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As filed with the Securities and Exchange Commission on January 22, 2007

Registration No. 333-138379

 


U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


AMENDMENT NO. 3

TO

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, Executive Vice President of Finance, Treasurer and Secretary

U.S. Auto Parts Network, Inc.

17150 South Margay Avenue

Carson, CA 90746

(310) 735-0085

(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(3)

Common Stock, $0.001 par value

   $138,000,000    $14,766

(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 calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(3)   Previously paid.

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. Neither we nor the selling stockholders may 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 January 22, 2007

PROSPECTUS

10,000,000 Shares

LOGO

Common Stock

 


This is U.S. Auto Parts Network, Inc.’s initial public offering. We are offering 8,000,000 shares of our common stock and 2,000,000 shares are being offered by the selling stockholders identified in this prospectus. We will not receive any of the proceeds from the sale of the shares by the selling stockholders.

We expect the public offering price to be between $10.00 and $12.00 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 8.

 


PRICE $     PER SHARE

 


 

     Per Share    Total

Public offering price

   $                     $                 

Underwriting discounts and commissions

   $      $  

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

   $      $  

Net proceeds, before expenses, to the selling stockholders

   $             $      

The underwriters may also purchase up to an additional 1,500,000 shares from the selling stockholders 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                 , 2007.

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

                                , 2007.


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LOGO


Table of Contents

TABLE OF CONTENTS

 

Prospectus Summary

  1

Risk Factors

  8

Forward-looking Statements

  25

Use of Proceeds

  26

Dividend Policy

  27

Capitalization

  28

Dilution

  29

Selected Consolidated Financial Data of U.S. Auto Parts

  30

Selected Combined Financial Data of Partsbin

  33

Unaudited Pro Forma Combined Statement of Operations

  35

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

  38

Business

  59

Management

  71

Related Party Transactions

  84

Principal and Selling Stockholders

  87

Description of Capital Stock

  89

Shares Eligible For Future Sale

  93

Underwriting

  95

Legal Matters

  98

Experts

  98

Where You Can Find More Information

  98

Index to Consolidated/Combined 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 and the selling stockholders 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.

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.


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PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus 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 network of websites provides individual consumers 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. Our flagship websites are located at www.partstrain.com and www.autopartswarehouse.com , and our corporate website is located at www.usautoparts.net .

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. Net sales increased to $59.7 million and $83.5 million for the year ended December 31, 2005 and the nine months ended September 30, 2006, respectively, from $40.7 million and $44.0 million for the year ended December 31, 2004 and the nine months ended September 30, 2005, respectively. Net income decreased slightly to $6.8 million and $3.6 million for the year ended December 31, 2005 and the nine months ended September 30, 2006, respectively, from $7.1 million and $4.8 million for the year ended December 31, 2004 and the nine months ended September 30, 2005, respectively. Our Adjusted EBITDA increased to $8.8 million and $10.3 million for the year ended December 31, 2005 and the nine months ended September 30, 2006, respectively, from $8.0 million and $6.1 million for the year ended December 31, 2004 and the nine months ended September 30, 2005, respectively.

In addition, we have experienced continued growth in the number of monthly unique visitors to our websites. In September 2006, approximately 6.9 million unique visitors viewed our websites. The number of orders placed through our e-commerce websites has also increased to approximately 288,000 and 505,000 for the year ended December 31, 2005 and the nine months ended September 30, 2006, respectively, from approximately 201,000 and 207,000 for the year ended December 31, 2004 and the nine months ended September 30, 2005, respectively. 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

 

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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.

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. 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 represents only 3% of our addressable market, 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. 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:

 

  Ÿ   disintermediation of the traditional auto parts supply chain, which enables us to eliminate several intermediaries, allowing us to offer auto parts at competitive prices while maintaining higher profit margins;

 

  Ÿ   a leading network of aftermarket auto parts websites;

 

  Ÿ   a proprietary product catalog that maps our 550,000 SKUs to over 4.3 million product applications based on vehicle makes, models and years;

 

  Ÿ   flexible fulfillment methods that allow us to offer a broad selection of products, while effectively managing our inventory and enhancing our overall profitability;
  Ÿ   low-cost 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 and customer service and sales functions; and

 

  Ÿ   long-standing, strong supplier relationships with manufacturers and distributors located in Asia and the United States.

Benefits to Customers

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

 

  Ÿ   broad product selection and availability;

 

  Ÿ   competitive pricing;

 

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  Ÿ   prompt order fulfillment;

 

  Ÿ   detailed product information; and

 

  Ÿ   an overall satisfying shopping experience and knowledgeable customer service.

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;

 

  Ÿ   cost-effectively increase the number of visitors to our websites;

 

  Ÿ   increase our visitor conversion rate;

 

  Ÿ   increase repeat customers;

 

  Ÿ   expand e-commerce distribution channels; and

 

  Ÿ   pursue strategic acquisitions that augment our business.

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.net. 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.

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

 

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The Offering

 

Common stock offered by us

8,000,000 shares

 

Common stock offered by the selling stockholders

2,000,000 shares

 

Common stock to be outstanding after this offering

29,832,927 shares

 

Use of proceeds

For repayment of approximately $33.0 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 21,832,927 shares outstanding as of December 31, 2006, which assumes the conversion of all of our outstanding preferred stock into 6,633,255 shares of common stock immediately prior to the completion of this offering, and does not include 2,400,000 shares of common stock reserved for future grant or issuance under our 2007 Omnibus Incentive Plan adopted in January 2007, and does not include, as of December 31, 2006:

 

  Ÿ   2,786,532 shares of common stock issuable upon the exercise of outstanding options at a weighted average exercise price of $9.04 per share;

 

  Ÿ   716,309 shares of common stock reserved for future grant or issuance under our 2006 Equity Incentive Plan; and

 

  Ÿ   84,332 shares of common stock issuable upon the exercise of outstanding warrants at a weighted average exercise price of $7.29 per share.

Unless otherwise indicated, all information in this prospectus assumes:

 

  Ÿ   the underwriters will not exercise their over-allotment option to purchase up to 1,500,000 additional shares of common stock from the selling stockholders;

 

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

 

  Ÿ   the initial public offering price will be $11.00 per share, which is the midpoint of the range set forth on the cover of this prospectus; and

 

  Ÿ   the effect of a 3-for-5 reverse stock split, which occurred in January 2007.

 

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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     $98,168     $43,979     $83,514     $107,366  

Cost of sales

  17,814     21,334   34,829     64,362     25,876     53,779     71,614  
                                       

Gross profit

  13,843     19,324   24,869     33,806     18,103     29,735     35,752  

Operating expenses:

             

General and administrative(2)

  2,284     3,599   7,254     10,325     5,555     7,013     8,626  

Marketing(2)

  3,617     4,526   5,802     10,862     4,315     10,134     13,360  

Fulfillment(2)

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

Technology(2)

  405     776   868     1,431     596     898     1,211  

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     24,671     32,979  

Income (loss) from operations

  4,291     7,425   6,571     (1,395 )   4,462     5,064     2,773  

Other income (expense), net

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

Income (loss) before income taxes

  4,249     7,461   6,656     (3,247 )   4,559     4,264     1,244  

Income tax provision (benefit)

  478     328   (163 )   (195 )   (199 )   615     (357 )
                                       

Net income (loss)

  $3,771     $7,133   $6,819     $(3,052 )   $4,758     $3,649     $1,601  
                                       

Basic net income (loss) per share

  $0.33     $0.54   $0.52     $(0.20 )   $0.36     $0.26     $0.11  

Diluted net income (loss) per share

  $0.33     $0.54   $0.52     $(0.20 )   $0.36     $0.19     $0.08  

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

  11,276,876     13,200,000   13,200,000     15,183,315     13,200,000     14,180,869     15,190,687  

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

  11,276,876     13,200,000   13,200,000     15,183,315     13,200,000     19,362,189     20,372,007  

Non-GAAP Financial Measures:

             

EBITDA(3)

  4,382     7,961   8,755     8,947     6,095     9,792     10,740  

Adjusted EBITDA(3)

  4,382     7,961   8,755     8,947     6,095     10,299     11,247  

Unaudited Pro Forma Statement of Income Data(4):

             

Income (loss) before income taxes

  4,249     7,461   6,656     (3,247 )   4,559     4,264     1,244  

Pro forma provision (benefit) for income taxes

  1,729     2,964   2,657     (1,301 )   1,822     1,809     575  
                                       

Pro forma net income (loss)

  $2,520     $4,497   $3,999     $(1,946 )   $2,737     $2,455     $669  
                                       

Pro forma basic net income (loss) per share

  $0.22     $0.34   $0.20     $(0.13 )   $0.21     $0.12     $0.04  

Pro forma diluted net income (loss) per share

  $0.22     $0.34   $0.20     $(0.13 )   $0.21     $0.12     $0.03  

Shares used in computation of pro forma basic net income per share

  11,276,876     13,200,000   19,833,255     15,183,315     13,200,000     20,814,124     15,190,687  

Shares used in computation of pro forma diluted net income per share

  11,276,876     13,200,000   19,833,255     15,183,315     13,200,000     20,844,345     20,372,007  

(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. See “Unaudited Pro Forma Combined Statement of Operations.”

 

(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

   $    $    $    $    $    $ 336    $ 336

Marketing

                              107      107

Fulfillment

                              16      16

Technology

                              48      48
                                                
   $    $    $    $    $    $ 507    $ 507
                                                

 

(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. As part of this presentation, pro forma basic net income per share for the year ended December 31, 2005 and the nine months ended September 30, 2006 also give effect to the conversion of our Series A convertible preferred stock into common stock immediately prior to the closing of this offering. See Note 1 and Note 8 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.

The pro forma as adjusted consolidated balance sheet data below give effect to the conversion of all of our outstanding preferred stock into 6,633,255 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 8,000,000 shares of common stock offered by us in this offering at an assumed initial offering price of $11.00 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 approximately $33.0 million of indebtedness incurred primarily 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     $ 49,595

Working capital

     (4,968 )     47,854

Total assets

     69,059       114,681

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

     34,888       182

Stockholders’ equity

     20,343       99,651

 

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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     $ (3,052 )   $ 4,758     $ 3,649   $ 1,601  

Interest expense, net

    13     44     106       1,931       68       950     1,657  

Income tax provision (benefit)

    478     328     (163 )     (195 )     (199 )     615     (357 )

Amortization of intangibles

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

Depreciation and amortization

    120     448     1,976       2,087       1,455       1,541     1,665  
                                                 

EBITDA

    4,382     7,961     8,755       8,947       6,095       9,792     10,740  

Share-based compensation

                              507     507  
                                                 

Adjusted EBITDA

  $ 4,382   $ 7,961   $ 8,755     $ 8,947     $ 6,095     $ 10,299   $ 11,247  
                                                 

(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 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. In particular, Yahoo! has announced that it is changing the manner in which it handles paid search listings to an approach similar to the one used by Google. We believe this change will make it more difficult for us to ascertain what other companies are

 

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bidding for specific key words. The adoption of this approach by Yahoo! and other paid search providers could significantly increase the cost of our Internet advertising. In addition, if any free search engine or shopping comparison site on which we rely begins charging 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. 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.

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

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

 

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Trade Commission, or USITC, against us and five other named respondents, including four Taiwan-based manufacturers. Ford alleged in this action that we and the other respondents infringed 14 design patents (four of which were subsequently dropped from the investigation at Ford’s request) 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. The administrative law judge issued a preliminary ruling on December 4, 2006 upholding the validity of seven of the ten patents. The judge further ruled that the importation of automotive parts allegedly covered by these seven patents violates Section 337 of the Tariff Act of 1930, as amended. This ruling is subject to review by the USITC and will become final if adopted in whole or in part by the USITC. If it ultimately finds a violation of Section 337, the USITC may issue an order prohibiting further importation of the covered parts into the United States. 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 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.

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.

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

 

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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 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.

 

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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.

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;

 

  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

 

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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.

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. 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

 

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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 $83.5 million for the nine months ended September 30, 2006. Our recent expansion and planned growth have 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

 

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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.

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

As part 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. Integrating any newly acquired businesses, technologies or services is likely to be expensive and time consuming. For example, our recent acquisition of Partsbin has resulted in significant costs and a number of challenges, including integrating the diverse technologies and differing e-commerce platforms and accounting systems used by each company. If we are unable to successfully complete this integration, we may not realize the synergies from the acquisition, and our business and results of operations could suffer. To finance any future acquisitions, it may also 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. 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 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

 

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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.

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.

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

 

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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 do 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 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

 

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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 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 and our 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

 

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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 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.net , www.partstrain.com and www.autopartswarehouse.com . We may be unable to protect these domain names or acquire or maintain 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.

 

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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 from foreign manufacturers and other suppliers who source products internationally. 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 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 other countries 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.

 

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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 $79.3 million. Approximately $33.0 million of the net proceeds will be used to repay outstanding indebtedness, which will become due and payable in full upon the closing of an initial public offering. Our management will retain broad discretion as to the allocation of the remaining 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 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 57.2% of our outstanding shares of common stock. This 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 29,832,927 shares of common stock. This includes the 10,000,000 shares we and the selling stockholders are selling in this offering, which may be resold in the public market immediately. The

 

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remaining shares outstanding after the offering are all subject to lock-up agreements. Of these remaining shares, 6,649,618 shares will become available for resale in the public market 180 days after the date of this prospectus and 13,183,309 shares will become available for resale in the public market one year after the date of this prospectus, all subject to extension in certain circumstances. However, the underwriters can waive this restriction and allow these stockholders to sell their shares at any time, subject to applicable securities law and limitations. 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 assumed initial public offering price of $11.00 per share, purchasers in this public offering will experience immediate and substantial dilution of approximately $9.28 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 83.3% of the aggregate price paid by all purchasers of our stock but will own only approximately 24.5% 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 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

 

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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. 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.

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

Provisions in our certificate of incorporation and bylaws could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. Such provisions include the following:

 

  Ÿ   our board of directors will be authorized, without prior stockholder approval, to create and issue preferred stock which could be used to implement anti-takeover devices;

 

  Ÿ   advance notice will be required for director nominations or for proposals that can be acted upon at stockholder meetings;

 

  Ÿ   our board of directors will be classified such that not all members of our board are elected at one time, which may make it more difficult for a person who acquires control of a majority of our outstanding voting stock to replace all or a majority of our directors;

 

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  Ÿ   stockholder action by written consent will be prohibited except with regards to an action that has been approved by the board;

 

  Ÿ   special meetings of the stockholders will be permitted to be called only by the chairman of our board of directors, our chief executive officer or by a majority of our board of directors;

 

  Ÿ   stockholders will not be permitted to cumulate their votes for the election of directors; and

 

  Ÿ   stockholders will be permitted to amend certain provisions of our bylaws only upon receiving at least 66  2 / 3 % of the votes entitled to be cast by holders of all outstanding shares then entitled to vote generally in the election of directors, voting together as a single class.

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 8,000,000 shares of common stock in this offering are estimated to be approximately $79.3 million based on an assumed initial public offering price of $11.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of shares by the selling stockholders.

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

 

  Ÿ   Approximately $28.0 million will be used to repay our outstanding indebtedness under two term loans for approximately $18.0 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 6,633,255 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 6,633,255 shares of common stock immediately prior to the completion of this offering; (b) the issuance of 8,000,000 shares of common stock at an assumed initial public offering price of $11.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us; and (c) the repayment after the offering of $33.0 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)  

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

   $ 34,888     $ 34,888     $ 182  
                        

Stockholders’ equity:

      

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

     11              

Common stock, $0.001 par value; 50,000,000 shares authorized; 15,199,678 shares issued and outstanding, actual; 21,832,933 shares issued and outstanding, pro forma; 29,832,927 shares issued and outstanding, pro forma as adjusted

     15       26       34  

Additional paid-in capital, excluding share-based compensation

     67,879       67,879       147,179  

Share-based compensation

     604       604       604  

Accumulated other comprehensive income

     6       6       6  

Accumulated deficit

     (48,172 )     (48,172 )     (48,172 )
                        

Total stockholders’ equity

     20,343       20,343       99,651  
                        

Total capitalization

   $ 55,231     $ 55,231     $ 99,833  
                        

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

 

  Ÿ   2,416,536 shares of common stock issuable upon the exercise of outstanding options at a weighted average exercise price of $8.20 per share;

 

  Ÿ   186,305 shares of common stock reserved for future grant or issuance under our stock option plans; and

 

  Ÿ   84,332 shares of common stock issuable upon the exercise of warrants outstanding at a weighted average exercise price of $7.29 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 $(29.2) million, or $(1.34) 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 8,000,000 shares of common stock offered by this prospectus at an assumed offering price of $11.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us; and (c) the repayment of $33.0 million of our indebtedness upon completion of this offering, our pro forma net tangible book value as of September 30, 2006 would have been $51.4 million, or $1.72 per share of common stock. This represents an immediate increase in pro forma net tangible book value of $3.06 per share to existing stockholders and an immediate dilution in pro forma net tangible book value of $9.28 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

     $ 11.00

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

   $ (1.34 )  

Increase per share attributable to new investors

     3.06    
          

Pro forma net tangible book value per share after this offering

     $ 1.72
        

Dilution per share to new investors

     $ 9.28
        

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 $11.00 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

   21,832,927    73.2 %   $ 17,658    16.7 %   $ 0.81

New investors

   8,000,000    26.8       88,000    83.3       11.00
                          

Total

   29,832,927    100.0 %   $ 105,658    100.0 %  
                          

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 December 31, 2006, options to purchase 2,786,532 shares of common stock were outstanding at a weighted average exercise price of $9.04 per share and warrants to purchase 84,332 shares of common stock were outstanding at a weighted average exercise price of $7.29 per share. Assuming all of our outstanding options and warrants are exercised, new investors will own approximately 24.5% of our outstanding shares while contributing approximately 66.9% 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     $ 83,514  

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       29,735  

Operating expenses:

             

General and administrative(1)

    1,528       1,090       2,284       3,599       7,254       5,555       7,013  

Marketing(1)

    467       1,685       3,617       4,526       5,802       4,315       10,134  

Fulfillment(1)

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

Technology(1)

    111       259       405       776       868       596       898  

Amortization of intangibles

                      8       17       13       3,037  
                                                       

Total operating expenses

    3,040       5,507       9,552       11,899       18,298       13,641       24,671  
                                                       

Income from operations

    231       154       4,291       7,425       6,571       4,462       5,064  

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       4,264  

Income tax provision (benefit)

    3       3       478       328       (163 )     (199 )     615  
                                                       

Net income

  $ 186     $ 215     $ 3,771     $ 7,133     $ 6,819     $ 4,758     $ 3,649  
                                                       

Basic net income per share

  $ 0.02     $ 0.02     $ 0.33     $ 0.54     $ 0.52     $ 0.36     $ 0.26  

Diluted net income per share

  $ 0.02     $ 0.02     $ 0.33     $ 0.54     $ 0.52     $ 0.36     $ 0.19  

Shares used in computation of basic net income per share

    10,999,560       10,999,560       11,276,876       13,200,000       13,200,000       13,200,000       14,180,869  

Shares used in computation of diluted net income per share

    10,999,560       10,999,560       11,276,876       13,200,000       13,200,000       13,200,000       19,362,189  

EBITDA(2)

  $ 274     $ 333     $ 4,382     $ 7,961     $ 8,755     $ 6,095     $ 9,792  

Adjusted EBITDA(2)

  $ 274     $ 333     $ 4,382     $ 7,961     $ 8,755     $ 6,095     $ 10,299  

(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

   $         —    $         —    $         —    $         —    $         —    $         —    $         —    $       336

Marketing

                                        107

Fulfillment

                                        16

Technology

                                        48
                                                       
   $    $    $    $    $    $    $    $ 507
                                                       

 

(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      (4,968 )

Total assets

    2,963      4,290      8,289      13,111      14,484      69,059  

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      20,343  

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     $ 3,649

Interest expense, net

    44     21     13     44     106       68       950

Income tax provision (benefit)

    3     3     478     328     (163 )     (199 )     615

Amortization of intangibles

                8     17       13       3,037

Depreciation and amortization

    41     94     120     448     1,976       1,455       1,541
                                             

EBITDA

    274     333     4,382     7,961     8,755       6,095       9,792

Share-based compensation

                                507
                                             

Adjusted EBITDA

  $ 274   $ 333   $ 4,382   $ 7,961   $ 8,755     $ 6,095     $ 10,299
                                             

 

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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     $ 175 (h)   $ 98,168  

Cost of sales

     34,829       29,398       135 (h)     64,362  
                                

Gross profit

     24,869       8,897       40       33,806  

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       (7,967 )     (1,395 )

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 )     (9,895 )     (3,247 )

Income tax benefit

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

Net income (loss)

   $ 6,819     $ (8 )   $ (9,863 )   $ (3,052 )
                                

Basic and diluted net income per share

   $ 0.52         $ (0.20 )

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

     13,200,000         1,983,31 5(d)     15,183,315  

(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; (g) the exclusion of the operations of TPB Real Estate, LLC, which we did not acquire as part of the Partsbin acquisition and was insignificant to Partsbin; and (h) the conforming of Partsbin’s accounting policy of revenue recognition to F.O.B. shipping point terms.

 

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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

   $ 83,514     $ 23,646     $ 206 (i)   $ 107,366  

Cost of sales

     53,779       17,690       145 (i)     71,614  
                                

Gross profit

     29,735       5,956       61       35,752  

Operating expenses:

        

General and administrative

     7,013       1,594       19 (e)(g)(h)     8,626  

Marketing

     10,134       3,419       (193 )(a)(e)     13,360  

Fulfillment

     3,589       19             3,608  

Technology

     898       413       (100 )(e)     1,211  

Amortization of intangibles

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

Total operating expenses

     24,671       5,445       2,863       32,979  
                                

Income from operations

     5,064       511       (2,802 )     2,773  

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

     4,264       510       (3,530 )     1,244  

Income tax provision (benefit)

     615             (972 )(f)     (357 )
                                

Net income (loss)

   $ 3,649     $ 510     $ (2,558 )   $ 1,601  
                                

Basic net income per share

   $ 0.28         $ 0.11  

Diluted net income per share

   $ 0.20         $ 0.08  

Shares used in computation of basic net income per share

     13,207,372         1,983,315 (d)     15,190,687  

Shares used in computation of diluted net income per share

     18,388,692         1,983,315 (d)     20,372,007  

(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 was insignificant to Partsbin; (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; and (i) the conforming of Partsbin’s accounting policy of revenue recognition to F.O.B. shipping point terms.

 

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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 $83.5 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 1,983,315 shares of our common stock. The acquisition of Partsbin did not result in a new operating segment for financial reporting purposes. Upon completion of this offering, we may pursue selective acquisition opportunities to increase our share of the aftermarket auto parts market and expand our product offerings.

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, Chief Operating 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 provides us

 

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with 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.

Industry Issues. Certain industry issues could have an adverse impact on our future operating results. First, Ford Global Technologies, LLC has filed a complaint with the USITC alleging that we and certain other parties in the aftermarket auto part distribution chain have infringed certain of Ford’s design patents. If Ford is successful in this litigation and other OEMs commence similar actions, we could be precluded from selling certain parts, our costs could increase and the aftermarket auto parts industry in general could be adversely effected. The second issue relates to certain changes in the paid search market. In particular, Yahoo! recently announced that it is changing the manner in which it handles paid search advertising to an approach similar to the one used by Google. We believe this change will make it more difficult for us to ascertain what other companies are bidding for specific key words. The adoption of this approach by Yahoo! and other paid search providers could significantly increase the cost of our Internet advertising.

Basis of Presentation

Net Sales. E-commerce, online marketplaces and wholesale sales represent different sales channels for our products. We generate net sales primarily through the sale of auto parts to individual consumers through our network of e-commerce websites and online marketplaces. E-commerce sales are derived from our network of websites, which are company owned and operated. E-commerce and online marketplace sales also include inbound telephone sales through our call center that supports these sales channels. Online marketplaces consist primarily of sales of our products on online auction websites, where we sell through auctions as well as through storefronts that we maintain on these third-party owned websites. Our wholesale channel represents our distribution of products directly to commercial customers by selling auto parts to auto body shops and collision repair shops located in Southern California. Our wholesale channel also includes the distribution of our Kool-Vue 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.

 

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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.

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 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 (to the common carrier), 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,

 

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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 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 $52.5 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 $14.1 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.

 

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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 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. 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.

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

 

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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.

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 $507,000, 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

 

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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.

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     64.4  
                              

Gross profit

   43.7     47.5     41.7     41.2     35.6  

Operating expenses:

          

General and administrative

   7.2     8.9     12.2     12.6     8.4  

Marketing

   11.4     11.1     9.7     9.8     12.1  

Fulfillment

   10.3     7.4     7.3     7.2     4.3  

Technology

   1.3     1.9     1.5     1.4     1.1  

Amortization of intangibles

   —       0.0     0.0     0.0     3.6  
                              

Total operating expenses

   30.2     29.3     30.7     31.0     29.5  
                              

Income from operations

   13.5     18.2     11.0     10.2     6.1  

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 )   (1.2 )
                              

Other income (expense), net

   (0.1 )   0.1     0.1     0.2     (1.0 )

Income before income taxes

   13.4     18.3     11.1     10.4     5.1  

Income tax provision (benefit)

   1.5     0.8     (0.3 )   (0.4 )   0.7  
                              

Net income

   11.9 %   17.5 %   11.4 %   10.8 %   4.4 %
                              

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     $ 83,514     $ 39,535    89.9 %

Cost of sales

     25,876       53,779       27,903    107.8 %
                         

Gross profit

   $ 18,103     $ 29,735     $ 11,632    64.3 %

Gross margin

     41.2 %     35.6 %      (5.6 )%

Net sales increased due to a 119.3% increase in our online business, which consists of our e-commerce and online marketplace channels, that was principally driven by the acquisition of Partsbin, which was completed on May 19, 2006. E-commerce sales increased $35.8 million, or 141.5%, from $25.3 million for the nine months ended September 30, 2005 to $61.1 million in the corresponding period of 2006. The

 

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Partsbin acquisition significantly increased the number of engine parts, performance parts and accessories offered to our customers. 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, or 47.4%, increase in our online marketplace sales, which included the contribution of Partsbin sales through this channel. Online marketplace sales were $7.8 million for the nine months ended September 30, 2005 compared to $11.5 million in the corresponding period of 2006. Net 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. There was no meaningful change in wholesale sales for the nine months ended September 30, 2005 compared to the corresponding period of 2006. 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.

Seasonality represents a known trend in our business. We expect seasonality to continue in future years as automobile collisions create increased demand for body parts in winter months and consumers continue to undertake projects to maintain and enhance the performance of their automobiles in the summer months. Seasonality trends will continue to have a material impact on our financial condition and results of operations during any given year.

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 margin products sold in our e-commerce channel through our drop-ship distribution method. Although we are able to determine gross profit at the SKU level within our sales channels, we do not currently track gross profit separately for each sales channel. This distribution method commenced largely in connection with the Partsbin acquisition and has generated lower product margins than our stock-and-ship distribution method. We expect, however, that this new distribution method will allow us to offer a broader product selection and facilitate 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. We experienced declining margins in recent years due to overall competitive pressure in the market and recently as a result of the Partsbin acquisition completed in May 2006. We expect our margins to stabilize in the future, however as we continue to focus on various initiatives designed to improve gross margins and overall profitability.

General and Administrative Expense

 

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

General and administrative expense

   $ 5,555     $ 7,013     $ 1,458    26.2 %

Percent of net sales

     12.6 %     8.4 %      (4.2 )%

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

 

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related to an aborted financing transaction in 2005. This increase also includes $336,000 of share-based compensation related to options granted in the current period. 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, 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

 

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

Marketing expense

   $ 4,315     $ 10,134     $ 5,819    134.9 %

Percent of net sales

     9.8 %     12.1 %      2.3 %

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. In addition, marketing expense increased $1.7 million due to the addition of 146 employees, which increased our total number of employees from 143 in the prior year to 289 in the current period.

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 12 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     $ 898     $ 302    50.7 %

Percent of net sales

     1.4 %     1.1 %      (0.3 )%

The increase in technology expense was primarily due to higher communication fees to support the expanded communications infrastructure and the addition of $48,000 of share-based compensation expense.

 

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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 %     (1.0 )%     (1.2)%

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. We anticipate that interest expense will decrease after this offering since we plan to use a portion of the proceeds of this offering to repay our term loans and stockholder notes.

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 $17.5 million, or 63.1%, increase in our online business, which was principally driven by the expansion of our online marketplaces, which generated net sales of $10.6 million in 2005. Online marketplace sales commenced in late 2004 and represented only nominal sales prior to 2005. Our e-commerce sales increased $7.3 million, or 26.5%, from $27.5 million in 2004 to $34.8 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 $1.9 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. Overall, wholesale sales (which includes Kool-Vue sales) increased $1.5 million, or 11.3%, from $12.9 million in 2004 to $14.4 million in 2005.

 

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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 through our online marketplaces that have a higher ratio of shipping costs to product sales. Gross margin also decreased as a result of increased competition and the addition of our online marketplaces channel, which occurred late in 2004.

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.

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.

 

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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.

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 $5.9 million, or 27.6%, 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. E-commerce sales were $21.6 million in 2003 and $27.5 million in 2004, an increase of 27.3%. Online marketplace sales commenced in late 2004 and represented $300,000 in 2004. In addition, sales in our wholesale channel increased $2.8 million, or 27.2%, from $10.1 million in 2003 to $12.9 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.

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 an 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.

 

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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.

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 %

 

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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.

 

    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       $38,543  

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       12,640  

Operating expenses:

             

General and administrative (1)

    1,966       1,905       1,684       1,699       1,965       2,290       2,758  

Marketing (1)

    1,273       1,507       1,535       1,487       1,976       3,179       4,979  

Fulfillment (1)

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

Technology (1)

    183       211       202       272       194       323       381  

Amortization of intangibles

    5       4       4       4       4       947       2,086  
                                                       

Total operating expenses

    4,377       4,714       4,550       4,657       5,291       7,952       11,428  

Income from operations

    1,949       1,114       1,399       2,109       2,455       1,397       1,212  

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       2,564       1,083       617  

Income tax provision (benefit)

    34       (256 )     24       35       (156 )     472       299  
                                                       

Net income

    $  1,978       $  1,395       $  1,383       $  2,063       $  2,720       $  611       $  318  
                                                       

Basic net income per share

    $0.15       $0.11       $0.10       $0.16       $0.21       $0.04       $0.02  

Diluted net income per share

    $0.15       $0.11       $0.10       $0.16       $0.18       $0.03       $0.01  

Shares used in computation of basic net income per share

    13,200,000       13,200,000       13,200,000       13,200,000       13,200,000       14,120,952       15,199,681  

Shares used in computation of diluted net income per share

    13,200,000       13,200,000       13,200,000       13,200,000       15,382,341       20,772,428       21,876,868  

EBITDA

    $2,505       $1,645       $1,945       $2,660       $3,139       $2,898       $3,755  

Share-based compensation

                            4       189       314  
                                                       

Adjusted EBITDA

    $2,505       $1,645       $1,945       $2,660       $3,143       $3,087       $4,069  

(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

  $     $     $     $     $ 2     $ 113     $ 221  

Marketing

                            2       49       56  

Fulfillment

                                  8       8  

Technology

                                  19       29  
                                                       
  $     $     $     $     $ 4     $ 189     $ 314  

 

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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     67.2  
                                          

Gross profit

   44.6     38.2     40.9     43.0     43.0     34.7     32.8  

Operating expenses:

              

General and administrative

   13.9     12.5     11.6     10.8     10.9     8.5     7.2  

Marketing

   9.0     9.9     10.6     9.5     11.0     11.8     12.9  

Fulfillment

   6.7     7.1     7.7     7.6     6.4     4.5     3.2  

Technology

   1.3     1.4     1.4     1.7     1.1     1.2     1.0  

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     29.5     29.7  

Income from operations

   13.7     7.3     9.6     13.4     13.6     5.2     3.1  

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     4.0     1.6  

Income tax provision (benefit)

   0.2     (1.7 )   0.2     0.2     (0.9 )   1.7     0.8  
                                          

Net income

   13.9 %   9.2 %   9.5 %   13.1 %   15.1 %   2.3 %   0.8 %
                                          

EBITDA

   17.7 %   10.8 %   13.4 %   16.9 %   17.4 %   10.7 %   9.7 %

Share-based compensation

                   0.1     0.7     0.9  
                                          

Adjusted EBITDA

   17.7 %   10.8 %   13.4 %   16.9 %   17.5 %   11.4 %   10.6 %

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    $ 2,720     $ 611    $ 318

Interest expense, net

     20      18       31      37      40       317      593

Income tax provision (benefit)

     34      (256 )     24      35      (156 )     472      299

Depreciation and amortization

     468      484       503      521      531       551      459

Amortization of intangibles

     5      4       4      4      4       947      2,086
                                                  

EBITDA

     2,505      1,645       1,945      2,660      3,139       2,898      3,755

Share-based compensation

                          4       189      314
                                                  

Adjusted EBITDA

   $ 2,505    $ 1,645     $ 1,945    $ 2,660    $ 3,143     $ 3,087    $ 4,069
                                                  

We expect that our revenue, operating results and cash flows generally will vary from quarter to quarter depending on a variety of factors, including but not limited to the following:

 

  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   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   our ability to offer a broad range of aftermarket auto parts;

 

  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;

 

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

 

  Ÿ   technical difficulties, system downtime or Internet brownouts;

 

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

 

  Ÿ   general economic, industry and market conditions.

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 (which are currently convertible into 6,633,255 shares of

 

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our common 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 1,983,315 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.

Upon completion of this offering, we intend to use a portion of the proceeds of this offering to repay (i) the outstanding indebtedness under the bank term loans, of which approximately $28.0 million was outstanding as of December 31, 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 $5.0 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

 

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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          

Contractual obligations as of September 30, 2006 increased from December 31, 2005 due to additional notes payable related to two term loans for approximately $22.0 million and $10.0 million as well as $5.0 million for certain promissory notes payable to the former stockholders of Partsbin. In January 2006, we repaid in full the $96,000 note which was outstanding as of December 31, 2005. During the nine months ended September 30, 2006, we repaid $2.0 million on the $22.0 million loan. The outstanding principal balance of our notes payable as of September 30, 2006 was $35.0 million. In the fourth quarter of 2006, we repaid an additional $2.0 million on the $22.0 million term loan. The outstanding principal balance on our notes payable as of December 31, 2006 was $33.0 million. As of September 30, 2006, both capital lease obligations and operating lease obligations decreased to $202,000 and $1.6 million, respectively. Commitments under capital lease obligations relate to our leases for telephone and computer equipment, and the operating lease obligations for our facilities in Carson, California and Trenton, New Jersey. We intend to use the net proceeds of this offering to repay the $33.0 million of notes payable.

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

 

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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 dismissed our independent auditors, Stonefield Josephson, Inc., and engaged 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.

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. 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,

 

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estimates, accounting policies and procedures. We are actively working to correct these deficiencies through hiring additional finance personnel and increasing focus on documentation, and we have upgraded our accounting system since December 31, 2005 when the deficiencies were identified. 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.net .

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 $83.5 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 $3.6 million, respectively. During the same periods, we also generated Adjusted EBITDA of $8.8 million and $10.3 million, respectively. In addition, we have experienced continued growth in the number of monthly unique visitors to our websites. In September 2006, approximately 6.9 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.

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.

 

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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 1.0% in the third quarter of 2000 to an estimated 2.8% in the third quarter of 2006 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 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.

 

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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

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.

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

 

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parts supply chain, leveraging our long-term supplier relationships and establishing an efficient online cost structure that capitalizes on relatively inexpensive labor.

 

  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

 

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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.

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

Door handles

Doors

Fenders

Grilles

Hoods

Lamps

Mirrors

Performance lamps

Tailgates

Wheels

Window regulators

  

Alternators

Brake discs

Catalytic converters

Climate control

Clutches

Driveshafts

Exhausts

Fuel injection/delivery

Headers

Oxygen sensors

Radiators

Shocks and struts

  

Air deflectors

Bug shields

Car bras

Car covers

Cargo liners

Cold air intakes

Floor mats/carpeting

Nerf bars

Running boards

Seat covers

Tonneau covers

Vent visors

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.

 

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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.

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.

 

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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 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

 

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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.

We have recently entered into written a contract with one of our major suppliers. Our agreement with WORLDPAC, Inc. has an initial term of two years, and renews automatically. In addition, WORLDPAC may terminate the agreement upon 30 days’ written notice if we exceed maximum return rates on parts purchased from WORLDPAC. We do not have material written contracts with any of our other principal suppliers.

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

 

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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. 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,

 

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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.

Employees

As of December 31, 2006, we employed 218 people in the United States and 233 people in the Philippines for a total of 451 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 6,000 square foot 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. Additionally, four of the Ford Design Patents were dropped from the investigation at Ford’s request. A hearing before the ALJ occurred in August 2006, and the ALJ issued a preliminary ruling on December 4, 2006. The ALJ upheld the validity of seven of the ten Ford Design Patents and ruled that the importation of automotive parts allegedly covered by these seven patents violates Section 337 of the Tariff Act of 1930, as amended. This ruling is subject to review by the USITC Commissioners, and we expect a final determination on or before May 4, 2007. We and the other respondents filed a petition urging the USITC Commissioners to review and reverse the portions of the initial determination upholding seven of the ten patents, as well as earlier rulings by the ALJ. Ford also filed a petition urging the USITC Commissioners to

 

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review and reverse the portions of the initial determination invalidating three of the ten patents. The USITC has until March 20, 2007 to decide whether or not it will grant, in whole or in part, the respective petitions for review. If the petition is granted, the USITC will then set a briefing schedule and we expect a final determination on or before May 4, 2007. If the USITC ultimately finds a violation of Section 337, it may issue an order prohibiting further importation of the covered parts into the United States. The USITC’s actions are subject to review by the President of the United States, who has the authority to approve or disapprove the USITC’s action. After the end of such review period, the USITC’s final decision can be appealed to the United States Court of Appeals for the Federal Circuit. 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 the ALJ’s preliminary ruling, 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, Ford and other car manufacturers may attempt to assert similar allegations based upon design patents on a significant number of parts for other models, which over time could have a material adverse impact on us and 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 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 January 22, 2007.

 

Name

   Age   

Position(s)

Mehran Nia

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

Michael J. McClane

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

Howard Tong

   36    Chief Operating Officer

Alexander Adegan

   37    Chief Information Officer

Houman Akhavan

   28    Vice President of Marketing

Richard Pine

   55    Vice President of Strategic Planning and Director

Sol Khazani

   47    Co-Founder and Chairman of the Board

Fredric W. Harman

   46    Director

Robert J. Majteles (1)(2)(3)

   42    Director

Ellen F. Siminoff (1)(2)(3)

   39    Director

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

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.

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.

Howard Tong has been our Chief Operating Officer since November 2006. From January 2001 to November 2006, Mr. Tong served as vice president of Newegg.com, an online retailer of technology parts and products, and was involved in many critical aspects of its operations. Prior to that, from January 1999 to January 2001, Mr. Tong served as the General Manager of Internet/e-commerce at ABS Computer Technologies, Inc., a provider of computing solutions. Mr. Tong holds a B.S. degree in architectural engineering from Pennsylvania State University.

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

 

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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.

Richard Pine has been our Vice President of Strategic Planning since January 2007 and a director since June 2006. From May 2006 to January 2007, he served as our Vice President, East Coast Operations. 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.

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.

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.

Robert J. Majteles has been a director since November 2006. Mr. Majteles currently serves as the Managing Member of Treehouse Capital, LLC, an investment management company which he founded in June 2001. Mr. Majteles also serves on the boards of directors of Adept Technology, Inc., Macrovision Corporation, Unity Corporation, Vertical Communications, Inc. and World Heart Corporation. Mr. Majteles holds a B.A. degree in political science from Columbia University and a J.D. from Stanford Law School.

Ellen F. Siminoff has been a director since November 2006. Since March 2004, Ms. Siminoff has served as the President and Chief Executive Officer of Efficient Frontier, Inc., a provider of paid search engine marketing solutions. Prior to that, from 1996 to February 2002, Ms. Siminoff served in various capacities at Yahoo!, including as Senior Vice-President of Entertainment and Small Business and Senior Vice President of Corporate Development. Ms. Siminoff also serves as a director of three privately-held companies, including Efficient Frontier. Ms. Siminoff holds an A.B. degree in economics from Princeton University and an M.B.A. from Stanford University.

Messrs. Khazani and Nia are brothers-in-law. Mr. Nia is also the cousin of Mr. Ben Elyashar, a selling stockholder. 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

The size of our board of directors is set at seven members. We currently have six directors and one vacancy. We intend to fill the vacancy on our board with a person who is qualified to serve on our audit committee, under the requirements of the NASDAQ Stock Market qualification standards. 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 Mr. Nia and Ms. Siminoff, Class II shall consist of Messrs. Khazani and Majteles, and Class III shall consist of Messrs. Harman and Pine. 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.

Mr. Harman was elected to serve as a member of our board of directors pursuant to a voting agreement entered into in March 2006 by and among us and certain of our stockholders. Pursuant to the voting agreement, Mr. Harman was selected as a representative of the holders of a majority of our Series A preferred stock. Mr. Pine was elected to serve as a member of our board of directors pursuant to the acquisition agreement entered into in May 2006 by and among us, Partsbin and the stockholders of Partsbin. The voting agreement terminates upon the consummation of this offer, and the arrangement under the acquisition agreement is not a continuing obligation. Messrs. Harman and Pine will continue to serve as directors until their resignation or until their successors are duly elected by holders of our common stock.

Board Committees

Our board of directors has an audit committee, a compensation committee and a nominating and corporate governance committee.

Audit Committee. Our audit committee consists of Mr. Majteles and Ms. Siminoff. All members of the audit committee are independent directors, as defined in the NASDAQ Stock Market qualification standards. Mr. Majteles 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;

 

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  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.

Compensation Committee. Our compensation committee currently consists of Mr. Majteles and Ms. Siminoff. All members of the compensation committee are independent directors, 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 Mr. Majteles and Ms. Siminoff. 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.

Compensation Discussion and Analysis

The primary objective of our compensation policies and programs with respect to executive compensation is to serve our stockholders by attracting, retaining and motivating talented and qualified executives. We focus on providing a competitive compensation package which provides significant short and long-term incentives for the achievement of measurable corporate and individual performance objectives. Prior to the creation of the compensation committee of our board of directors in October 2006, decisions regarding executive compensation were made by our board of directors. Future decisions regarding executive compensation will be the primary responsibility of our compensation committee.

 

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In 2006, we paid our senior management through a mix of base salary, bonus and equity compensation at levels that we believed were comparable to executives of companies of similar size and stage of development. We did not have an equity incentive plan until March 2006 and have not yet established a formalized policy with respect to our allocations between long-term equity compensation and currently paid out compensation. As a private company, our compensation plans and the amount of each compensation element to pay our executives were generally developed by our management and approved by our board on an individual, case-by-case basis utilizing a number of factors, including publicly available data and our general business conditions and objectives, as well as our subjective determination with respect the executive’s individual contributions to such objectives. We recently retained a compensation consultant and are working with the consultant to assist the compensation committee and the board to establish a compensation program which we anticipate will include more objective criteria or formalized policies with respect to the determination of compensation amounts and allocations for our executives. In addition, we expect that in the future, we may seek additional assistance, including engaging the services of other compensation consultants, conducting annual benchmark reviews of our executive compensation or subscribing to various surveys or reports, in setting appropriate levels of compensation for our executives.

Elements of Executive Compensation

Base Salary

We seek to provide our senior management with a level of a base salary in the form of cash compensation appropriate to their roles and responsibilities. Base salaries for our executives are established based on the executive’s qualifications and experience, scope of responsibilities and future potential, the executive’s past performance, and the salaries paid by other companies for similar positions. Base salaries are reviewed annually, and adjusted from time to time to realign salaries with market levels after taking into account individual responsibilities, performance and experience.

Incentive Cash Bonuses

Our practice is to award incentive cash bonuses to our executive officers based upon their individual performance as well as performance objectives of the company. In 2006, we paid to one of our named executive officers a bonus in connection with the successful completion of our March 2006 recapitalization. All other bonuses to our executive officers were awarded primarily based on the subjective evaluation by the board of each executive’s contribution towards achieving general business objectives. The compensation committee expects to adopt formal processes for incentive cash bonuses in 2007 and beyond. The compensation committee intends to utilize incentive cash bonuses to reward executives for achieving financial and operational goals and for achieving individual performance objectives.

Long-Term Equity Compensation

We believe that long-term performance is achieved through an ownership culture that encourages long-term performance by our executive officers through the use of stock-based awards. We have established equity incentive plans to provide our employees, including our executive officers, with incentives to help align those employees’ interests with the interests of stockholders. In 2006, we granted to our executive officers varying amounts of stock options which generally vest over a four year period, to provide a long-term incentive to such officers, provide them with an opportunity to obtain an ownership interest in our company and further align their interests with the interests of our stockholders. The compensation committee believes that the use of stock and stock-based awards promotes our overall executive compensation objectives and expects that equity incentives will continue to be a significant source of compensation for our executives.

 

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Historically, we have issued stock options, which may be exercised prior to vesting and converted into restricted stock. The stock options that we grant generally vest as to 25% of the shares underlying the grant on the first anniversary of the grant date, with the remainder vesting in 36 equal monthly installments thereafter. In addition, these stock options generally have a maximum term of ten years. We have not had a formalized policy as to the amount or timing of grants to executive officers, and the compensation committee has not yet formalized any procedures or established specific factors for the granting of options. The compensation committee expects, however, that any future grants will be made on a structured and systematic basis, based on a number of factors, including individual performance, benchmark data, our strategic goals and our financial condition.

Other Compensation

Our executive officers are eligible to receive the same benefits, including non-cash group life and health benefits, that are available to all employees. Certain additional benefits may be provided to our executives such as a car allowance, but each on a case-by-case basis.

Summary Compensation Table

The following table shows information regarding the compensation earned during the fiscal year ended December 31, 2006 by our Chief Executive Officer, Chief Financial Officer and our three other most highly compensated executive officers who were employed by us as of December 31, 2006 and whose total compensation exceeded $100,000 during that fiscal year. The officers listed below will be collectively referred to as the “named executive officers” in this prospectus.

 

Name

  Salary   Bonus     Option
Awards(1)
  All Other
Compen-
sation
    Total

Mehran Nia

    Chief Executive Officer and President

  $ 400,000   $     $   $ 22,985 (2)   $ 422,985

Michael J. McClane

    Chief Financial Officer

    198,077     321,639 (3)     127,072     22,339 (4)     669,127

Houman Akhavan

    Vice President of Marketing

    293,788           64,905     10,786 (4)     369,479

Ben Elyashar(5)

    Director of Perfectfit

    300,000               25,630 (4)     325,630

Richard Pine(6)

    Vice President of Strategic Planning

    116,589           117,294     22,204 (7)     256,087

(1)   Represents the expense recognized by us for fiscal year 2006 for the stock options granted, determined pursuant to SFAS 123(R) utilizing assumptions discussed in Note 1 to our financial statements included elsewhere in this prospectus. See also our discussion of share-based compensation under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates.”

 

(2)   Represents health insurance premiums, telephone expenses and $13,661 paid by us for an automobile lease.
(3)   Includes a bonus of $221,639 in the aggregate paid in connection with the completion of the March 2006 recapitalization.

 

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(4)   Represents health insurance premiums, 401(k) plan employer contributions, telephone expenses and automobile allowances paid by us.

 

(5)   Mr. Elyashar served as our Chief Operating Officer from February 2006 to October 2006, and was our Vice President of Operations as of December 31, 2006. He has served as our Director of Perfectfit since January 2007.

 

(6)   Mr. Pine joined us as our Vice President, East Coast Operations in connection with our acquisition of Partsbin. He has served as our Vice President of Strategic Planning since January 2007.

 

(7)   Represents health insurance premiums, telephone expenses and $12,658 paid by us for an automobile allowance.

Grants of Plan-Based Awards

All plan-based awards granted to our named executive officers are incentive stock options, to the extent permissible under the Internal Revenue Code. The exercise price per share of each option granted to our named executive officers was as determined in good faith by our board of directors to be equal to the fair market value of our common stock as determined by our board of directors on the date of the grant. All options were granted under our 2006 Equity Incentive Plan and are immediately exercisable. Except as otherwise noted below, the options vest as to 25% of the shares underlying the option on the first anniversary of the grant date, with the remainder vesting in 36 equal monthly installments thereafter. For a further description of these plans, see “Employee Benefit Plans.”

The following table presents information concerning grants of plan-based awards to each of the named executive officers during 2006.

 

Name

   Grant
Date
   All Other
Option Awards:
Number of
Securities
Underlying
Options (#)
  

Exercise or
Base Price of
Option Awards

($/Share)

   Grant Date
Fair Value of
Option Awards(1)

Mehran Nia

    Chief Executive Officer and President

         $    $

Michael J. McClane(2)

    Chief Financial Officer

   03/01/06
03/28/06
   42,240
266,820
    
 
7.10
6.78
    
 
86,324
573,578

Houman Akhavan

    Vice President of Marketing

   03/28/06    231,000      6.78      486,544

Ben Elyashar

    Director of Perfectfit

               

Richard Pine

    Vice President of Strategic Planning

   05/22/06    265,050      9.17      730,427

(1)   Represents the grant date fair value of the stock options granted, determined pursuant to SFAS 123(R) utilizing assumptions discussed in Note 1 to our financial statements included elsewhere in this prospectus. See also our discussion of share-based compensation under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates.” The amounts listed represent the total share-based compensation to be recognized by us over the vesting period.

 

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(2)   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.

Outstanding Equity Awards at Fiscal Year-End

The following table presents the outstanding equity awards held by each of the named executive officers as of the fiscal year ended December 31, 2006. Except as otherwise indicated below, each option vests as to 25% of the shares underlying the option on the first anniversary of the grant date, with the remainder vesting in 36 equal monthly installments thereafter.

 

Name

  Option Awards
  Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
   Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
   Equity
Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
   Option
Exercise
Price ($)
   Option
Expiration
Date

Mehran Nia

    Chief Executive Officer and President

           $   

Michael J. McClane

    Chief Financial Officer

  42,240
266,820
  
  
    
 
7.10
6.78
   02/29/16
03/27/16

Houman Akhavan

    Vice President of Marketing

  231,000            6.78    03/27/16

Ben Elyashar

    Director of Perfectfit

               

Richard Pine

    Vice President of Strategic Planning

  265,050            9.17    05/21/16

Option Exercises and Stock Vested

None of the named executive officers exercised any options to purchase our common stock or became vested in restricted stock during the year ended December 31, 2006.

Pension Benefits

We do not have any qualified or non-qualified defined benefit plans.

Non-qualified Deferred Compensation

We do not have any non-qualified defined contribution plans or other deferred compensation 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 January 2007, 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

 

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we will be required to continue to provide coverage for one year under our healthcare plans and group insurance policies for Mr. McClane and his immediate family, as well as pay six months of severance 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 42,240 shares at an exercise price equal to $7.10 per share (which was above fair value); and (ii) an option granted on March 28, 2006 to purchase up to 266,820 shares at an exercise price equal to $6.78 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. 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 shares of our common stock under our 2006 Equity Incentive Plan at an exercise price of $9.17 per share. Mr. Pine is also entitled to participate in all of our sponsored employee benefit programs.

We entered into an offer letter with Howard Tong in November 2006, pursuant to which he agreed to serve as our Chief Operating Officer. Mr. Tong’s annual salary is $220,000, and Mr. Tong is also eligible to receive a discretionary bonus of up to $100,000 per year. In the event Mr. Tong’s employment is terminated for any reason other than for cause, then we will be required to pay six months of severance to Mr. Tong if the termination occurs within the first two years of his service and 12 months of severance if the termination occurs after the first two years of his service. Mr. Tong is entitled to participate in all of our sponsored employee benefit programs. In November 2006, Mr. Tong was granted an option to purchase up to 270,000 shares of our common stock at an exercise price of $11.68 per share.

Director Compensation

The compensation and benefits for service as a member of the board of directors is determined by our board of directors. Directors employed by us or one of our subsidiaries are not compensated for service on the board or on any committee of the board; however, we reimburse each of 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. Beginning January 2007, each of our non-employee directors, other than Messrs. Harman and Khazani, will be paid a fee of $25,000 per year for his or her service as a director. Members of the audit committee, the compensation committee, and the nominating and corporate governance committee will each receive an additional $7,500, $5,000 and $2,500, respectively, per year for his or her service on such committee. The chairpersons of the audit committee, the compensation committee, and the nominating and corporate governance committee will receive $15,000, $7,500 and $5,000, respectively, per year for his or her service on such committee.

Any non-employee director who is first elected to the board of directors following this offering will be granted an option to purchase 45,000 shares of our common stock on the date of his or her initial election to the board of directors. In addition, on the date of each annual stockholders meeting, each person who has

 

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served as a non-employee member of the board of directors for at least six months before the date of the stockholder meeting will be granted a stock option to purchase 20,000 shares of our common stock. 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 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 2007 Omnibus Incentive Plan.

For the year ended 2006, we approved the payment of $12,500 per quarter to Mr. Entekhabi for his service as a director. Each of our other non-employee directors, other than Messrs. Harman and Khazani, was entitled to $20,000 per year for his or her service as a director, as well as the payment of an additional $2,500 per year for each committee on which he or she served. The chairperson of a committee was entitled to receive $5,000 per year for service on such committee. The following table sets forth a summary of the compensation earned in fiscal year 2006 by each person who served as a director during such year, who is not a named executive officer.

 

Name

  Fees Earned or
Paid in Cash ($)
   

Option

Awards ($)(1)

    All Other
Compensation ($)
    Total ($)

Sol Khazani

  $     $     $ 30,000 (2)   $ 30,000

Massoud Entekhabi

    28,333 (3)     48,743 (4)           77,076

Fredric W. Harman

                     

Robert J. Majteles

    2,667 (3)     3,126 (4)           5,793

Ellen F. Siminoff

    2,667 (3)     3,126 (4)           5,793

(1)   Stock options were granted pursuant to the U.S. Auto Parts Network, Inc. 2006 Equity Incentive Plan. Represents the expense recognized by us for fiscal year 2006 for the stock options granted, determined pursuant to SFAS 123(R) utilizing assumptions discussed in Note 1 to our financial statements included elsewhere in this prospectus. See also our discussion of share-based compensation under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates.” The total share-based compensation to be recognized over the vesting period is as follows: Massoud Entekhabi—$256,790; Robert J. Majteles—$106,197 and Ellen F. Siminoff—$106,197.

 

(2)   Consists of consulting fees paid to a company owned by Mr. Khazani for his consulting services. See “Related Party Transactions—Transactions with Sol Khazani or Persons Affiliated with Sol Khazani”.

 

(3)   Represents amounts earned by the directors based on the compensation arrangement for 2006 described above. Mr. Entekhabi served as a director from June 2006 to January 2007, and served as the chairperson of the audit committee from October 2006 and as a member of the compensation committee and the nominating and corporate governance committees from October 2006 and November 2006, respectively. Mr. Majteles and Ms. Siminoff have each served as a director, a chairperson of a committee, and a member of the other two committees of the board since November 2006.

 

(4)  

In June 2006, we granted to Mr. Entekhabi an option to purchase up to 109,200 shares of our common stock at an exercise price of $9.17 per share. In November 2006, we granted to each of Mr. Majteles and Ms. Siminoff an option to purchase up to 30,000 shares of our common stock at an exercise price of $11.68 per share. One third of each option granted to these directors vests on the first anniversary of the option grant date and the balance of each option vests in 24 equal monthly installments thereafter. Each option was outstanding as of the end of fiscal year 2006. Upon Mr. Entekhabi’s resignation from the board in January 2007, his option was canceled in full. In January 2007, in accordance with our new compensation program with respect to non-employee directors, Mr. Majteles and Ms. Siminoff

 

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were each granted an option to purchase 15,000 shares of our common stock at an exercise price of $11.68 per share, to bring the initial option holdings for each to 45,000 shares in the aggregate. The new options will vest on the same schedule as the options granted to them in 2006.

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 3,519,204 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 December 31, 2006, options to purchase 2,786,532 shares of our common stock were outstanding under the 2006 Incentive Plan at a weighted average exercise price of $9.04 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.

2007 Omnibus Incentive Plan

Our 2007 Omnibus Incentive Plan (the “Omnibus Plan”) was adopted by our board of directors and approved by our stockholders in January 2007 and will become effective upon our initial public offering. The compensation committee of our board of directors (also referred to herein as the “committee”) has the authority to administer the Omnibus Plan and, except for option grants made to non-employee directors under the Automatic Option Grant Program discussed below, will have full power and authority to determine when and to whom awards will be granted, and the type, amount, form of payment and other terms and conditions of each award, consistent with the provisions of the Omnibus Plan. Subject to the provisions of the Omnibus Plan, the committee may amend or waive the terms and conditions, or accelerate the exercisability, of an outstanding award. The committee has authority to interpret the Omnibus Plan and establish rules and regulations for the administration of the Omnibus Plan. In addition, our board of directors may exercise the powers of the committee at any time. Any employee, officer, consultant, advisor or director providing services to us or any of our affiliates, who is selected by the committee, is eligible to receive awards under the Omnibus Plan.

The aggregate number of shares of common stock that may be issued under all stock-based awards made under the Omnibus Plan will be 2,400,000 shares. In addition, the number of shares of common stock reserved under the Omnibus Plan will automatically be increased on the first day of each fiscal year, beginning on January 1, 2008, in an amount equal to the lesser of 1,500,000 shares or five percent of the number of shares outstanding as of the immediately preceding date. Such automatic increase may also be reduced by resolution of the board. Additionally, any shares of our common stock subject to any award that is terminated or forfeited will be available for future awards under the Omnibus Plan. The shares of common stock issuable under the Omnibus Plan may be drawn from shares of authorized but unissued common stock or from shares of common stock that we acquire.

 

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Under our Omnibus Plan, the committee is permitted and authorized to make awards that are denominated or payable in, valued by reference to, or otherwise based on or related to shares of our common stock, including the following:

 

  Ÿ   Stock Options. The committee may grant stock options to officers and other employees intended to qualify as incentive stock options, as defined in Section 422 of the Internal Revenue Code of 1986, as amended, and may also grant options to employees, consultants and independent contractors that do not qualify as incentive stock options. The holder of an option will be entitled to purchase a number of shares of our common stock at a specified exercise price during a specified time period, all as determined by the committee. The shares subject to each option will generally vest in one or more installments over a specified period of service measured from the grant date.

 

  Ÿ   Stock Appreciation Rights (SAR). The holder of a SAR is entitled to receive the excess of the fair market value (calculated as of the exercise date or, at the committee’s discretion, as of any time during a specified period before or after the exercise date) of a specified number of shares of our common stock over the grant price of the SAR, as determined by the committee, paid solely in shares of common stock. SARs vest and become exercisable in accordance with a vesting schedule established by the committee.

 

  Ÿ   Restricted Stock and Restricted Stock Units. The holder of restricted stock will own shares of our common stock subject to restrictions imposed by the committee (including, for example, restrictions on transferability or on the right to vote the restricted shares or to receive any dividends with respect to the shares) for a specified time period determined by the committee. The restrictions, if any, may lapse or be waived separately or collectively, in installments or otherwise, as the committee may determine. The holder of restricted stock units will have the right, subject to any restrictions imposed by the committee, to receive shares of our common stock at some future date determined by the committee.

 

  Ÿ   Performance Awards. Performance awards give participants the right to receive payments in stock or property based solely upon the achievement of certain performance goals during a specified performance period. Subject to the terms of the Omnibus Plan, the performance goals to be achieved during any performance period, the length of any performance period, the amount of any performance award granted, the amount of any payment or transfer to be made pursuant to any performance award and any other terms and conditions of any performance award is determined by the committee.

 

  Ÿ   Dividend Equivalents. The holder of a dividend equivalent is entitled to receive payments (in cash, shares of our common stock, other securities, other awards or other property) equivalent to the amount of cash dividends paid by us to holders of our common stock with respect to a number of shares determined by the committee, subject to terms and conditions determined by the committee and the Omnibus Plan limitations.

 

  Ÿ   Stock Awards. The committee may grant unrestricted shares of our common stock, subject to terms and conditions determined by the committee and the Omnibus Plan limitations.

The term of awards will not be longer than ten years, or in the case of incentive stock options, longer than five years with respect to holders of more than 10% of our common stock. The committee may permit accelerated vesting of an award upon the occurrence of certain events, including a change in control, regardless of whether the award is assumed, substituted or otherwise continued in effect by the successor corporation. The acceleration of vesting in the event of a change in the ownership or control may be seen as an anti-takeover provision and may have the effect of discouraging a merger proposal, a takeover attempt or other efforts to gain control of us.

 

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Under the Automatic Option Grant Program of the Omnibus Plan, when an individual who has not been in our prior employ first becomes a non-employee member of the board of directors, whether through election by our stockholders or appointment by the board of directors, he or she will receive an automatic option grant for 45,000 shares of common stock. In addition, on the date of each annual stockholders meeting, each person who has served as a non-employee member of the board of directors for at least six months before the date of the stockholder meeting, whether or not he or she has been in our prior employ, will automatically be granted a stock option to purchase 20,000 shares of common stock. The Automatic Option Grant Program is expressly governed by the provisions of the Omnibus Plan, and neither the board of directors nor the committee has any discretionary authority to administer the Automatic Option Grant Program. Each option granted under the Automatic Option Grant Program will have an exercise price per share equal to 100% of the fair market value of the option shares on the automatic grant date and have a maximum term of ten years measured from the grant date. One-third of each automatic grant will become vested and exercisable one year from the date of the automatic grant, and the remainder will vest and become exercisable in 24 equal monthly installments over the 24 month period measured from on the one year anniversary of the automatic grant date.

Unless earlier discontinued or terminated by the board, the Omnibus Plan will expire in January 2017. No awards may be made after that date. However, unless otherwise expressly provided in an applicable award agreement, any award granted under the Omnibus Plan prior to expiration may extend beyond the end of such period through the award’s normal expiration date.

 

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RELATED PARTY TRANSACTIONS

Since December 31, 2003, 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 $120,000 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. We believe that the agreements and transactions described below were generally on terms that were comparable to terms we could have obtained from unaffiliated third parties.

Policies and Procedures for Related Party Transactions

Pursuant to the written charter of our audit committee adopted in November 2006, our audit committee of the board of directors is responsible for reviewing and approving, prior to our entry into any such transaction, all related party transactions and potential conflict of interest situations involving a principal stockholder, a member of the Board of Directors or senior management. In addition, our company policies require that our officers and employees avoid using their positions for purposes that are, or give the appearance of being, motivated by a desire for personal gain, and our policies further require that all officers and employees who have authority to initiate related party transactions provide a written report, on an annual basis, of all activities which could result in a conflict of interest or impair their professional judgment. All such written reports concerning related party transactions or conflicts of interest are submitted to, and reviewed by, our Chief Financial Officer and our audit committee.

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 5% stockholders. Mr. Nia is our Chief Executive Officer, President and a director, as well as a 5% stockholder. Mr. Elyashar is our Director of Perfectfit and a 5% stockholder. Mr. Elyashar also served as one our directors from 1995 to November 2006 and as our Chief Operating Officer from February 2006 to October 2006. Lease payments and expenses associated with this arrangement totaled $420,000, $475,000 and $541,000 in the years ended December 31, 2004, 2005 and 2006, respectively.

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 $498,000, $338,000 and $0 from us in the years ended December 31, 2004, 2005 and 2006, respectively.

 

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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 or Persons Affiliated with Sol Khazani

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 services totaled $120,000 in 2005 and $30,000 in 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, 2004, 2005 and 2006 totaled $185,000, $415,000 and $360,000, respectively. Since November 2003, Saman has used a portion of our facility located in Nashville, Tennessee. In the years ended December 31, 2004, 2005 and 2006, Saman paid to us $41,000, $36,000 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 2004, 2005 and 2006 totaled $827,000, $23,000 and $7,000, 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, 2004, 2005 and 2006, we paid this entity $120,000, $101,000 and $177,000, 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 years ended December 31, 2005 and 2006, we paid to Solomon Disposable Supplies an aggregate of $114,000 and $131,000, respectively.

In addition, one of Mr. Elyashar’s brothers received wages from us of approximately $69,000, $79,000 and $79,000 in 2004, 2005 and 2006, respectively, as an employee in our sales department. Mr. Elyashar’s brother remains employed by us and continues to receive wages.

 

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Other Related Party Transactions

In 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 2004). The total amounts of the loans recorded for Messrs. Nia and Elyashar in 2004 were $259,000 and $97,000, respectively. As of December 31, 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.

In connection with our acquisition of Partsbin in May 2006, we issued to Richard Pine, currently our Vice President of Strategic Planning 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 $84,000, $118,000 and $77,000 during the years ended December 31, 2004, 2005 and 2006, respectively, to defend and settle these lawsuits.

In October 2006, we entered into a services agreement with Efficient Frontier, Inc., a provider of paid search engine marketing solutions. Ellen Siminoff, one of our directors, is the President and Chief Executive Officer of Efficient Frontier. The agreement provides for an initial payment to Efficient Frontier of $5,000, and monthly payments thereafter based on our total online marketing budget spent at Internet search engines through the use of Efficient Frontier, subject to certain minimums. The agreement automatically renews for six month periods, but either party may terminate the agreement at any time without cause upon 30 days’ prior written notice.

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 AND SELLING STOCKHOLDERS

The following table indicates information as of January 22, 2007 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;

 

  Ÿ   each of the selling stockholders; 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 21,832,927 shares of common stock outstanding as of January 22, 2007, which assumes the conversion of all of our outstanding preferred stock into 6,633,255 shares of common stock immediately prior to the completion of this offering, and 29,832,927 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 January 22, 2007 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.

 

    

Beneficially Owned
Before the Offering

   

Number of
Shares Being
Offered in
this Offering(2)

  

Beneficially Owned
After the Offering

 

Name and Address of Beneficial Owners(1)

  

Number of
Shares

  

Percent

      

Number of
Shares

  

Percent

 

Oak Investment Partners XI, L.P.(3)

   6,633,255    30.4 %      6,633,255    22.2 %

Sol Khazani(4)

   5,609,998    25.7     964,134    4,645,864    15.6  

Mehran Nia(5)

   5,609,998    25.7     513,903    5,096,095    17.1  

Ben Elyashar(6)

   1,979,998    9.1     340,283    1,639,715    5.5  

Todd Daugherty(7)

   1,008,793    4.6     68,130    940,663    3.1  

Lowell E. Mann(8)

   336,264    1.5     22,710    313,554    1.0  

Michael J. McClane(9)

   309,060    1.4        309,060    1.0  

Richard Pine(10)

   1,008,793    4.6     68,130    940,663    3.1  

Brian Tinari(11)

   336,265    1.5     22,710    313,555    1.0  

Fredric W. Harman(3)

   6,633,255    30.4        6,633,255    22.2  

Robert J. Majteles(9)

   45,000    *          45,000    *  

Ellen F. Siminoff(9)

   45,000    *          45,000    *  

All directors and executive officers as a group (10 persons)(12)

   19,964,467    86.1 %   1,546,167    18,418,300    59.1 %

 *   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.

 

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(2)   In the event the underwriters exercise their over-allotment option, Messrs. Daugherty, Elyashar, Khazani, Mann, Nia, Pine and Tinari have agreed to sell to the underwriters up to 51,098 shares, 255,212 shares, 723,100 shares, 17,033 shares, 385,426 shares, 51,098 shares and 17,033 shares, respectively, of our common stock at the public offering price, less the underwriting discounts and commissions.

 

(3)   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 (“Oak Associates”), the general partner of Oak Investment Partners XI, L.P. (“Oak Partners”). Mr. Harman, Bandel L. Carano, Ann H. Lamont, Edward F. Glassmeyer, and David B. Walrod all serve as Managing Members (the “Managing Members”) of Oak Associates. Oak Associates, as the general partner of Oak Partners, may be deemed to have beneficial ownership of the shares held by Oak Partners. The Managing Members have shared voting and investment control over all of the shares held by Oak Associates and therefore may be deemed to share beneficial ownership of the shares held by Oak Associates by virtue of their status as the controlling persons of Oak Associates. Each Managing Member disclaims beneficial ownership of the shares held by Oak Partners, except to the extent of each such Managing Member’s pecuniary interest therein.

 

(4)   Consists of (i) 5,182,040 shares held by the Khazani Living Trust established October 26, 2004, of which Mr. Khazani and his spouse are the co-trustee and beneficiaries, and (ii) 427,958 shares in the aggregate held in annuity trusts established by Mr. Khazani and his spouse, for which Mr. Khazani and his spouse serve as co-trustees. Mr. Khazani is our Chairman of the Board and one of our co-founders.

 

(5)   Consists of (i) 5,182,040 shares held by the Nia Living Trust established September 24, 2004, of which Mr. Nia and his spouse are the co-trustee and beneficiaries, and (ii) 427,958 shares in the aggregate held in annuity trusts established by Mr. Nia and his spouse, for which Mr. Nia and his spouse serve as co-trustees. Mr. Nia is our Chief Executive Officer and President, a director and one of our co-founders.

 

(6)   Consists of (i) 1,637,632 shares held by the Elyashar Living Trust established August 4, 2004, of which Mr. Elyashar and his spouse are the co-trustees and beneficiaries, and (ii) 342,366 shares in the aggregate held in annuity trusts established by Mr. Elyashar and his spouse, for which Mr. Elyashar and his spouse serve as co-trustees. Mr. Elyashar is our Director of Perfectfit and one of our co-founders. Mr. Elyashar also served as one of our directors from 1995 to November 2006 and served as our Chief Operating Officer from February 2006 to October 2006.

 

(7)   Consists of (i) 743,743 shares held by the Daugherty Family Limited Partnership, of which Mr. Daugherty and his spouse are the general partners, and (ii) 265,050 shares issuable upon exercise of outstanding options which are currently exercisable. Mr. Daugherty joined us in connection with our acquisition of Partsbin and currently serves as our Vice President of Vendor Relations.

 

(8)   Includes 88,350 shares issuable upon exercise of outstanding options which are currently exercisable. Mr. Mann acquired his shares in connection with our acquisition of Partsbin.

 

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

 

(10)   Consists of (i) 743,743 shares held by the Pine Family Partnership, of which Mr. Pine and his spouse are the general partners, and (ii) 265,050 shares issuable upon exercise of outstanding options which are currently exercisable. Mr. Pine joined us in connection with our acquisition of Partsbin and currently serves as a director and our Vice President of Strategic Planning.

 

(11)   Includes 88,350 shares issuable upon exercise of outstanding options which are currently exercisable. Mr. Tinari joined us in connection with our acquisition of Partsbin and currently serves as our Vice President of Marketing.

 

(12)   Includes 1,351,110 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 100,000,000 shares of common stock, par value $0.001 per share, and 10,000,000 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 December 31, 2006, 15,199,672 shares of common stock were outstanding and held of record by fourteen 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 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 December 31, 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 six-tenths of a share of our common stock such that all of the outstanding preferred stock will convert into an aggregate of 6,633,255 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 10,000,000 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 . Upon the closing of this offering, our certificate of incorporation 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.

Special Stockholder Meetings . The bylaws 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 Board or a majority of the entire board. 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

 

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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 bylaws prohibit the taking of stockholder action by written consent without a meeting except with regards to an action earlier approved by the board of directors. These provisions will make it more difficult for stockholders to take action opposed by the board of directors.

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

 

  Ÿ   the classified board of directors;

 

  Ÿ   the authority of stockholders to act by written consent;

 

  Ÿ   calling a special meeting of stockholders; and

 

  Ÿ   procedure and content of stockholder proposals concerning business to be conducted at a meeting of 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 December 31, 2006, options to purchase a total of 2,786,532 shares of common stock were outstanding, at a weighted average exercise price of $9.04 per share and up to 716,309 additional shares of common stock were reserved for future issuance under our 2006 Equity Incentive Plan. Our 2007 Omnibus Incentive Plan will become effective upon our initial public offering, and no additional grants will be made under the 2006 Equity Incentive Plan after such time. A total of 2,400,000 shares have been reserved for issuance under the 2007 Omnibus Incentive Plan. For a more complete discussion of our stock option plans, please see “— Employee Benefit Plans.”

As of December 31, 2006, warrants to purchase up to an aggregate of 84,332 shares of common stock were outstanding, at a weighted average exercise price of $7.29 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 6,633,255 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 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

 

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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 29,832,927 shares of common stock outstanding assuming no exercise of any options after September 30, 2006. Of this amount, the 8,000,000 shares offered by us and the 2,000,000 shares offered by the selling stockholders by this prospectus will be available for immediate sale in the public market as of the date of this prospectus. Following the expiration of lock-up agreements with the representatives of the underwriters or U.S. Auto Parts, 19,832,927 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

   10,000,000    Freely tradable shares sold in this offering

180 days

     6,649,618    180-day lock-up released; shares saleable under Rule 144, 144(k) or 701

One year

   13,183,309    One-year lock-up released with respect to shares held by selling stockholders; shares saleable under Rule 144 or 144(k)

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 selling stockholders have agreed to similar restrictions for a period of one year from the date of this prospectus.

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

 

  Ÿ   during the last 17 days of the 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 restricted period, we announce that we will release earnings results during the 16-day period beginning on the last day of the restricted period, in which case the

 

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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.

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 December 31, 2006, the holders of options to purchase approximately 2,786,532 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 5,200,332 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 — Employee Benefit Plans.” In addition, the holders of our Series A preferred stock have registration rights with respect to the 6,633,255 shares of our common stock issuable upon conversion of the preferred stock. 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 and the selling stockholders, 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

   10,000,000

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 and the selling stockholders 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.

 

          Total
     Per Share    No Exercise    Full Exercise

Public offering price

        

Underwriting discounts and commissions payable by us

        

Underwriting discounts and commissions payable by the selling stockholders

        

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 $2,532,200.

Over-Allotment Option

The selling stockholders have granted the underwriters an option to purchase up to an aggregate of 1,500,000 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

 

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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.

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. The selling stockholders have agreed to similar restrictions for a period of one year from the date of this prospectus. 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 or one-year lock-up period, or if, prior to the expiration of the 180-day or one-year lock-up period, we announce that we will release earnings results during the 16-day period beginning on the last day of the applicable 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. In addition, the foregoing restrictions are not applicable to the issuance of up to 2,983,293 shares of common stock by us in connection with a strategic partnership, joint venture, lending or similar arrangement, or in connection with the acquisition or license by us of any businesses, services or technologies; provided, however, that the recipients of any such shares are restricted from selling, transferring or requiring registration of such shares during the restriction period otherwise applicable to us and that such shares are not issued until at least 30 days from the date of this prospectus.

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 and the selling stockholders have agreed to indemnify the underwriters against liabilities relating to the offering, including liabilities under the Securities Act of 1933, as amended, 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.

 

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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.

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 500,000 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, for the years ended December 31, 2003, 2004 and 2005

   F-36

Combined Balance Sheets

   F-37

Combined Statements of Operations

   F-38

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

   F-39

Combined Statements of Cash Flows

   F-40

Notes to Combined Financial Statements

   F-41

 

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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, except for Note 13, as to which the date is
January 10, 2007

 

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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     2,308    

Intangible assets, net

    42       25     35,416    

Goodwill

              14,142    

Deferred income taxes

              1,282    

Other noncurrent assets

    970       186     292    
                       

Total assets

  $ 13,111     $ 14,484   $ 69,059    
                       

Liabilities and Stockholders’ Equity

       

Current liabilities:

       

Accounts payable

  $ 2,134     $ 6,882   $ 9,573    

Accrued expenses

    1,113       1,307     2,642    

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     1,421    
                       

Total current liabilities

    6,988       8,878     20,587    

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     48,716    

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; 13,200,000, 13,200,000 and 15,199,678 issued and outstanding, as of December 31, 2004 and 2005, and September 30, 2006 (unaudited), respectively

    13       13     15     26  

Additional paid-in capital

    526       526     68,483     68,483  

Loans to stockholders

    (356 )              

Accumulated other comprehensive income

    132           6     6  

Retained earnings (accumulated deficit)

    5,645       4,700     (48,172 )   (48,172 )
                           

Total stockholders’ equity

    5,960       5,239     20,343     20,343  
                           

Total liabilities and stockholders’ equity

  $ 13,111     $ 14,484   $ 69,059    
                       

See accompanying notes.

 

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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     $ 83,514  

Cost of sales

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

Gross profit

    13,843       19,324       24,869       18,103       29,735  

Operating expenses:

         

General and administrative(1)

    2,284       3,599       7,254       5,555       7,013  

Marketing(1)

    3,617       4,526       5,802       4,315       10,134  

Fulfillment(1)

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

Technology(1)

    405       776       868       596       898  

Amortization of intangibles

          8       17       13       3,037  
                                       

Total operating expenses

    9,552       11,899       18,298       13,641       24,671  
                                       

Income from operations

    4,291       7,425       6,571       4,462       5,064  

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       4,264  

Income tax provision (benefit)

    478       328       (163 )     (199 )     615  
                                       

Net income

  $ 3,771     $ 7,133     $ 6,819     $ 4,758     $ 3,649  
                                       

Basic net income per share

  $ 0.33     $ 0.54     $ 0.52     $ 0.36     $ 0.26  

Diluted net income per share

  $ 0.33     $ 0.54     $ 0.52     $ 0.36     $ 0.19  

Shares used in computation of basic net income per share

    11,276,876       13,200,000       13,200,000       13,200,000       14,180,869  

Shares used in computation of diluted net income per share

    11,276,876       13,200,000       13,200,000       13,200,000       19,362,189  

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

    11,276,876       13,200,000       19,833,255       13,200,000       20,814,124  

Shares used in computation of pro forma diluted net income per share (unaudited)

    11,276,876       13,200,000       19,833,255       13,200,000       20,844,345  

Pro forma provision for income taxes (unaudited)

    1,729       2,964       2,657       1,822       1,809  

Pro forma basic net income per share (unaudited)

  $ 0.22     $ 0.34     $ 0.20     $ 0.21     $ 0.12  

Pro forma diluted net income per share (unaudited)

  $ 0.22     $ 0.34     $ 0.20     $ 0.21     $ 0.12  

(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

   $   —    $   —    $   —    $     —    $ 336

Marketing expense

                         107

Fulfillment expense

                         16

Technology expense

                         48
                                  
   $    $    $    $    $ 507
                                  

See accompanying notes.

 

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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

    $   10,999,560   $ 11   $ 523   $     $ (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

        2,200,440     2     2                       4    

Unrealized gain on available-for-sale investments

                          70             70       70  
                                                                 

Total comprehensive income

                      $ 3,841  
                         

Balance, December 31, 2003

      13,200,000     13     526     (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

      13,200,000     13     526     (356 )     132       5,645       5,960    

Net income

                                6,819       6,819     $ 6,819  

Distributions

                                (7,764 )     (7,764 )  

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

        13,200,000     13     526                 4,700       5,239    

Net income (unaudited)

                                3,649       3,649     $ 3,649  

Final S corporation distribution (unaudited)

                                (1,700 )     (1,700 )  

Undistributed earnings related to terminated S corporation status (unaudited)

                4,821                 (4,821 )        

Recapitalization distribution (unaudited)

                            (50,000 )     (50,000 )  

Contributions (unaudited)

                110                       110    

Issuance of common stock (unaudited)

        16,363         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 acquisition (unaudited)

        1,983,315     2     19,998           20,000    

Effect of changes in foreign currencies (unaudited)

                          6             6       6  
                                                                 

Total comprehensive income (unaudited)

                    $ 3,655  
                         

Balance, September 30, 2006 (unaudited)

  11,055,425   $ 11   15,199,678   $ 15   $ 68,483   $     $ 6     $ (48,172 )   $ 20,343    
                                                           

 

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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     $ 3,649  

Adjustments to reconcile net income to net cash provided by operating activities:

         

Depreciation and amortization

    120       448       1,976       1,455       1,541  

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

                            607  

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       1,004  

Other current liabilities

    63       4       104       51       (82 )
                                       

Net cash provided by operating activities

    3,020       6,503       9,636       5,106       7,679  

Investing activities

         

Additions to property, equipment and intangibles

    (38 )     (1,368 )     (440 )     (304 )     (1,236 )

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 )     723       859       (25,689 )

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 )     (685 )     (1,547 )     (1,304 )      

Contributed capital

    1             10       10        

Proceeds from sale of common stock

                            150  

Stockholder distributions

    (247 )     (5,629 )     (7,764 )     (6,031 )     (1,700 )

Recapitalization distribution

                            (50,000 )
                                       

Net cash provided by (used in) financing activities

    (843 )     (4,545 )     (11,136 )     (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                    

Undistributed earnings related to terminated S corporation status

                            4,821  

Issuance of common stock in connection with business acquisition

                            20,000  

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.

 

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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.net .

The Company’s products consist of body parts, engine parts and accessories. Body parts include bumpers, doors, door handles, fenders, grilles, hoods, lamps, mirrors, tailgates, wheels and window regulators. Engine parts include alternators, brake discs, catalytic converters, climate control, clutches, driveshafts, exhausts, fuel injection/delivery, headers, oxygen sensors, radiators and shocks and struts. Accessories include air deflectors, bug shields, car bras, car covers, cargo liners, cold air intakes, floor mats/carpeting, nerf bars, running boards, seat covers, tonneau covers and vent visors. 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 2,200,440 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.

 

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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 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 6,633,255 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.

 

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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)

 

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 $760,000, respectively, representing 58%, 54% and 30% 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 $579,000 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 $14.1 million, respectively (see Note 12). 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 (to the common

 

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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)

 

carrier), the selling price is fixed or determinable, and collectibility is reasonably assured. These criteria follow the Company’s general policy to recognize revenue according to its shipping terms, which are F.O.B. shipping point. Under this policy, title and risk of loss are transferred to the customer upon delivery to the common carrier, at which time, revenue is recognized.

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 $647,000 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.

 

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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)

 

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 and diluted net income per share for all periods presented has been presented to give effect to the pro forma provision for income taxes as if the Company had been a C corporation for all periods. As part of this presentation, pro forma basic net income per share for the latest year end and interim period also gives 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.

 

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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 a valuation study.

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       3,978  

Vehicles

     112       116       144  

Leasehold improvements

     3       52       111  

Furniture and fixtures

     149       40       101  

Construction in process

                 653  
                        
     4,148       4,934       6,768  

Less accumulated depreciation and amortization

     (699 )     (2,675 )     (4,460 )
                        

Property and equipment, net

   $ 3,449     $ 2,259     $ 2,308  
                        

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

 

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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)

 

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 $0, $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.   Recapitalization

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 two 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.

To provide additional financing for the recapitalization, the Company borrowed $10.0 million from a bank on March 3, 2006 (see Note 4). This loan and a portion of the $45.0 million received from the sale of the Preferred Stock, were used to fund the $51.7 million distribution made to the holders of the Company’s common stock as a part of the recapitalization, of which $50.0 million related to the transaction and $1.7 million represented the final S corporation distribution resulting from the termination of the Company’s S corporation status. Total undistributed earnings of $4.8 million on this date have been included in the Company’s consolidated financial statements as additional paid in capital. The amount distributed in excess of accumulated earnings was $45.2 million.

In addition, 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.

 

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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)

 

6.   Series A Convertible Preferred Stock and Stockholders’ Equity

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.

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 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 $507,000 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 $ 0.04 and $ 0.03, 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

   $ 874    $ 1,469    $ 1,469    $ 1,414    $ 456

 

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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 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

   2,428,644       8.20

Exercised

        

Expired

        

Forfeited

   (12,108 )     8.35
            

Options outstanding, September 30, 2006

   2,416,536     $ 8.20
            

Options exercisable, September 30, 2006

   2,416,536     $ 8.20
            

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 $2.58 per share of common stock subject to options. As of September 30, 2006 the Company had 186,305 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.

 

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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)

 

Warrants

At September 30, 2006, the Company had outstanding vested warrants to purchase up to 84,332 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

   66,332    March 3, 2006    $ 6.78    Financial advisory
services

Common stock

   18,000    May 22, 2006    $ 9.17    Lending arrangement
             

Total

   84,332         

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.

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.

 

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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)

 

7.   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    $ 3,649

Denominator:

              

Weighted-average common shares outstanding (basic)

     11,276,876      13,200,000      13,200,000      13,200,000      14,180,869

Common equivalent shares from conversion of preferred stock

                         5,151,099

Common equivalent shares from common stock options and warrants

                         30,221
                                  

Weighted-average common shares outstanding (diluted)

     11,276,876      13,200,000      13,200,000      13,200,000      19,362,189

Basic net income per share

   $ 0.33    $ 0.54    $ 0.52    $ 0.36    $ 0.26

Diluted net income per share

   $ 0.33    $ 0.54    $ 0.52    $ 0.36    $ 0.19
                                  

Pro forma Net Income Per Share (unaudited)

              

Income before income taxes

   $ 4,249    $ 7,461    $ 6,656    $ 4,559    $ 4,264

Pro forma provision for income taxes (unaudited)

     1,729      2,964      2,657      1,822      1,809
                                  

Pro forma net income (unaudited)

   $ 2,520    $ 4,497    $ 3,999    $ 2,737    $ 2,455
                                  

Shares use in computation of pro forma basic net income per share (unaudited)

     11,276,876      13,200,000      19,833,255      13,200,000      20,814,124

Shares used in computation of pro forma diluted net income per share (unaudited)

     11,276,876      13,200,000      19,833,255      13,200,000      20,844,345

Pro forma basic net income per share (unaudited)

   $ 0.22    $ 0.34    $ 0.20    $ 0.21    $ 0.12

Pro forma diluted net income per share (unaudited)

   $ 0.22    $ 0.34    $ 0.20    $ 0.21    $ 0.12

 

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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

     —             1,668,265

Shares of common stock subject to repurchase

     —            
                        

Total

     —      —      —      —    1,668,265
                        

Pro Forma Net Income Per Share (unaudited)

The following table sets forth the computation of pro forma basic and diluted net income per share (in thousands, except share and per share amounts):

 

    Year Ended
December 31,
2005
 

Nine Months Ended
September 30,

2006

Numerator:

   

Pro forma net income

  $ 3,999   $ 2,455

Denominator:

   

Weighted average common shares outstanding (basic)

    13,200,000     14,180,869

Add: Adjustment to reflect the assumed conversion of convertible preferred stock from January 1, 2005 (unaudited)

    6,633,255     6,633,255
           

Denominator for basic pro forma calculation (unaudited)

    19,833,255     20,814,124

Pro forma basic net income per common share (unaudited)

  $ 0.20   $ 0.12

Numerator:

   

Pro forma net income

  $ 3,999   $ 2,455

Denominator for basic pro forma calculation (unaudited)

    19,833,255     20,814,124

Common equivalent shares from common stock options and warrants

        30,221
           

Denominator for diluted pro forma calculation (unaudited)

    19,833,255     20,844,345

Pro forma diluted net income per common share (unaudited)

  $ 0.20   $ 0.12

 

8.   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

 

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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)

 

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 .”

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 )   $ 1,919  

State tax

     155       134      148       90       517  
                                       

Total current taxes

     512       214      (61 )     (119 )     2,436  
                                       

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 )   $ 615  
                                       

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

   $    $    $     $     $ 730  

MBS Marketing

     325      165      (3 )     (3 )      

Share-based compensation

                           99  

State income tax, net of federal tax effect

     153      163      115       79       256  

Change in rate for deferred tax assets

               (275 )     (275 )     (457 )

Other

                           (13 )
                                      

Effective tax provision (benefit)

   $ 478    $ 328    $ (163 )   $ (199 )   $ 615  
                                      

 

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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 $453,000 for the years ended December 31, 2004 and 2005 and for the nine months ended September 30, 2006, respectively.

 

9.   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 $198,000 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.

 

10.   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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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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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. Additionally, four of the Ford Design Patents were dropped from the investigation at Ford’s request. A hearing before the ALJ occurred in August 2006, and the deadline for the ALJ’s ruling was set as December 4, 2006. (See Note 15)

 

11.   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. 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.

 

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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)

 

12.   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 current 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 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 1,983,315 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 1.1 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.

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
      

 

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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 purchase price for the Partsbin transaction was preliminarily allocated to assets purchased and liabilities assumed based on their estimated fair values determined by management as follows (in thousands):

 

          

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

     14,142    
          

Total assets

     54,668    

Liabilities:

    

Accounts payable and accrued expenses

     (3,022 )  

Other current liabilities

     (1,080 )  

Note payable — current

     (8 )  

Note payable — long term

     (7 )  
          

Total liabilities

     (4,117 )  
          

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

   $ 98,168     $ 107,366

Net income (loss)

     (3,052 )     1,601

Basic net income (loss) per share

   $ (0.20 )   $ 0.11

Diluted net income (loss) per share

   $ (0.20 )   $ 0.08

Weighted average shares used in computing basic net income (loss) per common share

     15,183,315       15,190,687

Weighted average shares used in computing diluted net income (loss) per common share

     15,183,315       20,372,007

 

13.   Stock Split

In January 2007, the Company completed a reverse stock split of the Company’s common stock pursuant to which each share of the Company’s outstanding common stock was converted into 0.6 shares of the Company’s common stock. All share and per share data included in these consolidated financial statements retroactively reflect the stock split.

 

14.   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   $ 38,543

Gross profit

    6,326     5,828     5,949     6,766     7,746     9,349     12,640

Income from operations

    1,949     1,114     1,399     2,109     2,455     1,397     1,212

Income before income taxes

    2,012     1,139     1,407     2,098     2,564     1,083     617

Net income

  $ 1,978   $ 1,395   $ 1,383   $ 2,063   $ 2,720   $ 611   $ 318

Basic net income per share

  $ 0.15   $ 0.11   $ 0.10   $ 0.16   $ 0.21   $ 0.04   $ 0.02

Diluted net income per share

  $ 0.15   $ 0.11   $ 0.10   $ 0.16   $ 0.18   $ 0.03   $ 0.01

Shares used in computation of basic net income per share

    13,200,000     13,200,000     13,200,000     13,200,000     13,200,000     14,120,952     15,199,681

Shares used in computation of diluted net income per share

    13,200,000     13,200,000     13,200,000     13,200,000     15,382,341     20,772,428     21,876,868

 

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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)

 

 

15.   Subsequent Events (Unaudited)

On December 4, 2006, the ALJ issued a preliminary ruling upholding the validity of seven of the ten Ford Design Patents and ruled that the importation of automotive parts allegedly covered by these seven patents violates Section 337 of the Tariff Act of 1930, as amended. This ruling is subject to review by the USITC Commissioners. The Company and the other respondents filed a petition urging the USITC Commissioners to review and reverse the portions of the initial determination upholding seven of the ten patents, as well as earlier rulings by the ALJ. Ford also filed a petition urging the USITC Commissioners to review and reverse the portions of the initial determination invalidating three of the ten patents. The USITC has until March 20, 2007 to decide whether or not it will grant, in whole or in part, the respective petitions for review. If the petition is granted, the USITC will then set a briefing schedule and must issue a final determination on or before May 4, 2007. If the USITC ultimately finds a violation of Section 337, it may issue an order prohibiting further importation of the covered parts into the United States. The USITC’s actions are subject to review by the President of the United States, who has the authority to approve or disapprove the USITC’s action. After the end of such review period, the USITC’s final decision can be appealed to the United States Court of Appeals for the Federal Circuit. 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 the ALJ’s preliminary ruling, 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, Ford and other car manufacturers may attempt to assert similar allegations based upon design patents on a significant number of parts for other models, which over time could have a material adverse impact on the Company and the entire aftermarket parts industry.

 

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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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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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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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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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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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ALL OEM PARTS, INC. AND AFFILIATES

NOTES TO COMBINED FINANCIAL STATEMENTS — (Continued)

 

arrangement, the fees are fixed and determinable and collection is reasonably assured. 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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LOGO


Table of Contents

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

 


                    , 2007

 



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

   $ 14,766

NASD filing fee

     14,300

Nasdaq Global Market listing fee

     100,000

Blue sky fees and expenses

     10,000

Printing and engraving expenses

     200,000

Legal fees and expenses

     650,000

Accounting fees and expenses

     1,300,000

Transfer Agent and Registrar fees

     15,000

Miscellaneous

     228,134
      

Total

   $ 2,532,200
      

 

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 3.6 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 3.4 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, 2003, 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 2,200,440 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. Such shares of Series A preferred stock are currently convertible into an aggregate of 6,633,255 shares of our common stock.

(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 1,983,315 shares of our common stock to the stockholders of Partsbin.

(4) From March 2006 to January 2007, we granted options to purchase an aggregate of 3,014,304 shares of common stock to our employees and directors under our 2006 Equity Incentive Plan at exercise prices ranging from $6.78 to $11.68 per share. Of the options granted, as of January 22, 2007, 2006, options to purchase 2,800,332 shares were outstanding, no shares of common stock have been purchased pursuant to exercises of stock options and 213,972 shares have been cancelled and returned to the stock option plan pool.

(5) In June 2006, we issued and sold 16,363 shares of our common stock under the 2006 Equity Incentive Plan to an employee at a purchase price of $11.68 per share or an aggregate cash purchase price of $150,000.

 

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The issuances of securities in the transactions described in paragraphs 1, 2 and 3 above were effected without registration under the Securities Act in reliance on Section 4(2) thereof or Rule 506 of Regulation D thereunder based on the status of each investor as an accredited investor as defined under the Securities Act. The issuances of securities in the transactions described in paragraphs 4 and 5 above were effected without registration under the Securities Act in reliance on Section 4(2) thereof or Rule 701 thereunder as transactions pursuant to compensatory benefit plans and contracts relating to compensation. None of the foregoing transactions was effected using any form of general advertising or general solicitation as such terms are used in Regulation D under the Securities Act. The recipients of securities in each such transaction either received adequate information about us or had access, through their relationships with us, to such information.

 

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
    2.1*    Acquisition Agreement dated May 19, 2006 by and among U.S. Auto Parts Network, Inc. and Partsbin, Inc., on the one hand, and The Partsbin.com, Inc., All OEM Parts, Inc., Power Host, Inc., Auto Parts Web Solutions, Inc., Web Chat Solutions, Inc., Everything Internet, LLC, Richard E. Pine, Lowell E. Mann, Brian Tinari and Todd Daugherty, on the other hand
    3.1*    Amended and Restated Certificate of Incorporation of U.S. Auto Parts Network, Inc. as filed with the Delaware Secretary of State on March 3, 2006
    3.2*    Certificate of Amendment of Certificate of Incorporation of U.S. Auto Parts Network, Inc. as filed with the Delaware Secretary of State on November 11, 2006
    3.3*   

Certificate of Amendment of Certificate of Incorporation of U.S. Auto Parts Network, Inc. as filed with the Delaware Secretary of State on January 9, 2007

    3.4   

Proposed Amended and Restated Certificate of Incorporation of U.S. Auto Parts Network, Inc. to become effective upon completion of this offering

    3.5*    Bylaws of U.S. Auto Parts Network, Inc., as amended
    3.6    Proposed Amended and Restated Bylaws of U.S. Auto Parts Network, Inc. to become effective upon completion of this offering
    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. 2007 Omnibus Plan and forms of agreements
  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.

 

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Exhibit No.   

Description

  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
  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†*   

Catalog License and Parts Purchase Agreement dated November 20, 2006 by and between U.S. Auto Parts Network, Inc. and WORLDPAC, Inc.

 

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Exhibit No.   

Description

  10.28+    Employment Agreement dated January 2007 by and between U.S. Auto Parts Network, Inc. and Michael J. McClane
  10.29†*    Services Agreement dated October 3, 2006 by and between U.S. Auto Parts Network, Inc. and Efficient Frontier, Inc.
  10.30+    Offer Letter of Employment dated November 2006 by and between U.S. Auto Parts Network, Inc. and Howard Tong
  10.31†*    Master Services Agreement dated August 5, 2005 by and between PartsBin, Inc. (as successor in interest to All OEM Parts, Inc.) and Access Worldwide Communications, Inc.
  10.32+*    Offer Letter of Employment dated January 1, 2006 by and between U.S. Auto Parts Network, Inc. and Houman Akhavan
  10.33+*    Form of Indemnification Agreement for Officers and Directors
  10.34+*    Indemnification Agreement dated March 3, 2006 by and between U.S. Auto Parts Network, Inc. and Frederic Harman
  10.35*    Deeds of Assignment and Declarations of Trust executed September 2006 regarding MBS Tek Corporation stock transfer
  16.1*    Letter from Stonefield Josephson, Inc.
  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)
  24.2*    Power of Attorney of Robert J. Majteles and Ellen F. Siminoff

*   Previously filed.

 

+   Indicates management contract or compensatory plan.

 

  Confidential treatment is requested for certain confidential portions of this exhibit pursuant to Rule 406 under the Securities Act. In accordance with Rule 406, these confidential portions have been omitted from this exhibit and filed separately with the Commission.

(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

 

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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 Amendment No. 3 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Carson, State of California, on the 22nd day of January 2007.

 

U.S. Auto Parts Network, Inc.
By:   

/s/    M EHRAN N IA        

 

Mehran Nia

Chief Executive Officer and President

Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 3 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)

  January 22, 2007

/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)

 

January 22, 2007

*

Sol Khazani

  

Chairman of the Board

 

January 22, 2007

*

Fredric W. Harman

  

Director

 

January 22, 2007

*

Richard Pine

   Vice President of Strategic Planning and Director   January 22, 2007

*

Robert J. Majteles

   Director   January 22, 2007

*

Ellen F. Siminoff

   Director  

January 22, 2007

* By:

 

/s/    M EHRAN N IA        

Mehran Nia

Attorney-in-Fact

    

 

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EXHIBIT INDEX

 

Exhibit No.

  

Description

    1.1    Form of Underwriting Agreement
    2.1*    Acquisition Agreement dated May 19, 2006 by and among U.S. Auto Parts Network, Inc. and Partsbin, Inc., on the one hand, and The Partsbin.com, Inc., All OEM Parts, Inc., Power Host, Inc., Auto Parts Web Solutions, Inc., Web Chat Solutions, Inc., Everything Internet, LLC, Richard E. Pine, Lowell E. Mann, Brian Tinari and Todd Daugherty, on the other hand
    3.1*    Amended and Restated Certificate of Incorporation of U.S. Auto Parts Network, Inc. as filed with the Delaware Secretary of State on March 3, 2006
    3.2*    Certificate of Amendment of Certificate of Incorporation of U.S. Auto Parts Network, Inc. as filed with the Delaware Secretary of State on November 11, 2006
    3.3*   

Certificate of Amendment of Certificate of Incorporation of U.S. Auto Parts Network, Inc. as filed with the Delaware Secretary of State on January 9, 2007

    3.4   

Proposed Amended and Restated Certificate of Incorporation of U.S. Auto Parts Network, Inc. to become effective upon completion of this offering

    3.5*    Bylaws of U.S. Auto Parts Network, Inc., as amended
    3.6    Proposed Amended and Restated Bylaws of U.S. Auto Parts Network, Inc. to become effective upon completion of this offering
    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. 2007 Omnibus Plan and forms of agreements
  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


Table of Contents
Exhibit No.   

Description

  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
  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†*   

Catalog License and Parts Purchase Agreement dated November 20, 2006 by and between U.S. Auto Parts Network, Inc. and WORLDPAC, Inc.

  10.28+    Employment Agreement dated January 2007 by and between U.S. Auto Parts Network, Inc. and Michael J. McClane
  10.29†*    Services Agreement dated October 3, 2006 by and between U.S. Auto Parts Network, Inc. and Efficient Frontier, Inc.
  10.30+    Offer Letter of Employment dated November 2006 by and between U.S. Auto Parts Network, Inc. and Howard Tong
  10.31†*    Master Services Agreement dated August 5, 2005 by and between PartsBin, Inc. (as successor in interest to All OEM Parts, Inc.) and Access Worldwide Communications, Inc.
  10.32+*    Offer Letter of Employment dated January 1, 2006 by and between U.S. Auto Parts Network, Inc. and Houman Akhavan
  10.33+*    Form of Indemnification Agreement for Officers and Directors

 

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Exhibit No.   

Description

  10.34+*    Indemnification Agreement dated March 3, 2006 by and between U.S. Auto Parts Network, Inc. and Frederic Harman
  10.35*    Deeds of Assignment and Declarations of Trust executed September 2006 regarding MBS Tek Corporation stock transfer
  16.1*    Letter from Stonefield Josephson, Inc.
  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)
  24.2*    Power of Attorney of Robert J. Majteles and Ellen F. Siminoff

*   Previously filed.

 

+   Indicates management contract or compensatory plan.

 

  Confidential treatment is requested for certain confidential portions of this exhibit pursuant to Rule 406 under the Securities Act. In accordance with Rule 406, these confidential portions have been omitted from this exhibit and filed separately with the Commission.

Exhibit 1.1

                     Shares

U.S. Auto Parts Network, Inc.

Common Stock

($0.001 Par Value)

EQUITY UNDERWRITING AGREEMENT

                     , 2007

RBC Capital Markets Corporation

Thomas Weisel Partners LLC

Piper Jaffray & Co.

JMP Securities LLC

As the Representatives of the

several underwriters named in Schedule I hereto

c/o RBC Capital Markets

One Liberty Plaza, 165 Broadway

New York, NY 10006-1404

Ladies and Gentlemen:

U.S. Auto Parts Network, Inc., a Delaware corporation (the “Issuer”) and certain stockholders of the Issuer (the “Selling Stockholders”) propose to sell to the several underwriters (the “Underwriters”) named in Schedule I hereto for whom you are acting as representatives (the “Representatives”) an aggregate of 10,000,000 shares of the Issuer’s Common Stock, $0.001 par value (the “Firm Securities”), of which 8,000,000 shares will be sold by the Issuer and 2,000,000 shares will be sold by the Selling Stockholders. The respective amounts of the Firm Securities to be so purchased by the several Underwriters are set forth opposite their names in Schedule I hereto and the respective amounts to be sold by the Selling Stockholders are set forth opposite their names in Schedule II hereto. The Selling Stockholders also propose to sell at the Underwriters’ option an aggregate of up to 1,500,000 additional shares of the Issuer’s Common Stock (the “Option Securities”) as set forth below.

As the Representatives, you have advised the Issuer and the Selling Stockholders (a) that you are authorized to enter into this Agreement on behalf of the several Underwriters, and (b) that the several Underwriters are willing, acting severally and not jointly, to purchase the numbers of Firm Securities set forth opposite their respective names in Schedule I , plus their pro rata portion of


the Option Securities if you elect to exercise the over-allotment option in whole or in part for the accounts of the several Underwriters. The Firm Securities and the Option Securities (to the extent the aforementioned option is exercised) are herein collectively called the “Shares.”

The Issuer hereby acknowledges that, in connection with the proposed offering of the Shares, it has requested RBC Capital Markets Corporation to administer a directed share program (the “Directed Share Program”) under which up to 500,000 Firm Securities, or 5% of the Firm Securities to be purchased by the Underwriters (the “Reserved Shares”), shall be reserved for sale by RBC Capital Markets Corporation at the initial public offering price to the Issuer’s officers, directors, employees and consultants and other persons having a relationship with the Issuer as designated by the Issuer, (the “Directed Share Participants”) as part of the distribution of the Shares by the Underwriters, subject to the terms of this Agreement, the applicable rules, regulations and interpretations of the National Association of Securities Dealers, Inc. (“NASD”) and all other applicable laws, rules and regulations. The number of Shares available for sale to the general public will be reduced to the extent that Directed Share Participants purchase Reserved Shares. The Underwriters may offer any Reserved Shares not purchased by Directed Share Participants to the general public on the same basis as the other Shares being issued and sold hereunder. The Issuer has supplied RBC Capital Markets Corporation with names, addresses and telephone numbers of the individuals or other entities which the Issuer has designated to be participants in the Directed Share Program. It is understood that any number of those designated to participate in the Directed Share Program may decline to do so.

The Issuer has prepared a registration statement on Form S-1 (File No. 333-138379) with respect to the Shares pursuant to the Securities Act of 1933, as amended (the “Securities Act”), and the rules and regulations (the “Rules and Regulations”) of the United States Securities and Exchange Commission (the “Commission”) thereunder. As used in this Agreement, “Effective Time” means the date and the time as of which such registration statement, or the most recent post-effective amendment thereto, if any, was declared effective by the Commission; “Effective Date” means the date of the Effective Time; “Preliminary Prospectus” means each prospectus included in such registration statement, or amendments thereof, before it became effective under the Securities Act and any prospectus filed with the Commission by the Issuer with the consent of the Underwriters pursuant to Rule 424(a) of the Rules and Regulations; “Pricing Prospectus” means the Preliminary Prospectus that was included in the Registration Statement immediately prior to the Applicable Time (as defined below); “Prospectus” means the prospectus in the form first used to confirm sales of Shares; “Registration Statement” means such registration statement, as amended at the Effective Time, including all information deemed to be a part of the registration statement as of the Effective Time pursuant to Rule 430A of the Rules and Regulations; “Free Writing Prospectus” means any “free writing prospectus” as defined in Rule 405 under the Securities Act relating to the Shares; and “Issuer Free Writing Prospectus” means any “issuer free writing prospectus” as defined in Rule 433 under the Securities Act relating to the Shares. If the Issuer has filed an abbreviated registration statement to register additional Common Stock pursuant to Rule 462(b) under the Securities Act (the “Rule 462 Registration Statement”), then any reference herein to the term “Registration Statement” shall be deemed to include such Rule 462 Registration Statement. For the purposes of this Agreement, the “Applicable Time” is      :           m (Eastern time) on the date of this Agreement.

 

2


In consideration of the mutual agreements contained herein and of the interests of the parties in the transactions contemplated hereby, the parties hereto agree as follows:

1. R EPRESENTATIONS AND W ARRANTIES OF THE I SSUER .

The Issuer represents and warrants to each of the Underwriters as follows:

(a) The Registration Statement has been filed with the Commission under the Securities Act and has become effective under the Securities Act. No stop order suspending the effectiveness of such registration statement is in effect, and no proceedings for such purpose are pending before or, to the knowledge of the Issuer, threatened by the Commission. The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus or any Issuer Free Writing Prospectus. Copies of such registration statement and each of the amendments thereto have been delivered by the Issuer to you. The Registration Statement conforms, and any further amendments or supplements to the Registration Statement will conform, in all material respects to the requirements of the Securities Act and the Rules and Regulations. The Prospectus and the Pricing Prospectus each conforms and, as amended or supplemented, will conform, in all material respects to the requirements of the Securities Act and the Rules and Regulations. As of the Effective Date, the date hereof, the Closing Date (as defined below) and each Option Closing Date (as defined below), if any, the Registration Statement does not and will not, and any further amendments to the Registration Statement will not, when they become effective, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; as of its date and the date hereof, the Prospectus does not, and as amended or supplemented on the Closing Date and each Option Closing Date, if any, will not, contain an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; the Pricing Prospectus, as supplemented by the Issuer Free Writing Prospectuses and other documents listed in Schedule III(a) hereto, taken together with the final pricing information included on the cover page of the Prospectus (collectively, the “Disclosure Package”), as of the Applicable Time did not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; each Issuer Free Writing Prospectus listed on Schedule III(a ) or Schedule III(b) hereto does not conflict with the information contained in the Registration Statement; and each such Issuer Free Writing Prospectus listed on Schedule III(b) , as supplemented by and taken together with the Disclosure Package as of the Applicable Time, did not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the representations and warranties set forth in this sentence do not apply to statements or omissions in the Registration Statement, the Prospectus, the Pricing Prospectus or any Issuer Free Writing Prospectus or any such amendment or supplement in reliance upon and in conformity with written information furnished to the Issuer by any Underwriter through RBC Capital Markets Corporation expressly for use therein, such information being listed in Section 15 below. The Issuer filed the Registration Statement with the Commission before using

 

3


any Issuer Free Writing Prospectus and, to the extent within the Issuer’s control, each Issuer Free Writing Prospectus was preceded or accompanied by the most recent Preliminary Prospectus satisfying the requirements of Section 10 under the Securities Act, which Preliminary Prospectus included an estimated price range.

(b) Each of the statements contained in the Registration Statement, the Prospectus, the Pricing Prospectus or any Issuer Free Writing Prospectus that constitutes “forward looking” information within the coverage of Rule 175(b) of the Rules and Regulations, including (but not limited to) any of the Issuer’s expectations, plans, intentions, projections, results of operations or statements with respect to future available cash or future cash distributions of the Issuer or the anticipated ratio of taxable income to distributions, was made or will be made with a reasonable basis and in good faith. Notwithstanding the foregoing, this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with written information concerning the Underwriters furnished to the Issuer by or on behalf of any Underwriter specifically for inclusion in the Registration Statement, the Pricing Prospectus or the Prospectus, such information being listed in Section 15 below.

(c) This Agreement has been duly authorized, executed and delivered by the Issuer, and constitutes a valid, legal, and binding obligation of the Issuer, enforceable in accordance with its terms, except as rights to indemnity hereunder may be limited by federal or state securities laws and except as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting the rights of creditors generally, and subject to general principles of equity. The Issuer has full power and authority to enter into this Agreement and to authorize, issue and sell the Shares as contemplated by this Agreement.

(d) The Issuer has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Delaware, with corporate power and authority to own or lease its properties and conduct its business as described in the Prospectus and the Disclosure Package. Each of the subsidiaries of the Issuer, as listed in Exhibit A attached hereto (collectively, the “Subsidiaries”), has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, with corporate power and authority to own or lease its properties and conduct its business as described in the Prospectus and the Disclosure Package. The Subsidiaries are the only material subsidiaries, direct or indirect, of the Issuer. The Issuer and each of the Subsidiaries are duly qualified to transact business and are in good standing in all jurisdictions in which the conduct of their business requires such qualification, except where the failure to be so qualified or to be in good standing would not have a material adverse effect on the condition (financial or otherwise), properties, assets, liabilities, operations or business of the Issuer and its Subsidiaries taken as a whole, whether or not arising from transactions in the ordinary course of business (a “Material Adverse Effect”). Except as indicated on Exhibit A , all of the outstanding shares of capital stock of each of the Subsidiaries have been duly authorized and validly issued, are fully paid and non-assessable and are wholly owned by the Issuer or another Subsidiary free and clear of all liens, encumbrances and equities and claims; and no options, warrants or other rights to purchase, agreements or other obligations to issue or other rights to convert any obligations into shares of capital stock or ownership interests in the Subsidiaries are outstanding.

 

4


(e) The outstanding shares of Common Stock of the Issuer, including all shares to be sold by the Selling Stockholders, have been duly authorized and validly issued and are fully paid and non-assessable; the portion of the Shares to be issued and sold by the Issuer have been duly authorized and when issued and paid for as contemplated herein will be validly issued, fully paid and non-assessable; and no preemptive rights of stockholders exist with respect to any of the Shares or the issue and sale thereof. Neither the filing of the Registration Statement nor the offering or sale of the Shares as contemplated by this Agreement gives rise to any rights, other than those which have been waived or satisfied, for or relating to the registration of any shares of Common Stock in connection with the offering or sale of the Shares.

(f) The information set forth under the caption “Capitalization” in the Prospectus and the Disclosure Package is true and correct. All of the Shares conform to the description thereof contained in the Prospectus and the Disclosure Package. The form of certificates for the Shares conforms to the corporate law of the State of Delaware. Immediately after the closing of the issuance and sale of the Shares to the Underwriters, no shares of Preferred Stock of the Issuer shall be issued and outstanding, and no holder of any shares of capital stock, securities convertible into or exchangeable or exercisable for capital stock or options, warrants or other rights to purchase capital stock or any other securities of the Issuer shall have any existing or future right to acquire any shares of Preferred Stock of the Issuer.

(g) The consolidated financial statements of the Issuer and the Subsidiaries, together with related notes and schedules as set forth in the Registration Statement, the Prospectus and the Disclosure Package, present fairly the financial position and the results of operations and cash flows of the Issuer and the consolidated Subsidiaries, at the indicated dates and for the indicated periods. Such financial statements and related schedules have been prepared in accordance with U.S. generally accepted principles of accounting (“GAAP”), consistently applied throughout the periods involved, except as disclosed therein, and all adjustments necessary for a fair presentation of results for such periods have been made; provided, however, that financial statements that are unaudited are subject to normal year end adjustments and do not contain certain footnotes required by GAAP. The summary financial and statistical data included in the Registration Statement, the Prospectus and the Disclosure Package presents fairly the information shown therein and such data has been compiled on a basis consistent with the financial statements presented therein and the books and records of the Issuer. The pro forma financial statements and other pro forma financial information included in the Registration Statement, Prospectus and the Disclosure Package present fairly the information shown therein, have been prepared in accordance with the Commission’s rules and guidelines with respect to pro forma financial statements, have been properly compiled on the pro forma bases described therein, and, in the opinion of the Issuer, the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions or circumstances referred to therein. The statistical, industry related and market related data included in the Registration Statement, the Prospectus and the Disclosure Package are based on or derived from sources which the Issuer reasonably and in good faith believes are reliable and accurate.

 

5


(h) The Issuer maintains a system of internal accounting controls sufficient to provide reasonable assurances that: (i) transactions are executed in accordance with management’s general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

(i) To the Issuer’s knowledge, Ernst & Young LLP, Stonefield Josephson, Inc. and J.H. Cohn LLP, each of which have certified certain financial statements of the Issuer (or, in the case of J.H. Cohn LLP, the predecessors of certain of the Issuer’s subsidiaries) and have delivered their opinions with respect to the audited financial statements and schedules included in the Registration Statement and the Prospectus, are (or were) independent registered public accounting firms with respect to the Issuer (or predecessors of certain of the Issuers’ subsidiaries) within the meaning of the Securities Act and the Rules and Regulations.

(j) There is no action, suit, claim or proceeding pending or, to the knowledge of the Issuer, threatened against the Issuer or any of the Subsidiaries before any court or administrative agency or otherwise: (1) that are required to be described in the Registration Statement, the Prospectus or the Disclosure Package and are not so described; or (2) which, if determined adversely to the Issuer or any of its Subsidiaries, would have a Material Adverse Effect or prevent the consummation of the transactions contemplated hereby, except as set forth in the Registration Statement, the Prospectus and the Disclosure Package.

(k) No labor problem or dispute with the employees of the Issuer or the Subsidiaries exists or, to the Issuer’s knowledge, is threatened, and the Issuer is not aware of any existing labor disturbance by the employees of any of its or its Subsidiaries’ principal suppliers, contractors or customers, except for such problems, disputes or disturbances that are not reasonably expected to have a Material Adverse Effect.

(l) The Issuer and the Subsidiaries have good and marketable title to all of the properties and assets reflected in the financial statements (or as described in the Prospectus and the Disclosure Package) hereinabove described, subject to no lien, mortgage, pledge, charge or encumbrance of any kind except those reflected in such financial statements (or as described in the Prospectus and the Disclosure Package) or which are not material in amount and except where the failure to have such title would not have a Material Adverse Effect. The Issuer and the Subsidiaries occupy their leased properties under valid and binding leases conforming in all material respects to the description thereof set forth in the Prospectus and the Disclosure Package.

(m) The Issuer and the Subsidiaries have filed all Federal, State, local and foreign tax returns which have been required to be filed and have paid all taxes indicated by said returns and all assessments received by them or any of them to the extent that such taxes have become due and are not being contested in good faith and for which an adequate reserve for accrual has been established in accordance with GAAP. All tax liabilities have been adequately provided

 

6


for in the financial statements of the Issuer to the extent required by GAAP, and the Issuer does not know of any actual or proposed additional material tax assessments that are required by GAAP to be provided for in such financial statements. There are no transfer taxes or other similar fees or charges under Federal law or the laws of any state, or any political subdivision thereof, required to be paid in connection with the execution and delivery of this Agreement or the issuance by the Issuer or sale by the Issuer of the Shares.

(n) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, as it may be amended or supplemented, there has not been any material adverse change which has had or is reasonably likely to have a Material Adverse Effect, whether or not occurring in the ordinary course of business, and there has not been any material transaction entered into or any material transaction that is probable of being entered into by the Issuer or the Subsidiaries, other than transactions in the ordinary course of business and changes and transactions described in the Prospectus and the Disclosure Package. The Issuer and the Subsidiaries have no material contingent obligations that are not disclosed in the Issuer’s financial statements or otherwise in the Registration Statement and the Prospectus.

(o) Neither the Issuer nor any of the Subsidiaries is or with the giving of notice or lapse of time or both, will be, in violation of or in default under: (i) its Certificate of Incorporation (“Charter”) or By-Laws; or (ii) any agreement, lease, contract, indenture or other instrument or obligation to which it is a party or by which it, or any of its properties, is bound and which violation or default has had or is reasonably likely to have a Material Adverse Effect. The execution and delivery of this Agreement and the consummation of the transactions herein contemplated and the fulfillment of the terms hereof will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under: (i) the Charter or By-Laws of the Issuer; or (ii) any contract, indenture, mortgage, deed of trust or other agreement or instrument to which the Issuer or any of the Subsidiaries is a party, or any order, rule or regulation applicable to the Issuer or any of the Subsidiaries of any court or of any regulatory body or administrative agency or other governmental body having jurisdiction, except, in the case of this clause (ii), for such conflicts, breaches or defaults as would not be reasonably expected to have a Material Adverse Effect.

(p) Each approval, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body necessary in connection with the execution and delivery by the Issuer of this Agreement and the consummation of the transactions herein contemplated (except such additional steps as may be required by the Commission, the NASD or such additional steps as may be necessary to qualify the Shares for public offering by the Underwriters under state securities or Blue Sky laws or foreign laws) has been obtained or made and is in full force and effect.

(q) The Issuer and each of the Subsidiaries has all material licenses, certifications, permits, franchises, approvals, clearances and other regulatory authorizations (“Permits”) from governmental authorities as are necessary to conduct its businesses as currently conducted and to own, lease and operate its properties in the manner described in the Prospectus and the Disclosure Package. There is no claim, proceeding or controversy, pending or, to the

 

7


knowledge of the Issuer or any of the Subsidiaries, threatened, involving the status of or sanctions under any of the Permits. The Issuer and each of the Subsidiaries has fulfilled and performed all of its material obligations with respect to the Permits, and to the Issuer’s knowledge, no event has occurred which allows, or after notice or lapse of time would allow, the revocation, termination, modification or other impairment of the rights of the Issuer or any of the Subsidiaries under such Permit.

(r) To the Issuer’s knowledge, there are no affiliations or associations between any member of the NASD and any of the Issuer’s officers, directors or 5% or greater security holders, except as set forth in the Registration Statement.

(s) Neither the Issuer, nor to the Issuer’s knowledge, any of its affiliates, has taken, directly or indirectly, any action designed to cause or result in, or which constitutes, the stabilization or manipulation of the price of the shares of Common Stock to facilitate the sale or resale of the Shares. The Issuer acknowledges that the Underwriters may engage in passive market making transactions in the Shares on The NASDAQ Global Market in accordance with Regulation M under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

(t) Neither the Issuer nor any of the Subsidiaries is nor, upon the application of the proceeds from the sales of the Shares will be, an “investment company” within the meaning of such term under the Investment Issuer Act of 1940, and the rules and regulations of the Commission thereunder (collectively, the “1940 Act”).

(u) The Issuer and each of the Subsidiaries carry, or are covered by, insurance in such amounts and covering such risks as is adequate for the conduct of their respective businesses and the value of their respective properties and as is customary for companies engaged in similar industries. All policies of insurance insuring the Issuer or any Subsidiary or any of their respective businesses, assets, employees, officers and directors are in full force and effect, and the Issuer and the Subsidiaries are in compliance with the terms of such policies in all material respects. There are no claims by the Issuer or any Subsidiary under any such policy or instrument as to which an insurance company is denying liability or defending under a reservation of rights clause.

(v) The Issuer is in compliance in all material respects with all presently applicable provisions of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder (“ERISA”); no “reportable event” (as defined in ERISA) has occurred with respect to any “pension plan” (as defined in ERISA) for which the Issuer would have any liability; the Issuer has not incurred and does not expect to incur liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any “pension plan” or (ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended, including the regulations and published interpretations thereunder (the “Code”); and each “pension plan” for which the Issuer would have any liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and, to the Issuer’s knowledge, nothing has occurred, whether by action or by failure to act, which would cause the loss of such qualification.

 

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(w) Other than as contemplated by this Agreement, the Issuer has not incurred any liability for any finder’s or broker’s fee, or agent’s commission in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby.

(x) Other than the Subsidiaries, the Issuer does not own, directly or indirectly, any shares of capital stock and does not have any other equity or ownership or proprietary interest in any corporation, partnership, association, trust, limited liability company, joint venture or other entity.

(y) There are no statutes, regulations, contracts or other documents (including, without limitation, any voting agreement) that are required to be described in the Registration Statement, the Prospectus or the Disclosure Package or to be filed as exhibits to the Registration Statement that are not described or filed as required. Neither the Issuer nor any of the Subsidiaries has sent or received any notice indicating the termination of or intention to terminate any of the contracts or agreements referred to or described in the Registration Statement, Prospectus or the Disclosure Package, or filed as an exhibit to the Registration Statement, and no such termination has been threatened by the Issuer, any Subsidiary or any other party to any such contract or agreement.

(z) Neither the Issuer nor any Subsidiary is in violation of any statute, any rule, regulation, decision or order of any governmental agency or body or any court, domestic or foreign, relating to the use, disposal or release of hazardous chemicals, toxic substances or radioactive and biological materials or relating to the protection or restoration of the environment or human exposure to hazardous chemicals, toxic substances or radioactive and biological materials (collectively, “Environmental Laws”) which could reasonably be expected to have a Material Adverse Effect. To the Issuer’s knowledge, neither the Issuer nor the Subsidiaries own or operate any real property contaminated with any substance that is subject to any Environmental Laws, is liable for any off-site disposal or contamination pursuant to any Environmental Laws, or is subject to any claim relating to any Environmental Laws, which violation, contamination, liability or claim would individually or in the aggregate have a Material Adverse Effect; and the Issuer is not aware of any pending investigation which might lead to such a claim.

(aa) No payments or inducements have been made or given, directly or indirectly, to any federal or local official or candidate for, any federal or state office in the United States or foreign offices by the Issuer or any Subsidiary, or to the Issuer’s knowledge, by any of their officers, directors, employees, agents or any other person in connection with any opportunity, contract, permit, certificate, consent, order, approval, waiver or other authorization relating to the business of the Issuer or any Subsidiary, except for such payments or inducements as were lawful under applicable laws, rules and regulations. Neither the Issuer nor any Subsidiary, nor, to the knowledge of the Issuer, any director, officer, agent, employee or other person associated with or acting on behalf of the Issuer or any Subsidiary, (i) has used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expense

 

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relating to political activity; (ii) made any direct or indirect unlawful payment to any government official or employee from corporate funds; (iii) violated or is in violation of any provision of the Foreign Corrupt Practices Act of 1977; or (iv) made any bribe, unlawful rebate, payoff, influence payment, kickback or other unlawful payment in connection with the business of the Issuer or any Subsidiary.

(bb) Except as described in the Prospectus, the Issuer and each of the Subsidiaries owns, licenses, or otherwise has rights in all United States and foreign patents, industrial design rights, trademarks, service marks, trade names, domain names, copyrights, database rights, rights of publicity, trade secrets, and other proprietary rights (collectively, and together with any applications or registrations for the foregoing, “Intellectual Property”) necessary for the conduct of its respective business as currently carried on and as proposed to be carried on as described in the Prospectus and the Disclosure Package. Except as specifically described in the Prospectus and the Disclosure Package: (i) no third parties have obtained rights from the Issuer or any of the Subsidiaries to any Intellectual Property owned, licensed, or otherwise controlled by the Issuer or any of the Subsidiaries (collectively, “Issuer Intellectual Property”), other than licenses granted in the ordinary course and those that would not have a Material Adverse Effect; (ii) to the Issuer’s knowledge, there is no infringement or misappropriation by others of any such Issuer Intellectual Property, except where such infringement or misappropriation, individually or in the aggregate, would not have a Material Adverse Effect; (iii) there is no pending or, to the Issuer’s knowledge, threatened action, suit, proceeding or claim by others challenging the Issuer’s or any of the Subsidiaries’ rights in or to any Issuer Intellectual Property; (iv) there is no pending or, to the Issuer’s knowledge, threatened action, suit, proceeding or claim by others against the Issuer or any of the Subsidiaries challenging the validity, enforceability, or scope of any such Issuer Intellectual Property; (v) to the Issuer’s knowledge, there is no pending or threatened action, suit, proceeding or claim by others against any third party challenging the validity, enforceability, or scope of any such Issuer Intellectual Property; (vi) there is no prior art or public or commercial activity of which the Issuer is aware that may render any patent held by the Issuer or any of the Subsidiaries invalid or any patent application held by the Issuer or any of the Subsidiaries unpatentable which has not been disclosed to the U.S. Patent and Trademark Office in compliance with all applicable laws; (vii) there is no prior, pending, or, to the Issuer’s knowledge, threatened action, suit, proceeding, or claim by others against the Issuer or any of the Subsidiaries that the Issuer or any of the Subsidiaries, any services performed or technology employed by the Issuer or any of the Subsidiaries, any products promoted, offered, distributed, or sold by the Issuer or any of the Subsidiaries, or any products, services, or technology to be sold, performed, or employed as described in the Prospectus (if such products, services, or technology actually were sold, performed, or employed as so described), infringes, misappropriates, or otherwise violates any Intellectual Property of others, and the Issuer is unaware of any facts which would form a reasonable basis for any such claim; (viii) to the Issuer’s knowledge, there is no Intellectual Property owned or controlled by a third party that: covers or reasonably may be deemed to cover any Issuer Intellectual Property; is necessary for the conduct of the Issuer’s or any of the Subsidiaries’ businesses as currently or, as described in the Prospectus, contemplated to be conducted; or interferes or reasonably could interfere with such businesses or with any Issuer Intellectual Property in a manner that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect; and (ix) either the Issuer or one of the Subsidiaries of the Issuer exclusively holds the first

 

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rights to enforce, protect, and defend all patents, copyrights, trademarks, service marks, trade names, domain names, and applications for any of the foregoing included in the Issuer Intellectual Property and to seek all legal and equitable remedies against others by reason of past, present, and future infringement or misappropriation of such Issuer Intellectual Property, except with respect to any Intellectual Property that the Issuer has licensed from third parties where such third party may hold these rights or where the failure to have such rights would not have a Material Adverse Effect. Except as disclosed in the Prospectus, to the Issuer’s knowledge, none of the technology employed, or products promoted, offered, distributed, or sold, by the Issuer or any of the Subsidiaries has been obtained or, to the Issuer’s knowledge, is being used, promoted, offered, distributed, or sold by the Issuer or any of the Subsidiaries in violation of the Intellectual Property or other rights of any third party. Each current employee and independent contractor who is an executive officer of the Issuer or a Subsidiary or performs services of an inventive or creative nature in connection with the development of Intellectual Property of the Issuer or a Subsidiary, has signed and delivered one or more written contracts with the Issuer or such Subsidiary pursuant to which such employee or independent contractor assigns to the Issuer or such Subsidiary all of his, her, or its rights in and to any inventions, discoveries, improvements, works of authorship, know-how, or information made, conceived, reduced to practice, authored, or discovered in the course of employment by, or performance of services for, the Issuer or such Subsidiary, and to any and all Intellectual Property relating thereto. The Issuer and the Subsidiaries took all reasonable measures to obtain such written contracts from their respective former employees, and from their respective former independent contractors who performed services of an inventive or creative nature, except where the failure to do so would not have, individually or in the aggregate, a Material Adverse Effect. The Issuer previously has provided to the Underwriters true and complete lists all of the issued patents, registered copyrights, registered trademarks, registered domain names, and registered databases in which the Issuer or any of the Subsidiaries has rights.

(cc) The conduct of business by the Issuer and each of the Subsidiaries complies, and at all times has complied, in all material respects with federal, state, local and foreign laws, statutes, ordinances, rules, regulations, decrees, orders, Permits and other similar items (“Laws”) applicable to its business, including, without limitation, (i) the Sherman Antitrust Act and similar federal, state, local and foreign Laws applicable to anti-competitive practices and consumer protection; and (ii) licensing and certification Laws covering any aspect of the business of the Issuer or any of the Subsidiaries. Neither the Issuer nor any of the Subsidiaries has received any notification asserting, or has knowledge of, any present or past failure to comply with or violation of any such Laws, except for violations that would not reasonably be expected to have a Material Adverse Effect.

(dd) Any certificate signed by any officer of the Issuer and delivered to the Representatives or counsel for the Underwriters in connection with the offering of the Shares contemplated hereby shall be deemed a representation and warranty by the Issuer to each Underwriter and shall be deemed to be a part of this Section 1 and incorporated herein by this reference.

(ee) The Issuer is in compliance with all applicable provisions of the Sarbanes–Oxley Act of 2002 (the “Sarbanes–Oxley Act”) and is actively taking steps to ensure

 

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that it will be in compliance with other provisions of the Sarbanes–Oxley Act that will become applicable to the Issuer.

(ff) The Issuer has established and maintains “disclosure controls and procedures” (as defined in Rules 13a–15(e) and 15d–15(e) of the Exchange Act; the Issuer’s “disclosure controls and procedures” are reasonably designed to ensure that all information (both financial and non–financial) required to be disclosed by the Issuer in the reports that it will file or furnish under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and regulations of the Commission, and that all such information is accumulated and communicated to the Issuer’s management as appropriate to allow timely decisions regarding required disclosure and to make the certifications of the Chief Executive Officer and Chief Financial Officer of the Issuer required under the Exchange Act with respect to such reports.

(gg) Other than as described in the Prospectus and the Disclosure Package, no current or former director, officer or holder of more than 5% of any class of the Issuer’s voting securities, nor any affiliate or immediate family member of any of the foregoing persons (each, a “Related Party”), has, since December 31, 2003, had any direct or indirect interest in any material transaction or business dealing involving with the Issuer that is required to be disclosed in the Prospectus. There are no outstanding loans, advances (except normal advances for business expenses in the ordinary course of business) or guarantees of indebtedness by the Issuer to or for the benefit of any Related Party, except as disclosed in the Prospectus and the Disclosure Package. Except as disclosed in the Prospectus and except for such loans as have been repaid and are no longer outstanding, the Issuer has not directly or indirectly extended or maintained credit, arranged for the extension of credit, or renewed an extension of credit, in the form of a personal loan to or for any Related Party.

(hh) Neither the Issuer nor any of its affiliates has, prior to the date hereof, made any offer or sale of any securities which could be “integrated” for purposes of the Securities Act or the rules and regulations promulgated thereunder with the offer and sale of the Shares pursuant to the Registration Statement. Except as disclosed in the Prospectus and the Disclosure Package, neither the Issuer nor any of its affiliates has sold or issued any security during the six–month period preceding the date of the Prospectus, including but not limited to any sales pursuant to Rule 144A or Regulation D or S under the Securities Act, other than shares of Common Stock issued pursuant to employee benefit plans, qualified stock option plans or the employee compensation plans or pursuant to outstanding options, rights or warrants as described in the Prospectus and the Disclosure Package.

(ii) The offer and sale of the Reserved Shares is not in violation of any applicable laws or regulations of any foreign jurisdiction. The Registration Statement and the Prospectus and any preliminary prospectus comply, and any further amendments or supplements thereto will comply, with any applicable laws or regulations of any foreign jurisdiction in which the Prospectus or any preliminary prospectus is distributed in connection with the Directed Share Program; and no approval, authorization, consent or order of or filing with any governmental or regulatory commission, board, body, authority or agency, other than those obtained, is required in

 

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connection with the offering or sale of the Reserved Shares in any jurisdiction where the Reserved Shares are being offered or sold. The Issuer has not offered, or caused the Underwriters to offer, Shares to any person pursuant to the Directed Share Program with the intent to influence unlawfully: (1) a customer or supplier of the Issuer or any of the Subsidiaries to alter the customer’s or supplier’s level or type of business with the Issuer or any of the Subsidiaries; or (ii) a trade journalist or publication to write or publish favorable information about the Issuer or any of the Subsidiaries or any of their respective products or services.

2. R EPRESENTATIONS AND W ARRANTIES OF THE S ELLING S TOCKHOLDERS .

Each of the Selling Stockholders severally represents and warrants to each of the Underwriters as follows:

(a) Such Selling Stockholder now has and at the Closing Date and the Option Closing Date, if any, will have good and marketable title to the Firm Shares and the Option Shares to be sold by such Selling Stockholder, free and clear of any liens, encumbrances, equities and claims, and full right, power and authority to effect the sale, transfer, assignment and delivery of such Firm Shares and Option Shares; and upon the delivery of, against payment for, such Firm Shares and Option Shares pursuant to this Agreement, the Underwriters will acquire good and marketable title thereto, free and clear of any liens, encumbrances, equities and claims.

(b) Such Selling Stockholder has full right, power and authority to execute and deliver this Agreement, the Power of Attorney and the Custodian Agreement referred to below and to perform its obligations under such agreements. The execution and delivery of this Agreement and the consummation by such Selling Stockholder of the transactions herein contemplated and the fulfillment by such Selling Stockholder of the terms hereof will not require any consent, approval, authorization, or other order of any court, regulatory body, administrative agency or other governmental body (except as may be required under the Securities Act, state securities laws or Blue Sky laws) and will not result in a breach of any of the terms and provisions of, or constitute a default under, organizational documents of such Selling Stockholder, if not an individual, or any indenture, mortgage, deed of trust or other agreement or instrument to which such Selling Stockholder is a party, or of any order, rule or regulation applicable to such Selling Stockholder of any court or of any regulatory body or administrative agency or other governmental body having jurisdiction.

(c) Such Selling Stockholder has not taken and will not take, directly or indirectly, any action designed to, or which has constituted, or which might reasonably be expected to cause or result in the stabilization or manipulation of the price of the Common Stock of the Issuer and, other than as permitted by the Securities Act, the Selling Stockholder will not distribute any prospectus or other offering material in connection with the offering of the Shares.

(d) Without having undertaken to determine independently the accuracy or completeness of either the representations and warranties of the Issuer contained herein or the information contained in the Registration Statement, such Selling Stockholder has no reason to believe that the representations and warranties of the Issuer contained in Section 1 are not true and

 

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correct, has reviewed and is familiar with the Registration Statement, has no knowledge of any material fact, condition or information not disclosed in the Registration Statement which has adversely affected or may adversely affect the business of the Issuer or any of the Subsidiaries and has no reason to believe that the Registration Statement or the Prospectus contains any untrue statement of a material fact, or omits to state any material fact necessary in order to make the statements therein, in light of the circumstances then prevailing, not misleading; and the sale of the Firm Shares and the Option Shares by such Selling Stockholder pursuant hereto is not prompted by any information concerning the Issuer or any of the Subsidiaries which is not set forth in the Registration Statement. The information pertaining to such Selling Stockholder under the caption “Principal and Selling Stockholders” in the Prospectus and any information pertaining to such Selling Stockholder furnished in writing by or on behalf of such Selling Stockholder for use in the Registration Statement is complete and accurate in all material respects.

(e) Except as disclosed in the Prospectus, there are no contracts, agreements or understandings between such Selling Stockholder and any person that would give rise to a valid claim against such Selling Stockholder or any Underwriter for a brokerage commission, finder’s fee or other like payment in connection with this offering.

3. P URCHASE , S ALE AND D ELIVERY OF THE F IRM S ECURITIES .

(a) On the basis of the representations, warranties and covenants herein contained, and subject to the conditions herein set forth, the Issuer and each of the Selling Stockholders agree to sell to the Underwriters and each Underwriter agrees, severally and not jointly, to purchase, at a price of $              per share, the number of Firm Securities set forth opposite the name of each Underwriter in Schedule I hereof, subject to adjustments in accordance with Section 11 hereof. The number of Firm Securities to be purchased by each Underwriter from each seller shall be as nearly as practicable in the same proportion to the total number of Firm Securities being sold by each seller as the number of Firm Securities being purchased by each Underwriter bears to the total number of Firm Securities to be sold hereunder. The obligations of the Issuer and of each of the Selling Stockholders shall be several and not joint.

(b) Certificates in negotiable form for the total number of the Shares to be sold hereunder by the Selling Stockholders have been placed in custody with U.S. Stock Transfer Corporation as custodian (the “Custodian”) pursuant to the Custodian Agreement executed by each Selling Stockholder for delivery of all Firm Securities and any Option Securities to be sold hereunder by the Selling Stockholders. Each of the Selling Stockholders specifically agrees that the Firm Securities and any Option Securities represented by the certificates held in custody for the Selling Stockholders under the Custodian Agreement are subject to the interests of the Underwriters hereunder, that the arrangements made by the Selling Stockholders for such custody are to that extent irrevocable, and that the obligations of the Selling Stockholders hereunder shall not be terminable by any act or deed of the Selling Stockholders (or by any other person, firm or corporation including the Issuer, the Custodian or the Underwriters) or by operation of law (including the death of an individual Selling Stockholder or the dissolution of a corporate Selling Stockholder) or by the occurrence of any other event or events, except as set forth in the Custodian Agreement. If any such event should occur prior to the delivery to the Underwriters of the Firm

 

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Securities or the Option Securities hereunder, certificates for the Firm Securities or the Option Securities, as the case may be, shall be delivered by the Custodian in accordance with the terms and conditions of this Agreement as if such event has not occurred. The Custodian is authorized to receive and acknowledge receipt of the proceeds of sale of the Shares held by it against delivery of such Shares.

(c) Payment for the Firm Securities to be sold hereunder is to be made by wire transfer of Federal (same day) funds to an account designated by the Issuer for the shares to be sold by it and to an account designated by the Custodian for the shares to be sold by the Selling Stockholders, in each case against delivery of certificates therefor to the Representatives for the several accounts of the Underwriters. Such payment and delivery are to be made through the facilities of the Depository Trust Issuer, New York, New York at 10:00 a.m., New York time, on the third business day after the date of this Agreement or at such other time and date not later than five business days thereafter as you and the Issuer shall agree upon, such time and date being herein referred to as the “Closing Date.” As used herein, “business day” means a day on which the New York Stock Exchange is open for trading and on which banks in New York are open for business and are not permitted by law or executive order to be closed.

(d) In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Selling Stockholders hereby grant an option to the several Underwriters to purchase the Option Securities at the price per share as set forth in the first paragraph of this Section. The option granted hereby may be exercised in whole or in part by giving written notice (i) at any time before the Closing Date and (ii) only once thereafter within 30 days after the date of this Agreement, by you, as the Representatives of the several Underwriters, to the Issuer, the Attorney-in-Fact and the Custodian setting forth the number of Option Securities as to which the several Underwriters are exercising the option, the names and denominations in which the Option Securities are to be registered and the time and date at which such certificates are to be delivered. If the option granted hereby is exercised in part, the respective number of Option Securities to be sold by each of the Selling Stockholders shall be in the same proportion to the total number of Option Securities being sold as the number of Firm Securities being sold by each of the Selling Stockholders bears to the total number of Firm Securities, adjusted by you in such manner as to avoid fractional shares. The time and date at which certificates for Option Securities are to be delivered shall be determined by the Representatives but shall not be earlier than three nor later than 10 full business days after the exercise of such option, nor in any event prior to the Closing Date (such time and date being herein referred to as the “Option Closing Date”). If the date of exercise of the option is three or more days before the Closing Date, the notice of exercise shall set the Closing Date as the Option Closing Date. The number of Option Securities to be purchased by each Underwriter shall be in the same proportion to the total number of Option Securities being purchased as the number of Firm Securities being purchased by such Underwriter bears to the total number of Firm Securities, adjusted by you in such manner as to avoid fractional shares. The option with respect to the Option Securities granted hereunder may be exercised only to cover over-allotments in the sale of the Firm Securities by the Underwriters. You, as the Representatives of the several Underwriters, may cancel such option at any time prior to its expiration by giving written notice of such cancellation to the Issuer and the Attorney-in-Fact. To the extent, if any, that the option is exercised, payment for the Option Securities shall be made on

 

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the Option Closing Date in Federal (same day funds) through the facilities of the Depository Trust Issuer in New York, New York drawn to the order of “U.S. Stock Transfer Corporation as Custodian”.

4. O FFERING BY THE U NDERWRITERS .

It is understood that the several Underwriters are to make a public offering of the Firm Securities as soon as the Representatives deem it advisable to do so. The Firm Securities are to be initially offered to the public at the initial public offering price set forth in the Prospectus. To the extent, if at all, that any Option Securities are purchased pursuant to Section 3 hereof, the Underwriters will offer them to the public on the foregoing terms.

It is further understood that you will act as the Representatives for the Underwriters in the offering and sale of the Securities in accordance with a Master Agreement Among Underwriters entered into by you and the several other Underwriters.

5. C OVENANTS OF THE I SSUER

(a) The Issuer covenants and agrees with the several Underwriters that it will (i) prepare and timely file with the Commission under Rule 424(b) of the Rules and Regulations a Prospectus in a form approved by the Representatives containing information previously omitted at the time of effectiveness of the Registration Statement in reliance on Rule 430A of the Rules and Regulations; (ii) not file any amendment to the Registration Statement or supplement to the Prospectus, any Preliminary Prospectus or any Issuer Free Writing Prospectus of which RBC Capital Markets Corporation and Thomas Weisel Partners LLC shall not previously have been advised and furnished with a copy or to which the Representatives shall have reasonably objected in writing or which is not in compliance with the Rules and Regulations; and (iii) file on a timely basis all reports and any definitive proxy or information statements required to be filed by the Issuer with the Commission subsequent to the date of the Prospectus and prior to the termination of the offering of the Shares by the Underwriters.

(b) The Issuer has not distributed and, without the prior consent of RBC Capital Markets Corporation and Thomas Weisel Partners LLC, will not distribute any prospectus or other offering material (including, without limitation, any offer relating to the Shares that would constitute a Free Writing Prospectus and content on the Issuer’s website that may be deemed to be a prospectus or other offering material) in connection with the offering and sale of the Shares, other than the materials referred to in Section 1(a). Each Underwriter represents and agrees that it has not made and, without the prior consent of the Issuer, RBC Capital Markets Corporation and Thomas Weisel Partners LLC, will not make, any offer relating to the Shares that would constitute an Issuer Free Writing Prospectus. Any such Issuer Free Writing Prospectus the use of which has been consented to by the Issuer, RBC Capital Markets Corporation and Thomas Weisel Partners LLC is listed on Schedule III(a) or Schedule III(b) hereto. The Issuer has complied and will comply with the requirements of Rule 433 under the Securities Act applicable to any Issuer Free Writing Prospectus, including timely filing with the Commission or retention where required and legending. The Issuer represents that it has satisfied, and agrees that it will

 

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satisfy, the conditions under Rule 433 under the Securities Act to avoid a requirement to file with the Commission any electronic road show. The Issuer agrees that if at any time following issuance of an Issuer Free Writing Prospectus any event has occurred or occurs as a result of which such Issuer Free Writing Prospectus would conflict with the information in the Registration Statement, the Pricing Prospectus or the Prospectus or would include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances then prevailing, not misleading, the Issuer will give prompt notice thereof to RBC Capital Markets Corporation and Thomas Weisel Partners LLC and, if requested by RBC Capital Markets Corporation or Thomas Weisel Partners LLC, will prepare and furnish without charge to each Underwriter an Issuer Free Writing Prospectus or other document which will correct such conflict, statement or omission.

(c) Neither the Issuer nor any of its affiliates will take, directly or indirectly, any action designed to cause or result in, or that has constitutes the stabilization or manipulation of the price of any securities of the Issuer.

(d) The Issuer will advise the Representatives promptly (i) when the Registration Statement or any post-effective amendment thereto shall have become effective; (ii) of receipt of any comments from the Commission; (iii) of any request of the Commission for amendment of the Registration Statement or for supplement to the Prospectus or for any additional information; and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the use of the Prospectus or of the institution of any proceedings for that purpose. The Issuer will use its best efforts to prevent the issuance of any such stop order preventing or suspending the use of the Prospectus and to obtain as soon as possible the lifting thereof, if issued.

(e) The Issuer will cooperate with the Representatives in endeavoring to qualify the Shares for sale under the securities laws of such jurisdictions as the Representatives may reasonably have designated in writing and will make such applications, file such documents, and furnish such information as may be reasonably required for that purpose, provided the Issuer shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction where it is not now so qualified or required to file such a consent. The Issuer will, from time to time, prepare and file such statements, reports, and other documents, as are or may be required to continue such qualifications in effect for so long a period as the Representatives may reasonably request for distribution of the Shares.

(f) The Issuer will deliver to, or upon the order of, the Representatives, from time to time, as many copies of any Preliminary Prospectus as the Representatives may reasonably request. The Issuer will deliver to, or upon the order of, the Representatives during the period when delivery of a Prospectus is required under the Securities Act, as many copies of the Prospectus in final form, or as thereafter amended or supplemented, as the Representatives may reasonably request. The Issuer will deliver to the Representatives at or before the Closing Date, four signed copies of the Registration Statement and all amendments thereto including all exhibits filed therewith, and will deliver to the Representatives such number of copies of the Registration

 

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Statement (including such number of copies of the exhibits filed therewith that may reasonably be requested) and of all amendments thereto, as the Representatives may reasonably request.

(g) The Issuer will comply with the Securities Act and the Rules and Regulations, and the Exchange Act, and the rules and regulations of the Commission thereunder, so as to permit the completion of the distribution of the Shares as contemplated in this Agreement and the Prospectus. If during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer, any event shall occur as a result of which, in the judgment of the Issuer or in the reasonable opinion of the Underwriters, it becomes necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances existing at the time the Prospectus is delivered to a purchaser, not misleading, or, if it is necessary at any time to amend or supplement the Prospectus to comply with any law, the Issuer promptly will prepare and file with the Commission an appropriate amendment to the Registration Statement or supplement to the Prospectus so that the Prospectus as so amended or supplemented will not, in the light of the circumstances when it is so delivered, be misleading, or so that the Prospectus will comply with the law.

(h) The Issuer will make generally available to its security holders, as soon as it is practicable to do so, but in any event not later than 15 months after the effective date of the Registration Statement, an earnings statement (which need not be audited) in reasonable detail, covering a period of at least 12 consecutive months beginning after the effective date of the Registration Statement, which earning statement shall satisfy the requirements of Section 11(a) of the Securities Act and Rule 158 of the Rules and Regulations and will advise you in writing when such statement has been so made available.

(i) Prior to the Closing Date, the Issuer will furnish to the Underwriters, as soon as they have been prepared by or are available to the Issuer, a copy of any unaudited interim financial statements of the Issuer for any period subsequent to the period covered by the most recent financial statements appearing in the Registration Statement and the Prospectus.

(j) The Issuer covenants and agrees that no offering, sale, short sale or other disposition of any shares of Common Stock of the Issuer or other securities convertible into or exchangeable or exercisable for shares of Common Stock or derivative of Common Stock (or any agreement for such) will be made for a period of 180 days after the date of this Agreement (the “Lock-Up Period”), directly or indirectly, by the Issuer otherwise than as contemplated hereunder or with the prior written consent of RBC Capital Markets Corporation and Thomas Weisel Partners LLC; provided , however, that if (1) the Issuer issues an earnings release or material news, or a material event relating to the Issuer occurs, during the last 17 days of the Lock-Up Period, or (2) prior to the expiration of the Lock-Up Period, the Issuer announces that it will release earnings results during the 16-day period beginning on the last day of the Lock-Up Period, the restrictions imposed hereunder shall 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. The foregoing will not apply to (A) equity grants made to employees, consultants, officers or directors of the Issuer pursuant to employee benefit plans described in the Prospectus and the Disclosure Package; (B) issuances pursuant to the exercise or conversion of exercisable or convertible

 

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securities outstanding on the date of this Agreement; or (C) up to 2,983,293 shares of Common Stock (as adjusted for stock splits, stock dividends, recapitalizations and the like) issued in connection with a strategic partnership, joint venture, lending or similar arrangement, or in connection with the acquisition (by merger or otherwise) or license by the Issuer of any businesses, services or technologies; provided , however that the recipients of any shares issued under this clause (C) are restricted from selling, transferring or requiring registration of such shares during the Lock-Up Period; and provided , further that such shares are not issued until at least 30 days from the date of this Agreement.

(k) The Issuer will use its best efforts to list, subject to notice of issuance, the Shares on The NASDAQ Global Market.

(l) The Issuer has used its best efforts to cause each officer and director, and each major stockholder identified on Exhibit B attached hereto, to furnish to you, on or prior to the date of this Agreement, letter agreements (the “Lock-Up Agreements”), in form and substance satisfactory to the Underwriters.

(m) The Issuer intends to apply the net proceeds of its sale of the Shares as described under the heading “Use of Proceeds” in the Prospectus and the Disclosure Package and shall file reports with the Commission with respect to the sale of the Shares and the application of the proceeds therefrom as may be required in accordance with Rule 463 under the Securities Act.

(n) The Issuer shall not invest, or otherwise use the proceeds received by the Issuer from its sale of the Shares in such a manner as would require the Issuer or any of the Subsidiaries to register as an investment company under the 1940 Act.

(o) The Issuer will maintain a transfer agent and, if necessary under the jurisdiction of incorporation of the Issuer, a registrar for the Common Stock.

(p) The Issuer take such actions as reasonably requested by the Representatives to ensure that the Reserved Shares will be restricted from sale, transfer, assignment, pledge or hypothecation for such period and to such extent as may be required by the NASD and its rules; and the Issuer will comply with all applicable securities and other applicable laws, rules and regulations in each jurisdiction in which the Reserved Shares are offered in connection with the Directed Share Program.

6. C OVENANTS OF THE S ELLING S TOCKHOLDERS .

Each of the Selling Stockholders covenants and agrees with the several Underwriters that:

(a) In order to document the Underwriters’ compliance with the reporting and withholding provisions of the Tax Equity and Fiscal Responsibility Act of 1982 and the Interest and Dividend Tax Compliance Act of 1983 with respect to the transactions herein contemplated, each of the Selling Stockholders agrees to deliver to you prior to or at the Closing Date a properly

 

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completed and executed United States Treasury Department Form W-8 or W-9 (or other applicable form or statement specified by Treasury Department regulations in lieu thereof).

(b) Such Selling Stockholder agrees to deliver to the Issuer or the Underwriters such documentation as the Issuer or the Underwriters or any of their respective counsel may reasonably request in order to effectuate any of the provisions of this Agreement.

(c) Such Selling Stockholder will not take, directly or indirectly, any action designed to cause or result in, or that has constituted or might reasonably be expected to constitute, the stabilization or manipulation of the price of any securities of the Issuer.

(d) During the Lock-Up Period, such Selling Stockholder will not, without the prior written consent of RBC Capital Markets Corporation and Thomas Weisel Partners LLC, make any demand for, or exercise any right with respect to, the registration of any shares of Common Stock or any security convertible into or exercisable or exchangeable for Common Stock.

7. C OSTS AND E XPENSES .

The Issuer will pay all costs, expenses and fees incident to the performance of the obligations of the Issuer under this Agreement, including, without limiting the generality of the foregoing, the following: accounting fees of the Issuer; the fees and disbursements of counsel for the Issuer; the cost of printing and delivering to, or as requested by, the Underwriters copies of the Registration Statement, Preliminary Prospectuses, the Pricing Prospectus, any Issuer Free Writing Prospectus, the Prospectus, the Underwriters’ Selling Memorandum and the Underwriters’ Invitation Letter, if any, the Listing Application, the Blue Sky Survey and any supplements or amendments thereto; the filing fees of the Commission; the filing fees incident to securing any required review by the National Association of Securities Dealers, Inc. (the “NASD”) of the terms of the sale of the Shares; and the Listing Fee of The NASDAQ Global Market. The Issuer also agrees to pay all costs and expenses of the Underwriters, including the fees and disbursements of counsel for the Underwriters, incident to the offer and sale of the Reserved Shares by the Underwriters to employees and persons having business relationships with the Issuer and any of the Subsidiaries.

The Issuer shall not, however, be required to pay for any of the Underwriters expenses (other than those related to qualification under NASD regulation and State securities or Blue Sky laws) except that, if the transactions contemplated by this Agreement are not consummated by reason of any breach of this Agreement by the Issuer or the Selling Stockholders or any refusal or failure on the part of the Issuer or the Selling Stockholders to perform any undertaking or to satisfy any condition of this Agreement that is within the Issuer’s or Selling Stockholders’ control, including without limitation such conditions in Section 8, or to comply with any of the terms hereof on its or their part required to be performed that is within its or their control, unless such refusal or failure to satisfy said condition or to comply with said terms be due to the default or omission of any Underwriter, then the Issuer shall reimburse the several Underwriters for reasonable out-of-pocket expenses, including all fees and disbursements of counsel, reasonably

 

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incurred in connection with investigating, marketing and proposing to market the Shares or in contemplation of performing their obligations hereunder; provided, however, that the Issuer shall not be liable pursuant to this paragraph for any amounts in excess of $200,000, and the Issuer shall not in any event be liable to any of the several Underwriters for damages on account of loss of anticipated profits from the sale by them of the Shares.

8. C ONDITIONS OF O BLIGATIONS OF THE U NDERWRITERS .

The several obligations of the Underwriters to purchase the Firm Securities on the Closing Date and the Option Securities, if any, on the Option Closing Date are subject to the accuracy, as of the Closing Date and the Option Closing Date, if any, of the representations and warranties of the Issuer and the Selling Stockholders contained herein, and to the performance by the Issuer and the Selling Stockholders of their covenants and obligations hereunder and to the following additional conditions:

(a) The Registration Statement and all post-effective amendments thereto shall have become effective and any and all filings required by Rule 424 and Rule 430A of the Rules and Regulations shall have been made, and any request of the Commission for additional information (to be included in the Registration Statement or otherwise) shall have been disclosed to the Representatives and complied with to their reasonable satisfaction. All material required to be filed by the Issuer pursuant to Rule 433(d) under the Securities Act shall have been filed with the Commission within the applicable time period prescribed for such filing by Rule 433 under the Securities Act; if the Issuer has elected to rely upon Rule 462(b) under the Securities Act, the Rule 462(b) Registration Statement shall have become effective by 10:00 P.M., Washington, D.C. time, on the date of this Agreement. No stop order suspending the effectiveness of the Registration Statement, as amended from time to time, shall have been issued and no proceedings for that purpose shall have been taken or, to the knowledge of the Issuer, shall be contemplated by the Commission; no stop order suspending or preventing the use of the Pricing Prospectus, Prospectus or any Issuer Free Writing Prospectus shall have been initiated or, to the knowledge of the Issuer, shall be contemplated by the Commission; all requests for additional information on the part of the Commission shall have been complied with to your reasonable satisfaction; and no injunction, restraining order, or order of any nature by a Federal or state court of competent jurisdiction shall have been issued as of the Closing Date which would prevent the issuance of the Shares.

(b) The Representatives shall have received on the Closing Date and each Option Closing Date, if any, the opinions of each of: (1) Dorsey & Whitney LLP, as counsel for the Issuer, in the form attached hereto as Annex 1 ; (2) Averilla Salazar Defensor & Enrile Law Offices, as counsel to the Issuer’s Philippine Subsidiary in the form attached hereto as Annex 2 ; (3) Dorsey & Whitney LLP, as counsel to the following Selling Stockholders: Mehran Nia, Ben Elyashar and Sol Khazani, in the form attached hereto as Annex 3 ; and (4) Mann Law Associates, P.C., as counsel for the following Selling Stockholders: Todd Daugherty, Lowell Mann, Richard Pine and Brian Tinari, in the form attached hereto as Annex 3 , each dated the Closing Date or the Option Closing Date, if any, addressed to the Underwriters.

 

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(c) The Representatives shall have received from Howard Rice Nemerovski Canady Falk & Rabkin, a Professional Corporation, counsel for the Underwriters, an opinion dated the Closing Date and the Option Closing Date, if any, with respect to the due execution and delivery of this Agreement by the Issuer, the validity of the Shares and other related matters as the Representatives reasonably may request, and such counsel shall have received such papers and information as they request to enable them to pass upon such matters.

(d) The Representatives shall have received at or prior to the Closing Date from Howard Rice Nemerovski Canady Falk & Rabkin, a Professional Corporation, a memorandum or summary, in form and substance satisfactory to the Representatives, with respect to the qualification for offering and sale by the Underwriters of the Shares under the State securities or Blue Sky laws of such jurisdictions as the Representatives may reasonably have designated to the Issuer.

(e) You shall have received, on each of the date hereof, the Closing Date and the Option Closing Date, if any, a letter dated the date hereof, the Closing Date or the Option Closing Date, if any, in form and substance satisfactory to you, from each of Ernst & Young LLP, Stonefield Josephson, Inc. and J.H. Cohn LLP confirming that they are independent public accountants within the meaning of the Securities Act and the applicable published Rules and Regulations thereunder and stating that in their opinion the financial statements and schedules examined by them and included in the Registration Statement comply in form in all material respects with the applicable accounting requirements of the Securities Act and the related published Rules and Regulations; and containing such other statements and information as is ordinarily included in accountants’ “comfort letters” to Underwriters with respect to the financial statements and certain financial and statistical information contained in the Registration Statement and the Prospectus.

(f) The Representatives shall have received on the Closing Date and the Option Closing Date, if any, a certificate or certificates of the Issuer’s Chief Executive Officer and Chief Financial Officer to the effect that, as of the Closing Date or the Option Closing Date, if any, each of them severally represents as follows:

(i) The Registration Statement has become effective under the Securities Act and, to the knowledge of such officer, no stop order suspending the effectiveness of the Registrations Statement has been issued, and no proceedings for such purpose have been taken by the Commission;

(ii) The representations and warranties of the Issuer contained in Section 1 hereof are true and correct as of the Closing Date or the Option Closing Date, if any;

(iii) All filings required to have been made pursuant to Rules 424 or 430A under the Securities Act have been made;

(iv) They have carefully examined the Registration Statement and the Prospectus and, to their knowledge, as of the effective date of the Registration Statement, such

 

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Registration Statement and Prospectus did not contain any untrue statement of any material fact and did not omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading, and, to their knowledge, since the effective date of the Registration Statement, no event has occurred which should have been set forth in a supplement to or an amendment of the Prospectus which has not been so set forth in such supplement or amendment; and

(v) Since the respective dates as of which information is given in the Disclosure Package, there has not been any material adverse change or any development involving a prospective change, which has had or is reasonably likely to have a Material Adverse Effect, whether or not arising in the ordinary course of business.

(g) The Issuer and the Selling Stockholders shall have furnished to the Representatives such further certificates and documents confirming the representations and warranties, covenants and conditions contained herein and related matters as the Representatives may reasonably have requested.

(h) The Firm Securities and Option Securities, if any, shall have been approved for designation upon notice of issuance on The NASDAQ Global Market.

(i) The Lock-Up Agreements described in Section 5(j) shall be in full force and effect.

(j) The Underwriters shall have received from each Selling Stockholder on or before each Option Closing Date (if any) a certificate dated the applicable Option Closing Date and signed by such Selling Stockholder to the effect that the representations and warranties of such Selling Stockholder contained in this Agreement are true and correct as of the applicable Option Closing Date and that such Selling Stockholder has complied with all of the agreements and satisfied all of the conditions on his or its part to be performed or satisfied hereunder on or before such Option Closing Date.

The opinions and certificates mentioned in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in all material respects satisfactory to the Representatives and to Howard Rice Nemerovski Canady Falk & Rabkin, a Professional Corporation, counsel for the Underwriters.

If any of the conditions hereinabove provided for in this Section shall not have been fulfilled when and as required by this Agreement to be fulfilled, the obligations of the Underwriters hereunder may be terminated by the Representatives. In such event, the Issuer and the Underwriters shall not be under any obligation to each other (except to the extent provided in Sections 7 and 10 hereof).

 

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9. C ONDITIONS OF THE O BLIGATIONS OF THE I SSUER AND THE S ELLING S TOCKHOLDERS .

The obligations of the Issuer and the Selling Stockholders to sell and deliver the portion of the Shares required to be delivered as and when specified in this Agreement are subject to the conditions that at the Closing Date or the Option Closing Date, if any, no stop order suspending the effectiveness of the Registration Statement shall have been issued and in effect or proceedings therefor initiated or threatened.

10. I NDEMNIFICATION .

(a) The Issuer agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls such Underwriter within the meaning of Section 15 of the Securities Act, against any losses, claims, damages or liabilities to which such Underwriter or any such controlling person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in (A) the Registration Statement, any Preliminary Prospectus, the Pricing Prospectus, the Prospectus or any amendment or supplement thereto, (B) any Issuer Free Writing Prospectus or any “issuer information” filed or required to be filed pursuant to Rule 433(d) under the Securities Act, (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made; or (iii) any alleged act or failure to act by RBC Capital Markets Corporation in connection with, or relating in any manner to, the Directed Share Program ( provided , however , that the Issuer shall not be liable under this clause (iii) for any loss, claim, damage, liability or action that is finally judicially determined to have resulted from the gross negligence or willful misconduct of RBC Capital Markets Corporation in conducting the Directed Share Program); and will reimburse any legal or other expenses reasonably incurred by the Underwriter and such controlling person in connection with investigating or defending any such loss, claim, damage, liability, action or proceeding (whether or not such Underwriter or controlling person is a party thereto); provided , however , that the Issuer will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement, or omission or alleged omission made in the Registration Statement, any Preliminary Prospectus, Pricing Prospectus, the Prospectus, or such amendment or supplement, or any Issuer Free Writing Prospectus or any “issuer information” filed or required to be filed pursuant to Rule 433(d) under the Securities Act in reliance upon and in conformity with written information furnished to the Issuer by or through the Representatives specifically for use in the preparation thereof, such information being listed in Section 15 below.

(b) Each Underwriter severally and not jointly will indemnify and hold harmless the Issuer, each of its directors, each of its officers who have signed the Registration Statement, the Selling Stockholders and each person, if any, who controls the Issuer or the Selling Stockholders within the meaning of Section 15 of the Securities Act, against any losses, claims, damages or liabilities to which the Issuer or any such director, officer, Selling Stockholder or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages

 

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or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon: (i) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Pricing Prospectus, the Prospectus or any amendment or supplement thereto, or in any Issuer Free Writing Prospectus or any “issuer information” filed or required to be filed pursuant to Rule 433(d) under the Securities Act; or (ii) the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made; and will reimburse any legal or other expenses reasonably incurred by the Issuer or any such director, officer, Selling Stockholder or controlling person in connection with investigating or defending any such loss, claim, damage, liability, action or proceeding; provided, however, that each Underwriter will be liable in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission has been made in the Registration Statement, any Preliminary Prospectus, the Pricing Prospectus, the Prospectus or any amendment or supplement thereto, or in any Issuer Free Writing Prospectus or any “issuer information” filed or required to be filed pursuant to Rule 433(d) under the Securities Act in reliance upon and in conformity with written information furnished to the Issuer by or through the Representatives specifically for use in the preparation thereof, such information being listed in Section 15 below.

(c) Each Selling Stockholder agrees, severally and not jointly, to indemnify and hold harmless each Underwriter and each person, if any, who controls such Underwriter within the meaning of Section 15 of the Securities Act, against any losses, claims, damages or liabilities to which such Underwriter or any such controlling person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in (A) the Registration Statement, any Preliminary Prospectus, the Pricing Prospectus, the Prospectus or any amendment or supplement thereto, (B) any Issuer Free Writing Prospectus or any “issuer information” filed or required to be filed pursuant to Rule 433(d) under the Securities Act or (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made, but in each instance only with reference to information relating to such Selling Stockholder furnished in writing by or on behalf of such Selling Stockholder expressly for use in the Registration Statement, the Preliminary Prospectus, the Pricing Prospectus, the Prospectus or any Issuer Free Writing Prospectus. Notwithstanding any other provision of this Agreement, the liability of each of Selling Stockholder under and in connection with this Agreement, the transactions contemplated hereby, and the Custody Agreement shall be limited to an amount equal to the proceeds received by such Selling Shareholder from the Underwriters in the offering. For purposes of this Section 10(c), the parties hereto acknowledge and agree that the information regarding the name of, and the number of shares of Common Stock beneficially owned by, such Selling Stockholder in the section captioned “Principal [and Selling] Stockholders” in the Registration Statement is the only information relating to such Selling Stockholder furnished in writing by such Selling Stockholder for use in the Registration Statement, the Preliminary Prospectus, the Pricing Prospectus, the Prospectus or any Issuer Free Writing Prospectus.

 

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(d) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to this Section, such person (the “indemnified party”) shall promptly notify the person against whom such indemnity may be sought (the “indemnifying party”) in writing. No indemnification provided for in Section 10(a), (b) or (c) shall be available to any party who shall fail to give notice as provided in this Subsection if the party to whom notice was not given was unaware of the proceeding to which such notice would have related and was materially prejudiced by the failure to give such notice, but the failure to give such notice shall not relieve the indemnifying party or parties from any liability which it or they may have to the indemnified party for contribution or otherwise than on account of the provisions of Section 10(a), (b) or (c). In case any such proceeding shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party and shall pay as incurred the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel at its own expense. Notwithstanding the foregoing, the indemnifying party shall pay the fees and expenses of the counsel retained by the indemnified party in the event (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel, (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them or (iii) the indemnifying party shall have failed to assume the defense and employ counsel reasonably acceptable to the indemnified party within a reasonable period of time after notice of commencement of the action.

It is understood that the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees and expenses of more than one separate firm for all such indemnified parties. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment to the extent such party is entitled to indemnification pursuant to Section 10(a), (b) or (c) above. In addition, the indemnifying party will not, without the prior written consent of the indemnified party, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action or proceeding of which indemnification may be sought hereunder (whether or not any indemnified party is an actual or potential party to such claim, action or proceeding) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action or proceeding.

(e) If the indemnification provided for in this Section is unavailable to or insufficient to hold harmless an indemnified party under Section 10(a), (b) or (c) above in respect of any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the

 

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Issuer, the Selling Stockholders and the Underwriters from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Issuer, the Selling Stockholders and the Underwriters in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, (or actions or proceedings in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Issuer, the Selling Stockholders and the Underwriters shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Issuer or each Selling Stockholder, as the case may be, bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Issuer, the Selling Stockholder or the Underwriters and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.

The Issuer, the Selling Stockholders and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Subsection were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Subsection. The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to above in this Subsection shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Subsection, (i) no Underwriter shall be required to contribute any amount in excess of the underwriting discounts and commissions applicable to the Shares purchased by such Underwriter, (ii) no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation and (iii) no Selling Stockholder shall be required to contribute any amount in excess of the proceeds received by such Selling Stockholder from the Underwriters in the offering. The Underwriters’ obligations in this Subsection to contribute are several in proportion to their respective underwriting obligations and not joint.

(f) In any proceeding relating to the Registration Statement, any Preliminary Prospectus, the Pricing Prospectus, the Prospectus or any supplement or amendment thereto, or any Issuer Free Writing Prospectus, each party against whom contribution may be sought under this Section hereby consents to the jurisdiction of any court having jurisdiction over any other contributing party, agrees that process issuing from such court may be served upon him or it by any other contributing party and consents to the service of such process and agrees that any other contributing party may join him or it as an additional defendant in any such proceeding in which such other contributing party is a party.

(g) Any losses, claims, damages, liabilities or expenses for which an indemnified party is entitled to indemnification or contribution under this Section shall be paid by the indemnifying party to the indemnified party as such losses, claims, damages, liabilities or expenses are incurred. The indemnity and contribution agreements contained in this Section and the representations and warranties of the Issuer set forth in this Agreement shall remain operative and in full force and effect, regardless of (i) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter, the Issuer, its directors or officers or any persons controlling the Issuer, (ii) acceptance of any Shares and payment therefor hereunder, and (iii) any termination of this Agreement. A successor to any Underwriter, or to the Issuer, its directors or officers, or any person controlling the Issuer, shall be entitled to the benefits of the indemnity, contribution and reimbursement agreements contained in this Section.

 

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11. D EFAULT BY U NDERWRITERS .

If on the Closing Date or the Option Closing Date, if any, any Underwriter shall fail to purchase and pay for the portion of the Shares which such Underwriter has agreed to purchase and pay for on such date (otherwise than by reason of any default on the part of the Issuer or a Selling Stockholder), you, as the Representatives of the Underwriters, shall use your reasonable efforts to procure within 36 hours thereafter one or more of the other Underwriters, or any others, to purchase from the Issuer and the Selling Stockholders such amounts as may be agreed upon and upon the terms set forth herein, the Firm Securities or Option Securities, as the case may be, which the defaulting Underwriter or Underwriters failed to purchase. If during such 36 hours you, as such Representatives, shall not have procured such other Underwriters, or any others, to purchase the Firm Securities or Option Securities, as the case may be, agreed to be purchased by the defaulting Underwriter or Underwriters, then (a) if the aggregate number of shares with respect to which such default shall occur does not exceed 10% of the Firm Securities or Option Securities, as the case may be, covered hereby, the other Underwriters shall be obligated, severally, in proportion to the respective numbers of Firm Securities or Option Securities, as the case may be, which they are obligated to purchase hereunder, to purchase the Firm Securities or Option Securities, as the case may be, which such defaulting Underwriter or Underwriters failed to purchase, or (b) if the aggregate number of shares of Firm Securities or Option Securities, as the case may be, with respect to which such default shall occur exceeds 10% of the Firm Securities or Option Securities, as the case may be, covered hereby, the Issuer and the Selling Stockholders or you as the Representatives of the Underwriters will have the right to terminate this Agreement without liability on the part of the non-defaulting Underwriters or of the Issuer or of the Selling Stockholders except to the extent otherwise provided in Section 13 hereof. In the event of a default by any Underwriter or Underwriters, as set forth in this Section, the Closing Date or Option Closing Date, if any, may be postponed for such period, not exceeding seven days, as you, as Representatives, may determine in order that the required changes in the Registration Statement or in the Prospectus or in any other documents or arrangements may be effected. The term “Underwriter” includes any person substituted for a defaulting Underwriter. Any action taken under this Section shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement.

12. N OTICES .

All communications hereunder shall be in writing and, except as otherwise provided herein, will be mailed, delivered, or faxed and confirmed as follows:

 

if to the Underwriters, to    RBC Capital Markets Corporation
   c/o RBC Capital Markets
   One Liberty Plaza, 165 Broadway
   New York, NY 10006-1404
   Attention:    Joe Morea
      Syndicate Director
   Fax: (212) 428-6260

 

if to the Issuer, to    U.S. Auto Parts Network, Inc.
   17150 South Margay Avenue
   Carson, CA 90746
   Attention:    Michael McClane
      Chief Financial Officer
   Fax: (310) 735-0088

 

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13. T ERMINATION .

(a) This Agreement may be terminated by you at any time prior to the Closing Date if any of the following has occurred: (i) since the respective dates as of which information is given in the Registration Statement and the Prospectus, any material adverse change or any development involving a prospective change, which (A) in the absolute discretion of any group of Underwriters (which may include RBC Capital Markets Corporation and/or Thomas Weisel Partners LLC) that has agreed to purchase in the aggregate at least 50% of the Firm Securities, as long as neither RBC Capital Markets Corporation nor Thomas Weisel Partners LLC affirmatively asserts that termination should not occur, or (B) in the absolute discretion of RBC Capital Markets Corporation and Thomas Weisel Partners LLC (whether or not the condition of clause (A) is satisfied) has had or is reasonably likely to have a Material Adverse Effect, (ii) any outbreak, attack, or escalation of hostilities or declaration of war, national emergency, act of terrorism or other national or international calamity or crisis or change in economic, financial or political conditions if the effect of such outbreak, escalation, declaration, emergency, calamity, crisis or change on the financial markets of the United States, China, Taiwan or the Philippines would, in (A) the absolute discretion of any group of Underwriters (which may include RBC Capital Markets Corporation and/or Thomas Weisel Partners LLC) that has agreed to purchase in the aggregate at least 50% of the Firm Securities, as long as neither RBC Capital Markets Corporation nor Thomas Weisel Partners LLC affirmatively asserts that termination should not occur, or (B) in the absolute discretion of RBC Capital Markets Corporation and Thomas Weisel Partners LLC (whether or not the condition of clause (A) is satisfied), make it impracticable or inadvisable to market the Shares or to enforce contracts for the sale of the Shares, or (iii) suspension of trading in securities generally on the New York Stock Exchange or the NASDAQ Global Market or limitation on prices (other than limitations on hours or numbers of days of trading) for securities on either such Exchange, (iv) the enactment, publication, decree or other promulgation of any statute, regulation, rule or order of any court or other governmental authority which in your opinion materially and adversely affects or is reasonably likely to materially and adversely affect the business or operations of the Issuer, (v) declaration of a banking moratorium by United States or New York State authorities, (vi) any downgrading, or placement on any watch list for possible downgrading, in the rating of the Issuer’s debt securities by any “nationally recognized statistical rating organization” (as defined for purposes of Rule 436(g) under the Exchange Act); (vii) the suspension of trading of the Issuer’s common stock by The NASDAQ Global Market, the Commission, or any other governmental authority or, (viii) the taking of any action by any governmental body or agency in respect of its monetary or fiscal affairs which in your reasonable opinion has a material adverse effect on the securities markets in the United States; or

(b) as provided in Sections 8 and 11 of this Agreement.

14. S UCCESSORS .

This Agreement has been and is made solely for the benefit of the Issuer, the Selling Stockholders and Underwriters and their respective successors, executors, administrators, heirs and

 

29


assigns, and the officers, directors and controlling persons referred to herein, and no other person will have any right or obligation hereunder. No purchaser of any of the Shares from any Underwriter shall be deemed a successor or assign merely because of such purchase.

15. I NFORMATION P ROVIDED BY U NDERWRITERS .

The Issuer, the Selling Stockholders and the Underwriters acknowledge and agree that the only information furnished or to be furnished by any Underwriter to the Issuer for inclusion in any Preliminary Prospectus, Prospectus, Issuer Free Writing Prospectus or the Registration Statement consists of the information set forth in the table under the first paragraph under the caption “Underwriting” in the Prospectus, the information set forth in the first and second paragraphs and the table under the sub-caption “Underwriting — Commissions and Expenses”, the information set forth in the first paragraph under the sub-caption “Underwriting — Offering Price Determination” and the information set forth in second through fifth paragraphs under the sub-caption “Underwriting — Stabilization, Short Positions and Penalty Bids”.

16. R ESEARCH I NDEPENDENCE

In addition, the Issuer acknowledges that the Underwriters’ research analysts and research departments are required to be independent from their respective investment banking divisions and are subject to certain regulations and internal policies, and that such Underwriters’ research analysts may hold and make statements or investment recommendations and/or publish research reports with respect to the Issuer and/or the offering that differ from the views of its investment bankers. The Issuer hereby waives and releases, to the fullest extent permitted by law, any claims that the Issuer may have against the Underwriters with respect to any conflict of interest that may arise from the fact that the views expressed by their independent research analysts and research departments may be different from or inconsistent with the views or advice communicated to the Issuer by such Underwriters’ investment banking divisions. The Issuer acknowledges that each of the Underwriters is a full service securities firm and as such from time to time, subject to applicable securities laws, may effect transactions for its own account or the account of its customers and hold long or short position in debt or equity securities of the companies which may be the subject to the transactions contemplated by this Agreement.

17. N O F IDUCIARY D UTY .

Notwithstanding any preexisting relationship, advisory or otherwise, between the parties or any oral representations or assurances previously or subsequently made by the Underwriters, the Issuer and each of the Selling Stockholders acknowledge and agree that:

(a) nothing herein shall create a fiduciary or agency relationship between the Issuer and the Selling Stockholders, on the one hand, and the Underwriters on the other;

(b) the Underwriters are not acting as advisors, expert or otherwise, to the Issuer or the Selling Stockholders in connection with this offering, sale of the Shares or any other

 

30


services the Underwriters may be deemed to be providing hereunder, including, without limitation, with respect to the public offering price of the Shares;

(c) the relationship between and the Selling Stockholders, on the one hand, and the Underwriters on the other, is entirely and solely commercial, based on arms-length negotiations;

(d) any duties and obligations that the Underwriters may have to the Issuer and the Selling Stockholders shall be limited to those duties and obligations specifically stated herein; and

(e) notwithstanding anything in this Agreement to the contrary, the Issuer and each of the Selling Stockholders acknowledge that the Underwriters may have financial interests in the success of the Offering that are not limited to the difference between the price to the public and the purchase price paid to the Issuer or the Selling Stockholders by the Underwriters for the shares, and the Underwriters have no obligation to disclose, or account to the Issuer or the Selling Stockholders for, any of such additional financial interests.

The Issuer and each of the Selling Stockholders hereby waive and release, to the fullest extent permitted by law, any claims that the Issuer or such Selling Stockholder may have against the Underwriters with respect to any breach or alleged breach of fiduciary duty.

18. F AILURE OF THE S ELLING S TOCKHOLDERS TO S ELL AND D ELIVER S HARES .

If the Selling Stockholders shall fail to sell and deliver to the Underwriters their portion of the Firm Securities or the Option Securities to be sold and delivered by the Selling Stockholders at the Closing Date or any Option Closing Date pursuant to this Agreement, then the Underwriters may at their option, by written notice from the Representatives to the Issuer and the Selling Stockholders, either (i) terminate this Agreement without any liability on the part of any Underwriter or, except as provided in Sections 7 and 10 hereof, the Issuer or the Selling Stockholders or (ii) require the Issuer to deliver for sale any Shares which the Selling Stockholders fail to sell or deliver. If the Selling Stockholders shall fail to sell and deliver to the Underwriters the Shares to be sold and delivered by the Selling Stockholders pursuant to this Agreement at any Option Closing Date, then the Underwriters shall have the right, by written notice from the Representatives to the Issuer and the Selling Stockholders, to postpone the applicable Option Closing Date, but in no event for longer than seven days in order that the required changes, if any, to the Registration Statement and the Prospectus or any other documents or arrangements may be effected.

19. M ISCELLANEOUS .

The reimbursement, indemnification and contribution agreements contained in this Agreement and the representations, warranties and covenants in this Agreement shall remain in full force and effect regardless of (a) any termination of this Agreement, (b) any investigation made by

 

31


or on behalf of any Underwriter or controlling person thereof, or by or on behalf of the Issuer or its directors or officers and (c) delivery of and payment for the Shares under this Agreement.

This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York.

This Agreement constitutes the entire agreement of the parties to this Agreement and supersedes all prior written or oral and all contemporaneous oral agreements, understandings and negotiations with respect to the subject matter hereof.

This Agreement may only be amended or modified in writing, signed by all of the parties hereto, and no condition herein (express or implied) may be waived unless waived in writing by each party whom the condition is meant to benefit.

[ remainder of page intentionally blank ]

 

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If the foregoing letter is in accordance with your understanding of our agreement, please sign and return to us the enclosed duplicates hereof, whereupon it will become a binding agreement among the Issuer and the several Underwriters in accordance with its terms.

 

Very truly yours,
U.S. AUTO PARTS NETWORK, INC.
By:  

 

  Mehran Nia
  Chief Executive Officer
SELLING STOCKHOLDERS LISTED ON
SCHEDULE II ATTACHED HERETO
By:  

 

  Michael McClane, Attorney-in-Fact

 

The foregoing Underwriting Agreement is hereby confirmed and accepted as of the date first above written.
RBC CAPITAL MARKETS CORPORATION
Thomas Weisel Partners LLC
Piper Jaffray & Co.
JMP Securities LLC
As the Representatives of the several
Underwriters listed on Schedule I
By: RBC Capital Markets Corporation
By:  

 

Name:  

 

Title:  

 

 

33


SCHEDULE I

S CHEDULE OF U NDERWRITERS

 

Underwriter

  

Number of Firm Securities

to be Purchased

RBC Capital Markets Corporation

  

Thomas Weisel Partners LLC

  

Piper Jaffray & Co.

  

JMP Securities LLC

  

TOTAL:

  


SCHEDULE II

S ELLING S TOCKHOLDERS


S CHEDULE III(a)

Materials Other than the Pricing Prospectus that Comprise the Pricing Disclosure Package


S CHEDULE III(b)

Issuer Free Writing Prospectuses Not Included in the Pricing Disclosure Package

[List on this Schedule all electronic roadshows and any other Issuer FWPs

that were not required to be distributed in order to satisfy Section 12 obligations]


Exhibit A

L IST OF S UBSIDIARIES

 

Name

 

Jurisdiction

PartsBin, Inc.

  Delaware

Power Host, Inc.(1)

  Ontario, Canada

MBS Tek Corporation (2)

  Philippines

(1) Power Host Inc. is a wholly-owned subsidiary of PartsBin, Inc.
(2) As described in the Registration Statement, the Issuer holds 99.9% of the outstanding shares of capital stock of MBS Tek. The balance (5 shares of common stock in total, representing 0.1% of the total number of shares of MBS Tek Corporation outstanding) are held by 5 individuals, including Mehran Nia and Michael McClane.


E XHIBIT B

M AJOR S TOCKHOLDERS

Oak Investment Partners XI, L.P.

Exhibit 3.4

SECOND AMENDED AND RESTATED

CERTIFICATE OF INCORPORATION

OF

U.S. AUTO PARTS NETWORK, INC.

The undersigned, Mehran Nia, hereby certifies that:

FIRST : He is the duly elected and acting President and Chief Executive Officer of U.S. Auto Parts Network, Inc., a Delaware corporation.

SECOND : The Certificate of Incorporation of said corporation was originally filed in the office of the Secretary of the State of Delaware on February 27, 2006.

THIRD : The Amended and Restated Certificate of Incorporation of said corporation was filed in the office of the Secretary of the State of Delaware on March 3, 2006 and was amended by Certificates of Amendment filed on November 3, 2006 and January 9, 2006.

FOURTH : The Amended and Restated Certificate of Incorporation of said corporation, as amended, is hereby further amended and restated to read in its entirety as follows:

ARTICLE I

The name of the corporation is U.S. Auto Parts Network, Inc. (the “ Corporation ”).

ARTICLE II

The purpose of this Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware.

ARTICLE III

The address of the Corporation’s registered office in the State of Delaware is 2711 Centerville Road, Suite 400, City of Wilmington, County of New Castle. The name of the registered agent at such address is Corporation Service Company.

ARTICLE IV

The total number of shares of stock that the Corporation shall have authority to issue is 110,000,000, consisting of 100,000,000 shares of Common Stock, $0.001 par value per share, and 10,000,000 shares of Preferred Stock, $0.001 par value per share.

A. The holders of shares of the Common Stock shall be entitled to vote on all matters to be voted on by the stockholders of the Corporation and shall be entitled to one vote for each share thereof held of record.

B. The Preferred Stock may be issued from time to time by the board of directors as shares of one or more series, without further stockholder approval. Subject to the provisions

 

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hereof and the limitations prescribed by law, the board of directors is expressly authorized, by adopting resolutions providing for the issuance of shares of any particular series and, if and to the extent from time to time required by law, by filing with the Delaware Secretary of State a certificate setting forth the resolutions so adopted pursuant to the DGCL, to establish the number of shares to be included in each such series and to fix the designation and relative powers, including voting powers, preferences, rights, qualifications and limitations and restrictions thereof, relating to the shares of each such series. The rights, privileges, preferences and restrictions of any such additional series may be subordinated to, pari passu with (including, without limitation, inclusion in provisions with respect to liquidation and acquisition preferences, redemption and/or approval of matters by vote), or senior to any of those of any present or future class or series of Preferred Stock or Common Stock. The board of directors is also authorized to increase or decrease the number of shares of any series prior or subsequent to the issue of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series.

The authority of the board of directors with respect to each series shall include, but not be limited to, determination of the following:

(i) the distinctive serial designation of such series and the number of shares constituting such series;

(ii) the annual dividend rate on shares of such series, if any, whether dividends shall be cumulative and, if so, from which date or dates;

(iii) whether the shares of such series shall be redeemable and, if so, the terms and conditions of such redemption, including the date or dates upon and after which such shares shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates;

(iv) the obligation, if any, of the Corporation to retire shares of such series pursuant to a sinking fund;

(v) whether shares of such series shall be convertible into, or exchangeable for, shares of stock of any other class or classes and, if so, the terms and conditions of such conversion or exchange, including the price or prices or the rate or rates of conversion or exchange and the terms of adjustment, if any;

(vi) whether the shares of such series shall have voting rights, in addition to any voting rights provided by law, and, if so, the terms of such voting rights;

(vii) the rights of the shares of such series in the event of voluntary or involuntary liquidation, dissolution or winding-up of the Corporation; and

(viii) any other relative rights, powers, preferences, qualifications, limitations or restrictions thereof relating to such series.

 

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ARTICLE V

The number of directors to constitute the whole board of directors shall be such number (not less than three (3) nor more than nine (9)) as shall be fixed from time to time by resolution of the board of directors or the affirmative vote of the holders of at least 66 2/3 % of the outstanding voting stock. The board of directors shall be divided into three classes as nearly equal in number as may be feasible, hereby designated as Class I, Class II and Class III, with the term of office of one class expiring each year. For the purposes hereof, the initial Class I, Class II and Class III directors shall be those directors so designated and elected and who are holding such offices as of the date this Second Amended and Restated Certificate of Incorporation is duly filed with the Secretary of State of the State of Delaware. At the annual meeting of stockholders in 2007, the term of office of the Class I directors shall expire and Class I directors shall be elected for a full term of three years. At the annual meeting of stockholders in 2008, the term of office of the Class II directors shall expire and Class II directors shall be elected for a full term of three years. At the annual meeting of stockholders in 2009, the term of office of the Class III directors shall expire and Class III directors shall be elected for a full term of three years. At each succeeding annual meeting of stockholders, successors to the directors whose terms shall then expire shall be elected to hold office for terms expiring at the third succeeding annual meeting of stockholders. In case of any vacancies, by reason of an increase in the number of directors or otherwise, subject to the rights of the holders of any series of Preferred Stock then outstanding, each additional director may be elected by a majority of the directors then in office, even though less than a quorum of the board of directors, to serve until the end of the term he or she is elected to fill and until his or her successor shall have been elected and qualified in the class to which such director is assigned and for the term or remainder of the term of such class. Directors shall continue in office until others are elected and qualified in their stead. When the number of directors is changed, each director then serving as such shall nevertheless continue as a director of the class of which he or she is a member until the expiration of his or her current term and any newly created directorships or any decrease in directorships shall be so assigned among the classes by a majority of the directors then in office, though less than a quorum, as to make all classes as nearly equal in number as may be feasible. No decrease in the number of directors shall shorten the term of any incumbent director.

Election of directors at all meetings of the stockholders at which directors are to be elected shall be by written ballot, and, except with respect to the right of the holders of any series of Preferred Stock then outstanding to elect additional directors under specified circumstances, a plurality of the votes cast thereat shall elect directors.

Notwithstanding any other provision hereof, this ARTICLE V may not be altered, amended or repealed except by the board of directors of the Corporation or by the affirmative vote of holders of at least 66 2/3% of the outstanding voting stock of the Corporation.

ARTICLE VI

In furtherance and not in limitation of the powers conferred by statute, the board of directors of the Corporation is expressly authorized to make, alter, amend or repeal the Bylaws of the Corporation.

 

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ARTICLE VII

1. To the fullest extent permitted by the Delaware General Corporation Law as the same exists or as may hereafter be amended, a director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for a breach of fiduciary duty as a director.

2. The Corporation may indemnify to the fullest extent permitted by law any person made or threatened to be made a party to an action or proceeding, whether criminal, civil, administrative or investigative, by reason of the fact that he, his testator or intestate is or was a director, officer or employee of the Corporation or any predecessor of the Corporation or serves or served at any other enterprise as a director, officer or employee at the request of the Corporation or any predecessor to the Corporation.

If and to the extent that the Corporation may from time to time be or become subject to certain provisions of the CGCL pursuant to operation of Section 2115 thereof, then, as authorized by Section 317(g) of CGCL, for the duration of any such period, the Corporation is authorized to indemnify officers, directors, employees, and agents of this Corporation (and any other person to which applicable law permits this Corporation to provide indemnification) in excess of that which is otherwise permitted under Section 317 of the CGCL, subject only to the limits created by applicable Delaware law (statutory or non-statutory).

3. Neither any amendment nor repeal of this ARTICLE VII, nor the adoption of any provision of this Corporation’s Certificate of Incorporation inconsistent with this ARTICLE VII, shall eliminate or reduce the effect of this ARTICLE VII, in respect of any matter occurring, or any action or proceeding accruing or arising or that, but for this ARTICLE VII, would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision.

ARTICLE VIII

Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws may provide. The books of the Corporation may be kept (subject to any provision contained in the statutes) outside of the State of Delaware at such place or places as may be designated from time to time by the board of directors or in the Bylaws of the Corporation.

* * *

FIFTH : This Second Amended and Restated Certificate of Incorporation has been duly adopted by the board of directors and the stockholders of said corporation in accordance with Sections 242 and 245 of the General Corporation Law of the State of Delaware.

 

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IN WITNESS WHEREOF , U.S. Auto Parts Network, Inc. has caused this Second Amended and Restated Certificate of Incorporation to be signed by its President and Chief Executive Officer on this                      day of                      , 2007.

 

  

Mehran Nia

President and Chief Executive Officer

 

5

Exhibit 3.6

AMENDED AND RESTATED BYLAWS

OF

U.S. AUTO PARTS NETWORK, INC.,

a Delaware corporation

(Effective as of                      , 2007)

ARTICLE I: OFFICES

SECTION 1.1. Registered Office.

The registered office of U.S. Auto Parts Network, Inc. (the “Corporation”) shall be at and the name of its registered agent at that address is 2711 Centerville Road, Suite 400 in the City of Wilmington, County of New Castle and the name of its registered agent at that address is Corporation Service Company.

SECTION 1.2. Principal Office.

The principal office for the transaction of the business of the Corporation shall be 17150 South Margay Avenue, Carson, CA 90746, or otherwise as set forth in a resolution adopted by the Board of Directors of the Corporation (the “Board”).

SECTION 1.3. Other Offices.

The Corporation may also have an office or offices at such other place or places, either within or without the State of Delaware, as the Board may from time to time determine or as the business of the Corporation may require.

ARTICLE II: MEETINGS OF STOCKHOLDERS

SECTION 2.1. Place of Meetings.

All annual meetings of stockholders and all other meetings of stockholders shall be held either at the principal office of the Corporation or at any other place within or without the State of Delaware that may be designated by the Board pursuant to authority hereinafter granted to the Board.

SECTION 2.2. Annual Meetings.

Annual meetings of stockholders of the Corporation for the purpose of electing directors and for the transaction of such other business as may properly come before such meetings may be held at such time and place and on such date as the Board shall determine by resolution.

SECTION 2.3. Special Meetings.

A special meeting of the stockholders for the transaction of any proper business may be

 

1


called at any time exclusively by the Chairman of the Board or by a majority of the Board. This SECTION 2.3 may not be altered, amended or repealed except by the Board or by the affirmative vote of holders of at least 66  2 / 3 % of the outstanding voting stock of the Corporation.

SECTION 2.4. Notice of Meetings.

Except as otherwise required by law, notice of each meeting of stockholders, whether annual or special, shall be given not less than ten (10) days nor more than sixty (60) days before the date of the meeting to each stockholder of record entitled to vote at such meeting by delivering a typewritten or printed notice thereof to such stockholder personally, or by depositing such notice in the United States mail, in a postage prepaid envelope, directed to such stockholder at such stockholder’s post office address furnished by such stockholder to the Secretary of the Corporation for such purpose, or, if such stockholder shall not have furnished an address to the Secretary for such purpose, then at such stockholder’s post office address last known to the Secretary, or by transmitting a notice thereof to such stockholder at such address by telegraph, cable, wireless or facsimile. Except as otherwise expressly required by law, no publication of any notice of a meeting of stockholders shall be required. Every notice of a meeting of stockholders shall state the place, date and hour of the meeting and, in the case of a special meeting, shall also state the purpose for which the meeting is called. Notice of any meeting of stockholders shall not be required to be given to any stockholder to whom notice may be omitted pursuant to applicable Delaware law or who shall have waived such notice, and such notice shall be deemed waived by any stockholder who shall attend such meeting in person or by proxy, except a stockholder who shall attend such meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Except as otherwise expressly required by law, notice of any adjourned meeting of stockholders need not be given if the time and place thereof are announced at the meeting at which the adjournment is taken.

SECTION 2.5. Fixing Date for Determination of Stockholders of Record.

In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any other change, conversion or exchange of stock or for the purpose of any other lawful action other than to consent to corporate action in writing without a meeting, the Board may fix, in advance, a record date, which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any such other action. If in any case involving the determination of stockholders for any purpose other than notice of or voting at a meeting of stockholders the Board shall not fix such a record date, then the record date for determining stockholders for such purpose shall be the close of business on the day on which the Board shall adopt the resolution relating thereto. A determination of stockholders entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of such meeting; provided, however, that the Board may fix a new record date for the adjourned meeting.

 

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SECTION 2.6. Quorum.

Except as otherwise required by law, the holders of record of a majority in voting interest of the shares of stock of the Corporation entitled to be voted thereat, present in person or by proxy, shall constitute a quorum for the transaction of business at any meeting of stockholders of the Corporation or any adjournment thereof. Subject to the requirement of a larger percentage vote, if any, contained in the Certificate of Incorporation, these Bylaws or by statute, the stockholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding any withdrawal of stockholders that may leave less than a quorum remaining, if any action taken (other than adjournment) is approved by the vote of at least a majority in voting interest of the shares required to constitute a quorum. In the absence of a quorum at any meeting or any adjournment thereof, a majority in voting interest of the stockholders present in person or by proxy and entitled to vote thereat or, in the absence therefrom of all the stockholders, any officer entitled to preside at, or to act as secretary of, such meeting may adjourn such meeting from time to time. At any such adjourned meeting at which a quorum is present, any business may be transacted that might have been transacted at the meeting as originally called.

SECTION 2.7. Voting.

(a) Each stockholder shall, at each meeting of stockholders, be entitled to vote, in the manner prescribed by the Corporation’s Certificate of Incorporation, in person or by proxy each share of the stock of the Corporation that has voting rights on the matter in question and that shall have been held by such stockholder and registered in such stockholder’s name on the books of the Corporation:

(i) on the date fixed pursuant to SECTION 2.5 of these Bylaws as the record date for the determination of stockholders entitled to notice of and to vote at such meeting; or

(ii) if no such record date shall have been so fixed, then (A) at the close of business on the business day next preceding the day upon which notice of the meeting shall be given or (B) if notice of the meeting shall be waived, at the close of business on the business day next preceding the day upon which the meeting shall be held.

(b) Shares of the Corporation’s own stock belonging to the Corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors in such other corporation is held, directly or indirectly, by the Corporation, shall neither be entitled to vote nor be counted for quorum purposes. Persons holding stock of the Corporation in a fiduciary capacity shall be entitled to vote such stock. Persons whose stock is pledged shall be entitled to vote, unless in the transfer by the pledgor on the books of the Corporation the pledgor shall have expressly empowered the pledgee to vote thereon, in which case only the pledgee, or the pledgee’s proxy, may represent such stock and vote thereon. Stock having voting power standing of record in the names of two or more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, tenants by the entirety or otherwise, or with respect to which two or more persons have the same fiduciary relationship, shall be voted in accordance with the provisions of the Delaware General Corporation Law, as the same exists or may hereafter be amended (the “DGCL”).

 

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(C) Subject to the provisions of the Corporation’s Certificate of Incorporation, any such voting rights may be exercised by the stockholder entitled thereto in person or by such stockholder’s proxy appointed by an instrument in writing, subscribed by such stockholder or by such stockholder’s attorney thereunto authorized and delivered to the secretary of the meeting. The attendance at any meeting of a stockholder who may theretofore have given a proxy shall not have the effect of revoking the same unless such stockholder shall in writing so notify the secretary of the meeting prior to the voting of the proxy. At any meeting of stockholders at which a quorum is present, all matters, except as otherwise provided in the Certificate of Incorporation, in these Bylaws or by law, shall be decided by the vote of a majority in voting interest of the stockholders present in person or by proxy and entitled to vote thereat and thereon. The vote at any meeting of stockholders on any question need not be by ballot, unless so directed by the chairman of the meeting. On a vote by ballot, each ballot shall be signed by the stockholder voting, or by such stockholder’s proxy, if there be such proxy, and it shall state the number of shares voted.

SECTION 2.8. Inspectors of Election.

Prior to each meeting of stockholders, the Chairman of such meeting shall appoint an inspector(s) of election to act with respect to any vote. Each inspector of election so appointed shall first subscribe an oath faithfully to execute the duties of an inspector of election at such meeting with strict impartiality and according to the best of such inspector of election’s ability. Such inspector(s) of election shall decide upon the qualification of the voters and shall certify and report the number of shares represented at the meeting and entitled to vote on any question, determine the number of votes entitled to be cast by each share, shall conduct the vote and, when the voting is completed, accept the votes and ascertain and report the number of shares voted respectively for and against each question, and determine, and retain for a reasonable period a record of the disposition of, any challenge made to any determination made by such inspector(s) of election. Reports of inspector(s) of election shall be in writing and subscribed and delivered by them to the Secretary of the Corporation. The inspector(s) of election need not be stockholders of the Corporation, and any officer of the Corporation may be an inspector(s) of election on any question other than a vote for or against a proposal in which such officer shall have a material interest. The inspector(s) of election may appoint or retain other persons or entities to assist the inspector(s) of election in the performance of the duties of the inspector(s) of election.

SECTION 2.9. Advance Notice of Stockholder Proposals and Stockholder Nominations.

Nominations of persons for election to the Board of Directors and the proposal of business to be considered by the stockholders may be made at any meeting of stockholders only (a) pursuant to the Corporation’s notice of meeting, (b) by or at the direction of the Board, or (c) by any stockholder of the Corporation who was a stockholder of record at the time of giving of notice provided for in these bylaws, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this SECTION 2.9.

 

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Stockholders’ notices must be timely. To be timely, a stockholder’s notice shall be delivered to the secretary at the principal executive offices of the Corporation not later than the close of business on the sixtieth day (60 th ) day nor earlier than the ninetieth (90 th ) day prior to the first anniversary of the preceding year’s annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than thirty (30) days or delayed by more than sixty (60) days from such anniversary date or if the Corporation has not previously held an annual meeting, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the ninetieth (90 th ) day prior to such annual meeting and not later than the close of business on the later of the sixtieth (60 th ) day prior to such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made by the Corporation. In no event shall the public announcement of a postponement or adjournment of an annual meeting to a later date or time commence a new time period for the giving of a stockholder’s notice as described above.

Such stockholder’s notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection as a director (i) all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (or any successor thereto) and Rule 14a-11 thereunder (or any successor thereto) (including such person’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected), (ii) the name and address of the stockholder who intends to make the nomination and of the person or persons to be nominated, (iii) a representation that the stockholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting and nominate the person or persons specified in the notice; (iv) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; and (v) such other information regarding each nominee proposed by such stockholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the United States Securities and Exchange Commission had the nominee been nominated, or intended to be nominated, by the Board, (b) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (c) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such stockholder, as they appear on the Corporation’s books, and of such beneficial owner, and (ii) the class and number of shares of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner. In addition, the stockholder making such proposal shall promptly provide any other information reasonably requested by the Corporation. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at any meeting of the stockholders except in accordance with the procedures set forth in this SECTION 2.9. The Chairman or presiding officer of any such meeting shall direct that any nomination or business not properly brought before the meeting in compliance with the procedures set forth in this SECTION 2.9 shall not be considered. This SECTION 2.9 may not be altered, amended or repealed except by the Board or by the affirmative vote of holders of at least 66  2 / 3 % of the outstanding voting stock of the Corporation.

 

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SECTION 2.10. Action Without Meeting.

Any action required to be taken at any annual or special meeting of stockholders of the Corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken only with regards to an action that has been earlier approved by the Board, without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken and earlier approved by the Board, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing.

ARTICLE III: BOARD OF DIRECTORS

SECTION 3.1. General Powers.

Subject to any requirements in the Certificate of Incorporation, these Bylaws, or of the DGCL as to action which must be authorized or approved by the stockholders, any and all corporate powers shall be exercised by or under the authority of, and the business and affairs of the Corporation shall be under the direction of, the Board to the fullest extent permitted by law. Without limiting the generality of the foregoing, it is hereby expressly declared that the Board shall have the following powers:

(a) to select and remove all the officers, agents and employees of the Corporation, prescribe such powers and duties for them as may not be inconsistent with law, the Certificate of Incorporation or these Bylaws, fix their compensation, and require from them security for faithful service;

(b) to conduct, manage and control the affairs and business of the Corporation, and to make such rules and regulations therefor not inconsistent with law, the Certificate of Incorporation or these Bylaws, as it may deem best;

(c) to change the location of the registered office of the Corporation in SECTION 1.1 hereof; to change the principal office and the principal office for the transaction of the business of the Corporation from one location to another as provided in SECTION 1.2 hereof; to fix and locate from time to time one or more offices of the Corporation within or without the State of Delaware as provided in SECTION 1.3 hereof; to designate any place within or without the State of Delaware for the holding of any meeting or meetings of stockholders; and to adopt, make and use a corporate seal, and to prescribe the forms of certificates of stock, and to alter the form of such seal and of such certificates from time to time, and in its judgment as it may deem best, provided such seal and such certificate shall at all times comply with the provisions of law;

(d) to authorize the issuance of shares of stock of the Corporation from time to time, whether certificated or uncertificated, upon such terms and for such considerations as may be lawful;

 

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(e) to borrow money and incur indebtedness for the purposes of the Corporation, and to cause to be executed and delivered therefor, in the corporate name, promissory notes, bonds, debentures, deeds of trust and securities therefor; and

(f) by resolution adopted by a majority of the whole Board to designate an executive and other committees of the Board, each consisting of one or more directors, to serve at the pleasure of the Board, and to prescribe the manner in which proceedings of such committee or committees shall be conducted.

SECTION 3.2. Number and Term of Office.

The number of directors constituting the entire Board shall consist of not less than three (3) nor more than nine (9) directors, with the exact number of directors to be fixed, as may be changed from time to time, by resolution of the Board of Directors, or as otherwise provided by law or the Certificate of Incorporation. Directors need not be stockholders. At each annual meeting of stockholders, each of the successors elected to replace the directors whose term shall have expired at such annual meeting shall be elected to hold office until the first annual meeting succeeding his or her election and until his or her respective successor shall have been elected and qualified. Notwithstanding the foregoing provisions of this Article, each director shall serve until his or her successor is duly elected and qualified or until his or her death, resignation or removal. This SECTION 3.2 may not be altered, amended or repealed except by the Board or by the affirmative vote of holders of at least 66  2 / 3 % of the outstanding voting stock of the Corporation.

SECTION 3.3. Chairman of the Board.

The Chairman of the Board, when present, shall preside at all meetings of the Board and all meetings of stockholders. The Chairman of the Board shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board of Directors shall designate from time to time.

SECTION 3.4. Election of Directors.

The directors shall be elected by the stockholders (subject to the limitations set forth in SECTION 2.9) of the Corporation, and at each election, the persons receiving the greater number of votes, up to the number of directors then to be elected, shall be the persons then elected. The election of directors is subject to any provision contained in the Certificate of Incorporation relating thereto, including any provision regarding the rights of holders of preferred stock to elect directors.

SECTION 3.5. Resignations.

Any director of the Corporation may resign at any time by giving written notice to the Board or to the Secretary of the Corporation. Any such resignation shall take effect at the time specified therein, or, if the time is not specified, it shall take effect immediately upon receipt; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.

 

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SECTION 3.6. Vacancies.

Except as otherwise provided in the Certificate of Incorporation, any vacancy in the Board, whether because of death, resignation, disqualification, an increase in the number of directors, removal, or any other cause, may be filled by vote of the majority of the remaining directors, although less than a quorum. When the Board fills a vacancy, the director chosen to fill that vacancy shall complete the term of the director he succeeds and shall hold office until such director’s successor shall have been elected and shall qualify or until such director shall resign or shall have been removed. No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of such director’s term of office.

SECTION 3.7. Place of Meeting.

The Board or any committee thereof may hold any of its meetings at such place or places within or without the State of Delaware as the Board or such committee may from time to time by resolution designate or as shall be designated by the person or persons calling the meeting or in the notice or a waiver of notice of any such meeting. Directors may participate in any regular or special meeting of the Board or any committee thereof by means of conference telephone or similar communications equipment pursuant to which all persons participating in the meeting of the Board or such committee can hear each other, and such participation shall constitute presence in person at such meeting.

SECTION 3.8. Regular Meetings.

Regular meetings of the Board may be held at such times as the Board shall from time to time by resolution determine.

SECTION 3.9. Special Meetings.

Special meetings of the Board for any purpose or purposes shall be called at any time by the Chairman of the Board or, if the Chairman of the Board is absent or unable or refuses to act, by the Chief Executive Officer or the President, and may also be called by any two members of the Board. Except as otherwise provided by law or by these Bylaws, written notice of the time and place of special meetings shall be delivered personally or by facsimile to each director, or sent to each director by mail or by other form of written communication, charges prepaid, addressed to such director at such director’s address as it is shown upon the records of the Corporation, or, if it is not so shown on such records and is not readily ascertainable, at the place in which the meetings of the directors are regularly held. In case such notice is mailed or telegraphed, it shall be deposited in the United States mail or delivered to the telegraph company in the County in which the principal office for the transaction of the business of the Corporation is located at least forty-eight (48) hours prior to the time of the holding of the meeting. In case such notice is delivered personally or by facsimile as above provided, it shall be delivered at least twenty-four (24) hours prior to the time of the holding of the meeting. Such mailing, telegraphing, delivery or facsimile transmission as above provided shall be due, legal and personal notice to such director. Except where otherwise required by law or by these Bylaws, notice of the purpose of a special meeting need not be given. Notice of any meeting of the Board shall not be required to be given to any director who is present at such meeting, except a director

 

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who shall attend such meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened.

SECTION 3.10. Quorum and Manner of Acting.

Except as otherwise provided in these Bylaws, the Certificate of Incorporation or by applicable law, the presence of a majority of the authorized number of directors shall be required to constitute a quorum for the transaction of business at any meeting of the Board, and all matters shall be decided at any such meeting, a quorum being present, by the affirmative votes of a majority of the directors present. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, provided any action taken is approved by at least a majority of the required quorum for such meeting. In the absence of a quorum, a majority of directors present at any meeting may adjourn the same from time to time until a quorum shall be present. Notice of any adjourned meeting need not be given. The directors shall act only as a Board, and the individual directors shall have no power as such.

SECTION 3.11. Action by Unanimous Written Consent.

Any action required or permitted to be taken at any meeting of the Board or of any committee thereof may be taken without a meeting if consent in writing is given thereto by all members of the Board or of such committee, as the case may be, and such consent is filed with the minutes of proceedings of the Board or of such committee.

SECTION 3.12. Compensation.

Directors, whether or not employees of the Corporation or any of its subsidiaries, may receive an annual fee for their services as directors in an amount fixed by resolution of the Board plus other compensation, including options to acquire capital stock of the Corporation, in an amount and of a type fixed by resolution of the Board, and, in addition, a fixed fee, with or without expenses of attendance, may be allowed by resolution of the Board for attendance at each meeting, including each meeting of a committee of the Board. Nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity as an officer, agent, employee, or otherwise, and receiving compensation therefor.

SECTION 3.13. Committees.

The Board may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one (1) or more of the directors of the Corporation. Any such committee, to the extent provided in the resolution of the Board and subject to any restrictions or limitations on the delegation of power and authority imposed by applicable law, shall have and may exercise all the powers and authority of the Board in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it. Any such committee shall keep written minutes of its meetings and report the same to the Board at the next regular meeting of the Board. Unless the Board or these Bylaws shall otherwise prescribe the manner of proceedings of any such committee, meetings of such committee may be regularly scheduled in advance and may be called at any time by the chairman of the committee or by any two (2)

 

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members thereof; otherwise, the provisions of these Bylaws with respect to notice and conduct of meetings of the Board shall govern.

ARTICLE IV: OFFICERS

SECTION 4.1. Officers.

The officers of the Corporation shall be a Chief Executive Officer, a President, one or more Vice Presidents (the number thereof and their respective titles to be determined by the Board), a Secretary, a Chief Financial Officer, and such other officers as may be appointed at the discretion of the Board in accordance with the provisions of SECTION 4.3 hereof.

SECTION 4.2. Election.

The officers of the Corporation, except such officers as may be appointed or elected in accordance with the provisions of SECTION 4.3 or SECTION 4.5 hereof, shall be chosen annually by the Board at the first meeting thereof after the annual meeting of stockholders, and each officer shall hold office until such officer shall resign or shall be removed or otherwise disqualified to serve, or until such officer’s successor shall be elected and qualified.

SECTION 4.3. Other Officers.

In addition to the officers chosen annually by the Board at its first meeting, the Board also may appoint or elect such other officers as the business of the Corporation may require, each of whom shall have such authority and perform such duties as are provided in these Bylaws or as the Board may from time to time specify, and shall hold office until such officer shall resign or shall be removed or otherwise disqualified to serve, or until such officer’s successor shall be elected and qualified.

SECTION 4.4. Removal and Resignation.

Except as provided by DGCL Section 141(k), any officer may be removed, either with or without cause, by resolution of the Board, at any regular or special meeting of the Board, or, except in case of an officer chosen by the Board, by any officer upon whom such power of removal may be conferred by the Board. Any officer or assistant may resign at any time by giving written notice of his resignation to the Board or the Secretary of the Corporation. Any such resignation shall take effect at the time specified therein, or, if the time is not specified, upon receipt thereof by the Board or the Secretary, as the case may be; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.

SECTION 4.5. Vacancies.

A vacancy in any office because of death, resignation, removal, disqualification or any other cause may be filled by the vote of the majority of the directors present at any meeting in which a quorum is present, or pursuant to SECTION 3.11 of these Bylaws.

 

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SECTION 4.6. Chief Executive Officer.

The Chief Executive Officer shall preside at all meetings of the stockholders and at all meetings of the Board of Directors, unless the Chairman of the Board has been appointed and is present. The Chief Executive Officer shall be the chief executive officer of the Corporation and shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and affairs of the Corporation. The Chief Executive Officer shall also perform such other duties and have such other powers as the Board of Directors may designate from time to time.

SECTION 4.7. President.

The President shall preside at all meetings of the stockholders and at all meetings of the Board of Directors, unless the Chairman of the Board has been appointed and is present or, in the absence of the Chairman of the Board, the Chief Executive Officer has been appointed and is present. Subject to the provisions of these Bylaws and to the direction of the Board of Directors and Chief Executive Officer, the President shall have the responsibility for the general management and control of the business and affairs of the Corporation and shall perform all duties and have all powers which are commonly incident to the office of President or which are delegated to him by the Board of Directors. The President shall have the power to sign all stock certificates, contracts and other instruments of the Corporation which are authorized and shall have general supervision and direction of all the other officers, employees and agents of the Corporation.

SECTION 4.8. Vice President.

Each Vice President shall have such powers and perform such duties with respect to the administration of the business and affairs of the Corporation as are commonly incident to their office or as may from time to time be assigned to such Vice President by the Chairman of the Board, or the Board, or the Chief Executive Officer, or the President, or as may be prescribed by these Bylaws. In the absence or disability of the Chairman of the Board, the Chief Executive Officer and the President, the Vice Presidents in order of their rank as fixed by the Board, or if not ranked, the Vice President designated by the Board, shall perform all of the duties of the Chairman of the Board, and when so acting shall have all the powers of, and be subject to all the restrictions upon, the Chairman of the Board.

SECTION 4.9. Secretary.

(a) The Secretary shall attend all meetings of the stockholders and of the Board of Directors and shall record all acts and proceedings thereof in the minute book of the Corporation. The Secretary shall give notice in conformity with these Bylaws of all meetings of the stockholders and of all meetings of the Board of Directors and any committee thereof requiring notice. The Secretary shall perform all other duties given him in these Bylaws and other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board shall designate from time to time.

(b) The Secretary shall keep, or cause to be kept, at the principal office of the Corporation or such other place as the Board may order, a book of minutes of all meetings of

 

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directors and stockholders, with the time and place of holding, whether regular or special, and if special, how authorized and the notice thereof given, the names of those present at meetings of directors, the number of shares present or represented at meetings of stockholders, and the proceedings thereof.

(c) The Secretary shall keep, or cause to be kept, at the principal office of the Corporation’s transfer agent, a share register, or a duplicate share register, showing the name of each stockholder, the number of shares of each class held by such stockholder, the number and date of certificates issued for such shares, and the number and date of cancellation of every certificate surrendered for cancellation.

SECTION 4.10. Chief Financial Officer.

The Chief Financial Officer shall keep or cause to be kept the books of account of the Corporation in a thorough and proper manner and shall render statements of the financial affairs of the Corporation in such form and as often as required by the Board of Directors or the Chief Executive Officer. The Chief Financial Officer, subject to the order of the Board, shall have the custody of all funds and securities of the Corporation. The Chief Financial Officer shall perform other duties commonly incident to his office and shall also perform such other duties and have such other powers as the Board or the Chief Executive Officer shall designate from time to time.

ARTICLE V: CORPORATE INSTRUMENTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC.

SECTION 5.1. Execution of Corporate Instruments.

The Board of Directors may, in its discretion, determine the method and designate the signatory officer or officers, or other person or persons, to execute on behalf of the Corporation the corporate name without limitation, or enter into contracts on behalf of the Corporation, except where otherwise provided by law or these Bylaws, and such execution or signature shall be binding upon the Corporation. Such authority may be general or confined to specific instances, and unless so authorized by the Board or by these Bylaws, no officer, agent, or employee shall have any power or authority to bind the Corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or in any amount.

SECTION 5.2. Checks, Drafts, Etc.

All checks, drafts or other orders for payment of money, notes or other evidence of indebtedness, issued in the name of or payable to the Corporation, shall be signed or endorsed by such person or persons and in such manner as, from time to time, shall be determined by resolution of the Board. Each such officer, assistant, agent or attorney shall give such bond, if any, as the Board may require.

 

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SECTION 5.3. Deposits.

All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in such banks, trust companies or other depositories as the Board may select, or as may be selected by any officer or officers, assistant or assistants, agent or agents, or attorney or attorneys of the Corporation to whom such power shall have been delegated by the Board. For the purpose of deposit and for the purpose of collection for the account of the Corporation, the Chairman of the Board, the Chief Executive Officer, the President, any Vice President (or any other officer or officers, assistant or assistants, agent or agents, or attorney or attorneys of the Corporation who shall from time to time be determined by the Board) may endorse, assign and deliver checks, drafts and other orders for the payment of money which are payable to the order of the Corporation.

SECTION 5.4. General and Special Bank Accounts.

The Board may from time to time authorize the opening and keeping of general and special bank accounts with such banks, trust companies or other depositories as the Board may select or as may be selected by any officer or officers, assistant or assistants, agent or agents, or attorney or attorneys of the Corporation to whom such power shall have been delegated by the Board. The Board may make such special rules and regulations with respect to such bank accounts, not inconsistent with the provisions of these Bylaws, as it may deem expedient.

ARTICLE VI: SHARES AND THEIR TRANSFER

SECTION 6.1. Certificates for Stock.

The shares of the Corporation shall be represented by certificates, provided that the Board may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the Corporation. Every holder of stock represented by certificates shall be signed in the name of the Corporation by the Chairman of the Board, the Chief Executive Officer, the President or any Vice President, and by the Secretary. Any or all of the signatures on the certificates may be a facsimile. In case any officer, transfer agent or registrar who has signed, or whose facsimile signature has been placed upon, any such certificate, shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, such certificate may nevertheless be issued by the Corporation with the same effect as though the person who signed such certificate, or whose facsimile signature shall have been placed thereupon, were such an officer, transfer agent or registrar at the date of issue. A record shall be kept of the respective names of the persons, firms or corporations owning the stock represented by such certificates, the number and class or series of shares represented by such certificates, respectively, and the respective dates thereof, and in case of cancellation, the respective dates of cancellation. Every certificate surrendered to the Corporation for exchange or transfer shall be canceled, and no new certificate or certificates shall be issued in exchange for any existing certificate until such existing certificate shall have been so canceled, except in cases provided for in SECTION 6.4 hereof.

SECTION 6.2. Transfers of Stock.

Transfers of shares of stock of the Corporation shall be made only on the books of the Corporation by the registered holder thereof, or by such holder’s attorney thereunto authorized by

 

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power of attorney duly executed and filed with the Secretary, or with a transfer clerk or a transfer agent appointed as provided in SECTION 6.3 hereof, and (i) with regard to certificated shares, upon surrender of the certificate or certificates for such shares properly endorsed and the payment of all taxes thereon, and (ii) with regard to uncertificated shares, upon delivery of an instruction duly executed, and with such proof of the authenticity of the signature as the Corporation or its agents may reasonably require. The person in whose name shares of stock stand on the books of the Corporation shall be deemed the owner thereof for all purposes as regards the Corporation. Whenever any transfer of shares shall be made for collateral security, and not absolutely, such fact shall be so expressed in the entry of transfer if, when the certificate or certificates shall be presented to the Corporation for transfer or uncertificated shares are requested to be transferred, both the transferor and the transferee request the Corporation to do so.

SECTION 6.3. Regulations.

The Board may make such rules and regulations as it may deem expedient, not inconsistent with these Bylaws, concerning the issue, transfer and registration of certificates for shares of the stock of the Corporation or uncertificated shares of the Corporation. It may appoint, or authorize any officer or officers to appoint, one or more transfer clerks or one or more transfer agents and one or more registrars, and may require all certificates for stock to bear the signature or signatures of any of them.

SECTION 6.4. Lost, Stolen, Destroyed, and Mutilated Certificates.

In any case of loss, theft, destruction, or mutilation of any certificate of stock, a new certificate or certificates or uncertificated shares may be issued in its place upon proof satisfactory to the Board of such loss, theft, destruction, or mutilation and upon the giving of a bond of indemnity to the Corporation in such form and in such sum as the Board may direct; provided, however, that a new certificate or uncertificated shares may be issued without requiring any bond when, in the judgment of the Board, it is proper so to do.

ARTICLE VII: INDEMNIFICATION

SECTION 7.1. Indemnification of Directors and Officers.

To the fullest extent permitted by the Delaware General Corporation Law, as the same exists or may hereafter be amended (provided that the effect of any such amendment shall be prospective only) (the “Delaware Law”), a director of the Corporation shall not be liable to the Corporation or its stockholders for monetary damages for breach of his or her fiduciary duty as a director. The Corporation shall indemnify, in the manner and to the fullest extent permitted by the Delaware Law (but in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than permitted prior thereto), any person (or the estate of any person) who is or was a party to, or is threatened to be made a party to, any threatened, pending or completed action, suit or proceeding, whether or not by or in the right of the Corporation, and whether civil, criminal, administrative, investigative or otherwise, by reason of the fact that such person is or was a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director or officer of

 

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another corporation, partnership, joint venture, trust or other enterprise. The Corporation may, to the fullest extent permitted by the Delaware Law, purchase and maintain insurance on behalf of any such person against any liability which may be asserted against such person. The Corporation may create a trust fund, grant a security interest or use other means (including without limitation a letter of credit) to ensure the payment of such sums as may become necessary or desirable to effect the indemnification as provided herein. To the fullest extent permitted by the Delaware Law, the indemnification provided herein shall include expenses as incurred (including attorneys’ fees), judgments, fines and amounts paid in settlement and any such expenses shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the person seeking indemnification to repay such amounts if it is ultimately determined that he or she is not entitled to be indemnified. Notwithstanding the foregoing or any other provision of this SECTION 7.1, no advance shall be made by the Corporation if a determination is reasonably and promptly made by the Board by a majority vote of a quorum of disinterested Directors, or (if such a quorum is not obtainable or, even if obtainable, a quorum of disinterested Directors so directs) by independent legal counsel to the Corporation, that, based upon the facts known to the Board or such counsel at the time such determination is made, (i) the party seeking an advance acted in bad faith or deliberately breached his or her duty to the Corporation or its stockholders, and (ii) as a result of such actions by the party seeking an advance, it is more likely than not that it will ultimately be determined that such party is not entitled to indemnification pursuant to the provisions of this SECTION 7.1. The indemnification provided herein shall not be deemed to limit the right of the Corporation to indemnify any other person for any such expenses to the fullest extent permitted by the Delaware Law, nor shall it be deemed exclusive of any other rights to which any person seeking indemnification from the Corporation may be entitled under any agreement, the Corporation’s Bylaws, vote of stockholders or disinterested directors, or otherwise, both as to action in such person’s official capacity and as to action in another capacity while holding such office. The Corporation may, but only to the extent that the Board of Directors may (but shall not be obligated to) authorize from time to time, grant rights to indemnification and to the advancement of expenses to any employee or agent of the Corporation to the fullest extent of the provisions of this Section 7.1 as it applies to the indemnification and advancement of expenses of directors and officers of the Corporation.

SECTION 7.2. Indemnification of Employees and Agents.

Subject to SECTION 7.1, the Corporation may, but only to the extent that the Board may (but shall not be obligated to) authorize from time to time, grant rights to indemnification and to the advancement of expenses to any employee or agent of the Corporation to the fullest extent of the provisions of this Article VII as they apply to the indemnification and advancement of expenses of directors and officers of the Corporation.

SECTION 7.3. Enforcement of Indemnification.

The rights to indemnification and the advancement of expenses conferred above shall be contract rights. If a claim under this Article VII is not paid in full by the Corporation within 60 days after written claim has been received by the Corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be twenty (20) days, the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid

 

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amount of such claim. If successful in whole or in part in any such suit, or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall be entitled to be paid also the expenses of prosecuting or defending such suit. In (i) any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and (ii) any suit by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking the Corporation shall be entitled to recover such expenses upon a final adjudication that, the indemnitee has not met any applicable standard for indemnification set forth in the DGCL. Neither the failure of the Corporation (including its Board, independent legal counsel or stockholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the DGCL, nor an actual determination by the Corporation (including its Board, independent legal counsel or stockholders) that the indemnitee has not met such applicable standard of conduct, shall either create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified, or to such advancement of expenses, under this Article VII or otherwise shall be on the Corporation.

ARTICLE VIII: MISCELLANEOUS

SECTION 8.1. Seal.

The Board shall adopt a corporate seal, which shall be in the form set forth in a resolution approved by the Board.

SECTION 8.2. Waiver of Notices.

Whenever notice is required to be given by these Bylaws or the Certificate of Incorporation or by law, the person entitled to said notice may waive such notice in writing, either before or after the time stated therein, and such waiver shall be deemed equivalent to notice.

SECTION 8.3. Amendments.

Except as otherwise provided herein, by law, or in the Certificate of Incorporation, these Bylaws or any of them may be altered, amended, repealed or rescinded and new Bylaws may be adopted by the Board or by the stockholders at any annual or special meeting of stockholders, provided that notice of such proposed alteration, amendment, repeal, recession or adoption is given in the notice of such meeting of stockholders.

 

16

Exhibit 4.1

 

LOGO

 

Exhibit 4.1 PRTS

INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE

COMMON STOCK CUSIP 90343C 10 0

SEE REVERSE FOR CERTAIN DEFINITIONS

THIS CERTIFIES THAT

is the owner of

FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, $0.001 PAR VALUE PER SHARE

U.S. AUTO PARTS NETWORK, INC.

transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this certificate

properly endorsed.

This certificate is not valid unless countersigned and registered by the Transfer Agent and Registrar.

WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers .

COUNTERSIGNED AND REGISTERED:

U.S. STOCK TRANSFER CORPORATION

TRANSFER AGENT

AND REGISTRAR

BY

AUTHORIZED SIGNATURE

Dated:

SECRETARY

U.S. AUTO PARTS NETWORK, INC.

SEAL

2006 DELAWARE

CORPORATE

PRESIDENT


LOGO

 

The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations:

 

TEN COM

 

TEN ENT

 

JT TEN

 

– as tenants in common

 

– as tenants by the entireties

 

– as joint tenants with right of

 

Survivorship and not as tenants

 

in common

 

UNIF GIFT MIN ACT– Custodian

(Cust) (Minor)

 

Under Uniform Gifts to Minors

 

Act

(State)

UNIF TRF MIN ACT– Custodian (until age )

(Minor)

 

To Minors Act

(State)

 

Additional abbreviations may also be used though not in the above list.

 

For Value received hereby sell, assign and transfer unto

PLEASE INSERT SOCIAL SECURITY OR OTHER

IDENTIFYING NUMBER OF ASSIGNEE

PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING POSTAL ZIP CODE, OF ASSIGNEE

 

Of the Common Stock represented by the within Certificate, and do(es) hereby irrevocably constitute and appoint

Attorney To transfer the said stock on the books of the within named Corporation with full power of substitution in the premises.

Dated

X         X

THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND NOTICE: WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE

CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.

Signature(s) Guaranteed:

 

By

THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.

Exhibit 10.5

 


U.S. AUTO PARTS NETWORK, INC.

2007 OMNIBUS INCENTIVE PLAN

 



Table of Contents

 

Section 1.    Purpose    1
Section 2.    Definitions    1
Section 3.    Administration    4
(a)    Power and Authority of the Committee    4
(b)    Power and Authority of the Board    5
Section 4.    Shares Available for Awards    5
(a)    Shares Available    5
(b)    Accounting for Awards    5
(c)    Adjustments    6
(d)    Award Limitations Under the Plan    6
Section 5.    Eligibility    6
Section 6.    Awards    7
(a)    Options    7
(b)    Stock Appreciation Rights    8
(c)    Restricted Stock and Restricted Stock Units    8
(d)    Performance Awards    9
(e)    Dividend Equivalents    9
(f)    Other Stock Grants    10
(g)    Other Stock-Based Awards    10
(h)    General    10
Section 7.    Amendment and Termination; Adjustments    13
(a)    Amendments to the Plan    13
(b)    Amendments to Awards    14
(c)    Correction of Defects, Omissions and Inconsistencies    14
Section 8.    Income Tax Withholding    1 4
Section 9.    General Provisions    15
(a)    No Rights to Awards    15
(b)    Award Agreements    15
(c)    Plan Provisions Control    15
(d)    No Rights of Stockholders    15
(e)    No Limit on Other Compensation Arrangements    15
(f)    No Right to Employment    15
(g)    Governing Law    16
(h)    Severability    16
(i)    No Trust or Fund Created    16

 

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(j)    Other Benefits    16
(k)    No Fractional Shares    16
(l)    Headings    16
(m)    Section 16 Compliance; Section 162(m) Administration    16
(n)    Conditions Precedent to Issuance of Shares    17
Section 10.    Effective Date of the Plan    17
Section 11.    Term of the Plan    17

 

iii


U.S. AUTO PARTS NETWORK, INC.

2007 OMNIBUS INCENTIVE PLAN

Section 1. Purpose

The purpose of the Plan is to promote the interests of the Company and its stockholders by aiding the Company in attracting and retaining employees, officers, consultants, independent contractors and directors capable of assuring the future success of the Company, to offer such persons incentives to continue in the Company’s employ or service and to afford such persons an opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Company.

Section 2. Definitions

As used in the Plan, the following terms shall have the meanings set forth below:

(a) “ Affiliate ” shall mean (i) any entity that, directly or indirectly through one or more intermediaries, is controlled by the Company and (ii) any entity in which the Company has a significant equity interest, in each case as determined by the Committee.

(b) “ Award ” shall mean any Option, Stock Appreciation Right, Restricted Stock, Restricted Stock Unit, Performance Award, Dividend Equivalent, Other Stock Grant or Other Stock-Based Award granted under the Plan.

(c) “ Award Agreement ” shall mean any written agreement, contract or other instrument or document evidencing an Award granted under the Plan. Each Award Agreement shall be subject to the applicable terms and conditions of the Plan and any other terms and conditions (not inconsistent with the Plan) determined by the Committee.

(d) “ Board ” shall mean the Board of Directors of the Company.

(e) “ Change in Control ” shall mean a change in ownership or control of the Company effected through any of the following transactions: (i) a merger, consolidation or other reorganization unless securities representing more than 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 Company’s outstanding voting securities immediately prior to such transaction; (ii) a sale, transfer or other disposition of all or substantially all of the Company’s assets; or (iii) the acquisition, directly or indirectly, by any person or related group of persons (other than the Company or a person that directly or indirectly controls, is controlled by, or is under common control with, the Company), of beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than 50% of the total combined voting power of the Company’s outstanding securities pursuant to a tender or exchange offer made directly to the Company’s stockholders.

(f) “ Code ” shall mean the Internal Revenue Code of 1986, as amended from time to time, and any regulations promulgated thereunder.


(g) “ Committee ” shall mean a committee of Directors designated by the Board to administer the Plan, which shall initially be the Company’s compensation committee. The Committee shall be comprised of not less than such number of Directors as shall be required to permit Awards granted under the Plan to qualify under Rule 16b-3 and Section 162(m) of the Code, and each member of the Committee shall be a “ Non-Employee Director ” and an “ Outside Director .”

(h) “ Company ” shall mean U.S. Auto Parts Network, Inc., a Delaware corporation, and any successor corporation.

(i) “ Director ” shall mean a member of the Board, including any Non-Employee Director.

(j) “ Dividend Equivalent ” shall mean any right granted under Section 6(e) of the Plan.

(k) “ Eligible Person ” shall mean any employee, officer, consultant, independent contractor or director providing services to the Company or any Affiliate who the Committee determines to be an Eligible Person. An Eligible Person must be a natural person.

(l) “ Exchange Act ” shall mean the Securities Exchange Act of 1934, as amended.

(m) “ Fair Market Value ” shall mean, with respect to any property (including, without limitation, any Shares or other securities), the fair market value of such property determined by such methods or procedures as shall be established from time to time by the Committee. Notwithstanding the foregoing and unless otherwise determined by the Committee, the Fair Market Value of a Share as of a given date shall be, if the Shares are then listed on the Nasdaq Global Market, the average of the high and low sales price of one Share as reported on the Nasdaq Global Market on such date or, if the Nasdaq National Market is not open for trading on such date, on the most recent preceding date when it is open for trading.

(n) “ Incentive Stock Option ” shall mean an option granted under Section 6(a) of the Plan that is intended to qualify as an “incentive stock option” in accordance with the terms of Section 422 of the Code or any successor provision.

(o) “ Non-Employee Director ” shall mean any Director who is not also an employee of the Company or an Affiliate within the meaning of Rule 16b-3 (which term “Non-Employee Director” is defined in this paragraph for purposes of the definition of “Committee” only and is not intended to define such term as used elsewhere in the Plan).

(p) “ Non-Qualified Stock Option ” shall mean an option granted under Section 6(a) of the Plan that is not an Incentive Stock Option.

(q) “ Option ” shall mean an Incentive Stock Option or a Non-Qualified Stock Option.

(r) “ Other Stock Grant ” shall mean any right granted under Section 6(f) of the Plan.

 

2


(s) “ Other Stock-Based Award ” shall mean any right granted under Section 6(g) of the Plan.

(t) “ Outside Director ” shall mean any Director who is an “outside director” within the meaning of Section 162(m) of the Code.

(u) “ Participant ” shall mean an Eligible Person designated to be granted an Award under the Plan.

(v) “ Performance Award ” shall mean any right granted under Section 6(d) of the Plan.

(w) “ Performance Goal ” shall mean one or more of the following performance goals, either individually, alternatively or in any combination, applied on a corporate, subsidiary or business unit basis: revenue, cash flow, gross profit, earnings before interest and taxes, earnings before interest, taxes, depreciation and amortization and net earnings, earnings per share, margins (including one or more of gross, operating and net income margins), returns (including one or more of return on assets, equity, investment, capital and revenue and total stockholder return), stock price, economic value added, working capital, market share, cost reductions, workforce satisfaction and diversity goals, employee retention, customer satisfaction, completion of key projects and strategic plan development and implementation. Such goals may reflect absolute entity or business unit performance or a relative comparison to the performance of a peer group of entities or other external measure of the selected performance criteria. Pursuant to rules and conditions adopted by the Committee on or before the 90th day of the applicable performance period for which Performance Goals are established, the Committee may appropriately adjust any evaluation of performance under such goals to exclude the effect of certain events, including any of the following events: asset write-downs; litigation or claim judgments or settlements; changes in tax law, accounting principles or other such laws or provisions affecting reported results; severance, contract termination and other costs related to exiting certain business activities; and gains or losses from the disposition of businesses or assets or from the early extinguishment of debt.

(x) “ Permanent Disability ” shall mean the inability of Participant to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or has lasted or can be expected to last for a continuous period of twelve months or more. However, solely for purposes of the Automatic Option Grant Program, Permanent Disability shall mean the inability of the non-employee director to perform his or her usual duties as a director by reason of any medically determinable physical or mental impairment expected to result in death or to be of continuous duration of twelve months or more.

(y) “ Person ” shall mean any individual or entity, including a corporation, partnership, limited liability company, association, joint venture or trust.

(z) “ Plan ” shall mean the U.S. Auto Parts Network, Inc. 2007 Omnibus Incentive Plan, as amended from time to time, the provisions of which are set forth herein.

 

3


(aa) “ Qualified Performance Based Award ” shall have the meaning set forth in Section 6(d) of the Plan.

(bb) “ Restricted Stock ” shall mean any Share granted under Section 6(c) of the Plan.

(cc) “ Restricted Stock Unit ” shall mean any unit granted under Section 6(c) of the Plan evidencing the right to receive a Share (or evidencing the right to receive a cash payment equal to the Fair Market Value of a Share if explicitly so provided in the Award Agreement) at some future date.

(dd) “ Rule 16b-3 ” shall mean Rule 16b-3 promulgated by the Securities and Exchange Commission under the Exchange Act, or any successor rule or regulation.

(ee) “ Section 162(m) ” shall mean Section 162(m) of the Code and the applicable Treasury Regulations promulgated thereunder.

(ff) “ Securities Act ” shall mean the Securities Act of 1933, as amended.

(gg) “ Service ” shall mean the Participant’s performance of services for the Company (or any Affiliate) in the capacity of an employee, officer, consultant, independent contractor or director.

(hh) “ Share ” or “ Shares ” shall mean a share or shares of common stock, $0.001 par value per share, of the Company or such other securities or property as may become subject to Awards pursuant to an adjustment made under Section 4(c) of the Plan.

(ii) “ Stock Appreciation Right ” shall mean any right granted under Section 6(b) of the Plan.

Section 3. Administration

(a) Power and Authority of the Committee . The Plan shall be administered by the Committee. Any Awards made to members of the Committee, however, should be authorized by a disinterested majority of the Board. Subject to the express provisions of the Plan and to applicable law, the Committee shall have full power and authority to: (i) designate Participants; (ii) determine the type or types of Awards to be granted to each Participant under the Plan; (iii) determine the number of Shares to be covered by (or the method by which payments or other rights are to be determined in connection with) each Award; (iv) determine the terms and conditions of any Award or Award Agreement; (v) amend the terms and conditions of any Award or Award Agreement and accelerate the exercisability of any Option or waive any restrictions relating to any Award; (vi) determine whether, to what extent and under what circumstances Awards may be exercised in cash, Shares, promissory notes (provided, however, that the par value of any Shares to be issued pursuant to such exercise shall be paid in the form of cash, services rendered, personal property, real property or a combination thereof and the acceptance of such promissory notes does not conflict with Section 402 of the Sarbanes-Oxley Act of 2002), other securities, other Awards or other property, or canceled, forfeited or suspended; (vii) interpret and administer the Plan and any instrument or agreement, including an

 

4


Award Agreement, relating to the Plan; (viii) establish, amend, suspend or waive such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; and (ix) make any other determination and take any other action that the Committee deems necessary or desirable for the administration of the Plan. Unless otherwise expressly provided in the Plan, all designations, determinations, interpretations and other decisions under or with respect to the Plan or any Award or Award Agreement shall be within the sole discretion of the Committee, may be made at any time and shall be final, conclusive and binding upon any Eligible Person and any holder or beneficiary of any Award. The administration of the Automatic Option Grant Program, however, shall be self-executing in accordance with the terms of that program so that neither the Board nor any Committee shall exercise any discretionary functions with respect to any Awards made under that program.

(b) Power and Authority of the Board . Notwithstanding anything to the contrary contained herein, the Board may, at any time and from time to time, without any further action of the Committee, exercise the powers and duties of the Committee under the Plan, but only to the extent it would not cause a loss of any benefits under Section 162(m).

Section 4. Shares Available for Awards

(a) Shares Available . Subject to adjustment as provided in Section 4(c) of the Plan, the aggregate number of Shares that may be issued under the Plan shall be 2,400,000, plus an automatic annual increase on the first day of each of the Company’s fiscal years beginning on January 1, 2008 and enduing on January 1, 2017 equal to (i) the lesser of (A) 1,500,000 shares of Common Stock or (B) five percent (5%) of the number of shares of Common Stock outstanding on the last day of the immediately preceding fiscal year or (ii) such lesser number of shares of Common Stock than provided for in Section 4(a)(i) as determined by the Board. Shares to be issued under the Plan may be either authorized but unissued Shares or Shares re-acquired and held in treasury. Any Shares that are used by a Participant as full or partial payment to the Company of the purchase price relating to an Award, or in connection with the satisfaction of tax obligations relating to an Award, shall again be available for granting Awards (other than Incentive Stock Options) under the Plan. In addition, if any Shares covered by an Award or to which an Award relates are not purchased or are forfeited, or if an Award otherwise terminates without delivery of any Shares, then the number of Shares counted against the aggregate number of Shares available under the Plan with respect to such Award, to the extent of any such forfeiture or termination, shall again be available for granting Awards under the Plan. Notwithstanding the foregoing, (i) the number of Shares available for granting Incentive Stock Options under the Plan shall not exceed 2,400,000, plus the automatic annual increase described above, subject to adjustment as provided in Section 4(c) of the Plan and subject to the provisions of Section 422 or 424 of the Code or any successor provision and (ii) the number of Shares available for granting Restricted Stock and Restricted Stock Units shall not exceed 2,400,000, plus the automatic annual increase described above, subject to adjustment as provided in Section 4(c) of the Plan.

(b) Accounting for Awards . For purposes of this Section 4, if an Award entitles the holder thereof to receive or purchase Shares, the number of Shares covered by such Award or to which such Award relates shall be counted on the date of grant of such Award against the

 

5


aggregate number of Shares available for granting Awards under the Plan. Any Shares that are used by a Participant as full or partial payment to the Company of the purchase price relating to an Award or in connection with the satisfaction of tax obligations relating to an Award, shall again be available for granting Awards under the Plan. In addition, if any Shares covered by an Award or to which an Award relates are not purchased or are forfeited, or if an Award otherwise terminates without delivery of any Shares, then the number of Shares counted against the aggregate number of Shares available under the Plan with respect to such Award, to the extent of any such forfeiture or termination, shall again be available for granting Awards under the Plan.

(c) Adjustments. In the event that the Committee shall determine that any dividend or other distribution (whether in the form of cash, Shares, other securities or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of Shares or other securities of the Company, issuance of warrants or other rights to purchase Shares or other securities of the Company or other similar corporate transaction or event affects the Shares such that an adjustment is determined by the Committee to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Committee shall, in such manner as it may deem equitable, adjust any or all of (i) the number and type of Shares (or other securities or other property) that thereafter may be made the subject of Awards, (ii) the number and type of Shares (or other securities or other property) subject to outstanding Awards, (iii) the purchase price or exercise price with respect to any Award and (iv) the limitations contained in Section 4(d) of the Plan; provided , however , that the number of Shares covered by any Award or to which such Award relates shall always be a whole number.

(d) Section 162(m) Award Limitations Under the Plan . No Eligible Person may be granted any Award or Awards under the Plan, the value of which Award or Awards is based solely on an increase in the value of the Shares after the date of grant of such Award or Awards, and which is intended to represent “qualified performance based compensation” with the meaning of Section 162(m) of the Code, for more than 1,500,000 Shares (subject to adjustment as provided for in Section 4(c) of the Plan), in the aggregate in any taxable year.

Section 5. Eligibility

Any Eligible Person shall be eligible to be designated a Participant. In determining which Eligible Persons shall receive an Award and the terms of any Award, the Committee may take into account the nature of the services rendered by the respective Eligible Persons, their present and potential contributions to the success of the Company or such other factors as the Committee, in its discretion, shall deem relevant. Notwithstanding the foregoing, an Incentive Stock Option may only be granted to full-time or part-time employees (which term as used herein includes, without limitation, officers and directors who are also employees), and an Incentive Stock Option shall not be granted to an employee of an Affiliate unless such Affiliate is also a “subsidiary corporation” of the Company within the meaning of Section 424(f) of the Code or any successor provision.

 

6


Section 6. Awards

(a) Options . The Committee is hereby authorized to grant Options to Eligible Persons with the following terms and conditions and with such additional terms and conditions not inconsistent with the provisions of the Plan as the Committee shall determine:

(i) Exercise Price . The purchase price per Share purchasable under an Option shall be determined by the Committee; provided , however , that such purchase price shall not be less than 100% of the Fair Market Value of a Share on the date of grant of such Option.

(ii) Option Term . The term of each Option shall be fixed by the Committee at the time of grant, but shall not be longer than 10 years from the date of grant.

(iii) Time and Method of Exercise . The Committee shall determine the time or times at which an Option may be exercised in whole or in part and the method or methods by which, and the form or forms (including, without limitation, cash, Shares, promissory notes ( provided , however , that the par value of any Shares to be issued pursuant to such exercise shall be paid in the form of cash, services rendered, personal property, real property or a combination thereof and the acceptance of such promissory notes does not conflict with Section 402 of the Sarbanes-Oxley Act of 2002), other securities, other Awards or other property, or any combination thereof, having a Fair Market Value on the exercise date equal to the applicable exercise price) in which, payment of the exercise price with respect thereto may be made or deemed to have been made. The Committee shall have the discretion to grant Options that are exercisable for unvested Shares. Should the Participant’s Service cease while the Shares issued upon the early exercise of the Participant’s Options are still unvested, the Company shall have the right to repurchase any or all of those unvested Shares at a price per share determined by the Committee. 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 Committee and set forth in the Award Agreement. Any repurchases must be made in compliance with the relevant provisions of Delaware law.

(iv) Incentive Stock Options . Notwithstanding anything in the Plan to the contrary, the following additional provisions shall apply to the grant of stock options which are intended to qualify as Incentive Stock Options:

(A) The Committee will not grant Incentive Stock Options in which the aggregate Fair Market Value (determined as of the time the option is granted) of the Shares with respect to which Incentive Stock Options are exercisable for the first time by any Participant during any calendar year (under this Plan and all other plans of the Company and its Affiliates) shall exceed $100,000.

(B) All Incentive Stock Options must be granted within ten years from the earlier of the date on which this Plan was adopted by the Board or the date this Plan was approved by the stockholders of the Company.

 

7


(C) Unless sooner exercised, all Incentive Stock Options shall expire and no longer be exercisable no later than 10 years after the date of grant; provided , however , that in the case of a grant of an Incentive Stock Option to a Participant who, at the time such Option is granted, owns (within the meaning of Section 422 of the Code) stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of its Affiliate, such Incentive Stock Option shall expire and no longer be exercisable no later than 5 years from the date of grant.

(D) The purchase price per Share for an Incentive Stock Option shall be not less than 100% of the Fair Market Value of a Share on the date of grant of the Incentive Stock Option; provided , however , that, in the case of the grant of an Incentive Stock Option to a Participant who, at the time such Option is granted, owns (within the meaning of Section 422 of the Code) stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of its Affiliate, the purchase price per Share purchasable under an Incentive Stock Option shall be not less than 110% of the Fair Market Value of a Share on the date of grant of the Inventive Stock Option.

(E) Any Incentive Stock Option authorized under the Plan shall contain such other provisions as the Committee shall deem advisable, but shall in all events be consistent with and contain all provisions required in order to qualify the Option as an Incentive Stock Option.

(b) Stock Appreciation Rights . The Committee is hereby authorized to grant Stock Appreciation Rights to Eligible Persons subject to the terms of the Plan and any applicable Award Agreement. Each Stock Appreciation Right granted under the Plan shall confer on the holder upon exercise the right to receive, as determined by the Committee, cash or a number of Shares equal to the excess of (a) the Fair Market Value of one Share on the date of exercise (or, if the Committee shall so determine, at any time during a specified period before or after the date of exercise) over (b) the grant price of the Stock Appreciation Right as determined by the Committee, which grant price shall not be less than 100% of the Fair Market Value of one Share on the date of grant of the Stock Appreciation Right. Subject to the terms of the Plan, the grant price, term, methods of exercise, dates of exercise, methods of settlement and any other terms and conditions (including conditions or restrictions on the exercise thereof) of any Stock Appreciation Right shall be as determined by the Committee.

(c) Restricted Stock and Restricted Stock Units . The Committee is hereby authorized to grant Restricted Stock and Restricted Stock Units to Eligible Persons with the following terms and conditions and with such additional terms and conditions not inconsistent with the provisions of the Plan as the Committee shall determine:

(i) Restrictions . Shares of Restricted Stock and Restricted Stock Units shall be subject to such restrictions as the Committee may impose (including, without limitation, a restriction on or prohibition against the right to receive any dividend or other right or property with respect thereto), which restrictions may lapse separately or in

 

8


combination at such time or times, in such installments or otherwise as the Committee may deem appropriate.

(ii) Issuance of Shares . Any Restricted Stock granted under the Plan may be evidenced in such manner as the Board may deem appropriate, including book-entry registration or issuance of a stock certificate or certificates, which certificate or certificates shall be held by the Company. Such certificate or certificates shall be registered in the name of the Participant and shall bear an appropriate legend referring to the restrictions applicable to such Restricted Stock.

(iii) Forfeiture . Except as otherwise determined by the Committee, upon a Participant’s termination of employment (as determined under criteria established by the Committee) during the applicable restriction period, all Shares of Restricted Stock and Restricted Stock Units at such time subject to restriction shall be forfeited and reacquired by the Company; provided , however , that the Committee may, when it finds that a waiver would be in the best interest of the Company, waive in whole or in part any or all remaining restrictions with respect to Shares of Restricted Stock or Restricted Stock Units.

(d) Performance Awards . The Committee is hereby authorized to grant Performance Awards to Eligible Persons subject to the terms of the Plan. A Performance Award granted under the Plan (i) may be denominated or payable in cash, Shares (including, without limitation, Restricted Stock and Restricted Stock Units), other securities, other Awards or other property and (ii) shall confer on the holder thereof the right to receive payments, in whole or in part, upon the achievement of such performance goals during such performance periods as the Committee shall establish. Subject to the terms of the Plan, the performance goals to be achieved during any performance period, the length of any performance period, the amount of any Performance Award granted, the amount of any payment or transfer to be made pursuant to any Performance Award and any other terms and conditions of any Performance Award shall be determined by the Committee. From time to time, the Committee may designate an Award granted pursuant to the Plan as an award of “qualified performance-based compensation” within the meaning of Section 162(m) of the Code (a “ Qualified Performance Based Award ”). Qualified Performance Based Awards shall, to the extent required by Section 162(m), be conditioned solely on the achievement of one or more objective Performance Goals, and such Performance Goals shall be established by the Committee within the time period prescribed by, and shall otherwise comply with the requirements of, Section 162(m). The Committee shall also certify in writing that such Performance Goals have been met prior to payment of the Qualified Performance Based Awards to the extent required by Section 162(m). No Eligible Person may be granted Performance Awards under this Section 6(d) of the Plan in excess of 1,500,000 Shares (subject to adjustment as provided in Section 4(c) of the Plan) in the aggregate in any taxable year. The limitation contained in this Section 6(d) does not apply to any Award subject to the limitation contained in Section 4(d).

(e) Dividend Equivalents . The Committee is hereby authorized to grant Dividend Equivalents to Eligible Persons under which the Participant shall be entitled to receive payments (in cash, Shares, other securities, other Awards or other property as determined in the discretion

 

9


of the Committee) equivalent to the amount of cash dividends paid by the Company to holders of Shares with respect to a number of Shares determined by the Committee. Subject to the terms of the Plan, such Dividend Equivalents may have such terms and conditions as the Committee shall determine.

(f) Other Stock Grants . The Committee is hereby authorized, subject to the terms of the Plan, to grant to Eligible Persons Shares without restrictions thereon as are deemed by the Committee to be consistent with the purpose of the Plan. Subject to the terms of the Plan and any applicable Award Agreement, such Other Stock Grant may have such terms and conditions as the Committee shall determine.

(g) Other Stock-Based Awards . The Committee is hereby authorized to grant to Eligible Persons, subject to the terms of the Plan, such other Awards that are denominated or payable in, valued in whole or in part by reference to, or otherwise based on or related to, Shares (including, without limitation, securities convertible into Shares), as are deemed by the Committee to be consistent with the purpose of the Plan. Shares or other securities delivered pursuant to a purchase right granted under this Section 6(g) shall be purchased for such consideration, which may be paid by such method or methods and in such form or forms (including, without limitation, cash, Shares, promissory notes promissory notes ( provided , however , that the par value of any Shares to be issued pursuant to such exercise shall be paid in the form of cash, services rendered, personal property, real property or a combination thereof and the acceptance such promissory notes does not conflict with Section 402 of the Sarbanes-Oxley Act of 2002), other securities, other Awards or other property or any combination thereof), as the Committee shall determine, the value of which consideration, as established by the Committee, shall not be less than 100% of the Fair Market Value of such Shares or other securities as of the date such purchase right is granted.

(h) General .

(i) Consideration for Awards . Awards may be granted for no cash consideration or for any cash or other consideration as determined by the Committee and required by applicable law.

(ii) Awards May Be Granted Separately or Together . Awards may, in the discretion of the Committee, be granted either alone or in addition to, in tandem with or in substitution for any other Award or any award granted under any plan of the Company or any Affiliate. Awards granted in addition to or in tandem with other Awards or in addition to or in tandem with awards granted under any such other plan of the Company or any Affiliate may be granted either at the same time as or at a different time from the grant of such other Awards or awards.

(iii) Forms of Payment under Awards . Subject to the terms of the Plan and of any applicable Award Agreement, payments or transfers to be made by the Company or an Affiliate upon the grant, exercise or payment of an Award may be made in such form or forms as the Committee shall determine (including, without limitation, cash, Shares, promissory notes ( provided , however , that the acceptance of such promissory notes does

 

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not conflict with Section 402 of the Sarbanes-Oxley Act of 2002), other securities, other Awards or other property or any combination thereof), and may be made in a single payment or transfer, in installments or on a deferred basis, in each case in accordance with rules and procedures established by the Committee. Such rules and procedures may include, without limitation, provisions for the payment or crediting of reasonable interest on installment or deferred payments or the grant or crediting of Dividend Equivalents with respect to installment or deferred payments.

(iv) Limits on Transfer of Awards . No Award (other than Other Stock Grants) and no right under any such Award shall be transferable by a Participant other than by will or by the laws of descent and distribution and the Company shall not be required to recognize any attempted assignment of such rights by any Participant; provided , however , that, if so determined by the Committee, a Participant may, in the manner established by the Committee, designate a beneficiary or beneficiaries to exercise the rights of the Participant and receive any property distributable with respect to any Award upon the death of the Participant; provided , further , that, if so determined by the Committee, a Participant may, at any time that such Participant holds such Option, transfer a Non-Qualified Stock Option to any “ Family Member ” (as such term is defined in the General Instructions to Form S-8 (or any successor to such Instructions or such Form) under the Securities Act), provided that the Participant may not receive any consideration for such transfer, the Family Member may not make any subsequent transfers other than by will or by the laws of descent and distribution and the Company receives written notice of such transfer. Except as otherwise determined by the Committee, each Award (other than an Incentive Stock Option) or right under any such Award shall be exercisable during the Participant’s lifetime only by the Participant or, if permissible under applicable law, by the Participant’s guardian or legal representative. Except as otherwise determined by the Committee, no Award (other than an Incentive Stock Option) or right under any such Award may be pledged, alienated, attached or otherwise encumbered, and any purported pledge, alienation, attachment or other encumbrance thereof shall be void and unenforceable against the Company or any Affiliate.

(v) Term of Awards . Subject to Section 6(a)(iv)(C), the term of each Award shall be fixed by the Committee at the time of grant, but shall not be longer than 10 years from the date of grant.

(vi) Restrictions; Securities Exchange Listing . All Shares or other securities delivered under the Plan pursuant to any Award or the exercise thereof shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the Plan, applicable federal or state securities laws and regulatory requirements, and the Committee may direct appropriate stop transfer orders and cause other legends to be placed on the certificates for such Shares or other securities to reflect such restrictions. If the Shares or other securities are traded on a securities exchange, the Company shall not be required to deliver any Shares or other securities covered by an Award unless and until such Shares or other securities have been and continue to be admitted for trading on such securities exchange. No Shares or other assets shall be issued or delivered pursuant to the Plan unless and until there shall have been compliance with all applicable

 

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requirements of applicable securities laws, including the filing and effectiveness of the Form S-8 registration statement for the Shares issuable pursuant to the Plan, and all applicable listing requirements of any stock exchange or trading system, including the Nasdaq Stock Market, on which Common Stock is then traded. No Shares shall be issued or delivered pursuant to the Plan if doing so would violate any internal policies of the Company.

(vii) Prohibition on Repricing . Except as provided in Section 4(c) of the Plan, no Option or Stock Appreciation Right may be amended to reduce its initial exercise or grant price and no Option or Stock Appreciation Right shall be canceled and replaced with Options or Stock Appreciation Rights having a lower exercise or grant price, without the approval of the stockholders of the Company.

(i) Directors’ Automatic Option Grant Program .

(i) Annual Grant . Each non-employee director shall receive annually on the date of each annual stockholders’ meeting a Non-Qualified Option to purchase 20,000 Shares, provided that such non-employee director has served as a non-employee director for at least six months and is reelected at the annual stockholders’ meeting. The exercise price for the Shares shall be 100% of the Fair Market Value of the Shares on the date of grant. Each Option shall be exercisable for vested shares, shall be exercisable for 10 years following the date of grant and shall be generally subject to the terms and conditions set forth in the Plan. Thirty-Three (33%) of the Shares shall vest upon the director’s completion of one year of service as a Board member measured from the Option’s date of grant, and the balance of the Shares shall vest in a series of twenty-four (24) equal monthly installments upon the non-employee director’s completion of each month of service as a Board member over the two-year period measured from the one year anniversary of the Option’s date of grant date. There shall be no limit on the number of such annual Option grants any one non-employee director may receive over his or her period of Board service, and non-employee directors who have previously been employees of the Company (or any Affiliate) or who have otherwise received one or more Option grants from the Company shall be eligible to receive one or more such annual Option grants over their period of continued Board service.

(ii) Initial Grant . Upon appointment or initial election to the Board, each non-employee director shall receive a Non-Qualified Option to purchase 45,000 Shares, provided such individual was not previously in the Company’s employ. The exercise price for the Shares shall be 100% of the Fair Market Value of the Shares on the date of grant. Each Option shall be exercisable for vested shares, shall be exercisable for 10 years following the date of grant and shall be generally subject to the terms and conditions set forth in the Plan. Thirty-three (33%) of the Shares shall vest upon the director’s completion of one year of service as a Board member measured from the Option’s date of grant, and the balance of the Shares shall vest in a series of twenty-four (24) equal monthly installments upon the non-employee director’s completion of each month of service as a Board member over the two-year period measured from the one year anniversary of the Option’s date of grant.

 

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(iii) Termination of Board Service . The following provisions shall govern the exercise of any options granted to non-employee directors pursuant to the Automatic Option Grant Program that are outstanding at the time the non-employee director ceases to serve as a Board member:

(A) Should the non-employee director’s service as a Board member cease for any reason while one or more Options granted pursuant to this Automatic Option Grant Program are outstanding, then each such Option shall remain exercisable, for any or all of the vested Shares for which the Option is exercisable at the time of such cessation of Board service, until the earlier of (i) the termination date of the Option or (ii) the expiration of the one-year period measured from the date the non-employee director’s Board service ceases. Upon the expiration of the one-year post-termination exercise period, or (if earlier) upon the termination date of the Option, the Option shall terminate with respect to any vested Shares for which the Option has not been exercised.

(B) Each Option granted pursuant to this Automatic Option Grant Program that is outstanding at the time of the non-employee director’s cessation of Board service shall immediately terminate and cease to remain outstanding with respect to any and all unvested Shares for which the Option is not otherwise at that time exercisable.

(iv) Change in Control . In the event of a Change in Control effected during the non-employee director’s period of Board service, the vesting of each Option granted pursuant to this Automatic Option Grant Program at the time held by such non-employee director shall automatically accelerate so that each such Option shall, immediately prior to the specified effective date for the Change in Control, become exercisable for all of the Shares at the time subject to such Option and may be exercised for all or any portion of such Shares. Upon the consummation of the Change in Control, all Options granted pursuant to this Automatic Option Grant Program shall terminate and cease to be outstanding.

(v) Remaining Terms . The remaining terms and conditions of each Option granted pursuant to this Automatic Option Grant Program shall be substantially the same as the terms in effect for Options made under the Plan and shall be set forth in an Option Agreement.

Section 7. Amendment and Termination; Adjustments

(a) Amendments to the Plan . The Board may amend, alter, suspend, discontinue or terminate the Plan at any time; provided , however , that, notwithstanding any other provision of the Plan or any Award Agreement, without the approval of the stockholders of the Company, no such amendment, alteration, suspension, discontinuation or termination shall be made that, absent such approval:

(i) violates the rules or regulations of the National Association of Securities Dealers, Inc. or any other securities exchange that are applicable to the Company;

 

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(ii) causes the Company to be unable, under the Code, to grant Incentive Stock Options under the Plan;

(iii) increases the number of shares authorized under the Plan as specified in Section 4(a);

(iv) permits the award of Options or Stock Appreciation Rights at a price less than 100% of the Fair Market Value of a Share on the date of grant of such Option or Stock Appreciation Right, as prohibited by Sections 6(a)(i) and 6(b) of the Plan or the repricing of Options or Stock Appreciation Rights, as prohibited by Section 6(h)(vii) of the Plan; or

(v) would prevent the grant of Options or Stock Appreciation Rights that would qualify under Section 162(m) of the Code.

(b) Amendments to Awards . The Committee may waive any conditions of or rights of the Company under any outstanding Award, prospectively or retroactively. Except as otherwise provided herein or in an Award Agreement, the Committee may not amend, alter, suspend, discontinue or terminate any outstanding Award, prospectively or retroactively, if such action would adversely affect the rights of the holder of such Award, without the consent of the Participant or holder or beneficiary thereof. Notwithstanding the foregoing, the Committee shall not waive any conditions or rights of the Company, or otherwise amend or alter any outstanding Qualified Performance Based Award in such a manner as to cause such Award not to constitute “qualified performance based compensation” within the meaning of Section 162(m) of the Code.

(c) Correction of Defects, Omissions and Inconsistencies . The Committee may correct any defect, supply any omission or reconcile any inconsistency in the Plan or in any Award or Award Agreement in the manner and to the extent it shall deem desirable to implement or maintain the effectiveness of the Plan.

Section 8. Income Tax Withholding

In order to comply with all applicable federal, state or local income tax laws or regulations, the Company may take such action as it deems appropriate to ensure that all applicable federal, state or local payroll, withholding, income or other taxes, which are the sole and absolute responsibility of a Participant, are withheld or collected from such Participant. In order to assist a Participant in paying all or a portion of the federal, state and local taxes to be withheld or collected upon exercise or receipt of (or the lapse of restrictions relating to) an Award, the Committee, in its discretion and subject to such additional terms and conditions as it may adopt, may permit the Participant to satisfy such tax obligation by (i) electing to have the Company withhold a portion of the Shares otherwise to be delivered upon exercise or receipt of (or the lapse of restrictions relating to) such Award with a Fair Market Value equal to the amount of such taxes (but only to the extent of the minimum amount required to be withheld under applicable laws or regulations) or (ii) delivering to the Company Shares other than Shares issuable upon exercise or receipt of (or the lapse of restrictions relating to) such Award with a Fair Market Value equal to the amount of such taxes (but only to the extent of the minimum

 

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amount required to be withheld under applicable laws or regulations). The election, if any, must be made on or before the date that the amount of tax to be withheld is determined.

Section 9. General Provisions

(a) No Rights to Awards . No Eligible Person or other Person shall have any claim to be granted any Award under the Plan, and there is no obligation for uniformity of treatment of Eligible Persons or holders or beneficiaries of Awards under the Plan. The terms and conditions of Awards need not be the same with respect to any Participant or with respect to different Participants.

(b) Award Agreements . No Participant will have rights under an Award granted to such Participant unless and until an Award Agreement shall have been duly executed on behalf of the Company and, if requested by the Company, signed by the Participant.

(c) Plan Provisions Control . In the event that any provision of an Award Agreement conflicts with or is inconsistent in any respect with the terms of the Plan as set forth herein or subsequently amended, the terms of the Plan shall control.

(d) No Rights of Stockholders . Except with respect to Shares of Restricted Stock as to which the Participant has been granted the right to vote, neither a Participant nor the Participant’s legal representative shall be, or have any of the rights and privileges of, a stockholder of the Company with respect to any Shares issuable to such Participant upon the exercise or payment of any Award, in whole or in part, unless and until such Shares have been issued in the name of such Participant or such Participant’s legal representative without restrictions thereto.

(e) No Limit on Other Compensation Arrangements . Nothing contained in the Plan shall prevent the Company or any Affiliate from adopting or continuing in effect other or additional compensation arrangements, and such arrangements may be either generally applicable or applicable only in specific cases.

(f) No Right to Employment . The grant of an Award shall not be construed as giving a Participant the right to be retained in the employ, or as giving a director of the Company or an Affiliate the right to continue as a director or an Affiliate of the Company or any Affiliate, nor will it affect in any way the right of the Company or an Affiliate to terminate a Participant’s employment or service at any time, with or without cause. In addition, the Company or an Affiliate may at any time dismiss a Participant from employment, or terminate the term of a director of the Company or an Affiliate, free from any liability or any claim under the Plan or any Award, unless otherwise expressly provided in the Plan or in any Award Agreement. Nothing in this Plan shall confer on any person any legal or equitable right against the Company or any Affiliate, directly or indirectly, or give rise to any cause of action at law or in equity against the Company or an Affiliate. The Awards granted hereunder shall not form any part of the wages or salary of any Eligible Person for purposes of severance pay or termination indemnities, irrespective of the reason for termination of employment. Under no circumstances shall any person ceasing to be an employee of the Company or any Affiliate be entitled to any compensation for any loss of any right or benefit under the Plan which such employee might

 

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otherwise have enjoyed but for termination of employment, whether such compensation is claimed by way of damages for wrongful or unfair dismissal, breach of contract or otherwise. By participating in the Plan, each Participant shall be deemed to have accepted all the conditions of the Plan and the terms and conditions of any rules and regulations adopted by the Committee and shall be fully bound thereby.

(g) Governing Law . The validity, construction and effect of the Plan or any Award, and any rules and regulations relating to the Plan or any Award, shall be determined in accordance with the internal laws, and not the law of conflicts, of the State of Delaware.

(h) Severability . If any provision of the Plan or any Award is or becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to applicable laws, or if it cannot be so construed or deemed amended without, in the determination of the Committee, materially altering the purpose or intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction or Award, and the remainder of the Plan or any such Award shall remain in full force and effect.

(i) No Trust or Fund Created . Neither the Plan nor any Award shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company or any Affiliate and an Eligible Person or any other Person. To the extent that any Person acquires a right to receive payments from the Company or any Affiliate pursuant to an Award, such right shall be no greater than the right of any unsecured general creditor of the Company or any Affiliate.

(j) Other Benefits . No compensation or benefit awarded to or realized by any Participant under the Plan shall be included for the purpose of computing such Participant’s compensation under any compensation-based retirement, disability, or similar plan of the Company unless required by law or otherwise provided by such other plan.

(k) No Fractional Shares . No fractional Shares shall be issued or delivered pursuant to the Plan or any Award, and the Committee shall determine whether cash shall be paid in lieu of any fractional Shares or whether such fractional Shares or any rights thereto shall be canceled, terminated or otherwise eliminated.

(l) Headings . Headings are given to the Sections and subsections of the Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof.

(m) Section 16 Compliance; Section 162(m) Administration . The Plan is intended to comply in all respects with Rule 16b-3 or any successor provision, as in effect from time to time, and in all events the Plan shall be construed in accordance with the requirements of Rule 16b-3. If any Plan provision does not comply with Rule 16b-3 as hereafter amended or interpreted, the provision shall be deemed inoperative. The Board of Directors, in its absolute discretion, may bifurcate the Plan so as to restrict, limit or condition the use of any provision of the Plan with respect to persons who are officers or directors subject to Section 16 of the Exchange Act without so restricting, limiting or conditioning the Plan with respect to other Eligible Persons.

 

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With respect to Options and Stock Appreciation Rights, the Company intends to have the Plan administered in accordance with the requirements for the award of “qualified performance-based compensation” within the meaning of Section 162(m) of the Code.

(n) Conditions Precedent to Issuance of Shares . Shares shall not be issued pursuant to the exercise or payment of the purchase price relating to an Award unless such exercise or payment and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act, the Exchange Act, the rules and regulations promulgated thereunder, the requirements of any applicable Stock Exchange and the Delaware General Corporation Law. As a condition to the exercise or payment of the purchase price relating to such Award, the Company may require that the person exercising or paying the purchase price represent and warrant that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation and warranty is required by law.

Section 10. Effective Date of the Plan

The Plan shall be effective upon the effective date of the Company’s registration statement on Form S-1 in connection with the Company’s initial public offering of its common stock.

Section 11. Term of the Plan

No Award shall be granted under the Plan after (a) the tenth anniversary of the earlier of (i) the date on which this Plan was adopted by the Board or (ii) the date this Plan was approved by the stockholders of the Company, or (b) any earlier date of discontinuation or termination established pursuant to Section 7(a) of the Plan. However, unless otherwise expressly provided in the Plan or in an applicable Award Agreement, any Award theretofore granted may extend beyond such date, and the authority of the Committee provided for hereunder with respect to the Plan and any Awards, and the authority of the Board to amend the Plan, shall extend beyond the termination of the Plan.

 

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U.S. AUTO PARTS NETWORK, INC.

INCENTIVE STOCK OPTION AGREEMENT

This INCENTIVE STOCK OPTION AGREEMENT (the “ Agreement ”) is made this              day of              ,              , by and between U.S. Auto Parts Network, Inc., a Delaware corporation (the “ Company ”), and              , an individual resident of              ,              (“ Optionee ”).

1. Grant of Option . The Company hereby grants Optionee the option (the “ Option ”) to purchase all or any part of an aggregate of              shares (the “ Shares ”) of common stock, $0.001 par value (“ Common Stock ”), of the Company at the exercise price of $              per share according to the terms and conditions set forth in this Agreement and in the U.S. Auto Parts Network, Inc. 2007 Omnibus Incentive Plan (the “ Plan ”). The Option will be treated as an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the “ Code ”). The Option is issued under the Plan and is subject to its terms and conditions. A copy of the Plan will be furnished upon request of Optionee.

The Option shall terminate at the close of business ten (10) years from the date hereof; provided , however , that if Optionee owns (within the meaning of Section 422 of the Code) as of the date hereof stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of its Affiliates, the Option shall terminate at the close of business five (5) years from the date hereof.

2. Vesting of Option Rights .

(a) Except as otherwise provided in this Agreement, the Option may be exercised by Optionee in accordance with the following schedule:

 

On or after each of

the following dates

  

Number of Shares

with respect to which

the Option is exercisable

 

(b) During the lifetime of Optionee, the Option shall be exercisable only by Optionee and shall not be assignable or transferable by Optionee, other than by will or the laws of descent and distribution.

(c) Optionee understands that to the extent that the aggregate fair market value (determined at the time the option was granted) of the shares of Common Stock of the Company with respect to which all options that are incentive stock options within the meaning of Section 422 of the Code are exercisable for the first time by Optionee during any calendar year exceed $100,000, in accordance with Section 422(d) of the Code, such options shall be treated as options that do not qualify as incentive stock options.


3. Exercise of Option after Death or Termination of Employment or Service . The Option shall terminate and may no longer be exercised if Optionee ceases to be employed by or provide Service to the Company or its Affiliates, except that:

(a) If Optionee’s employment or Service shall be terminated for any reason, voluntary or involuntary, other than for “ Misconduct ” (as defined in Section 3(e)) or Optionee’s death or Permanent Disability (as defined in the Plan and within the meaning of Section 22(e)(3) of the Internal Revenue Code of 1986, as amended), Optionee may at any time within a period of three (3) months after such termination exercise the Option to the extent the Option was exercisable by Optionee on the date of the termination of Optionee’s employment or Service.

(b) If Optionee’s employment or Service is terminated for Misconduct, the Option shall be terminated as of the date of the act giving rise to such termination.

(c) If Optionee shall die while the Option is still exercisable according to its terms, or if employment or Service is terminated because of Optionee’s Permanent Disability while in the employ of the Company, and Optionee shall not have fully exercised the Option, such Option may be exercised, at any time within twelve (12) months after Optionee’s death or date of termination of employment or Service for Permanent Disability, by Optionee, personal representatives or administrators or guardians of Optionee, as applicable, or by any person or persons to whom the Option is transferred by will or the applicable laws of descent and distribution, to the extent of the full number of Shares Optionee was entitled to purchase under the Option on (i) the earlier of the date of death or termination of employment or Service or (ii) the date of termination for such Permanent Disability, as applicable.

(d) Notwithstanding the above, in no case may the Option be exercised to any extent by anyone after the termination date of the Option.

(e) “ Misconduct ” shall mean (i) the commission of any act of fraud, embezzlement or dishonesty by Optionee, (ii) any unauthorized use or disclosure by such person of confidential information or trade secrets of the Company (or of any Affiliate), or (iii) any other intentional misconduct by such person adversely affecting the business or affairs of the Company (or any Affiliate) in a material manner. However, if the term or concept has been defined in an employment agreement between the Company and Optionee, then Misconduct shall have the definition set forth in such employment agreement. The foregoing definition shall not in any way preclude or restrict the right of the Company (or any Affiliate) to discharge or dismiss any Optionee or other person in the Service of the Company (or any Affiliate) for any other acts or omissions but such other acts or omissions shall not be deemed, for purposes of the Agreement, to constitute grounds for termination for Misconduct.

4. Method of Exercise of Option . Subject to the foregoing, the Option may be exercised in whole or in part from time to time by serving written notice of exercise on the Company at its principal office within the Option period. The notice shall state the number of Shares as to which the Option is being exercised and shall be accompanied by payment of the

 

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exercise price. Payment of the exercise price shall be made (i) in cash (including bank check, personal check or money order payable to the Company), (ii) with the approval of the Company (which may be given in its sole discretion), by delivering to the Company for cancellation shares of the Company’s Common Stock already owned by Optionee having a Fair Market Value equal to the full exercise price of the Shares being acquired, (iii) with the approval of the Company (which may be given in its sole discretion) and subject to Section 402 of the Sarbanes-Oxley Act of 2002, by delivering to the Company the full exercise price of the Shares being acquired in a combination of cash and Optionee’s full recourse liability promissory note with a principal amount not to exceed eighty percent (80%) of the exercise price and a term not to exceed five (5) years, which promissory note shall provide for interest on the unpaid balance thereof which at all times is not less than the minimum rate required to avoid the imputation of income, original issue discount or a below-market rate loan pursuant to Sections 483, 1274 or 7872 of the Code or any successor provisions thereto, (iv) subject to Section 402 of the Sarbanes-Oxley Act of 2002, to the extent this Option is exercised for vested shares, through a special sale and remittance procedure pursuant to which Optionee shall concurrently provide irrevocable instructions (1) to Optionee’s brokerage firm to effect the immediate sale of the purchased Shares and remit to the Company, out of the sale proceeds available on the settlement date, 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 Company by reason of such exercise and (2) to the Company to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale, or (v) with the approval of the Company (which may be given in its sole discretion) and subject to Section 402 of the Sarbanes-Oxley Act of 2002, by delivering to the Company a combination of any of the forms of payment described above. This Option may be exercised only with respect to full shares and no fractional share of stock shall be issued.

5. Change in Control .

(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 Company’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 Company 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.

(c) For purposes of this Agreement, “ Change in Control ” shall mean a change in ownership or control of the Company effected through any of the following transactions:

 

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(i) a merger, consolidation or other reorganization unless securities representing more than 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 Company’s outstanding voting securities immediately prior to such transaction; (ii) the sale, transfer or other disposition of all or substantially all of the Company’s assets; or (iii) the acquisition, directly or indirectly by any person or related group of persons (other than the Company or a person that directly or indirectly controls, is controlled by, or is under common control with, the Company), of beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than 50% of the total combined voting power of the Company’s outstanding securities pursuant to a tender or exchange offer made directly to the Company’s stockholders.

6. Capital Adjustments and Reorganization . Should any change be made to the Common Stock by reason of any stock split, reverse stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Company’s receipt of consideration, appropriate adjustments shall be made to (a) the number and/or class of securities subject to this Option and (b) the exercise price in order to reflect such change and thereby preclude a dilution or enlargement of benefits hereunder.

7. Miscellaneous .

(a) Entire Agreement; Plan Provisions Control . This Agreement (and any addendum hereto) and the Plan constitute the entire agreement between the parties hereto with regard to the subject matter hereof. In the event that any provision of the Agreement conflicts with or is inconsistent in any respect with the terms of the Plan, the terms of the Plan shall control. All decisions of the Committee with respect to any question or issue arising under the Plan or this Agreement shall be and binding on all persons having an interest in this Option. All capitalized terms used in this Agreement and not otherwise defined in this Agreement shall have the meaning assigned to them in the Plan.

(b) No Rights of Stockholders . Neither Optionee, Optionee’s legal representative nor a permissible assignee of this Option shall have any of the rights and privileges of a stockholder of the Company with respect to the Shares, unless and until such Shares have been issued in the name of Optionee, Optionee’s legal representative or permissible assignee, as applicable, without restrictions thereto.

(c) No Right to Employment . The grant of the Option shall not be construed as giving Optionee the right to be retained in the employ of, or if Optionee is a director of the Company or an Affiliate as giving the Optionee the right to continue as a director of, the Company or an Affiliate, nor will it affect in any way the right of the Company or an Affiliate to terminate such employment or position at any time, with or without cause. In addition, the Company or an Affiliate may at any time dismiss Optionee from employment, or terminate the term of a director of the Company or an Affiliate, free from any liability or any claim under the Plan or the Agreement. Nothing in the Agreement shall confer on any person any legal or equitable right against the Company or any Affiliate, directly or indirectly, or give rise to any

 

4


cause of action at law or in equity against the Company or an Affiliate. The Option granted hereunder shall not form any part of the wages or salary of Optionee for purposes of severance pay or termination indemnities, irrespective of the reason for termination of employment. Under no circumstances shall any person ceasing to be an employee of the Company or any Affiliate be entitled to any compensation for any loss of any right or benefit under the Agreement or Plan which such employee might otherwise have enjoyed but for termination of employment, whether such compensation is claimed by way of damages for wrongful or unfair dismissal, breach of contract or otherwise. By participating in the Plan, Optionee shall be deemed to have accepted all the conditions of the Plan and the Agreement and the terms and conditions of any rules and regulations adopted by the Committee and shall be fully bound thereby.

(d) Governing Law . The validity, construction and effect of the Plan and the Agreement, and any rules and regulations relating to the Plan and the Agreement, shall be determined in accordance with the internal laws, and not the law of conflicts, of the State of Delaware.

(e) Severability . If any provision of the Agreement is or becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction or would disqualify the Agreement under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to applicable laws, or if it cannot be so construed or deemed amended without, in the determination of the Committee, materially altering the purpose or intent of the Plan or the Agreement, such provision shall be stricken as to such jurisdiction or the Agreement, and the remainder of the Agreement shall remain in full force and effect.

(f) No Trust or Fund Created . Neither the Plan nor the Agreement shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company or any Affiliate and Optionee or any other person.

(g) Headings . Headings are given to the Sections and subsections of the Agreement solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Agreement or any provision thereof.

(h) Notices . Any notice required to be given or delivered to the Company under the terms of this Agreement shall be addressed to the Company at its principal corporate offices. Any notice required to be given or delivered to Optionee shall be addressed to Optionee at the address indicated below Optionee’s signature line at the end of this Agreement or at such other address as Optionee may designate by ten (10) days’ advance written notice to the Company. Any notice required to be given under this Agreement shall be in writing and shall be deemed effective upon personal delivery or upon the third (3rd) day following deposit in the U.S. mail, registered or certified, postage prepaid and properly addressed to the party entitled to such notice.

(i) Conditions Precedent to Issuance of Shares . Shares shall not be issued pursuant to the exercise of the Option unless such exercise and the issuance and delivery of the applicable Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act of 1934, as amended, the

 

5


rules and regulations promulgated thereunder, state blue sky laws, the requirements of any applicable Stock Exchange or the Nasdaq Stock Market and the Delaware General Corporation Law. As a condition to the exercise of the purchase price relating to the Option, the Company may require that the person exercising or paying the purchase price represent and warrant that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation and warranty is required by law.

(j) Withholding . If Optionee shall dispose of any of the shares of Common Stock acquired upon exercise of the Option within two (2) years from the date the Option was granted or within one (1) year after the date of exercise of the Option, then, in order to provide the Company with the opportunity to claim the benefit of any income tax deduction, Optionee shall promptly notify the Company of the dates of acquisition and disposition of such shares, the number of shares so disposed of, and the consideration, if any, received for such shares. In order to comply with all applicable federal or state income tax laws or regulations, the Company may take such action as it deems appropriate to assure (i) notice to the Company of any disposition of the shares of the Company within the time periods described above, and (ii) that, if necessary, all applicable federal or state payroll, withholding, income or other taxes are withheld or collected from Optionee.

(k) Consultation With Professional Tax and Investment Advisors . Optionee acknowledges that the grant, exercise and vesting with respect to this Option, and the sale or other taxable disposition of the Shares, may have tax consequences pursuant to the Code or under local, state or international tax laws. Optionee further acknowledges that Optionee is relying solely and exclusively on Optionee’s own professional tax and investment advisors with respect to any and all such matters (and is not relying, in any manner, on the Company or any of its employees or representatives). Optionee understands and agrees that any and all tax consequences resulting from the Option and its grant, exercise and vesting, and the sale or other taxable disposition of the Shares, is solely and exclusively the responsibility of Optionee without any expectation or understanding that the Company or any of its employees or representatives will pay or reimburse Optionee for such taxes or other items.

[SIGNATURE PAGE FOLLOWS]

 

6


IN WITNESS WHEREOF , the Company and Optionee have executed this Agreement on the date set forth in the first paragraph.

 

U.S. AUTO PARTS NETWORK, INC.
By:  

 

Name:  

 

Title:  

 

OPTIONEE:
By:  

 

Name:  

 

Address:  

 

 

Facsimile:  

 

 

7


U.S. AUTO PARTS NETWORK, INC.

NON-INCENTIVE STOCK OPTION AGREEMENT

This NON-INCENTIVE STOCK OPTION AGREEMENT (the “ Agreement ”) is made this              day of              ,              , by and between U.S. Auto Parts Network, Inc., a Delaware corporation (the “ Company ”), and              , an individual resident of              ,              (“ Optionee ”).

1. Grant of Option . The Company hereby grants Optionee the option (the “ Option ”) to purchase all or any part of an aggregate of              shares (the “ Shares ”) of common stock, $0.001 par value (“ Common Stock ”), of the Company at the exercise price of $              per share according to the terms and conditions set forth in this Agreement and in the U.S. Auto Parts Network, Inc. 2007 Omnibus Incentive Plan (the “ Plan ”). The Option will not be treated as an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the “ Code ”). The Option is issued under the Plan and is subject to its terms and conditions. A copy of the Plan will be furnished upon request of Optionee.

The Option shall terminate at the close of business ten (10) years from the date hereof.

2. Vesting of Option Rights .

(a) Except as otherwise provided in this Agreement, the Option may be exercised by Optionee in accordance with the following schedule:

 

On or after each of

the following dates

  

Number of Shares

with respect to which

the Option is exercisable

 

(b) During the lifetime of Optionee, the Option shall be exercisable only by Optionee and shall not be assignable or transferable by Optionee, other than by will or the laws of descent and distribution. Notwithstanding the foregoing, Optionee may transfer the Option to any Family Member (as such term is defined in the General Instructions to Form S-8 (or successor to such Instructions or such Form)); provided , however , that (i) Optionee may not receive any consideration for such transfer, (ii) the Family Member must agree in writing not to make any subsequent transfers of the Option other than by will or the laws of the descent and distribution and (iii) the Company receives prior written notice of such transfer.

3. Exercise of Option after Death or Termination of Employment or Service . The Option shall terminate and may no longer be exercised if Optionee ceases to be employed by or provide Service to the Company or its Affiliates, except that:


(a) If Optionee’s employment or Service shall be terminated for any reason, voluntary or involuntary, other than for “ Misconduct ” (as defined in Section 3(e)) or Optionee’s death or Permanent Disability, Optionee may at any time within a period of three (3) months after such termination exercise the Option to the extent the Option was exercisable by Optionee on the date of the termination of Optionee’s employment or Service.

(b) If Optionee’s employment or Service is terminated for Misconduct, the Option shall be terminated as of the date of the act giving rise to such termination.

(c) If Optionee shall die while the Option is still exercisable according to its terms, or if employment or Service is terminated because of Optionee’s Permanent Disability while in the employ of the Company, and Optionee shall not have fully exercised the Option, such Option may be exercised, at any time within twelve (12) months after Optionee’s death or date of termination of employment or Service for Permanent Disability, by Optionee, personal representatives or administrators or guardians of Optionee, as applicable, or by any person or persons to whom the Option is transferred by will or the applicable laws of descent and distribution, to the extent of the full number of Shares Optionee was entitled to purchase under the Option on (i) the earlier of the date of death or termination of employment or Service or (ii) the date of termination for such Permanent Disability, as applicable.

(d) Notwithstanding the above, in no case may the Option be exercised to any extent by anyone after the termination date of the Option.

(e) “ Misconduct ” shall mean (i) the commission of any act of fraud, embezzlement or dishonesty by Optionee, (ii) any unauthorized use or disclosure by such person of confidential information or trade secrets of the Company (or of any Affiliate), or (iii) any other intentional misconduct by such person adversely affecting the business or affairs of the Company (or any Affiliate) in a material manner. However, if the term or concept has been defined in an employment agreement between the Company and Optionee, then Misconduct shall have the definition set forth in such employment agreement. The foregoing definition shall not in any way preclude or restrict the right of the Company (or any Affiliate) to discharge or dismiss any Optionee or other person in the Service of the Company (or any Affiliate) for any other acts or omissions but such other acts or omissions shall not be deemed, for purposes of the Agreement, to constitute grounds for termination for Misconduct.

4. Method of Exercise of Option . Subject to the foregoing, the Option may be exercised in whole or in part from time to time by serving written notice of exercise on the Company at its principal office within the Option period. The notice shall state the number of Shares as to which the Option is being exercised and shall be accompanied by payment of the exercise price. Payment of the exercise price shall be made (i) in cash (including bank check, personal check or money order payable to the Company), (ii) with the approval of the Company (which may be given in its sole discretion), by delivering to the Company for cancellation shares of the Company’s Common Stock already owned by Optionee having a Fair Market Value equal to the full exercise price of the Shares being acquired, (iii) with the approval of the Company

 

2


(which may be given in its sole discretion) and subject to Section 402 of the Sarbanes-Oxley Act of 2002, by delivering to the Company the full exercise price of the Shares being acquired in a combination of cash and Optionee’s full recourse liability promissory note with a principal amount not to exceed eighty percent (80%) of the exercise price and a term not to exceed five (5) years, which promissory note shall provide for interest on the unpaid balance thereof which at all times is not less than the minimum rate required to avoid the imputation of income, original issue discount or a below-market rate loan pursuant to Sections 483, 1274 or 7872 of the Code or any successor provisions thereto, (iv) subject to Section 402 of the Sarbanes-Oxley Act of 2002, to the extent this Option is exercised for vested shares, through a special sale and remittance procedure pursuant to which Optionee shall concurrently provide irrevocable instructions (1) to Optionee’s brokerage firm to effect the immediate sale of the purchased Shares and remit to the Company, out of the sale proceeds available on the settlement date, 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 Company by reason of such exercise and (2) to the Company to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale, or (v) with the approval of the Company (which may be given in its sole discretion) and subject to Section 402 of the Sarbanes-Oxley Act of 2002, by delivering to the Company a combination of any of the forms of payment described above. This Option may be exercised only with respect to full shares and no fractional share of stock shall be issued.

5. Change in Control .

(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 Company’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 Company 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.

(c) For purposes of this Agreement, “ Change in Control ” shall mean a change in ownership or control of the Company effected through any of the following transactions: (i) a merger, consolidation or other reorganization unless securities representing more than 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 Company’s outstanding voting securities immediately prior to such transaction; (ii) the sale, transfer

 

3


or other disposition of all or substantially all of the Company’s assets; or (iii) the acquisition, directly or indirectly by any person or related group of persons (other than the Company or a person that directly or indirectly controls, is controlled by, or is under common control with, the Company), of beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than 50% of the total combined voting power of the Company’s outstanding securities pursuant to a tender or exchange offer made directly to the Company’s stockholders.

6. Capital Adjustments and Reorganization . Should any change be made to the Common Stock by reason of any stock split, reverse stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Company’s receipt of consideration, appropriate adjustments shall be made to (a) the number and/or class of securities subject to this Option and (b) the exercise price in order to reflect such change and thereby preclude a dilution or enlargement of benefits hereunder.

7. Miscellaneous .

(a) Entire Agreement; Plan Provisions Control . This Agreement (and any addendum hereto) and the Plan constitute the entire agreement between the parties hereto with regard to the subject matter hereof. In the event that any provision of the Agreement conflicts with or is inconsistent in any respect with the terms of the Plan, the terms of the Plan shall control. All decisions of the Committee with respect to any question or issue arising under the Plan or this Agreement shall be and binding on all persons having an interest in this Option. All capitalized terms used in this Agreement and not otherwise defined in this Agreement shall have the meaning assigned to them in the Plan.

(b) No Rights of Stockholders . Neither Optionee, Optionee’s legal representative nor a permissible assignee of this Option shall have any of the rights and privileges of a stockholder of the Company with respect to the Shares, unless and until such Shares have been issued in the name of Optionee, Optionee’s legal representative or permissible assignee, as applicable, without restrictions thereto.

(c) No Right to Employment . The grant of the Option shall not be construed as giving Optionee the right to be retained in the employ of, or if Optionee is a director of the Company or an Affiliate as giving the Optionee the right to continue as a director of, the Company or an Affiliate, nor will it affect in any way the right of the Company or an Affiliate to terminate such employment or position at any time, with or without cause. In addition, the Company or an Affiliate may at any time dismiss Optionee from employment, or terminate the term of a director of the Company or an Affiliate, free from any liability or any claim under the Plan or the Agreement. Nothing in the Agreement shall confer on any person any legal or equitable right against the Company or any Affiliate, directly or indirectly, or give rise to any cause of action at law or in equity against the Company or an Affiliate. The Option granted hereunder shall not form any part of the wages or salary of Optionee for purposes of severance pay or termination indemnities, irrespective of the reason for termination of employment. Under no circumstances shall any person ceasing to be an employee of the Company or any Affiliate be entitled to any compensation for any loss of any right or benefit under the Agreement or Plan

 

4


which such employee might otherwise have enjoyed but for termination of employment, whether such compensation is claimed by way of damages for wrongful or unfair dismissal, breach of contract or otherwise. By participating in the Plan, Optionee shall be deemed to have accepted all the conditions of the Plan and the Agreement and the terms and conditions of any rules and regulations adopted by the Committee and shall be fully bound thereby.

(d) Governing Law . The validity, construction and effect of the Plan and the Agreement, and any rules and regulations relating to the Plan and the Agreement, shall be determined in accordance with the internal laws, and not the law of conflicts, of the State of Delaware.

(e) Severability . If any provision of the Agreement is or becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction or would disqualify the Agreement under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to applicable laws, or if it cannot be so construed or deemed amended without, in the determination of the Committee, materially altering the purpose or intent of the Plan or the Agreement, such provision shall be stricken as to such jurisdiction or the Agreement, and the remainder of the Agreement shall remain in full force and effect.

(f) No Trust or Fund Created . Neither the Plan nor the Agreement shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company or any Affiliate and Optionee or any other person.

(g) Headings . Headings are given to the Sections and subsections of the Agreement solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Agreement or any provision thereof.

(h) Notices . Any notice required to be given or delivered to the Company under the terms of this Agreement shall be addressed to the Company at its principal corporate offices. Any notice required to be given or delivered to Optionee shall be addressed to Optionee at the address indicated below Optionee’s signature line at the end of this Agreement or at such other address as Optionee may designate by ten (10) days’ advance written notice to the Company. Any notice required to be given under this Agreement shall be in writing and shall be deemed effective upon personal delivery or upon the third (3rd) day following deposit in the U.S. mail, registered or certified, postage prepaid and properly addressed to the party entitled to such notice.

(i) Conditions Precedent to Issuance of Shares . Shares shall not be issued pursuant to the exercise of the Option unless such exercise and the issuance and delivery of the applicable Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, state blue sky laws, the requirements of any applicable Stock Exchange or the Nasdaq Stock Market and the Delaware General Corporation Law. As a condition to the exercise of the purchase price relating to the Option, the Company may require that the person exercising or paying the purchase price represent and warrant that the Shares are being purchased only for investment and without any present intention to sell or

 

5


distribute such Shares if, in the opinion of counsel for the Company, such a representation and warranty is required by law.

(j) Withholding . In order to provide the Company with the opportunity to claim the benefit of any income tax deduction which may be available to it upon the exercise of the Option and in order to comply with all applicable federal or state income tax laws or regulations, the Company may take such action as it deems appropriate to insure that, if necessary, all applicable federal or state payroll, withholding, income or other taxes are withheld or collected from Optionee.

(k) Consultation With Professional Tax and Investment Advisors . Optionee acknowledges that the grant, exercise and vesting with respect to this Option, and the sale or other taxable disposition of the Shares, may have tax consequences pursuant to the Code or under local, state or international tax laws. Optionee further acknowledges that Optionee is relying solely and exclusively on Optionee’s own professional tax and investment advisors with respect to any and all such matters (and is not relying, in any manner, on the Company or any of its employees or representatives). Optionee understands and agrees that any and all tax consequences resulting from the Option and its grant, exercise and vesting, and the sale or other taxable disposition of the Shares, is solely and exclusively the responsibility of Optionee without any expectation or understanding that the Company or any of its employees or representatives will pay or reimburse Optionee for such taxes or other items.

[SIGNATURE PAGE FOLLOWS]

 

6


IN WITNESS WHEREOF , the Company and Optionee have executed this Agreement on the date set forth in the first paragraph.

 

U.S. AUTO PARTS NETWORK, INC.
By:  

 

Name:  

 

Title:  

 

OPTIONEE:
By:  

 

Name:  

 

Address:  

 

 

Facsimile:  

 

 

7


U.S. AUTO PARTS NETWORK, INC.

RESTRICTED STOCK AWARD AGREEMENT

This RESTRICTED STOCK AWARD AGREEMENT (the “ Agreement ”) is made this              day of              ,              , by and between U.S. Auto Parts Network, Inc., a Delaware corporation (the “ Company ”), and              , an individual resident of              ,              (“ Participant ”).

1. Award . The Company hereby grants to Participant a restricted stock award of              shares (the “ Shares ”) of common stock, par value $0.001 (“ Common Stock ”), of the Company according to the terms and conditions set forth herein and in the U.S. Auto Parts Network, Inc. 2007 Omnibus Incentive Plan (the “ Plan ”). The Shares are Restricted Stock granted under Section 6(c) of the Plan. A copy of the Plan will be furnished upon request of Participant. With respect to the Shares, Participant shall be entitled at all times on and after the date of issuance of the Shares to exercise the rights of a stockholder of Common Stock of the Company, including the right to vote the Shares and the right to receive dividends, if any, declared on the Shares.

2. Vesting . Except as otherwise provided in this Agreement, the Shares shall vest in accordance with the following schedule:

 

On each of

the following dates

  

Number of Shares Vested

 

3. Restrictions on Transfer . Until the Shares vest pursuant to Sections 2 or 4 hereof, none of the Shares may be pledged, alienated, attached or otherwise encumbered, and any purported pledge, alienation, attachment or encumbrance shall be void and unenforceable against the Company, and no attempt to transfer the Shares, whether voluntary or involuntary, by operation of law or otherwise, shall vest the purported transferee with any interest or right in or with respect to the Shares.

4. Forfeiture; Early Vesting . If Participant ceases to be an employee of or provide Service to the Company or any Affiliate prior to vesting of the Shares pursuant to Sections 2 or 4 hereof, all of Participant’s rights to all of the unvested Shares shall be immediately and irrevocably forfeited, except that if Participant ceases to be an employee or provide Service by reason of death or Permanent Disability prior to the vesting of Shares under Sections 2 or 4 hereof, the next vesting date for the Shares, as set out in Section 2 above, shall accelerate by twelve (12) months as of such date of termination. Upon forfeiture, Participant will no longer


have any rights relating to the unvested Shares, including the right to vote the Shares and the right to receive dividends, if any, declared on the Shares.

5. Distributions and Adjustments .

(a) If any Shares vest subsequent to any change in the number or character of the Common Stock of the Company (through any stock dividend or other distribution, recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of shares, or otherwise), Participant shall receive upon such vesting the number and type of securities or other consideration which Participant would have received if such Shares had vested prior to the event changing the number or character of the outstanding Common Stock.

(b) Any additional shares of Common Stock of the Company, any other securities of the Company and any other property (except for regular cash dividends or other cash distributions) distributed with respect to the Shares prior to the date or dates the Shares vest shall be subject to the same restrictions, terms and conditions as the Shares to which they relate and shall be promptly deposited with the Secretary of the Company or a custodian designated by the Secretary.

6. Change in Control .

(a) If this Agreement is assumed or otherwise continued in effect in connection with a Change in Control, then this Agreement shall be appropriately adjusted, upon such Change in Control, to apply to the number and class of securities which would have been issuable to Participant in consummation of such Change in Control had the Shares been vested immediately prior to such Change in Control. To the extent that the holders of Common Stock receive cash consideration for their Common Stock in consummation of the Change in Control, the successor corporation (or its parent) may, in connection with the assumption of this Agreement, 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 Company 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.

(c) For purposes of this Agreement, “ Change in Control ” shall mean a change in ownership or control of the Company effected through any of the following transactions: (i) a merger, consolidation or other reorganization unless securities representing more than 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 Company’s outstanding voting securities immediately prior to such transaction; (ii) the sale, transfer or other disposition of all or substantially all of the Company’s assets; or (iii) the acquisition, directly or indirectly by any person or related group of persons (other than the Company or a person that directly or indirectly controls, is controlled by, or is under common control with, the Company), of beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more

 

2


than 50% of the total combined voting power of the Company’s outstanding securities pursuant to a tender or exchange offer made directly to the Company’s stockholders

7. Miscellaneous .

(a) Issuance of Shares . The Company shall cause the Shares to be issued in the name of Participant, either by book-entry registration or issuance of a stock certificate or certificates evidencing the Shares, which certificate or certificates shall be held by the Secretary of the Company or the stock transfer agent or brokerage service selected by the Secretary of the Company to provide such services for the Plan. The Shares shall be restricted from transfer and shall be subject to an appropriate stop-transfer order. If any certificate is used, the certificate shall bear an appropriate legend referring to the restrictions applicable to the Shares. Participant hereby agrees to the retention by the Company of the Shares and, if a stock certificate is used, agrees to execute and deliver to the Company a blank stock power with respect to the Shares as a condition to the receipt of this award of Shares. After any Shares vest pursuant to Sections 2 or 4 hereof, and following payment of the applicable withholding taxes pursuant to Section 7(b) of this Agreement, the Company shall promptly cause to be issued a certificate or certificates, registered in the name of Participant or in the name of Participant’s legal representatives, beneficiaries or heirs, as the case may be, evidencing such vested whole Shares (less any shares withheld to pay withholding taxes) and shall cause such certificate or certificates to be delivered to Participant or Participant’s legal representatives, beneficiaries or heirs, as the case may be, free of the legend or the stop-transfer order referenced above. No fractional share of stock shall be issued.

(b) Income Tax Matters .

(i) In order to comply with all applicable federal or state income tax laws or regulations, the Company may take such action as it deems appropriate to ensure that all applicable federal or state payroll, withholding, income or other taxes, which are the sole and absolute responsibility of Participant, are withheld or collected from Participant.

(ii) In accordance with the terms of the Plan, and such rules as may be adopted by the Committee under the Plan, Participant may elect to satisfy Participant’s federal and state income tax withholding obligations arising from the receipt of, or the lapse of restrictions relating to, the Shares, by (i) delivering cash, check (bank check, certified check or personal check) or money order payable to the Company, (ii) having the Company withhold a portion of the Shares otherwise to be delivered having a Fair Market Value equal to the amount of such taxes, or (iii) delivering to the Company shares of Common Stock already owned by Participant having a Fair Market Value equal to the amount of such taxes. Any shares already owned by Participant for no less than six months prior to the date delivered to the Company if such shares were acquired upon the exercise of an option or upon the vesting of restricted stock units or other restricted stock. The Company will not deliver any fractional Shares but will pay, in lieu thereof, the Fair Market Value of such fractional Shares. Participant’s election must be made on or before the date that the amount of tax to be withheld is determined.

(c) Entire Agreement; Plan Provisions Control . This Agreement (and any addendum hereto) and the Plan constitute the entire agreement between the parties hereto with regard to the subject matter hereof. In the event that any provision of the Agreement conflicts with or is

 

3


inconsistent in any respect with the terms of the Plan, the terms of the Plan shall control. All decisions of the Committee with respect to any question or issue arising under the Plan or this Agreement shall be and binding on all persons having an interest in the Shares. All capitalized terms used in this Agreement and not otherwise defined in this Agreement shall have the meaning assigned to them in the Plan.

(d) No Right to Employment . The issuance of the Shares shall not be construed as giving Participant the right to be retained in the employ of, or if Participant is a director of the Company or an Affiliate as giving the Participant the right to continue as a director of, the Company or an Affiliate, nor will it affect in any way the right of the Company or an Affiliate to terminate such employment or position at any time, with or without cause. In addition, the Company or an Affiliate may at any time dismiss Participant from employment, or terminate the term of a director of the Company or an Affiliate, free from any liability or any claim under the Plan or the Agreement. Nothing in the Agreement shall confer on any person any legal or equitable right against the Company or any Affiliate, directly or indirectly, or give rise to any cause of action at law or in equity against the Company or an Affiliate. The Shares shall not form any part of the wages or salary of Participant for purposes of severance pay or termination indemnities, irrespective of the reason for termination of employment. Under no circumstances shall any person ceasing to be an employee of the Company or any Affiliate be entitled to any compensation for any loss of any right or benefit under the Agreement or Plan which such employee might otherwise have enjoyed but for termination of employment, whether such compensation is claimed by way of damages for wrongful or unfair dismissal, breach of contract or otherwise. By participating in the Plan, Participant shall be deemed to have accepted all the conditions of the Plan and the Agreement and the terms and conditions of any rules and regulations adopted by the Committee and shall be fully bound thereby.

(e) Governing Law . The validity, construction and effect of the Plan and the Agreement, and any rules and regulations relating to the Plan and the Agreement, shall be determined in accordance with the internal laws, and not the law of conflicts, of the State of Delaware.

(f) Severability . If any provision of the Agreement is or becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction or would disqualify the Agreement under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to applicable laws, or if it cannot be so construed or deemed amended without, in the determination of the Committee, materially altering the purpose or intent of the Plan or the Agreement, such provision shall be stricken as to such jurisdiction or the Agreement, and the remainder of the Agreement shall remain in full force and effect.

(g) No Trust or Fund Created . Neither the Plan nor the Agreement shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company or any Affiliate and Participant or any other person.

(h) Headings . Headings are given to the Sections and subsections of the Agreement solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Agreement or any provision thereof.

 

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(i) Notices . Any notice required to be given or delivered to the Company under the terms of this Agreement shall be addressed to the Company at its principal corporate offices. Any notice required to be given or delivered to Participant shall be addressed to Participant at the address indicated below Participant’s signature line at the end of this Agreement or at such other address as Participant may designate by ten (10) days’ advance written notice to the Company. Any notice required to be given under this Agreement shall be in writing and shall be deemed effective upon personal delivery or upon the third (3rd) day following deposit in the U.S. mail, registered or certified, postage prepaid and properly addressed to the party entitled to such notice.

(j) Conditions Precedent to Issuance of Shares . Shares shall not be issued pursuant to this Agreement unless such issuance and delivery of the Shares pursuant hereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, state blue sky laws, the requirements of any applicable Stock Exchange or the Nasdaq Stock Market and the Delaware General Corporation Law. As a condition to the issuance of the Shares, the Company may require that the person receiving such Shares represent and warrant that the Shares are being acquired only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation and warranty is required by law.

(k) Consultation With Professional Tax and Investment Advisors . Participant acknowledges that the grant and vesting with respect to the Shares, and the sale or other taxable disposition of the vested Shares, may have tax consequences pursuant to the Internal Revenue Code of 1986, as amended, or under local, state or international tax laws. Participant further acknowledges that Participant is relying solely and exclusively on Participant’s own professional tax and investment advisors with respect to any and all such matters (and is not relying, in any manner, on the Company or any of its employees or representatives). Participant understands and agrees that any and all tax consequences resulting from the grant and vesting of the Shares, and the sale or other taxable disposition of the vested Shares, is solely and exclusively the responsibility of Participant without any expectation or understanding that the Company or any of its employees or representatives will pay or reimburse Participant for such taxes or other items.

[SIGNATURE PAGE FOLLOWS]

 

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IN WITNESS WHEREOF , the Company and Participant have executed this Restricted Stock Award Agreement on the date set forth in the first paragraph.

 

U.S. AUTO PARTS NETWORK, INC.

By:

 

 

Name:

 

 

Title:

 

 

PARTICIPANT:

By:

 

 

Name:

 

 

Address:

 

 

 

Facsimile:

 

 


U.S. AUTO PARTS NETWORK, INC.

STOCK UNIT AWARD AGREEMENT

This STOCK UNIT AWARD AGREEMENT (this “ Agreement ”), dated as of                       ,              (the “ Effective Date ”), is between U.S. Auto Parts Network, Inc., a Delaware corporation (the “ Company ”), and                      , an individual resident of                      (“ Participant ”). This Stock Award is granted under the U.S. Auto Parts Network, Inc. 2007 Omnibus Incentive Plan (the “ Plan ”) and is subject to the terms of that Plan. This Agreement represents the Company’s unfunded and unsecured promise to issue common stock of the Company, $0.001 par value (“ Common Stock ”), at a future date, subject to the terms of this Agreement and the Plan.

1. Award . The Company hereby grants Participant, subject to the terms and conditions of this Agreement and the Plan, a stock award (the “ Stock Award ”) with respect to              shares (the “ Shares ”) of Common Stock. The Stock Award represents the right to receive the Shares only when, and with respect to the number of Shares to which, the Stock Award has vested (the “ Vested Shares ”). The Stock Award is subject to the terms and conditions set forth in this Agreement and in the Plan. A copy of the Plan will be furnished upon request of Participant.

2. Vesting . Subject to the terms and conditions of this Agreement and the Plan, the Stock Award shall vest and be converted into an equivalent number of shares that will be distributed to the Participant as follows:

 

On or after Each of the Following Dates

  

Percentage of Shares that Vest

3. Termination of Stock Award .

(a) Except as provided in subsections (b) below, a Participant’s rights under this Agreement with respect to the Stock Award shall terminate at the earlier of (i) the time such Stock Awards are converted into Vested Shares, or (ii) the termination of Participant’s employment with or Service to the Company. Upon termination of this Agreement in accordance with clause (ii) above, the Participant’s rights to all of the Shares subject to the Stock Award not vested on the date that Participant ceases to be an employee or to provide Service shall be immediately and irrevocably forfeited and the Participant will retain no rights with respect to the forfeited Shares.

(b) Notwithstanding the provisions of clause (ii) of Section 3(a) above, in the event of termination of Participant’s employment with or Service to the Company as a result of Participant’s death or Permanent Disability (as defined below) while in the employ or service of the Company, the next vesting date for the Stock Award, as set out


in Section 2 above, shall accelerate by twelve (12) months as of such date of termination. The Participant’s rights in any unvested shares subject to this Stock Award shall terminate at the time Participant ceases to be an employee or provide Service.

4. Additional Restrictions on Transfer of Stock Award . During the lifetime of Participant, this Stock Award cannot be sold, assigned, transferred, gifted, pledged, hypothecated or in any manner encumbered or disposed of at any time prior to delivery of the Vested Shares, other than by will or the laws of descent and distribution.

5. Conversion of Stock Award to Shares; Responsibility for Taxes .

(a) Provided Participant has satisfied the requirements of Section 5(b) below, after the vesting of the Stock Award with respect to Vested Shares, the Vested Shares will be distributed to Participant or, in the event of Participant’s death, to Participant’s legal representative, as soon as practicable. The distribution to the Participant, or in the case of the Participant’s death, to the Participant’s legal representative, of Vested Shares shall be evidenced by a stock certificate, appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company, or other appropriate means as determined by the Company. No fractional share of stock shall be issued.

(b) By signing this Agreement, Participant agrees that the Company may withhold from the Vested Shares to be distributed to Participant in accordance with Section 5(a), and cancel and not issue such withheld Vested Shares in satisfaction of all income tax (including federal, state and local taxes), social insurance, payroll tax or other tax-related withholding (“ Tax Related Items ”), a number of Vested Shares as is equal to the quotient of (i) the Fair Market Value of the Shares on the date of vesting, (i) divided by the amount of Tax Related Items; provided that the Company shall withhold only the amount of Vested Shares necessary to satisfy the minimum withholding amount. To the extent that the Company determines that it is not feasible, or not permissible under applicable law, to withhold in Shares, then prior to the issuance of Vested Shares as provided in Section 5(a) above, Participant shall pay, or make adequate arrangements satisfactory to the Company or to the Participant’s actual employer (in their sole discretion) to satisfy all withholding obligations of the Company and/or the Participant’s actual employer. In this regard, Participant authorizes the Company or the Participant’s actual employer to withhold all applicable Tax Related Items legally payable by Participant from Participant’s wages or other cash compensation payable to Participant by the Company or the Participant’s actual employer. Participant shall pay to the Company or to the Participant’s actual employer any amount of Tax Related Items that the Company or the Participant’s actual employer may be required to withhold as a result of Participant’s receipt of the Stock Award, the vesting of the Stock Award, or the conversion of vested Stock Award to Shares that cannot be satisfied by the means previously described. The Company may refuse to deliver Vested Shares to Participant if Participant fails to comply with Participant’s obligation in connection with the Tax Related Items as described herein.

Regardless of any action the Company or the subsidiary of the Company that is Participant’s actual employer takes with respect to any or all Tax Related Items, Participant acknowledges that the ultimate liability for all Tax Related Items legally due by Participant is and remains Participant’s responsibility and that the Company and/or the Participant’s actual

 

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employer (i) make no representations or undertakings regarding the treatment of any Tax Related Items in connection with any aspect of the Stock Award, including the grant of the Stock Award, the vesting of Stock Award with respect to Shares, the conversion of the Stock Award into Shares, the subsequent sale of any Shares acquired at vesting and the receipt of any dividends; and (ii) do not commit to structure the terms of the grant or any aspect of the Stock Award to reduce or eliminate the Participant’s liability for Tax Related Items.

6. Change in Control .

(a) If this Stock Award is assumed or otherwise continued in effect in connection with a Change in Control, then this Stock Award shall be appropriately adjusted, upon such Change in Control, to apply to the number and class of securities which would have been issuable to Participant in consummation of such Change in Control had this Stock Award been vested immediately prior to such Change in Control. To the extent that the holders of Common Stock receive cash consideration for their Common Stock in consummation of the Change in Control, the successor corporation (or its parent) may, in connection with the assumption of this Stock Award, 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 Company 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.

(c) For purposes of this Agreement, “ Change in Control ” shall mean a change in ownership or control of the Company effected through any of the following transactions: (i) a merger, consolidation or other reorganization unless securities representing more than 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 Company’s outstanding voting securities immediately prior to such transaction; (ii) the sale, transfer or other disposition of all or substantially all of the Company’s assets; or (iii) the acquisition, directly or indirectly by any person or related group of persons (other than the Company or a person that directly or indirectly controls, is controlled by, or is under common control with, the Company), of beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than 50% of the total combined voting power of the Company’s outstanding securities pursuant to a tender or exchange offer made directly to the Company’s stockholders.

7. Capital Adjustments and Reorganization . Should any change be made to the Common Stock by reason of any stock split, reverse stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Company’s receipt of consideration, appropriate adjustments shall be made to the number and/or class of securities subject to this Stock Award in order to reflect such change and thereby preclude a dilution or enlargement of benefits hereunder.

8. Miscellaneous .

(a) Entire Agreement; Plan Provisions Control . This Agreement (and any addendum hereto) and the Plan constitute the entire agreement between the parties hereto with regard to the subject matter hereof. In the event that any provision of the Agreement conflicts with or is inconsistent in any respect with the terms of the Plan, the terms of the Plan shall control. All

 

3


decisions of the Committee with respect to any question or issue arising under the Plan or this Agreement shall be and binding on all persons having an interest in this Stock Award. All capitalized terms used in this Agreement and not otherwise defined in this Agreement shall have the meaning assigned to them in the Plan.

(b) Rights of Stockholders . Prior to the vesting of the Stock Award, and prior to the receipt by the Participant, Participant’s legal representative, or a permissible assignee, of the Vested Shares as provided in this Agreement, neither Participant, Participant’s legal representative nor a permissible assignee of the Stock Award shall be or have any of the rights and privileges of a stockholder of the Company with respect to the Shares issuable to Participant pursuant to the terms of this Agreement. Participant shall not be entitled to receive dividend equivalents on the Stock Award.

(c) No Right to Employment . The grant of this Stock Award shall not be construed as giving Participant the right to be retained in the employ of, or if Participant is a director of the Company or an Affiliate as giving the Participant the right to continue as a director of, the Company or an Affiliate, nor will it affect in any way the right of the Company or an Affiliate to terminate such employment or position at any time, with or without cause. In addition, the Company or an Affiliate may at any time dismiss Participant from employment, or terminate the term of a director of the Company or an Affiliate, free from any liability or any claim under the Plan or this Agreement. Nothing in this Agreement shall confer on any person any legal or equitable right against the Company or any Affiliate, directly or indirectly, or give rise to any cause of action at law or in equity against the Company or an Affiliate. This Stock Award shall not form any part of the wages or salary of Participant for purposes of severance pay or termination indemnities, irrespective of the reason for termination of employment. Under no circumstances shall any person ceasing to be an employee of the Company or any Affiliate be entitled to any compensation for any loss of any right or benefit under this Agreement or the Plan which such employee might otherwise have enjoyed but for termination of employment, whether such compensation is claimed by way of damages for wrongful or unfair dismissal, breach of contract or otherwise. By participating in the Plan, Participant shall be deemed to have accepted all the terms and conditions of the Plan and this Agreement and the terms and conditions of any rules and regulations adopted by the Committee and shall be fully bound thereby.

(d) Governing Law . The validity, construction and effect of the Plan and this Agreement, and any rules and regulations relating to the Plan and this Agreement, shall be determined in accordance with the internal laws, and not the law of conflicts, of the State of Delaware.

(e) Severability . If any provision of the Agreement is or becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction or would disqualify the Agreement under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to applicable laws, or if it cannot be so construed or deemed amended without, in the determination of the Committee, materially altering the purpose or intent of the Plan or the Agreement, such provision shall be stricken as to such jurisdiction or the Agreement, and the remainder of the Agreement shall remain in full force and effect.

(f) No Trust or Fund Created . Neither the Plan nor this Agreement shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the

 

4


Company or any Affiliate and Participant or any other person. To the extent that any Person acquires a right to receive payments from the Company or any Affiliate pursuant to a Stock Award, such right shall be no greater than the right of any unsecured creditor of the Company or any Affiliate.

(g) Headings . Headings are given to the Sections and subsections of this Agreement solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of this Agreement or any provision thereof.

(h) Notices . Any notice required to be given or delivered to the Company under the terms of this Agreement shall be addressed to the Company at its principal corporate offices. Any notice required to be given or delivered to Participant shall be addressed to Participant at the address indicated below Participant’s signature line at the end of this Agreement or at such other address as Participant may designate by ten (10) days’ advance written notice to the Company. Any notice required to be given under this Agreement shall be in writing and shall be deemed effective upon personal delivery or upon the third (3rd) day following deposit in the U.S. mail, registered or certified, postage prepaid and properly addressed to the party entitled to such notice.

(i) Conditions Precedent to Issuance of Vested Shares . Vested Shares shall not be issued pursuant to the Stock Award unless such issuance and delivery of the applicable Vested Shares pursuant hereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, state blue sky laws, the requirements of any applicable Stock Exchange or the Nasdaq Stock Market and the Delaware General Corporation Law. As a condition to the issuance of the Vested Shares, the Company may require that the person receiving such Vested Shares represent and warrant that the Vested Shares are being acquired only for investment and without any present intention to sell or distribute such Vested Shares if, in the opinion of counsel for the Company, such a representation and warranty is required by law.

(j) Withholding . In order to provide the Company with the opportunity to claim the benefit of any income tax deduction which may be available to it in connection with the Stock Award, and in order to comply with all applicable federal or state tax laws or regulations, the Company may take such action as it deems appropriate to insure that, if necessary, all applicable federal or state payroll, withholding, income or other taxes are withheld or collected from Participant.

(k) Consultation With Professional Tax and Investment Advisors . Participant acknowledges that the grant and vesting with respect to this Stock Award, and the sale or other taxable disposition of the Vested Shares, may have tax consequences pursuant to the Internal Revenue Code of 1986, as amended, or under local, state or international tax laws. Participant further acknowledges that Participant is relying solely and exclusively on Participant’s own professional tax and investment advisors with respect to any and all such matters (and is not relying, in any manner, on the Company or any of its employees or representatives). Participant understands and agrees that any and all tax consequences resulting from the Stock Award and its

 

5


grant and vesting, and the sale or other taxable disposition of the Vested Shares, is solely and exclusively the responsibility of Participant without any expectation or understanding that the Company or any of its employees or representatives will pay or reimburse Participant for such taxes or other items.

[SIGNATURE PAGE FOLLOWS]

 

6


IN WITNESS WHEREOF , the Company and Participant have executed this Agreement on the date set forth in the first paragraph.

 

U.S. AUTO PARTS NETWORK, INC.
By:  

 

Name:  

 

Title:  

 

PARTICIPANT:
By:  

 

Name:  

 

Address:  

 

 

Facsimile:  

 

 

7


U.S. AUTO PARTS NETWORK, INC.

STOCK APPRECIATION RIGHTS AGREEMENT

(STOCK SETTLED)

This STOCK APPRECIATION RIGHTS AGREEMENT (this “ Agreement ”), dated as of                      ,          (the “ Effective Date ”), is between U.S. Auto Parts Network, Inc., a Delaware corporation (the “ Company ”), and              , an individual resident of              (“ Participant ”). This Agreement is granted under the U.S. Auto Parts Network, Inc. 2007 Omnibus Incentive Plan (the “ Plan ”) and is subject to the terms of that Plan. This Agreement represents the Company’s unfunded and unsecured promise to issue common stock of the Company, $0.001 par value (“ Shares ”) at a future date based on appreciation in the market value of such Shares from the date of this Agreement, subject to the terms of this Agreement and the Plan.

1. Award . The Company hereby grants Participant stock appreciation rights (the “ SAR ”) with respect to              shares of Common Stock (the “ Award ”). The initial value of the SAR is $              per share (the “ Grant Price ”). The Award represents the right to receive the Shares only when, and with respect to the number of Shares to which, the Award has vested (the “ Vested Shares ”).The Award is subject to the terms and conditions set forth in this Agreement and in the Plan. A copy of the Plan will be furnished upon request of Participant. The SAR shall terminate at the close of business ten (10) years from the Effective Date.

2. Vesting . Subject to the terms and conditions of this Agreement and the Plan, the SAR awarded to Participant pursuant to this Agreement shall vest and may be exercised by Participant with respect to the number of Vested Shares set forth in the following schedule:

 

On or after Each of the Following Dates

  

Percentage of Shares with

Respect to Which the SAR Is

Exercisable

 

3. Exercise of SAR after Death or Termination of Employment or Service . The SAR shall terminate and may no longer be exercised if Participant ceases to be employed by or provide Service to the Company or its Affiliates, except that:

(a) If Participant’s employment or Service shall be terminated for any reason, voluntary or involuntary, other than for “ Misconduct ” (as defined in Section 3(e)) or Participant’s death or Permanent Disability, Participant may at any time within a period of three (3) months after such termination exercise the SAR to the extent the SAR was exercisable by Participant on the date of the termination of Participant’s employment or Service.


(b) If Participant’s employment is terminated for Misconduct, the SAR shall be terminated as of the date of the act giving rise to such termination.

(c) If Participant shall die while the SAR is still exercisable according to its terms, or if employment or Service is terminated because of Participant’s Permanent Disability while in the employ or Service of the Company and Participant shall not have fully exercised the SAR, such SAR may be exercised at any time within twelve (12) months after Participant’s death or date of termination of employment or Service for such Permanent Disability by Participant, personal representatives, administrators or guardians of Participant, as applicable, or by any person or persons to whom the SAR is transferred by will or the applicable laws of descent and distribution, to the extent of the full number of Vested Shares Participant was entitled to purchase under the SAR on (i) the earlier of the date of death or termination of employment or Service or (ii) the date of termination for such Permanent Disability, as applicable.

(d) Notwithstanding the above, in no case may the SAR be exercised to any extent by anyone after the termination date of the SAR.

(e) “ Misconduct ” shall mean (i) the commission of any act of fraud, embezzlement or dishonesty by Participant, (ii) any unauthorized use or disclosure by such person of confidential information or trade secrets of the Company (or of any Affiliate), or (iii) any other intentional misconduct by such person adversely affecting the business or affairs of the Company (or any Affiliate) in a material manner. However, if the term or concept has been defined in an employment agreement between the Company and Participant, then Misconduct shall have the definition set forth in such employment agreement. The foregoing definition shall not in any way preclude or restrict the right of the Company (or any Affiliate) to discharge or dismiss any Participant or other person in the Service of the Company (or any Affiliate) for any other acts or omissions but such other acts or omissions shall not be deemed, for purposes of the Agreement, to constitute grounds for termination for Misconduct.

4. Method of Exercise of SAR .

(a) SARs may be exercised with respect to Vested Shares by delivery to the Company of a written notice which shall state that Participant elects to exercise the SAR as to the number of Vested Shares specified in the notice as of the date specified in the notice.

(b) Subject to deduction as described in Section 4(c) for withholding, upon exercise of the SAR, the Participant shall be entitled to receive a number of Shares (“ Issued Shares ”) for each Vested Share with respect to which the SAR is exercised that is equal to (i) the excess of the Fair Market Value of one Share on the date of exercise, over the Grant Price, divided by (ii) the Fair Market Value of one Share on the date of exercise. The distribution to the Participant, or in the case of the Participant’s death, to the Participant’s legal representative, of Issued Shares shall be evidenced by a stock certificate, appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company, or other appropriate means as determined by the Company. This SAR may be exercised only with respect to full shares and no fractional share of stock shall be issued.

 

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(c) By signing this Agreement, Participant agrees that the Company may withhold from Issued Shares due upon exercise of the SAR, or at its election from the Participant’s wages or other cash compensation, all income tax (including federal, state and local taxes), social insurance, payroll tax or other tax-related withholding (“ Tax Related Items ”) due from the Company or the subsidiary that is the Participant’s actual employer. To the extent that the Company determines that it is not feasible, or not permissible under applicable law, to withhold in Shares, then prior to the issuance of Issued Shares as provided in Section 4(b) above, Participant shall pay, or make adequate arrangements satisfactory to the Company or to the Participant’s actual employer (in their sole discretion) to satisfy all withholding obligations of the Company and/or the Participant’s actual employer. In this regard, Participant authorizes the Company or the Participant’s actual employer to withhold all applicable Tax Related Items legally payable by Participant from Participant’s wages or other cash compensation payable to Participant by the Company or the Participant’s actual employer. Participant shall pay to the Company or to the Participant’s actual employer any amount of Tax Related Items that the Company or the Participant’s actual employer may be required to withhold as a result of Participant’s receipt of the Award, the vesting of the Award, or exercise of the Award that cannot be satisfied by the means previously described. The Company may refuse to deliver Issued Shares to Participant if Participant fails to comply with Participant’s obligation in connection with the Tax Related Items as described herein.

Regardless of any action the Company or the subsidiary of the Company that is Participant’s actual employer takes with respect to any or all Tax Related Items, Participant acknowledges that the ultimate liability for all Tax Related Items legally due by Participant is and remains Participant’s responsibility and that the Company and/or the Participant’s actual employer (i) make no representations or undertakings regarding the treatment of any Tax Related Items in connection with any aspect of the Award, including the grant of the Award, the vesting of Award, or the exercise of the Award; and (ii) do not commit to structure the terms of the grant or any aspect of the Award to reduce or eliminate the Participant’s liability for Tax Related Items.

5. Additional Restrictions on Transfer of SAR . During the lifetime of Participant, the SAR shall be exercisable only by Participant and shall not be sold, assigned, transferred, gifted, pledged, hypothecated, or in any manner encumbered or disposed of at any time prior to delivery of the Issued Shares in accordance with Section 4, other than by will or the laws of descent and distribution.

6. Change in Control .

(a) If this SAR is assumed or otherwise continued in effect in connection with a Change in Control, then this SAR shall be appropriately adjusted, upon such Change in Control, to apply to the number and class of securities which would have been issuable to Participant in consummation of such Change in Control had this SAR been exercised immediately prior to such Change in Control, and appropriate adjustments shall also be made to the Grant Price, provided the aggregate Grant Price shall remain the same. To the extent that the holders of Common Stock receive cash consideration for their Common Stock in consummation of the Change in Control, the successor corporation (or its parent) may, in connection with the assumption of this

 

3


SAR, 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 Company 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.

(c) For purposes of this Agreement, “ Change in Control ” shall mean a change in ownership or control of the Company effected through any of the following transactions: (i) a merger, consolidation or other reorganization unless securities representing more than 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 Company’s outstanding voting securities immediately prior to such transaction; (ii) the sale, transfer or other disposition of all or substantially all of the Company’s assets; or (iii) the acquisition, directly or indirectly by any person or related group of persons (other than the Company or a person that directly or indirectly controls, is controlled by, or is under common control with, the Company), of beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than 50% of the total combined voting power of the Company’s outstanding securities pursuant to a tender or exchange offer made directly to the Company’s stockholders.

7. Capital Adjustments and Reorganization . Should any change be made to the Common Stock by reason of any stock split, reverse stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Company’s receipt of consideration, appropriate adjustments shall be made to (a) the number and/or class of securities subject to this SAR and (b) the Grant Price in order to reflect such change and thereby preclude a dilution or enlargement of benefits hereunder.

8. Miscellaneous .

(a) Entire Agreement; Plan Provisions Control . This Agreement (and any addendum hereto) and the Plan constitute the entire agreement between the parties hereto with regard to the subject matter hereof. In the event that any provision of the Agreement conflicts with or is inconsistent in any respect with the terms of the Plan, the terms of the Plan shall control. All decisions of the Committee with respect to any question or issue arising under the Plan or this Agreement shall be and binding on all persons having an interest in this SAR. All capitalized terms used in this Agreement and not otherwise defined in this Agreement shall have the meaning assigned to them in the Plan.

(b) Rights of Stockholders . Prior to the exercise of the SAR and prior to receipt by the Participant, Participant’s legal representative, or a permissible assignee, of Issued Shares as provided in this Agreement, neither Participant, Participant’s legal representative nor a permissible assignee shall be or have any of the rights and privileges of a stockholder of the Company with respect to this Agreement or the Shares subject to the Award referenced in this Agreement.

 

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(c) No Right to Employment . The grant of the SAR shall not be construed as giving Participant the right to be retained in the employ of, or if Participant is a director of the Company or an Affiliate as giving the Participant the right to continue as a director of, the Company or an Affiliate, nor will it affect in any way the right of the Company or an Affiliate to terminate such employment or position at any time, with or without cause. In addition, the Company or an Affiliate may at any time dismiss Participant from employment, or terminate the term of a director of the Company or an Affiliate, free from any liability or any claim under the Plan or this Agreement. Nothing in this Agreement shall confer on any person any legal or equitable right against the Company or any Affiliate, directly or indirectly, or give rise to any cause of action at law or in equity against the Company or an Affiliate. The SAR granted under this Agreement shall not form any part of the wages or salary of Participant for purposes of severance pay or termination indemnities, irrespective of the reason for termination of employment. Under no circumstances shall any person ceasing to be an employee of the Company or any Affiliate be entitled to any compensation for any loss of any right or benefit under this Agreement or the Plan which such employee might otherwise have enjoyed but for termination of employment, whether such compensation is claimed by way of damages for wrongful or unfair dismissal, breach of contract or otherwise. By participating in the Plan, Participant shall be deemed to have accepted all the terms and conditions of the Plan and this Agreement and the terms and conditions of any rules and regulations adopted by the Committee and shall be fully bound thereby.

(d) Governing Law . The validity, construction and effect of the Plan and this Agreement, and any rules and regulations relating to the Plan and this Agreement, shall be determined in accordance with the internal laws, and not the law of conflicts, of the State of Delaware.

(e) Severability . If any provision of the Agreement is or becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction or would disqualify the Agreement under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to applicable laws, or if it cannot be so construed or deemed amended without, in the determination of the Committee, materially altering the purpose or intent of the Plan or the Agreement, such provision shall be stricken as to such jurisdiction or the Agreement, and the remainder of the Agreement shall remain in full force and effect.

(f) No Trust or Fund Created . Neither the Plan nor this Agreement shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company or any Affiliate and Participant or any other person. To the extent that any Person acquires a right to receive payments from the Company or any Affiliate pursuant to an Award, such right shall be no greater than the right of any unsecured creditor of the Company or any Affiliate.

(g) Headings . Headings are given to the Sections and subsections of the Agreement solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Agreement or any provision thereof.

(h) Notices . Any notice required to be given or delivered to the Company under the terms of this Agreement shall be addressed to the Company at its principal corporate offices.

 

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Any notice required to be given or delivered to Participant shall be addressed to Participant at the address indicated below Participant’s signature line at the end of this Agreement or at such other address as Participant may designate by ten (10) days’ advance written notice to the Company. Any notice required to be given under this Agreement shall be in writing and shall be deemed effective upon personal delivery or upon the third (3rd) day following deposit in the U.S. mail, registered or certified, postage prepaid and properly addressed to the party entitled to such notice.

(i) Conditions Precedent to Issuance of Issued Shares . Issued Shares shall not be issued pursuant to the exercise of the SAR unless such exercise and the issuance and delivery of the applicable Issued Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, state blue sky laws, the requirements of any applicable Stock Exchange or the Nasdaq Stock Market and the Delaware General Corporation Law. As a condition to the exercise of the purchase price relating to the SAR, the Company may require that the person exercising or paying the purchase price represent and warrant that the Issued Shares are being purchased only for investment and without any present intention to sell or distribute such Issued Shares if, in the opinion of counsel for the Company, such a representation and warranty is required by law.

(j) Withholding . In order to provide the Company with the opportunity to claim the benefit of any income tax deduction which may be available to it in connection with the Award, and in order to comply with all applicable federal or state tax laws or regulations, the Company may take such action as it deems appropriate to insure that, if necessary, all applicable federal or state payroll, withholding, income or other taxes are withheld or collected from Participant.

(k) Consultation With Professional Tax and Investment Advisors . Participant acknowledges that the grant, exercise and vesting with respect to this SAR, and the sale or other taxable disposition of the Issued Shares, may have tax consequences pursuant to the Internal Revenue Code of 1986, as amended, or under local, state or international tax laws. Participant further acknowledges that Participant is relying solely and exclusively on Participant’s own professional tax and investment advisors with respect to any and all such matters (and is not relying, in any manner, on the Company or any of its employees or representatives). Participant understands and agrees that any and all tax consequences resulting from the SAR and its grant, exercise and vesting, and the sale or other taxable disposition of the Issued Shares, is solely and exclusively the responsibility of Participant without any expectation or understanding that the Company or any of its employees or representatives will pay or reimburse Participant for such taxes or other items.

[SIGNATURE PAGE FOLLOWS]

 

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IN WITNESS WHEREOF , the Company and Participant have executed this Agreement on the date set forth in the first paragraph.

 

U.S. AUTO PARTS NETWORK, INC.
By:  

 

Name:  

 

Title:  

 

PARTICIPANT:
By:  

 

Name:  

 

Address:  

 

 

Facsimile:  

 

 

7

Exhibit 10.28

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (the “ Agreement  ”) is made effective January 17, 2007 (the “ Effective Date ”) by and among between U.S. Auto Parts Network, Inc., a Delaware corporation (the Company ”) and Michael J. McClane, an individual (the “ Executive ”).

WHEREAS, the parties hereto desire to enter into a written agreement to document the terms of Executive’s employment with the Company, which agreement will replace in its entirety that certain Offer Letter dated September 19, 2005 between Executive and the Company (the “ Offer Letter ”).

 

  1.   Duties and Responsibilities .

A.    Executive shall serve as the Company’s Chief Financial Officer, Executive Vice President, Treasurer and Secretary reporting directly to the Chief Executive Officer. Executive shall have the duties and powers at the Company that are customary for an individual holding such positions.

B.    Executive agrees to use his best efforts to advance the business and welfare of the Company, to render his services under this Agreement faithfully, diligently and to the best of his ability.

C.    Executive shall be based at the Company’s office located at Carson, California, or at such other offices of the Company located within 30 miles of Executive’s residence as of the date hereof.

2.      Offer Letter Superseded; Period of Employment . As of the Effective Date, the Offer Letter shall be cancelled and terminated, and neither the Company nor Executive shall have any further rights or obligations thereunder. Without limiting the foregoing, Executive and the Company agree that the Notice of Grant of Stock Options, and attachments thereto, dated March 1, 2006 and March 28, 2006, together with the cash bonus paid to Executive upon completion of the acquisition of The Partsbin.com, Inc. and its affiliates, fully satisfies the Company’s obligations under Section 4 of the Offer Letter, and that no further payment shall be required upon completion of the Company’s initial public offering or any further financing or acquisition. Following the Effective Date, Executive’s employment with the Company shall be governed by the provisions of this Agreement for the period commencing as of the date hereof and continuing until the earlier of (i) Executive’s termination of employment with the Company for any reason, or (ii) November 28, 2011 (the “ Employment Period ”).

 

  3.   Cash Compensation .

A.      Annual Salary . Executive’s initial base salary shall be $225,000 per year (the “ Annual Salary ”), which shall be payable in accordance with the Company’s standard payroll schedule (but in no event less frequent than on a monthly basis), and may be increased from time to time at the discretion of the Compensation Committee of the Company’s Board of Directors. The Company’s Chief Executive Officer shall review Executive’s Annual Salary at least annually and shall make a recommendation to the Compensation Committee regarding any proposed increase to the Annual Salary. Any increased Annual Salary shall thereupon be the “Annual Salary” for the


purposes hereof. Executive’s Annual Salary shall not be decreased without his prior written consent at any time during the Employment Period.

B.     Bonus . Executive shall be entitled to receive an annual target incentive bonus of $100,000 based upon the Company achieving its revenue and EBITDA goals, and Executive meeting the annual goals determined by the Company’s Chief Executive Officer. Bonuses shall be paid no later than the end of February following the year for which the bonus is being paid.

C.     Applicable Withholdings . The Company shall deduct and withhold from the compensation payable to Executive hereunder any and all applicable Federal, State and local income and employment withholding taxes and any other amounts required to be deducted or withheld by the Company under applicable statutes, regulations, ordinances or orders governing or requiring the withholding or deduction of amounts otherwise payable as compensation or wages to employees.

4.     Equity Compensation . Executive shall be entitled to participate in any equity incentive plans of the Company. All such options or other equity awards will be made at the discretion of the Company’s Compensation Committee of the Board of Directors (with input from the Company’s Chief Executive Officer) pursuant and subject to the terms and conditions of the applicable equity incentive plan, including any provisions for repurchase thereof. The option exercise price or value of any equity award granted to Executive will be established by the Company’s Board of Directors as of the date such interests are granted but shall not be less than the fair market value of the class of equity underlying such award. To the extent the Company grants any additional options or shares of restricted stock to Executive during the Employment Period, then the Company shall in such grant documentation provide that in the event a Change in Control (as defined below) occurs during the Employment Period, and within twelve months following such Change in Control, Executive either (i) is terminated without Cause (as defined herein) or (ii) resigns for Good Reason (as defined herein), then all of Executive’s unvested options or unvested shares shall vest in full. For purposes of this Agreement, “ Change In Control ” shall mean any of the following transactions effecting a change in ownership or control of the Company:

(i)    a merger, consolidation or reorganization approved by the Company’s beneficial holders of securities, 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 Company’s outstanding voting securities immediately prior to such transaction; or

(ii)    any transfer, sale or other disposition of all or substantially all of the Company’s assets; or

(iii)    the acquisition, directly or indirectly by any person or related group of persons (other than the Company or a person that directly or indirectly controls, is controlled by, or is under common control with, the Company), 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 Company’s outstanding securities pursuant to a tender or exchange offer made directly to the Company’s beneficial holders.

 

2


In no event, however, shall a Change in Control be deemed to occur in connection with any public offering of Common Stock, the primary purpose of which is to raise capital and which is not for any specifically identified acquisition, reorganization or merger.

5.     Expense Reimbursement . In addition to the compensation specified in Section 3, Executive shall be entitled to receive reimbursement from the Company for all reasonable business expenses incurred by Executive in the performance of Executive’s duties hereunder, provided that Executive furnishes the Company with vouchers, receipts and other details of such expenses in the form reasonably required by the Company to substantiate a deduction for such business expenses under all applicable rules and regulations of federal and state taxing authorities.

6.     Fringe Benefits .

A.     Group Plans . Executive shall, throughout the Employment Period, be eligible to participate in all of the group term life insurance plans, group health plans, accidental death and dismemberment plans, short-term disability programs, retirement plans, profit sharing plans or other plans (for which Executive qualifies) that are available to the executive officers of the Company. During the Employment Period, the Company will pay for coverage for Executive and the members of his immediate family residing in Executive’s household under the Company’s health plan, and coverage for Executive under the Company’s accidental death and dismemberment plan and for short-term disability. Payment for all other benefit plans will be paid in accordance with the Company’s policy in effect for similar executive positions.

B.     Vacation . Executive shall be entitled to at least four weeks paid vacation per year. Vacation shall accrue pursuant to the Company’s vacation benefit policies.

C .     Auto Allowance. Executive shall be entitled to an auto allowance of $1,250 per month.

7.     Termination of Employment . During the Employment Period, the Executive’s employment with the Company may be terminated by either the Company or Executive at any time, and for any reason. Upon such termination, Executive (or, in the case of Executive’s death, Executive’s estate and beneficiaries) shall have no further rights to any other compensation or benefits from the Company on or after the termination of employment except as follows:

A.     Termination For Cause . In the event the Company terminates Executive’s employment with the Company prior to expiration of the Employment Period for Cause (as defined below), the Company shall pay to Executive the following: (i) Executive’s unpaid Annual Salary and Bonus that has been earned through the termination date of his employment; (ii) Executive’s accrued but unused vacation; (iii) any accrued expenses pursuant to Section 5 above, and (iv) any other payments as may be required under applicable law. For purposes of this Agreement, “ Cause ” shall mean that Executive has engaged in any one of the following: (i) material financial dishonesty involving the Company or its assets, including, without limitation, misappropriation of the Company’s funds or property; (ii) reckless or willful misconduct in the performance of Executive’s duties in the event such conduct continues after the Company has provided 30 days written notice to Executive and a reasonable opportunity to cure; (iii) conviction of, or plea of nolo contendre to, any felony involving dishonesty or fraud; or (iv) the material breach of any provision of this Agreement after 30 days written notice to Executive of such breach and a reasonable opportunity to cure such breach.

 

3


B.     Termination Upon Death or Disability . If Executive dies during the Employment Period, the Executive’s employment with the Company shall be deemed terminated as of the date of death, and the obligations of the Company to or with respect to Executive shall terminate in their entirety upon such date except as otherwise provided under this Section 7B. If Executive becomes Disabled (as defined below), then the Company shall have the right, to the extent permitted by law, to terminate the employment of Executive upon 30 days prior written notice in writing to Executive. Upon termination of employment due to death or Disability, Executive (or Executive’s estate or beneficiaries in the case of the death of Executive) shall be entitled to receive: (i) Executive’s unpaid Annual Salary that has been earned through the termination date of his employment; (ii) Executive’s accrued but unused vacation; (iii) any accrued expenses pursuant to Section 5 above, (iv) Executive’s bonus for the year of termination in accordance with Section 3B above (pro rated up to the termination date), which bonus shall be paid at such time as the Company regularly pays bonuses; (v) any other payments as may be required under applicable law; (vi) continuation of his Annual Salary following such termination for a period of one year, which shall be payable in accordance with the Company’s standard pay schedules; and (vii) in the case of termination due to Disability, the Company shall provide continued coverage for Executive under the Company’s healthcare plans and group insurance policies (to the extent Executive is eligible) or if Executive elects COBRA benefits, the Company shall reimburse Executive’s COBRA payments for Executive’s health insurance benefits for a period of one year. For the purposes of this Agreement, “ Disability ” shall mean a physical or mental impairment which, the Board of Directors determines, after consideration and implementation of reasonable accommodations, precludes the Executive from performing his essential job functions for a period longer than three consecutive months or a total of one hundred twenty (120) days in any twelve month period.

C.     Termination for Any Other Reason; Resignation for Good Reason . Should the Company terminate Executive’s employment other than for Cause or as a result of Executive’s Death of Disability, or in the event Executive resigns for Good Reason (as defined below), then the Company shall pay Executive as follows: (i) Executive’s unpaid Annual Salary that has been earned through the termination date of his employment; (ii) Executive’s accrued but unused vacation; (iii) any accrued expenses pursuant to Section 4 above, (iv) a pro rated share of Executive’s bonus (pro rated up to the termination date), which bonus shall be paid at such time as the Company regularly pays bonuses; (v) any other payments as may be required under applicable law; (vi) continued coverage for Executive and his immediate family under the Company’s healthcare plans and group insurance policies for one year; and (vii) continuation of Executive’s Annual Salary, which shall be payable in accordance with the Company’s standard pay schedules for: (A) a period of six months if Executive is terminated prior to September 18, 2007; or (B) a period of one year if Executive is terminated on or after September 18, 2007. For the purposes of this Agreement, “ Good Reason ” shall mean Executive’s voluntary resignation within one year following: (i) a reduction in the scope of Executive’s duties and responsibilities or the level of management to which he reports; (ii) a reduction in his level of Annual Salary without his prior written consent; (iii) a relocation of Executive more than thirty (30) miles outside of Executive’s residence as of the date hereof; (iv) a material breach of any provision of this Agreement by the Company or (v) the failure of the Company to have a successor entity specifically assume this Agreement.

8.     Non-Competition During the Employment Period . Executive acknowledges and agrees that given the extent and nature of the confidential and proprietary information he will obtain during the course of his employment with the Company, it would be inevitable that such confidential information would be disclosed or utilized by the Executive should he obtain employment from, or otherwise become associated with, an entity or person that is engaged in a business or enterprise that

 

4


directly competes with the Company. Consequently, during any period for which Executive is receiving payments from the Company, either as wages or as a severance benefit , Executive shall not, without prior written consent of the Chief Executive Officer, directly or indirectly own, manage, operate, control or participate in the ownership, management, operation or control of, or be employed by or provide advice to, any enterprise that is engaged in any business directly competitive to that of the Company in the aftermarket auto parts market in the United States.; provided, however, that such restriction shall not apply to any passive investment representing an interest of less than 1% of an outstanding class of publicly-traded securities of any company or other enterprise where Executive does not provide any management, consulting or other services to such company or enterprise.

9 .     Proprietary Information . Executive has executed the Company’s standard Confidential Information and Assignment of Inventions Agreement (the “ Confidentiality Agreement ”), which is hereby incorporated by this reference as if set forth fully herein. Executive’s obligations pursuant to the Confidentiality Agreement will survive termination of Executive’s employment with the Company.

10.     Successors and Assigns . This Agreement is personal in its nature and the Executive shall not assign or transfer his rights under this Agreement. The provisions of this Agreement shall inure to the benefit of, and shall be binding on, each successor of the Company whether by merger, consolidation, transfer of all or substantially all assets, or otherwise, and the heirs and legal representatives of Executive.

11.     Notices . Any notices, demands or other communications required or desired to be given by any party shall be in writing and shall be validly given to another party if served either personally or via overnight delivery service such as Federal Express, postage prepaid, return receipt requested. If such notice, demand or other communication shall be served personally, service shall be conclusively deemed made at the time of such personal service. If such notice, demand or other communication is given by overnight delivery, such notice shall be conclusively deemed given two business days after the deposit thereof addressed to the party to whom such notice, demand or other communication is to be given as hereinafter set forth:

 

To the Company:        

  

U.S. Auto Parts Network, Inc.

17150 South Margay Avenue

Carson, California 90746

Attn: Chief Executive Officer

With a copy to:

  

Dorsey & Whitney LLP

38 Technology Drive

Irvine, California 92618

Attn: Ellen S. Bancroft, Esq.

To Executive:

  

At Executive’s last residence as

provided by Executive to the

Company for payroll records.

Any party may change such party’s address for the purpose of receiving notices, demands and other communications by providing written notice to the other party in the manner described in this Section 11.

 

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12.     Governing Documents . This Agreement, along with the documents expressly referenced in this Agreement, constitute the entire agreement and understanding of the Company and Executive with respect to the terms and conditions of Executive’s employment with the Company and the payment of severance benefits, and supersedes all prior and contemporaneous written or verbal agreements and understandings (including the Offer Letter) between Executive and the Company relating to such subject matter. This Agreement may only be amended by written instrument signed by Executive and an authorized officer of the Company. Any and all prior agreements, understandings or representations relating to the Executive’s employment with the Company are terminated and cancelled in their entirety and are of no further force or effect.

13.     Governing Law . The provisions of this letter agreement will be construed and interpreted under the laws of the State of California. If any provision of this Agreement as applied to any party or to any circumstance should be adjudged by a court of competent jurisdiction to be void or unenforceable for any reason, the invalidity of that provision shall in no way affect (to the maximum extent permissible by law) the application of such provision under circumstances different from those adjudicated by the court, the application of any other provision of this Agreement, or the enforceability or invalidity of this Agreement as a whole. Should any provision of this Agreement become or be deemed invalid, illegal or unenforceable in any jurisdiction by reason of the scope, extent or duration of its coverage, then such provision shall be deemed amended to the extent necessary to conform to applicable law so as to be valid and enforceable or, if such provision cannot be so amended without materially altering the intention of the parties, then such provision will be stricken and the remainder of this Agreement shall continue in full force and effect.

14.     Remedies . All rights and remedies provided pursuant to this Agreement or by law shall be cumulative, and no such right or remedy shall be exclusive of any other. A party may pursue any one or more rights or remedies hereunder, or may seek damages or specific performance in the event of another party’s breach hereunder, or may pursue any other remedy by law or equity, whether or not stated in this Agreement.

15.     No Waiver . The waiver by either party of a breach of any provision of this Agreement shall not operate as, or be construed as, a waiver of any later breach of that provision.

16.     Counterparts . This Agreement may be executed in more than one counterpart, each of which shall be deemed an original, but all of which together shall constitute but one and the same instrument.

 

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.

 

U.S. AUTO PARTS NETWORK, INC.

 

By:

 

                /S/ MEHRAN NIA

Print Name:

 

                Mehran Nia

Title:

 

                Chief Executive Officer

Address:

 

                17150 South Margay Avenue

 

                Carson, CA 90746

 

/S/ MICHAEL MCCLANE

MICHAEL McCLANE, Executive

 

7

Exhibit 10.30

Private & Confidential

November 13, 2006

 

Mr. Howard Tong

____________________
____________________

 

  Re: Offer of Employment

Dear Howard:

On behalf of U.S. Auto Parts Network, Inc. (“USAP” or the “Company”), I am delighted to extend to you this offer of full-time employment with USAP in the position of Chief Operating Officer. You will be based out of our Corporate Office in Carson, California and will report to the Chief Executive Officer.

I. Compensation – Salary and Bonuses

As a full-time employee in the position of Chief Operating Officer, your annual compensation will be comprised of an annualized base salary of $220,000.00. You will also be eligible to receive an annual discretionary incentive bonus of up to $100,000. All bonus programs are intended to reward contribution to USAP’s performance over the entire fiscal year, and consequently are earned and will be paid only if you are employed and in good standing at the time of bonus payments, which payments shall be made within 90 days of the close of the fiscal year. Bonus determinations will be made at USAP’s sole discretion.

Contingent on approval of our recommendation by the Company’s Board of Directors or Compensation Committee, you will receive a non-qualified stock option to purchase 450,000 shares of the Company’s Common Stock. The grant date and option exercise price will be established on the date the Board of Directors or Compensation Committee grant the options to you pursuant to the Company’s Stock Option Plan. Your option grant will be subject to the terms of the Company’s stock option plan in effect as of the grant date and the related stock option agreements which provide, among other things, for vesting over four years, with the initial 25% of the shares vesting on the first anniversary of your date of employment with the company and the balance vesting in thirty-six equal monthly installments thereafter, as well as certain restrictions on transfer. These options will be subject to a Change in Control Agreement which shall vest your unvested options should you be terminated without Cause within six (6) months of a change in control.

II. Benefits

You shall be eligible to participate in all of the employee benefits and benefit plans that USAP generally makes available to its full-time executive employees in accordance with the


Mr. Howard Tong

November 13, 2006

Page 2

terms and conditions of such benefits and benefit plans, including group life insurance, group medical insurance, and a Section 401(k) Plan. At your election, you may decline to participate in the Company’s coverage and choose to continue your existing medical coverage and the Company will reimburse you up to $1,000.00 per month of premiums paid for such policy. Detailed information about the benefits presently available will be provided to you on your first day of employment. You will also receive an automobile allowance of $850.00 per month.

III. “At-Will” Employment

Employment with USAP is “at-will.” This means that it is not for any specified period of time and can be terminated by you or by USAP at any time, with or without advance notice, and for any or no particular reason or cause. It also means that your job duties, title, and responsibility and reporting level, compensation, and benefits, as well as USAP’s personnel policies and procedures, may be changed with or without notice at any time in the sole discretion of USAP. This “at-will” nature of your employment shall remain unchanged during your tenure as an employee and may not be changed, except in an express writing signed by you and by USAP’s Chief Executive Officer. Any termination of your employment is, however, subject to the severance provisions listed below.

IV. Severance

In the event your employment is terminated by the Company for Cause, you shall be entitled to no severance pay. In the event that you are terminated without Cause and execute a general release of all known and unknown claims against the Company, you shall be paid salary continuation for a period of (i) six (6) months if you are terminated within the first two years of service, or (ii) twelve (12) months if you are terminated after two years of service. For purposes of this paragraph “Cause” shall mean a reasonable belief by the Board that you (i) have committed a willful misconduct in the performance of your job duties, or (ii) have been convicted of, or pleaded nolo contendere to any felony.

V. Full-Time Service To USAP/Proprietary Information

USAP requires that as a full-time employee you devote your full business time, attention, skills, and efforts to the tasks and duties of your position as assigned by USAP. We also require that you refrain from conduct that creates a conflict of interest between your own (or a family member’s) interests and the interests of USAP as more fully outlined in our Employee Handbook and any Code of Ethics that may be adopted by USAP from time to time.

USAP also respects the proprietary information of other companies. We ask that you give adequate notice to your current employer, cooperate in a smooth transition and allow your current employer to confirm that you have returned all proprietary information to it and have not


Mr. Howard Tong

November 13, 2006

Page 3

kept any copies. You should take great care to return all property of prior employers. If you accept employment, you may not bring onto our premises or use in any manner any confidential or proprietary information developed, used, or disclosed to you while you were employed by some other company or entity. You will also be required to certify that you do not have any such information. This means you should not keep, even at home or on a personal computer, copies of anything which belongs to your prior employer(s). If you leave USAP, we will similarly require you to return all USAP proprietary information to us. Finally, you should not solicit employees or customers of your prior employer. If you find yourself in contact with an employee or customer of your prior employer, please notify the undersigned immediately so that we can take steps to insure that your contact is appropriate and does not involve the use of confidential information of others. If you have any questions about these requirements, please contact me immediately.

You will be designated as an officer under the Company’s Directors and Officers Insurance Policy and will receive the broadest indemnification agreement applicable to any officer of the Company.

VI. Conditions

This offer, and any employment pursuant to this offer, is conditioned upon the following:

 

    As required by law, your ability to provide satisfactory documentary proof of your identity and right to work in the United States of America no later than the third day after you commence working for USAP. Enclosed is a list of acceptable INS Form I-9 documentation.

 

    Your signed agreement to, and ongoing compliance with, the terms of the attached Proprietary Information and Inventions Assignment Agreement without modification. This is a very important document and we have included an extra copy for your files.

VII. Entire Agreement

If you accept this offer, this letter and the written agreements referenced in this letter shall constitute the complete agreement between you and USAP with respect to the initial terms and conditions of your employment. Any representations not contained in this letter, or contrary to those contained in this letter (whether written or oral), that may have been made to you are expressly cancelled and superceded by this offer. Except as otherwise specified in this letter, the terms and conditions of your employment pursuant to this letter may not be changed, except by a writing signed by the Chief Executive Officer.


Mr. Howard Tong

November 13, 2006

Page 4

We have many policies that provide all employees an informal means of resolving any problems that may arise during employment. Please read these policies and use the complaint procedures should you or anyone reporting to you believe there are violations of our policies or issues that need to be resolved.


Mr. Howard Tong

November 13, 2006

Page 5

VIII. Acceptance of Employment

Upon your acceptance of this offer of employment, please acknowledge your agreement with the terms set forth in this offer letter by signing in the designated space below. This offer will be rescinded if you have not responded by November 20, 2006.

The entire team and I look forward to you joining us! If you have any questions, please do not hesitate to call me.

Sincerely,

 

U.S. AUTOPARTS NETWORK, INC.
  /s/ Michael McClane
By:   Michael McClane
  Chief Financial Officer

I A GREE T O T HE T ERMS O F T HIS L ETTER A ND A TTACHMENTS

 

/s/ Howard Tong

    

11-13-2006

Howard Tong      Date

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 (except Note 13, as to which the date is January 10, 2007), in Amendment No. 3 to the Registration Statement (Form S-1 No. 333-138379) and related Prospectus of U.S. Auto Parts Network, Inc., to be filed on or about January 22, 2007.

/s/ Ernst & Young LLP

Los Angeles, California

January 19, 2007

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 Amendment No. 3 to the Registration Statement (Form S-1 No. 333-138379) and the related Prospectus of U.S. Auto Parts Network, Inc., to be filed on or about January 22, 2007.

/s/ Stonefield Josephson, Inc.

Los Angeles, California

January 19, 2007

Exhibit 23.3

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

We consent to the inclusion in this Amendment No. 3 to the 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

January 19, 2007