assignor (or two (2) days’ prior notice if an Event of Default has occurred or is threatened), Lender shall have the right from time to time, during normal business hours, to examine such books, records and accounts at the office of Assignor, or other Person maintaining such records and to make copies or extracts thereof as Lender shall desire.

4.2 Restrictions on Removal of Collateral . Assignor shall not remove the Collateral or any related books and records from its principal place of business except in the ordinary course of Assignor’s business, consistent with past practice.

4.3 Restriction on Changing State of Organization or Chief Executive Office . Assignor shall not change the state of its incorporation, or convert into a different type of entity. Assignor shall not change its chief executive office unless 30 days prior written notice has been provided to Lender.

4.4 Duty of Care . Assignor shall be responsible for preserving and maintaining the Collateral and Lender shall have no duty of care with respect to the Collateral, except that Lender shall have an obligation to exercise reasonable care with respect to Collateral in its possession; provided that (i) Lender shall be deemed to have exercised reasonable care if the Collateral in its possession is accorded treatment substantially comparable to that which the Lender accords its own property or treatment substantially in accordance with actions requested by Assignor in writing, although Lender shall not be obligated to comply with any such requests and (ii) Lender shall not be obligated to take steps to preserve rights against any other parties or property.

4.7 Taxes . Except for those presently being or to be contested by Assignor in good faith in the ordinary course of business, Assignor shall pay when due all Taxes upon the Collateral.

4.8 Further Assurances and Authority of Lender . Assignor shall from time to time execute, deliver, file and record all such further agreements, instruments, financing statements, third party notices and other documents (collectively, “ Supplemental Documentation ”) as may be requested by Lender to preserve Lender’s rights and interests in the Collateral, or otherwise to carry out the intent of this Agreement. If any amount payable under

 

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or in connection with any of the Collateral shall be or become evidenced by any Instrument, Certificated Security or Chattel Paper, such Instrument, Certificated Security or Chattel Paper shall be immediately delivered to the Lender, duly indorsed in a manner satisfactory to Lender.

5. RIGHT TO SATISFY OTHER CLAIMS AND TAXES . Except to the extent Assignor is reasonably contesting any of the following Taxes or claims, if Assignor fails to pay any Taxes when due, or fails to pay any claims secured by any lien against any Collateral when due, Assignor shall so advise Lender in writing and Lender may, without waiving or releasing any obligations of Assignor or any Event of Default, in its sole discretion (and without any obligation to do so), make such payment or any part thereof or obtain such discharge and take any other action with respect thereto that Lender deems advisable.

6. EVENTS OF DEFAULT . The occurrence or existence of an Event of Default under any Loan Document, Revolving Loan Documents, or Term Loan Documents shall constitute an Event of Default by the Assignor.

7. RIGHTS AND REMEDIES OF LENDER UPON EVENT OF DEFAULT .

7.1 Effect of Event of Default . If any Event of Default described in Section 7.1 of the Loan Agreement shall occur, Lender may declare the Obligations secured by this Agreement to be due and payable, whereupon such Obligations shall become immediately due and payable, all without notice of any kind. Lender shall promptly advise Assignor of any such declaration, but failure to do so shall not impair the effect of such declaration. Upon the occurrence of an Event of Default, Assignor’s permitted use of the Collateral pursuant to Section 2.3 above shall immediately terminate, and Lender may use, sell, lease, transfer or otherwise dispose of the Collateral as Lender shall determine in its sole and absolute discretion. Assignor hereby irrevocably makes, constitutes and appoints Lender and all persons designated by Lender true and lawful attorney (and agent-in-fact) upon and after the occurrence of an Event of Default for the purposes set forth in this Agreement.

7.2 Application of Proceeds . Any proceeds received by Lender in respect of any sale of collection from, or other realization upon all or any part of the Collateral following the occurrence of an Event of Default may, in the discretion of Lender, be held by Lender as collateral for, and/or then or at any time thereafter applied by Lender to the payment of the Obligations, or otherwise, as Lender may determine in its sole and absolute discretion. Payments received from any third party on account of disposition of Collateral shall not reduce the Obligations until paid in cash to Lender. The application of proceeds by Lender shall be without prejudice to Lender’s rights as against Assignor or other persons with respect to any Obligations which may remain unpaid. Any such deficiency shall be paid forthwith to Lender by the Assignor.

8. ASSIGNMENT BY LENDER . Assignor agrees that Lender may assign or otherwise transfer this Agreement and, subject to the terms hereof, may deliver all or any of the Collateral to the transferee(s), who shall thereupon become vested with all the powers and rights in respect thereto given to Lender herein transferred, and Lender shall thereafter be fully discharged from any liability or responsibility with respect thereto, all without prejudice to the

 

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retention by Lender of all rights and powers hereby given with respect to instruments, rights or property not so transferred.

9. EXPENSES, INCLUDING ATTORNEY’S FEES . Assignor agrees to be bound by and comply in all respects with the terms of Section 4.15 of the Loan Agreement, which are hereby incorporated in this Agreement.

10. REMEDIES NOT EXCLUSIVE . No right or remedy hereunder is exclusive of any other right or remedy. Each and every right and remedy shall be cumulative and shall be in addition to and without prejudice to every other remedy given hereunder, under any other agreement between or among Assignor, Merger Sub and Lender or now or hereafter existing at law or in equity, and may be exercised from time to time as often as deemed expedient, separately or concurrently. The giving, taking or enforcement of or execution against any other or additional security, collateral, or guaranty for the payment of the Obligations shall not operate to prejudice, waive or affect any rights, powers or remedies hereunder, nor shall Lender be required to first look to, enforce, exhaust or execute against such other or additional security, or guarantees prior to so acting against the Collateral.

11. WAIVERS . The failure or delay of Lender to insist in any instances upon the performance of any of the terms, covenants or conditions of this Agreement or the Loan Documents, or to exercise any right, remedy or privilege herein or therein conferred, shall not impair or be construed as thereafter waiving any such covenants, remedies, conditions or provisions, but every such term, condition and covenant shall continue and remain in full force and effect; nor shall any waiver of an Event of Default suspend, waive or affect any other Event of Default, whether the same is prior or subsequent thereto and whether of the same or of a different type.

12. SEVERABILITY . Wherever possible, each provision of this Agreement shall be interpreted in such a manner as to be effective. If any provision of this Agreement shall be held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Agreement.

13. TERMINATION . Upon payment in full and performance of all Obligations owed by Assignor to Lender, this Agreement shall be terminated; otherwise it shall remain in full force and effect.

14. NOTICE . All notices, demands and communications hereunder shall be given and deemed received or delivered in accordance with the provisions of Section 8.7 of the Loan Agreement and such notices, demands and communications to Assignor shall be given or made to Assignor at Borrower’s address set forth in such Section 8.7.

15. GOVERNING LAW; JURISDICTION . THE VALIDITY OF THIS AGREEMENT, ITS CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT, AND THE RIGHTS OF THE PARTIES HERETO SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS

 

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OF THE STATE OF CALIFORNIA, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.

ASSIGNOR AGREES TO SUBMIT TO EXCLUSIVE PERSONAL JURISDICTION IN THE STATE OF CALIFORNIA IN ANY ACTION, CASE OR PROCEEDING ARISING OUT OF THIS AGREEMENT AND, IN FURTHERANCE OF SUCH AGREEMENT, ASSIGNOR HEREBY AGREES AND CONSENTS THAT WITHOUT LIMITING OTHER METHODS OF OBTAINING JURISDICTION, PERSONAL JURISDICTION OVER ASSIGNOR IN ANY SUCH ACTION, CASE OR PROCEEDING MAY BE OBTAINED WITHIN OR WITHOUT THE JURISDICTION OF ANY COURT LOCATED IN CALIFORNIA AND THAT ANY PROCESS OR NOTICE OF MOTION OR OTHER APPLICATION TO ANY SUCH COURT IN CONNECTION WITH ANY SUCH ACTION, CASE OR PROCEEDING MAY BE SERVED UPON ASSIGNOR BY REGISTERED OR CERTIFIED MAIL TO OR BY PERSONAL SERVICE AT THE LAST KNOWN ADDRESS OF ASSIGNOR, WHETHER SUCH ADDRESS BE WITHIN OR WITHOUT THE JURISDICTION OF ANY SUCH COURT. ASSIGNOR ALSO AGREES THAT THE EXCLUSIVE VENUE OF ANY LITIGATION ARISING IN CONNECTION WITH THE DEBT OR IN RESPECT OF ANY OF THE OBLIGATIONS OF ASSIGNOR UNDER THIS AGREEMENT SHALL BE IN LOS ANGELES COUNTY, CALIFORNIA. NOTWITHSTANDING THE FOREGOING PROVISIONS, HOWEVER, LENDER MAY BRING ANY ACTION OR OTHER PROCEEDING FOR ANY PROVISIONAL REMEDIES (INCLUDING, WITHOUT LIMITATION, TEMPORARY RESTRAINING ORDER, INJUNCTIVE RELIEF, WRIT OF ATTACHMENT OR RECEIVERSHIP) AND/OR ANY ACTION OR OTHER PROCEEDING TO FORECLOSE UPON LENDER’S SECURITY INTEREST IN ANY OF THE COLLATERAL, IN ANY COURT HAVING SUBJECT MATTER AND PERSONAL JURISDICTION, AND WITH RESPECT TO ANY SUCH ACTION OR OTHER PROCEEDING, ASSIGNOR HEREBY AGREES TO SUBMIT TO PERSONAL JURISDICTION IN SUCH JURISDICTION AND TO VENUE IN ANY SUCH COURT.

16. WAIVER OF JURY TRIAL . ASSIGNOR HEREBY WAIVES THE RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, OR RELATED TO, THE SUBJECT MATTER OF THIS AGREEMENT. ASSIGNOR SHALL NOT SEEK TO CONSOLIDATE ANY SUCH ACTION IN WHICH A JURY TRIAL HAS BEEN WAIVED, WITH ANY OTHER ACTION IN WHICH A JURY CANNOT OR HAS NOT BEEN WAIVED. THIS WAIVER IS KNOWINGLY, INTENTIONALLY AND VOLUNTARILY MADE BY ASSIGNOR, AND ASSIGNOR ACKNOWLEDGES THAT NEITHER LENDER NOR ANY PERSON ACTING ON BEHALF OF LENDER HAS MADE ANY REPRESENTATIONS OF FACT TO INDUCE THIS WAIVER OF JURY TRIAL. ASSIGNOR ACKNOWLEDGES THAT 1) IT BARGAINED AT ARM’S LENGTH AND IN GOOD FAITH, WITHOUT DURESS, 2) THAT THE PROVISIONS HEREOF SHALL BE SUBJECT TO NO EXCEPTIONS WHATEVER, 3) THAT IT HAS BEEN REPRESENTED (OR HAS HAD THE OPPORTUNITY TO BE REPRESENTED) IN THE SIGNING OF THIS AGREEMENT AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL, SELECTED OF ITS OWN FREE WILL AND 4) THAT IT HAD THE OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL. ASSIGNOR SPECIFICALLY ACKNOWLEDGES THAT NO PARTY HAS IN ANY WAY AGREED

 

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WITH OR REPRESENTED TO ANY OTHER PARTY THAT THE PROVISIONS OF THIS SECTION WILL NOT BE FULLY ENFORCED IN ALL INSTANCES. ASSIGNOR FURTHER ACKNOWLEDGES THAT IT HAS READ AND UNDERSTANDS THE MEANING AND RAMIFICATIONS OF THIS WAIVER PROVISION.

17. ATTORNEYS’ FEES AND OTHER COSTS . Should either party hereto institute any action or proceeding to enforce this Agreement or any provisions hereof or for a declaration of rights under this Agreement, or for arbitration of any dispute arising under this Agreement, the prevailing party in any such action, proceeding or arbitration shall be entitled to receive from the other party all costs and expenses, including without limitation reasonable attorneys’ fees, incurred by the prevailing party in connection with such action, proceeding or arbitration.

18. INDEMNIFICATION . Assignor hereby agrees to indemnify and hold harmless Lender and its directors, officers, employees and agents against and from any and all claims, actions, liabilities, costs and expenses of any kind or nature whatsoever (including reasonable fees and disbursements of counsel) that may be imposed on, incurred by, or asserted against any of them, in any way relating to or arising out of this Agreement, any exercise of remedies hereunder or any other action taken or omitted by them hereunder, except to the extent a court holds in final and nonappealable judgment that such claims, actions, liabilities, costs and expenses directly resulted from the gross negligence or willful misconduct of such indemnified Persons.

19. WAIVERS BY ASSIGNOR . Except as otherwise expressly provided in this Agreement or the Loan Agreement, Assignor waives to the fullest extent allowable by law (i) presentment, demand, and protest and notice of presentment, protest, default, non-payment, maturity, release, compromise, settlement, extension, or renewal of the Loan Documents or the Note under or pursuant to which Assignor may in any way be liable and hereby ratifies and confirms whatever Lender may do in this regard; (ii) notice prior to taking possession or control of Collateral; (iii) the benefit of all valuation, appraisement, and exemption laws; (iv) any right to require Lender to proceed against any other Person or collateral held from any other person; (v) any right to require Lender to pursue any other remedy in Lender’s power whatsoever; or (vi) any defense arising out of any election by Lender to exercise or not exercise any right or remedy it may have against Assignor, any other person or any security held by it, even though such election operates to impair or extinguish any right of reimbursement to subrogation or other right or remedy of Assignor against any other person or any such security.

20. MISCELLANEOUS . Assignor agrees that the following shall govern the interpretation and enforcement of this Agreement:

20.1 Binding on Successors . This Agreement shall be binding upon Assignor, the executors, administrators, successors and assigns of Assignor, and shall inure to the benefit of and be enforceable by Lender, its successors, transferees and assigns.

20.2 Modifications . This Agreement may not be modified, amended or terminated, except by an agreement in writing executed by the parties hereto.

 

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20.3 Section Titles . The section titles contained in this Agreement are merely for convenience and shall be without substantive meaning or content.

20.4 Construction . The word “including” shall have the inclusive meaning represented by the phrase “including without limitation.” Unless the context of this Agreement clearly otherwise requires, the word “or” shall have the meaning represented by the phrase “and/or,” references to the plural include the singular and references to the singular include the plural.

IN WITNESS WHEREOF , this Agreement has been executed and delivered as of the date first set forth above.

 

Lender ”:    

Assignor ”:

EAST WEST BANK     PARTSBIN, INC.
    a Delaware corporation
By:   /s/ Mark H. Lee     By:   /s/ Mehran Nia
Name:   Mark H. Lee     Name:   Mehran Nia
Title:   FUP     Title:   CEO

 

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Exhibit 10.20

SECURITY AGREEMENT

This SECURITY AGREEMENT (the “ Agreement ”) is executed as of May 18, 2006 by U.S. AUTO PARTS NETWORK, INC ., a Delaware corporation (the Debtor ”) in favor of EAST WEST BANK (the “ Secured Party ”), with reference to the following:

WHEREAS, Debtor and Secured Party have heretofore entered into (a) that certain Business Loan Agreement, dated as of February 24, 2006, with respect to a revolving loan facility (Loan Number: 2001669) in the principal amount of $5,000,000.00; and (b) that certain Business Loan Agreement, dated as of February 24, 2006, with respect to a term loan (Loan Number: 3000071) in the principal amount of $10,000,000.00;

WHEREAS , concurrently herewith, Debtor and Secured Party are entering into a Loan Agreement of even date herewith (the “ Loan Agreement ”; capitalized terms used herein and not expressly defined shall have the meaning ascribed such terms in the Loan Agreement), with respect to the Loan to be made by Secured Party in connection with the proposed acquisition by Debtor of all outstanding shares of capital stock of the Target Companies pursuant to the Acquisition Agreement; and

WHEREAS , concurrently herewith, Debtor and Secured Party are executing an Amendment to Existing Agreements which provides, among other matters, that the security agreement previously executed by Debtor and Secured Party in connection with the revolving loan No: 2001669 (the “ Revolving Loan ”) and the term loan No: 3000071 (the “ Term Loan ”) shall be amended and restated by this Agreement, as more specifically set forth in such Amendment to Existing Agreements.

NOW, THEREFORE , in consideration of the premises and for other good and valuable consideration, the receipt of which is hereby acknowledged, Debtor and Secured Party hereby covenant and agree as follows:

1. GENERAL DEFINITIONS .

1.1 As used herein, “ UCC ” means the Uniform Commercial Code as in effect from time to time in the State of California.

1.2 All capitalized terms contained in this Agreement, but not specifically defined in this Agreement or the Loan Agreement, shall have the meanings provided by the UCC to the extent the same are used or defined therein.

2. OBLIGATIONS SECURED . The Collateral (as defined in Section 3 below) shall secure any and all Obligations of Debtor to Secured Party.

 

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3. SECURITY INTEREST .

3.1 Grant of Security Interest . To secure the punctual payment and performance of the Obligations when due whether at the stated maturity, by acceleration or otherwise, Debtor hereby grants to Secured Party a first priority security interest in and to, and a lien upon (the “ Security Interest ”), all right, title and interest of Debtor in and to the property listed on Exhibit “A ” hereto, whether now owned and existing or hereafter acquired or arising, and wherever located (collectively, the “ Collateral ”); provided , however , that with respect to the Collateral identified on Schedule 4.2 hereto, the security interest granted to Secured Party hereunder is subject to the liens in favor of third parties as set forth on Schedule 4.2 hereto. The grant of the security interest in this Section 3.1 to secure the Revolving Loan shall be effective as of the date the grant of security interest securing the Revolving Loan was initially made. The grant of security interest in this Section 3.1 to secure the Term Loan shall be effective as of the date the grant of security interest securing the Term Loan was initially made.

3.2 Security Interest Absolute . All rights of Secured Party hereunder, the Security Interest, and all obligations of Debtor hereunder, shall be absolute and unconditional irrespective of (i) any lack of validity or enforceability of the Loan Agreement, any other Loan Document, any other agreement with respect to any of the Obligations or any other agreement or instrument relating to any of the foregoing, (ii) any change in the time, manner or place of payment of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or consent to any departure from the Loan Agreement, any other Loan Document or any other agreement or instrument, (iii) any exchange, release, lapse in perfection, or non-perfection of any other collateral, or any release or amendment or waiver of, or consent to or departure from any guarantee, for all or any of the Obligations, or (iv) any other circumstance which might otherwise constitute a defense available to, or discharge of Debtor, and/or any other obligor in respect of the Obligations, or in respect of this Agreement.

4. REPRESENTATIONS AND WARRANTIES . Except as set forth on the Schedules of Exceptions attached hereto, Debtor represents and warrants to Secured Party that:

4.1 Authority . Debtor has full power and authority to grant security interests in the Collateral and to execute, deliver, and perform its obligations in accordance with the terms of this Agreement, without the consent or approval of any other person except as may have been specifically disclosed to Secured Party in writing.

4.2 Absence of Other Encumbrances; Legal Actions and Claims . Except as set forth on Schedule 4.2 hereto, (a) the Collateral is free and clear of all liens and adverse claims other than the Security Interest, which shall be a first lien on the Collateral, and (b) there are no actions, suits or proceedings at law or in equity now pending or, to the best of Debtor’s knowledge, threatened against or affecting the Collateral.

4.3 Information Regarding Names . Schedule 4.3 attached hereto sets forth Debtor’s exact legal name, and a true and complete list of all prior or current names and trade names used by the Debtor.

 

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4.4 Location of Collateral and Principal Place of Business . All Collateral and all related books and records related to the Collateral are located solely at Debtor’s principal place of business, at 17150 S. Margay Avenue, Carson, California 90746, except as set forth on Schedule 4.4 attached hereto.

4.5 Jurisdiction of Incorporation . Debtor has disclosed to the Secured Party complete and correct information regarding Debtor’s jurisdiction of incorporation and its identification number in the records of such jurisdiction.

5. COVENANTS AND AGREEMENTS OF DEBTOR . Debtor covenants and agrees as follows:

5.1 Records and Inspection . Debtor shall keep and cause to be kept accurate and complete records of the Collateral and its proceeds at its principal place of business. Upon ten (10) days’ prior notice to Debtor (or two (2) days’ prior notice if an Event of Default has occurred or is threatened), Secured Party shall have the right from time to time, during normal business hours, to examine such books, records and accounts at the office of Debtor, or other Person maintaining such records and to make copies or extracts thereof as Secured Party shall desire.

5.2 Restrictions on Removal of Collateral . Debtor shall not remove Collateral or any related books and records from its principal place of business except in the ordinary course of Debtor’s business, consistent with past practice.

5.3 Restriction on Changing State of Organization or Chief Executive Office . Debtor shall not change the state of its incorporation, or convert into a different type of entity. Debtor shall not change its chief executive office unless 30 days prior written notice has been provided to Secured Party.

5.4 Information Regarding Names . At least 30 days before changing its name on its organizational documents, or adopting a new trade name, Debtor shall give written notice to Secured Party of any new name or trade name of Debtor.

5.5 Duty of Care . Debtor shall be responsible for preserving and maintaining the Collateral and Secured Party shall have no duty of care with respect to the Collateral, except that Secured Party shall have an obligation to exercise reasonable care with respect to Collateral in its possession; provided that (i) Secured Party shall be deemed to have exercised reasonable care if the Collateral in its possession is accorded treatment substantially comparable to that which the Secured Party accords its own property or treatment substantially in accordance with actions requested by Debtor in writing, although Secured Party shall not be obligated to comply with any such requests and (ii) Secured Party shall not be obligated to take steps to preserve rights against any other parties or property.

5.6 Taxes . Except for those presently being or to be contested by Debtor in good faith in the ordinary course of business, Debtor shall pay when due all Taxes upon the Collateral.

 

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5.7 Further Assurances and Authority of Secured Party . Debtor shall from time to time execute, deliver, file and record all such further agreements, instruments, financing statements, notices and other documents (collectively, “ Supplemental Documentation ”) as may be requested by Secured Party to perfect or preserve the Security Interest, to enable Secured Party to notify any third parties of the existence of the Security Interest, or otherwise to carry out the intent of this Agreement. Debtor authorizes Secured Party to file financing statements where desirable in Secured Party’s judgment to perfect the Security Interest without the signature of Debtor. If any amount payable under or in connection with any of the Collateral shall be or become evidenced by any Instrument, Certificated Security or Chattel Paper, such Instrument, Certificated Security or Chattel Paper shall be immediately delivered to the Secured Party, duly indorsed in a manner satisfactory to Secured Party, to be held as Collateral pursuant to this Agreement.

5.8 Insurance . Debtor agrees to be bound by and comply in all respects with the terms of Sections 4.16 and 4.17 of the Loan Agreement, which are hereby incorporated in this Agreement.

6. RIGHT TO SATISFY OTHER CLAIMS AND TAXES . Except to the extent Debtor is reasonably contesting any of the following Taxes or claims, if Debtor fails to pay any Taxes when due, or fails to pay any claims secured by any lien against any Collateral when due, Debtor shall so advise Secured Party in writing and Secured Party may, without waiving or releasing any obligations of Debtor or any Event of Default, in its sole discretion (and without any obligation to do so), make such payment or any part thereof or obtain such discharge and take any other action with respect thereto that Secured Party deems advisable.

7. RELEASE OF COLLATERAL . Concurrently with any sale of Collateral permitted by the Loan Documents, the Security Interest shall automatically be released from the property so disposed of; provided , however , that the Security Interest shall continue in the proceeds thereof until it is otherwise terminated as set forth herein.

8. EVENTS OF DEFAULT . The occurrence or existence of an Event of Default under any Loan Document, Revolving Loan Documents, or Term Loan Documents shall constitute an Event of Default by the Debtor.

9. RIGHTS AND REMEDIES OF SECURED PARTY UPON EVENT OF DEFAULT .

9.1 Effect of Event of Default Remedies . If any Event of Default described in 7.1 of the Loan Agreement shall occur, Secured Party may declare the Obligations secured by this Agreement to be due and payable, whereupon such Obligations shall become immediately due and payable, all without notice of any kind. Secured Party shall promptly advise Debtor of any such declaration, but failure to do so shall not impair the effect of such declaration. In addition, upon the occurrence of an Event of Default, Secured Party may exercise the rights, powers and remedies set forth below.

(a) In addition to all of its other rights, powers and remedies under this Agreement, the Loan Documents, the Revolving Loan Documents, and the Term Loan

 

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Documents, and other applicable law, Secured Party shall have all of the rights, powers and remedies of a secured party under the Uniform Commercial Code of the state in which such rights, powers and remedies are asserted.

(b) Secured Party shall have the right: (i) to enter upon the premises of Debtor or any other place or places where Collateral is located through self-help and without judicial process or giving Debtor notice; (ii) to prepare, assemble, or process Collateral for sale, lease, or other disposition; (iii) to remove Collateral to the premises of Secured Party or any agent of Secured Party, for such time as Secured Party may desire, in order to collect or dispose of Collateral; and (iv) to require Debtor to assemble Collateral and make it available to Secured Party at a place to be designated by Secured Party.

(c) Until Secured Party is able to effect a sale, lease, or other disposition of Collateral or any part thereof, Secured Party shall have the right to use, process or operate Collateral or any part thereof to the extent that it deems appropriate for the purpose of preserving Collateral or its value or for any other purpose deemed appropriate by Secured Party.

(d) Secured Party shall have the right to sell, lease, license, or otherwise dispose of all or any Collateral in its then existing condition, or after any further assembly, manufacturing, or processing thereof, at public or private sale or sales, in lots or in bulk, for cash or on credit, all as Secured Party, in its sole discretion, may deem advisable. Without limitation, Secured Party may specifically disclaim any warranties of title and the like. Secured Party shall not be obligated to clean up or otherwise prepare the Collateral for sale. Such sales may be adjourned and continued from time to time with or without notice. Secured Party shall have the right to conduct such sales on Debtor’s premises or elsewhere and shall have the right to use Debtor’s premises without charge for such sales (or preparation for sales) for such time or times as Secured Party deems necessary or advisable. Upon an Event of Default, Secured Party is hereby granted a license or other right to use, without charge, Debtor’s labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, and advertising matter, or any property of a similar nature as it pertains to Collateral, in advertising for sale or lease or the disposition of any Collateral. Secured Party may purchase all or any part of the Collateral at public or, if permitted by law, private sale, and in lieu of actual payment of such purchase price may set off the amount of such Obligations whether or not such Obligations are matured. Debtor agrees that any sale of Collateral conducted by Secured Party in accordance with the foregoing provisions of this Section shall be deemed to be a commercially reasonable sale under the UCC. Secured Party may comply with any applicable laws and regulations in connection with any exercise of remedies hereunder and such compliance shall not be considered to adversely affect the commercial reasonableness of such exercise of remedies.

9.2 Application of Proceeds . Any proceeds received by Secured Party in respect of any sale of collection from, or other realization upon all or any part of the Collateral following the occurrence of an Event of Default may, in the discretion of Secured Party, be held by Secured Party as collateral for, and/or then or at any time thereafter applied by Secured Party as follows: (i) first, to pay all costs, expenses and charges of every kind (including attorneys’ fees and costs) for pursuing, searching, protecting, taking, removing, storing, safekeeping, caring, preparing for sale, advertising, selling and delivering the Collateral and otherwise enforcing this Agreement and the Loan Documents; (ii) second, to pay the Obligations in order

 

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determined by Secured Party in its sole discretion; and (iii) third, to pay the remaining funds, if any, after payment of all the Obligations in full, to Debtor or to whomever may be lawfully entitled to receive such surplus. Payments received from any third party on account of disposition of Collateral shall not reduce the Obligations until paid in cash to Secured Party. The application of proceeds by Secured Party shall be without prejudice to Secured Party’s rights as against Debtor or other persons with respect to any Obligations which may remain unpaid. Any such deficiency shall be paid forthwith to Secured Party by the Debtor.

9.3 Notice . Any notice required to be given by Secured Party of a sale, lease, or other disposition of Collateral, or any other intended action by Secured Party, which is sent pursuant to Section 16 hereof at least ten (10) days prior to such proposed action, or such longer period as shall be specified by applicable law, shall constitute commercially reasonable and fair notice thereof to Debtor.

9.4 Other Rights Upon Event of Default . Debtor hereby irrevocably makes, constitutes and appoints Secured Party and all persons designated by Secured Party true and lawful attorney (and agent-in-fact) upon and after the occurrence of an Event of Default for the purposes set forth in the following sentences of this Section. Upon and after the occurrence of an Event of Default, Secured Party or its agent may, without notice to Debtor and at such time or times thereafter as Secured Party or said agent in its sole discretion may determine, in Debtor’s or Secured Party’s name: (i) give notice to account debtors and other obligors and demand payment of Accounts or other obligations included in the Collateral; (ii) enforce payment and exercise all of Debtor’s rights and remedies with respect to the collection of Accounts, any Special Collateral and any other obligations by legal proceedings or otherwise; (iii) settle, adjust, compromise, discharge, release, extend or renew Accounts and other obligations; (iv) prepare, file and sign Debtor’s name on any proof of claim or similar document in any insolvency or similar case against any Account debtor or any person indebted to Debtor; (v) endorse or sign the name of Debtor upon any checks, drafts, chattel paper, document, instrument, or similar document or agreement relating to Accounts or Special Collateral; (vi) use Debtor’s stationery and sign the name of Debtor to verifications of Accounts and other obligations to Account debtors and other obligor; (vii) use the information recorded on or contained in any data processing equipment and computer hardware and software to which Debtor has access relating to Accounts, or Special Collateral; (viii) open any lock box; (ix) transfer into the name of Secured Party or the name of Secured Party’s agent or nominee any of the Collateral; (x) make, settle and adjust claims under policies of insurance, endorse or sign the name of Debtor on any check or other item of payment for the proceeds of such policies of insurance, and make all determinations and decisions with respect thereto and (xi) receive and direct the disposition of any proceeds of any Collateral.

10. EXPENSES, INCLUDING ATTORNEY’S FEES . Debtor agrees to be bound by and comply in all respects with the terms of Section 4.15 of the Loan Agreement, which are hereby incorporated in this Agreement.

11. ASSIGNMENT BY SECURED PARTY . Debtor agrees that Secured Party may assign or otherwise transfer this Agreement and, subject to the terms hereof, may deliver all or any of the Collateral to the transferee(s), who shall thereupon become vested with all the powers and rights in respect thereto given to Secured Party herein transferred, and Secured Party shall thereafter be fully discharged from any liability or responsibility with respect thereto, all without

 

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prejudice to the retention by Secured Party of all rights and powers hereby given with respect to instruments, rights or property not so transferred.

12. REMEDIES NOT EXCLUSIVE; FORECLOSURES . No right or remedy hereunder is exclusive of any other right or remedy. Each and every right and remedy shall be cumulative and shall be in addition to and without prejudice to every other remedy given hereunder, under any other agreement between or among Debtor, Merger Sub and Secured Party or now or hereafter existing at law or in equity, and may be exercised from time to time as often as deemed expedient, separately or concurrently. The giving, taking or enforcement of or execution against any other or additional security, collateral, or guaranty for the payment of the Obligations shall not operate to prejudice, waive or affect any rights, powers or remedies hereunder, nor shall Secured Party be required to first look to, enforce, exhaust or execute against such other or additional security, or guarantees prior to so acting against the Collateral. Secured Party may foreclose on or execute against the items of Collateral in such order as Secured Party may, in its sole and absolute discretion, determine.

13. WAIVERS . The failure or delay of Secured Party to insist in any instances upon the performance of any of the terms, covenants or conditions of this Agreement or the Loan Documents, or to exercise any right, remedy or privilege herein or therein conferred, shall not impair or be construed as thereafter waiving any such covenants, remedies, conditions or provisions, but every such term, condition and covenant shall continue and remain in full force and effect; nor shall any waiver of an Event of Default suspend, waive or affect any other Event of Default, whether the same is prior or subsequent thereto and whether of the same or of a different type.

14. SEVERABILITY . Wherever possible, each provision of this Agreement shall be interpreted in such a manner as to be effective. If any provision of this Agreement shall be held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Agreement.

15. TERMINATION . Upon payment in full and performance of all Obligations owed by Debtor to Secured Party, this Agreement shall be terminated; otherwise it shall remain in full force and effect.

16. NOTICE . All notices, demands and communications hereunder shall be given and deemed received or delivered in accordance with the provisions of Section 8.7 of the Loan Agreement.

17. GOVERNING LAW; JURISDICTION . TO THE EXTENT APPLICABLE, THIS AGREEMENT SHALL BE GOVERNED BY THE UNIFORM COMMERCIAL CODE OF THE STATE OF CALIFORNIA (OR TO THE EXTENT APPLICABLE TO THE ATTACHMENT, PERFECTION, PRIORITY OR ENFORCEMENT OF THE SECURITY INTERESTS IN ANY COLLATERAL, THE UNIFORM COMMERCIAL CODE OF ANY OTHER STATE). WITH RESPECT TO OTHER MATTERS NOT COVERED BY THE UNIFORM COMMERCIAL CODE, THIS AGREEMENT SHALL BE DETERMINED

 

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UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF CALIFORNIA.

DEBTOR AGREES TO SUBMIT TO EXCLUSIVE PERSONAL JURISDICTION IN THE STATE OF CALIFORNIA IN ANY ACTION, CASE OR PROCEEDING ARISING OUT OF THIS AGREEMENT AND, IN FURTHERANCE OF SUCH AGREEMENT, DEBTOR HEREBY AGREES AND CONSENTS THAT WITHOUT LIMITING OTHER METHODS OF OBTAINING JURISDICTION, PERSONAL JURISDICTION OVER DEBTOR IN ANY SUCH ACTION, CASE OR PROCEEDING MAY BE OBTAINED WITHIN OR WITHOUT THE JURISDICTION OF ANY COURT LOCATED IN CALIFORNIA AND THAT ANY PROCESS OR NOTICE OF MOTION OR OTHER APPLICATION TO ANY SUCH COURT IN CONNECTION WITH ANY SUCH ACTION, CASE OR PROCEEDING MAY BE SERVED UPON DEBTOR BY REGISTERED OR CERTIFIED MAIL TO OR BY PERSONAL SERVICE AT THE LAST KNOWN ADDRESS OF DEBTOR, WHETHER SUCH ADDRESS BE WITHIN OR WITHOUT THE JURISDICTION OF ANY SUCH COURT. DEBTOR ALSO AGREES THAT THE EXCLUSIVE VENUE OF ANY LITIGATION ARISING IN CONNECTION WITH THE DEBT OR IN RESPECT OF ANY OF THE OBLIGATIONS OF DEBTOR UNDER THIS AGREEMENT SHALL BE IN LOS ANGELES COUNTY, CALIFORNIA. NOTWITHSTANDING THE FOREGOING PROVISIONS, HOWEVER, SECURED PARTY MAY BRING ANY ACTION OR OTHER PROCEEDING FOR ANY PROVISIONAL REMEDIES (INCLUDING, WITHOUT LIMITATION, TEMPORARY RESTRAINING ORDER, INJUNCTIVE RELIEF, WRIT OF ATTACHMENT OR RECEIVERSHIP) AND/OR ANY ACTION OR OTHER PROCEEDING TO FORECLOSE UPON SECURED PARTY’S SECURITY INTEREST IN ANY OF THE COLLATERAL, IN ANY COURT HAVING SUBJECT MATTER AND PERSONAL JURISDICTION, AND WITH RESPECT TO ANY SUCH ACTION OR OTHER PROCEEDING, DEBTOR HEREBY AGREES TO SUBMIT TO PERSONAL JURISDICTION IN SUCH JURISDICTION AND TO VENUE IN ANY SUCH COURT.

18. WAIVER OF JURY TRIAL . DEBTOR HEREBY WAIVES THE RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, OR RELATED TO, THE SUBJECT MATTER OF THIS AGREEMENT. DEBTOR SHALL NOT SEEK TO CONSOLIDATE ANY SUCH ACTION IN WHICH A JURY TRIAL HAS BEEN WAIVED, WITH ANY OTHER ACTION IN WHICH A JURY CANNOT OR HAS NOT BEEN WAIVED. THIS WAIVER IS KNOWINGLY, INTENTIONALLY AND VOLUNTARILY MADE BY DEBTOR, AND DEBTOR ACKNOWLEDGES THAT NEITHER SECURED PARTY NOR ANY PERSON ACTING ON BEHALF OF SECURED PARTY HAS MADE ANY REPRESENTATIONS OF FACT TO INDUCE THIS WAIVER OF JURY TRIAL. DEBTOR ACKNOWLEDGES THAT 1) IT BARGAINED AT ARM’S LENGTH AND IN GOOD FAITH, WITHOUT DURESS, 2) THAT THE PROVISIONS HEREOF SHALL BE SUBJECT TO NO EXCEPTIONS WHATEVER, 3) THAT IT HAS BEEN REPRESENTED (OR HAS HAD THE OPPORTUNITY TO BE REPRESENTED) IN THE SIGNING OF THIS AGREEMENT AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL, SELECTED OF ITS OWN FREE WILL AND 4) THAT IT HAD THE OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL. DEBTOR SPECIFICALLY ACKNOWLEDGES THAT NO PARTY HAS IN ANY WAY AGREED

 

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WITH OR REPRESENTED TO ANY OTHER PARTY THAT THE PROVISIONS OF THIS SECTION WILL NOT BE FULLY ENFORCED IN ALL INSTANCES. DEBTOR FURTHER ACKNOWLEDGES THAT IT HAS READ AND UNDERSTANDS THE MEANING AND RAMIFICATIONS OF THIS WAIVER PROVISION.

19. ATTORNEYS’ FEES AND OTHER COSTS . Should either party hereto institute any action or proceeding to enforce this Agreement or any provisions hereof or for a declaration of rights under this Agreement, or for arbitration of any dispute arising under this Agreement, the prevailing party in any such action, proceeding or arbitration shall be entitled to receive from the other party all costs and expenses, including without limitation reasonable attorneys’ fees, incurred by the prevailing party in connection with such action, proceeding or arbitration.

20. INDEMNIFICATION . Debtor hereby agrees to indemnify and hold harmless Secured Party and its directors, officers, employees and agents against and from any and all claims, actions, liabilities, costs and expenses of any kind or nature whatsoever (including reasonable fees and disbursements of counsel) that may be imposed on, incurred by, or asserted against any of them, in any way relating to or arising out of this Agreement, any exercise of remedies hereunder or any other action taken or omitted by them hereunder, except to the extent a court holds in final and nonappealable judgment that such claims, actions, liabilities, costs and expenses directly resulted from the gross negligence or willful misconduct of such indemnified Persons.

21. WAIVERS BY DEBTOR . Except as otherwise expressly provided in this Agreement or the Loan Agreement, Debtor waives to the fullest extent allowable by law (i) presentment, demand, and protest and notice of presentment, protest, default, non-payment, maturity, release, compromise, settlement, extension, or renewal of the Loan Documents or the Note under or pursuant to which Debtor may in any way be liable and hereby ratifies and confirms whatever Secured Party may do in this regard; (ii) notice prior to taking possession or control of Collateral or any bond or security that might be required by any court prior to allowing Secured Party to exercise any of the remedies of Secured Party; (iii) any right to require that Secured Party marshal the Collateral; (iv) the benefit of all valuation, appraisement, and exemption laws; (v) any right to require Secured Party to proceed against any other Person or collateral held from any other person; (vi) any right to require Secured Party to pursue any other remedy in Secured Party’s power whatsoever; or (vii) any defense arising out of any election by Secured Party to exercise or not exercise any right or remedy it may have against Debtor, any other person or any security held by it, even though such election operates to impair or extinguish any right of reimbursement to subrogation or other right or remedy of Debtor against any other person or any such security.

22. MISCELLANEOUS . Debtor agrees that the following shall govern the interpretation and enforcement of this Agreement:

22.1 Binding on Successors . This Agreement shall be binding upon Debtor, the executors, administrators, successors and assigns of Debtor, and shall inure to the benefit of and be enforceable by Secured Party, its successors, transferees and assigns.

 

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22.2 Modifications . This Agreement may not be modified, amended or terminated, except by an agreement in writing executed by the parties hereto.

22.3 Section Titles . The section titles contained in this Agreement are merely for convenience and shall be without substantive meaning or content.

22.4 Construction . The word “including” shall have the inclusive meaning represented by the phrase “including without limitation.” Unless the context of this Agreement clearly otherwise requires, the word “or” shall have the meaning represented by the phrase “and/or,” references to the plural include the singular and references to the singular include the plural.

IN WITNESS WHEREOF , this Agreement has been executed and delivered as of the date first set forth above.

 

Secured Party ”:     Debtor ”:
EAST WEST BANK    

U.S. AUTO PARTS NETWORK, INC.

a Delaware corporation

By:   /s/ Mark H. Lee     By:   /s/ Mehran Nia
Name:   Mark H. Lee     Name:   Mehran Nia
Title:   FUP     Title:   CEO

 

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Exhibit 10.21

SECURITY AGREEMENT

This SECURITY AGREEMENT (the “ Agreement ”) is executed as of May 18, 2006 by PARTSBIN, INC ., a Delaware corporation (the “ Debtor ”) in favor of EAST WEST BANK (the “ Secured Party ”), with reference to the following:

WHEREAS , U.S. Auto Parts Network, Inc., a Delaware corporation and the sole shareholder of Debtor (the “ Borrower ”) and Secured Party are entering into a Loan Agreement of even date herewith (the “ Loan Agreement ”; capitalized terms used herein and not expressly defined shall have the meaning ascribed such terms in the Loan Agreement), with respect to the Loan to be made to Borrower by Secured Party in connection with the proposed acquisition by Debtor of all outstanding shares of capital stock of the Target Companies pursuant to the Acquisition Agreement (the “ Acquisition ”);

WHEREAS , as a condition to the making of the Loan, Secured Party has required that all assets of Borrower and Debtor be pledged to Secured Party to secure the Loan including, without limitation, such assets to be acquired by Secured Party as a result of the Acquisition; and

WHEREAS , in connection with the making of the Loan, the proceeds of which will be used to consummate the Acquisition, Debtor has agreed to grant Secured Party a security interest in the Collateral (as defined in Section 3.1 below).

NOW, THEREFORE , in consideration of the premises and for other good and valuable consideration, the receipt of which is hereby acknowledged, Debtor and Secured Party hereby covenant and agree as follows:

1. GENERAL DEFINITIONS .

1.1 As used herein, “ UCC ” means the Uniform Commercial Code as in effect from time to time in the State of California.

1.2 All capitalized terms contained in this Agreement, but not specifically defined in this Agreement or the Loan Agreement, shall have the meanings provided by the UCC to the extent the same are used or defined therein.

2. OBLIGATIONS SECURED . The Collateral (as defined in Section 3 below) shall secure any and all Obligations of Debtor to Secured Party.

3. SECURITY INTEREST .

3.1 Grant of Security Interest . To secure the punctual payment and performance of the Obligations when due whether at the stated maturity, by acceleration or otherwise, Debtor hereby grants to Secured Party a first priority security interest in and to, and a lien upon (the “ Security Interest ”), all right, title and interest of Debtor in and to the property listed on Exhibit “A ” hereto, whether now owned and existing or hereafter acquired or arising,

 

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and wherever located (collectively, the “ Collateral ”); provided , however , that with respect to the Collateral identified on Schedule 4.2 hereto, the security interest granted to Secured Party hereunder is subject to the liens in favor of third parties as set forth on Schedule 4.2 hereto.

3.2 Security Interest Absolute . All rights of Secured Party hereunder, the Security Interest, and all obligations of Debtor hereunder, shall be absolute and unconditional irrespective of (i) any lack of validity or enforceability of the Loan Agreement, any other Loan Document, any other agreement with respect to any of the Obligations or any other agreement or instrument relating to any of the foregoing, (ii) any change in the time, manner or place of payment of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or consent to any departure from the Loan Agreement, any other Loan Document or any other agreement or instrument, (iii) any exchange, release, lapse in perfection, or non-perfection of any other collateral, or any release or amendment or waiver of, or consent to or departure from any guarantee, for all or any of the Obligations, or (iv) any other circumstance which might otherwise constitute a defense available to, or discharge of Debtor, and/or any other obligor in respect of the Obligations, or in respect of this Agreement.

4. REPRESENTATIONS AND WARRANTIES . Except as set forth on the Schedules of Exceptions attached hereto, Debtor represents and warrants to Secured Party that:

4.1 Authority . Debtor has full power and authority to grant security interests in the Collateral and to execute, deliver, and perform its obligations in accordance with the terms of this Agreement, without the consent or approval of any other person except as may have been specifically disclosed to Secured Party in writing.

4.2 Absence of Other Encumbrances; Legal Actions and Claims . Except as set forth on Schedule 4.2 hereto, (a) the Collateral is free and clear of all liens and adverse claims other than the Security Interest, which shall be a first lien on the Collateral, and (b) there are no actions, suits or proceedings at law or in equity now pending or, to the best of Debtor’s knowledge, threatened against or affecting the Collateral.

4.3 Information Regarding Names . Schedule 4.3 attached hereto sets forth Debtor’s exact legal name, and a true and complete list of all prior or current names and trade names used by the Debtor.

4.4 Location of Collateral and Principal Place of Business . All Collateral and all related books and records related to the Collateral are located solely at Debtor’s principal place of business, at 92 Youngs Road, Trenton, New Jersey 08618, except as set forth on Schedule 4.4 attached hereto.

4.5 Jurisdiction of Incorporation . Debtor has disclosed to the Secured Party complete and correct information regarding Debtor’s jurisdiction of incorporation and its identification number in the records of such jurisdiction.

 

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5. COVENANTS AND AGREEMENTS OF DEBTOR . Debtor covenants and agrees as follows:

5.1 Records and Inspection . Debtor shall keep and cause to be kept accurate and complete records of the Collateral and its proceeds at its principal place of business. Upon ten (10) days’ prior notice to Debtor (or two (2) days’ prior notice if an Event of Default has occurred or is threatened), Secured Party shall have the right from time to time, during normal business hours, to examine such books, records and accounts at the office of Debtor, or other Person maintaining such records and to make copies or extracts thereof as Secured Party shall desire.

5.2 Restrictions on Removal of Collateral . Debtor shall not remove Collateral or any related books and records from its principal place of business except in the ordinary course of Debtor’s business, consistent with past practice.

5.3 Restriction on Changing State of Organization or Chief Executive Office . Debtor shall not change the state of its incorporation, or convert into a different type of entity. Debtor shall not change its chief executive office unless 30 days prior written notice has been provided to Secured Party.

5.4 Information Regarding Names . At least 30 days before changing its name on its organizational documents, or adopting a new trade name, Debtor shall give written notice to Secured Party of any new name or trade name of Debtor.

5.5 Duty of Care . Debtor shall be responsible for preserving and maintaining the Collateral and Secured Party shall have no duty of care with respect to the Collateral, except that Secured Party shall have an obligation to exercise reasonable care with respect to Collateral in its possession; provided that (i) Secured Party shall be deemed to have exercised reasonable care if the Collateral in its possession is accorded treatment substantially comparable to that which the Secured Party accords its own property or treatment substantially in accordance with actions requested by Debtor in writing, although Secured Party shall not be obligated to comply with any such requests and (ii) Secured Party shall not be obligated to take steps to preserve rights against any other parties or property.

5.6 Taxes . Except for those presently being or to be contested by Debtor in good faith in the ordinary course of business, Debtor shall pay when due all Taxes upon the Collateral.

5.7 Further Assurances and Authority of Secured Party . Debtor shall from time to time execute, deliver, file and record all such further agreements, instruments, financing statements, notices and other documents (collectively, “ Supplemental Documentation ”) as may be requested by Secured Party to perfect or preserve the Security Interest, to enable Secured Party to notify any third parties of the existence of the Security Interest, or otherwise to carry out the intent of this Agreement. Debtor authorizes Secured Party to file financing statements where desirable in Secured Party’s judgment to perfect the Security Interest without the signature of Debtor. If any amount payable under or in connection with any of the Collateral shall be or become evidenced by any Instrument, Certificated Security or Chattel Paper, such Instrument, Certificated Security or Chattel Paper shall be immediately delivered to the Secured Party, duly indorsed in a manner satisfactory to Secured Party, to be held as Collateral pursuant to this Agreement.

 

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5.8 Insurance . Debtor agrees to be bound by and comply in all respects with the terms of Sections 4.16 and 4.17 of the Loan Agreement, which are hereby incorporated in this Agreement.

6. RIGHT TO SATISFY OTHER CLAIMS AND TAXES . Except to the extent Debtor is reasonably contesting any of the following Taxes or claims, if Debtor fails to pay any Taxes when due, or fails to pay any claims secured by any lien against any Collateral when due, Debtor shall so advise Secured Party in writing and Secured Party may, without waiving or releasing any obligations of Debtor or any Event of Default, in its sole discretion (and without any obligation to do so), make such payment or any part thereof or obtain such discharge and take any other action with respect thereto that Secured Party deems advisable.

7. RELEASE OF COLLATERAL . Concurrently with any sale of Collateral permitted by the Loan Documents, the Security Interest shall automatically be released from the property so disposed of; provided , however , that the Security Interest shall continue in the proceeds thereof until it is otherwise terminated as set forth herein.

8. EVENTS OF DEFAULT . The occurrence or existence of an Event of Default under any Loan Document, Revolving Loan Documents, or Term Loan Documents shall constitute an Event of Default by the Debtor.

9. RIGHTS AND REMEDIES OF SECURED PARTY UPON EVENT OF DEFAULT .

9.1 Effect of Event of Default Remedies . If any Event of Default described in 7.1 of the Loan Agreement shall occur, Secured Party may declare the Obligations secured by this Agreement to be due and payable, whereupon such Obligations shall become immediately due and payable, all without notice of any kind. Secured Party shall promptly advise Debtor of any such declaration, but failure to do so shall not impair the effect of such declaration. In addition, upon the occurrence of an Event of Default, Secured Party may exercise the rights, powers and remedies set forth below.

(a) In addition to all of its other rights, powers and remedies under this Agreement, the Loan Documents, the Revolving Loan Documents, and the Term Loan Documents, and other applicable law, Secured Party shall have all of the rights, powers and remedies of a secured party under the Uniform Commercial Code of the state in which such rights, powers and remedies are asserted.

(b) Secured Party shall have the right: (i) to enter upon the premises of Debtor or any other place or places where Collateral is located through self-help and without judicial process or giving Debtor notice; (ii) to prepare, assemble, or process Collateral for sale, lease, or other disposition; (iii) to remove Collateral to the premises of Secured Party or any agent of Secured Party, for such time as Secured Party may desire, in order to collect or dispose of Collateral; and (iv) to require Debtor to assemble Collateral and make it available to Secured Party at a place to be designated by Secured Party.

(c) Until Secured Party is able to effect a sale, lease, or other disposition of Collateral or any part thereof, Secured Party shall have the right to use, process or

 

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operate Collateral or any part thereof to the extent that it deems appropriate for the purpose of preserving Collateral or its value or for any other purpose deemed appropriate by Secured Party.

(d) Secured Party shall have the right to sell, lease, license, or otherwise dispose of all or any Collateral in its then existing condition, or after any further assembly, manufacturing, or processing thereof, at public or private sale or sales, in lots or in bulk, for cash or on credit, all as Secured Party, in its sole discretion, may deem advisable. Without limitation, Secured Party may specifically disclaim any warranties of title and the like. Secured Party shall not be obligated to clean up or otherwise prepare the Collateral for sale. Such sales may be adjourned and continued from time to time with or without notice. Secured Party shall have the right to conduct such sales on Debtor’s premises or elsewhere and shall have the right to use Debtor’s premises without charge for such sales (or preparation for sales) for such time or times as Secured Party deems necessary or advisable. Upon an Event of Default, Secured Party is hereby granted a license or other right to use, without charge, Debtor’s labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, and advertising matter, or any property of a similar nature as it pertains to Collateral, in advertising for sale or lease or the disposition of any Collateral. Secured Party may purchase all or any part of the Collateral at public or, if permitted by law, private sale, and in lieu of actual payment of such purchase price may set off the amount of such Obligations whether or not such Obligations are matured. Debtor agrees that any sale of Collateral conducted by Secured Party in accordance with the foregoing provisions of this Section shall be deemed to be a commercially reasonable sale under the UCC. Secured Party may comply with any applicable laws and regulations in connection with any exercise of remedies hereunder and such compliance shall not be considered to adversely affect the commercial reasonableness of such exercise of remedies.

9.2 Application of Proceeds . Any proceeds received by Secured Party in respect of any sale of collection from, or other realization upon all or any part of the Collateral following the occurrence of an Event of Default may, in the discretion of Secured Party, be held by Secured Party as collateral for, and/or then or at any time thereafter applied by Secured Party as follows: (i) first, to pay all costs, expenses and charges of every kind (including attorneys’ fees and costs) for pursuing, searching, protecting, taking, removing, storing, safekeeping, caring, preparing for sale, advertising, selling and delivering the Collateral and otherwise enforcing this Agreement and the Loan Documents; (ii) second, to pay the Obligations in order determined by Secured Party in its sole discretion; and (iii) third, to pay the remaining funds, if any, after payment of all the Obligations in full, to Debtor or to whomever may be lawfully entitled to receive such surplus. Payments received from any third party on account of disposition of Collateral shall not reduce the Obligations until paid in cash to Secured Party. The application of proceeds by Secured Party shall be without prejudice to Secured Party’s rights as against Debtor or other persons with respect to any Obligations which may remain unpaid. Any such deficiency shall be paid forthwith to Secured Party by the Debtor.

9.3 Notice . Any notice required to be given by Secured Party of a sale, lease, or other disposition of Collateral, or any other intended action by Secured Party, which is sent pursuant to Section 16 hereof at least ten (10) days prior to such proposed action, or such longer period as shall be specified by applicable law, shall constitute commercially reasonable and fair notice thereof to Debtor.

 

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9.4 Other Rights Upon Event of Default . Debtor hereby irrevocably makes, constitutes and appoints Secured Party and all persons designated by Secured Party true and lawful attorney (and agent-in-fact) upon and after the occurrence of an Event of Default for the purposes set forth in the following sentences of this Section. Upon and after the occurrence of an Event of Default, Secured Party or its agent may, without notice to Debtor and at such time or times thereafter as Secured Party or said agent in its sole discretion may determine, in Debtor’s or Secured Party’s name: (i) give notice to account debtors and other obligors and demand payment of Accounts or other obligations included in the Collateral; (ii) enforce payment and exercise all of Debtor’s rights and remedies with respect to the collection of Accounts, any Special Collateral and any other obligations by legal proceedings or otherwise; (iii) settle, adjust, compromise, discharge, release, extend or renew Accounts and other obligations; (iv) prepare, file and sign Debtor’s name on any proof of claim or similar document in any insolvency or similar case against any Account debtor or any person indebted to Debtor; (v) endorse or sign the name of Debtor upon any checks, drafts, chattel paper, document, instrument, or similar document or agreement relating to Accounts or Special Collateral; (vi) use Debtor’s stationery and sign the name of Debtor to verifications of Accounts and other obligations to Account debtors and other obligor; (vii) use the information recorded on or contained in any data processing equipment and computer hardware and software to which Debtor has access relating to Accounts, or Special Collateral; (viii) open any lock box; (ix) transfer into the name of Secured Party or the name of Secured Party’s agent or nominee any of the Collateral; (x) make, settle and adjust claims under policies of insurance, endorse or sign the name of Debtor on any check or other item of payment for the proceeds of such policies of insurance, and make all determinations and decisions with respect thereto and (xi) receive and direct the disposition of any proceeds of any Collateral.

10. EXPENSES, INCLUDING ATTORNEY’S FEES . Debtor agrees to be bound by and comply in all respects with the terms of Section 4.15 of the Loan Agreement, which are hereby incorporated in this Agreement.

11. ASSIGNMENT BY SECURED PARTY . Debtor agrees that Secured Party may assign or otherwise transfer this Agreement and, subject to the terms hereof, may deliver all or any of the Collateral to the transferee(s), who shall thereupon become vested with all the powers and rights in respect thereto given to Secured Party herein transferred, and Secured Party shall thereafter be fully discharged from any liability or responsibility with respect thereto, all without prejudice to the retention by Secured Party of all rights and powers hereby given with respect to instruments, rights or property not so transferred.

12. REMEDIES NOT EXCLUSIVE; FORECLOSURES . No right or remedy hereunder is exclusive of any other right or remedy. Each and every right and remedy shall be cumulative and shall be in addition to and without prejudice to every other remedy given hereunder, under any other agreement between or among Debtor, Merger Sub and Secured Party or now or hereafter existing at law or in equity, and may be exercised from time to time as often as deemed expedient, separately or concurrently. The giving, taking or enforcement of or execution against any other or additional security, collateral, or guaranty for the payment of the Obligations shall not operate to prejudice, waive or affect any rights, powers or remedies hereunder, nor shall Secured Party be required to first look to, enforce, exhaust or execute against such other or additional security, or guarantees prior to so acting against the Collateral.

 

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Secured Party may foreclose on or execute against the items of Collateral in such order as Secured Party may, in its sole and absolute discretion, determine.

13. WAIVERS . The failure or delay of Secured Party to insist in any instances upon the performance of any of the terms, covenants or conditions of this Agreement or the Loan Documents, or to exercise any right, remedy or privilege herein or therein conferred, shall not impair or be construed as thereafter waiving any such covenants, remedies, conditions or provisions, but every such term, condition and covenant shall continue and remain in full force and effect; nor shall any waiver of an Event of Default suspend, waive or affect any other Event of Default, whether the same is prior or subsequent thereto and whether of the same or of a different type.

14. SEVERABILITY . Wherever possible, each provision of this Agreement shall be interpreted in such a manner as to be effective. If any provision of this Agreement shall be held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Agreement.

15. TERMINATION . Upon payment in full and performance of all Obligations owed by Debtor to Secured Party, this Agreement shall be terminated; otherwise it shall remain in full force and effect.

16. NOTICE . All notices, demands and communications hereunder shall be given and deemed received or delivered in accordance with the provisions of Section 8.7 of the Loan Agreement, and such notices, demands and communications to Debtor shall be given or made to Debtor at Borrower’s address set forth in such Section 8.7.

17. GOVERNING LAW; JURISDICTION . TO THE EXTENT APPLICABLE, THIS AGREEMENT SHALL BE GOVERNED BY THE UNIFORM COMMERCIAL CODE OF THE STATE OF CALIFORNIA (OR TO THE EXTENT APPLICABLE TO THE ATTACHMENT, PERFECTION, PRIORITY OR ENFORCEMENT OF THE SECURITY INTERESTS IN ANY COLLATERAL, THE UNIFORM COMMERCIAL CODE OF ANY OTHER STATE). WITH RESPECT TO OTHER MATTERS NOT COVERED BY THE UNIFORM COMMERCIAL CODE, THIS AGREEMENT SHALL BE DETERMINED UNDER, GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF CALIFORNIA.

DEBTOR AGREES TO SUBMIT TO EXCLUSIVE PERSONAL JURISDICTION IN THE STATE OF CALIFORNIA IN ANY ACTION, CASE OR PROCEEDING ARISING OUT OF THIS AGREEMENT AND, IN FURTHERANCE OF SUCH AGREEMENT, DEBTOR HEREBY AGREES AND CONSENTS THAT WITHOUT LIMITING OTHER METHODS OF OBTAINING JURISDICTION, PERSONAL JURISDICTION OVER DEBTOR IN ANY SUCH ACTION, CASE OR PROCEEDING MAY BE OBTAINED WITHIN OR WITHOUT THE JURISDICTION OF ANY COURT LOCATED IN CALIFORNIA AND THAT ANY PROCESS OR NOTICE OF MOTION OR OTHER APPLICATION TO ANY SUCH COURT IN CONNECTION WITH ANY SUCH ACTION, CASE OR PROCEEDING MAY BE SERVED UPON DEBTOR BY REGISTERED OR CERTIFIED MAIL TO OR BY

 

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PERSONAL SERVICE AT THE LAST KNOWN ADDRESS OF DEBTOR, WHETHER SUCH ADDRESS BE WITHIN OR WITHOUT THE JURISDICTION OF ANY SUCH COURT. DEBTOR ALSO AGREES THAT THE EXCLUSIVE VENUE OF ANY LITIGATION ARISING IN CONNECTION WITH THE DEBT OR IN RESPECT OF ANY OF THE OBLIGATIONS OF DEBTOR UNDER THIS AGREEMENT SHALL BE IN LOS ANGELES COUNTY, CALIFORNIA. NOTWITHSTANDING THE FOREGOING PROVISIONS, HOWEVER, SECURED PARTY MAY BRING ANY ACTION OR OTHER PROCEEDING FOR ANY PROVISIONAL REMEDIES (INCLUDING, WITHOUT LIMITATION, TEMPORARY RESTRAINING ORDER, INJUNCTIVE RELIEF, WRIT OF ATTACHMENT OR RECEIVERSHIP) AND/OR ANY ACTION OR OTHER PROCEEDING TO FORECLOSE UPON SECURED PARTY’S SECURITY INTEREST IN ANY OF THE COLLATERAL, IN ANY COURT HAVING SUBJECT MATTER AND PERSONAL JURISDICTION, AND WITH RESPECT TO ANY SUCH ACTION OR OTHER PROCEEDING, DEBTOR HEREBY AGREES TO SUBMIT TO PERSONAL JURISDICTION IN SUCH JURISDICTION AND TO VENUE IN ANY SUCH COURT.

18. WAIVER OF JURY TRIAL . DEBTOR HEREBY WAIVES THE RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, OR RELATED TO, THE SUBJECT MATTER OF THIS AGREEMENT. DEBTOR SHALL NOT SEEK TO CONSOLIDATE ANY SUCH ACTION IN WHICH A JURY TRIAL HAS BEEN WAIVED, WITH ANY OTHER ACTION IN WHICH A JURY CANNOT OR HAS NOT BEEN WAIVED. THIS WAIVER IS KNOWINGLY, INTENTIONALLY AND VOLUNTARILY MADE BY DEBTOR, AND DEBTOR ACKNOWLEDGES THAT NEITHER SECURED PARTY NOR ANY PERSON ACTING ON BEHALF OF SECURED PARTY HAS MADE ANY REPRESENTATIONS OF FACT TO INDUCE THIS WAIVER OF JURY TRIAL. DEBTOR ACKNOWLEDGES THAT 1) IT BARGAINED AT ARM’S LENGTH AND IN GOOD FAITH, WITHOUT DURESS, 2) THAT THE PROVISIONS HEREOF SHALL BE SUBJECT TO NO EXCEPTIONS WHATEVER, 3) THAT IT HAS BEEN REPRESENTED (OR HAS HAD THE OPPORTUNITY TO BE REPRESENTED) IN THE SIGNING OF THIS AGREEMENT AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL, SELECTED OF ITS OWN FREE WILL AND 4) THAT IT HAD THE OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL. DEBTOR SPECIFICALLY ACKNOWLEDGES THAT NO PARTY HAS IN ANY WAY AGREED WITH OR REPRESENTED TO ANY OTHER PARTY THAT THE PROVISIONS OF THIS SECTION WILL NOT BE FULLY ENFORCED IN ALL INSTANCES. DEBTOR FURTHER ACKNOWLEDGES THAT IT HAS READ AND UNDERSTANDS THE MEANING AND RAMIFICATIONS OF THIS WAIVER PROVISION.

19. ATTORNEYS’ FEES AND OTHER COSTS . Should either party hereto institute any action or proceeding to enforce this Agreement or any provisions hereof or for a declaration of rights under this Agreement, or for arbitration of any dispute arising under this Agreement, the prevailing party in any such action, proceeding or arbitration shall be entitled to receive from the other party all costs and expenses, including without limitation reasonable attorneys’ fees, incurred by the prevailing party in connection with such action, proceeding or arbitration.

20. INDEMNIFICATION . Debtor hereby agrees to indemnify and hold harmless Secured Party and its directors, officers, employees and agents against and from any and all

 

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claims, actions, liabilities, costs and expenses of any kind or nature whatsoever (including reasonable fees and disbursements of counsel) that may be imposed on, incurred by, or asserted against any of them, in any way relating to or arising out of this Agreement, any exercise of remedies hereunder or any other action taken or omitted by them hereunder, except to the extent a court holds in final and nonappealable judgment that such claims, actions, liabilities, costs and expenses directly resulted from the gross negligence or willful misconduct of such indemnified Persons.

21. WAIVERS BY DEBTOR . Except as otherwise expressly provided in this Agreement or the Loan Agreement, Debtor waives to the fullest extent allowable by law (i) presentment, demand, and protest and notice of presentment, protest, default, non-payment, maturity, release, compromise, settlement, extension, or renewal of the Loan Documents or the Note under or pursuant to which Debtor may in any way be liable and hereby ratifies and confirms whatever Secured Party may do in this regard; (ii) notice prior to taking possession or control of Collateral or any bond or security that might be required by any court prior to allowing Secured Party to exercise any of the remedies of Secured Party; (iii) any right to require that Secured Party marshal the Collateral; (iv) the benefit of all valuation, appraisement, and exemption laws; (v) any right to require Secured Party to proceed against any other Person or collateral held from any other person; (vi) any right to require Secured Party to pursue any other remedy in Secured Party’s power whatsoever; or (vii) any defense arising out of any election by Secured Party to exercise or not exercise any right or remedy it may have against Debtor, any other person or any security held by it, even though such election operates to impair or extinguish any right of reimbursement to subrogation or other right or remedy of Debtor against any other person or any such security.

22. MISCELLANEOUS . Debtor agrees that the following shall govern the interpretation and enforcement of this Agreement:

22.1 Binding on Successors . This Agreement shall be binding upon Debtor, the executors, administrators, successors and assigns of Debtor, and shall inure to the benefit of and be enforceable by Secured Party, its successors, transferees and assigns.

22.2 Modifications . This Agreement may not be modified, amended or terminated, except by an agreement in writing executed by the parties hereto.

22.3 Section Titles . The section titles contained in this Agreement are merely for convenience and shall be without substantive meaning or content.

22.4 Construction . The word “including” shall have the inclusive meaning represented by the phrase “including without limitation.” Unless the context of this Agreement clearly otherwise requires, the word “or” shall have the meaning represented by the phrase “and/or,” references to the plural include the singular and references to the singular include the plural.

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IN WITNESS WHEREOF , this Agreement has been executed and delivered as of the date first set forth above.

 

Secured Party ”:     Debtor ”:
EAST WEST BANK     PARTSBIN, INC.
    a Delaware corporation
By:   /s/ Mark H. Lee     By:   /s/ Mehran Nia
Name:   Mark H. Lee     Name:   Mehran Nia
Title:   FUP     Title:   CEO

 

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Exhibit 10.22

AMENDMENT TO EXISTING AGREEMENTS

This AMENDMENT TO EXISTING AGREEMENTS (the “ Amendment ”) is entered into as of May 18, 2006, between U.S. Auto Parts Network, Inc., a Delaware corporation (“ Borrower ”) and East West Bank (“ Lender ”), with reference to the following facts:

 

  A. Borrower and Lender are parties to that certain Business Loan Agreement, dated as of February 24, 2006, with respect to Loan No: 3000071 (the “ Term Loan Agreement ”; capitalized terms used in this Amendment and not expressly defined shall have the meaning ascribed such terms in the New Loan Agreement, as defined below);

 

  B. Borrower and Lender are parties to that certain Business Loan Agreement, dated as of February 24, 2006, with respect to Loan No: 2001669 (the “ Revolving Loan Agreement ”);

 

  C. Borrower and Lender are parties to that certain Commercial Security Agreement, dated as of February 24, 2006, with respect to Loan No: 2001669 (the “ Security Agreement ”);

 

  D. Concurrently herewith, Borrower and Lender are entering into a loan agreement (the “ New Loan Agreement ”), with respect to Lender’s Loan No: 3000082, in the principal amount of $22,000,000, in connection with Borrower’s proposed acquisition of all shares of capital stock of the Target Companies, are executing a promissory note evidencing such loan (the “ New Note ”), and entering into a security agreement with respect to Loan Nos. 3000082, 3000071, and 2001669 (together, the “ New Security Agreement ”); and

 

  E. The parties now desire to amend and restate the Security Agreement as set forth herein, and to modify certain terms of the Term Loan Agreement, the Revolving Loan Agreement and the related Promissory Note dated January 6, 2003, in the principal amount of $5,000,000, as modified by subsequent Change in Terms Agreements (the “ Existing Note ”) as set forth herein.

NOW, THEREFORE , in consideration of the promises set forth herein and for other valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows effective as of the date hereof:

1. Modification of Certain Terms of the Term Loan Agreement and Revolving Loan Agreement : Those sections of the Term Loan Agreement and Revolving Loan Agreement entitled “REPRESENTATIONS AND WARRANTIES,” “AFFIRMATIVE COVENANTS,” “LENDER’S EXPENDITURES,” “NEGATIVE COVENANTS,” “DEFAULT” AND “EFFECT OF DEFAULT” are hereby deleted in their entirety and are replaced and superseded in their entirety by Articles IV, VI and VII of the New Loan Agreement, which are incorporated in the Term Loan Agreement and the Revolving Loan Agreement by reference.

 

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2. Modification of the Definitions Sections of the Term Loan Agreement and Revolving Loan Agreement :

 

  (a) The following definition of “Indebtedness” set forth in that section of each of the Term Loan Agreement and the Revolving Loan Agreement entitled “DEFINITIONS” and which currently reads:

Indebtedness . The word “Indebtedness” means the indebtedness evidenced by the Note or Related Documents, including all principal and interest together with all other indebtedness and costs and expenses for which Borrower is responsible under this Agreement or under any of the Related Documents.”

is hereby amended to read in full as follows:

Indebtedness . The word “Indebtedness” means the indebtedness evidenced by the Note or Related Documents, including all principal and interest together with all other indebtedness and costs and expenses for which Borrower is responsible under this Agreement or under any of the Related Documents. Without limiting the generality of the foregoing, the term “Indebtedness” shall specifically include all principal and interest, together with all indebtedness and costs and expenses, with respect to Loan Nos: 3000082, 3000071, and 2001669.”

 

  (b) The following definition of “Loan” set forth in that section of each of the Term Loan Agreement and Revolving Loan Agreement entitled “DEFINITIONS” and which currently reads:

Loan . The term “Loan” means any and all loans and financial accommodations from Lender to Borrower whether now or hereafter existing, and however evidenced, including without limitation those loans and financial accommodations described herein or on any exhibit or schedule attached to this Agreement from time to time.”

is hereby amended to read in full as follows:

Loan . The term “Loan” means any and all loans and financial accommodations from Lender to Borrower whether now or hereafter existing, and however evidenced, including without limitation those loans and financial accommodations described herein or on any exhibit or schedule attached to this Agreement from time to time. Without limiting the generality

 

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of the foregoing, the term “Loan” specifically includes Loan Nos: 3000082, 3000071, and 2001669.”

 

  (c) The following definition is hereby added, in alphabetical order, to that section of each of the Term Loan Agreement and the Revolving Loan Agreement entitled “DEFINITIONS”:

Sellers’ Note . The words “Sellers’ Note” mean that certain promissory note in the principal amount of $5,000,000.00, issued by Borrower pursuant to that certain Acquisition Agreement dated May 19, 2006, with respect to Borrower’s acquisition of the Shares in the Company (as such terms are defined therein).”

3. Modification of the Note : The section of the Existing Note entitled “DEFAULT” is hereby deleted in its entirety and is replaced and superseded in its entirety by Section 6 of the New Note, which is incorporated in the Existing Note by reference.

4. Modification of Revolving Loan Amount : The principal amount of the loan set forth in the Revolving Loan Agreement and the Related Documents (as defined in the Revolving Loan Agreement) which is currently equal to Five Million Dollars ($5,000,000.00), is hereby increased to Seven Million Dollars ($7,000,000.00) . Accordingly, the note evidencing the Revolving Loan Agreement shall be subject to the Changes in Terms Agreement attached hereto as Exhibit “A ”, which shall be executed and delivered by Borrower concurrently with Borrower’s execution and delivery of this Amendment.

5. Amendment of Security Agreement : The Security Agreement is hereby amended and restated in its entirety by the terms of the New Security Agreement.

6. Conforming Changes : To the extent that the Term Loan Documents and the Revolving Loan Documents shall contain terms inconsistent with the modifications to the Term Loan Agreement, Revolving Loan Agreement or the Existing Note as set forth in this Amendment, then any such terms shall be deemed amended to conform to the terms hereof.

7. Miscellaneous : Except as expressly amended hereby, the terms of the Term Loan Agreement, the Revolving Loan Agreement and Existing Note (and such other terms contained in the Revolving Loan Documents and the Term Loan Documents to the extent modified hereby) shall remain unchanged, and in full force in effect.

8. Construction of Amendment : The titles and headings of the paragraphs of this Amendment have been inserted for convenience of reference only and are not intended to summarize or otherwise describe the subject matter of such paragraphs and shall not be given any consideration in the construction of this Amendment.

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IN WITNESS WHEREOF , the parties have executed this Amendment as of the date first written above.

 

Lender ”:    

Borrower ”:

EAST WEST BANK     U.S. AUTO PARTS NETWORK, INC.
    a Delaware corporation
By:   /s/ Mark H. Lee     By:   /s/ Mehran Nia
Name:   Mark H. Lee     Name:   Mehran Nia
Title:   FUP     Title:   CEO

 

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Exhibit 21.1

SUBSIDIARIES OF THE REGISTRANT

Name

 

Jurisdiction

       
PartsBin, Inc.   Delaware    

Power Host, Inc.(1)

  Ontario, Canada    
MBS Tek Corporation   Philippines    

(1)   Power Host Inc. is a wholly-owned subsidiary of PartsBin, Inc.

 

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the reference to our firm under the caption “Experts” and to the use of our report dated February 3, 2006, in the Registration Statement (Form S-1 No. 333-            ) and the related Prospectus of U.S. Auto Parts Network, Inc., to be filed on or about November 2, 2006.

/s/ Ernst & Young LLP

Los Angeles, California

November 1, 2006

Exhibit 23.2

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the reference to our firm under the caption “Experts” and to the use of our report dated August 12, 2005, in the Registration Statement (Form S-1 No. 333-            ) and the related Prospectus of U.S. Auto Parts Network, Inc., to be filed on or about November 2, 2006.

/s/ Stonefield Josephson, Inc.

Los Angeles, California

November 1, 2006

Exhibit 23.3

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

We consent to the inclusion in this registration statement on Form S-1 of U.S. Auto Parts Network, Inc. of our report dated March 10, 2006, except for Note 9 which is as of May 19, 2006, on our audits of the combined financial statements of All OEM Parts, Inc. and Affiliates. We also consent to the reference to our Firm under the caption “Experts.”

/s/ J.H. Cohn LLP

Lawrenceville, New Jersey

October 30, 2006