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Buy Com Inc – IPO: ‘424B4’ on 2/8/00

On: Tuesday, 2/8/00 · Accession #: 1017062-0-145 · File #: 333-89737

  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 2/08/00  Buy Com Inc                       424B4                  1:446K                                   Donnelley R R & S… 11/FA

Initial Public Offering (IPO): Prospectus — Rule 424(b)(4)
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 424B4       Final Prospectus for Buy.Com                         137    691K

Document Table of Contents

Page	(sequential)	\|	(alphabetic)	Top
			Alternative Formats (Word, et al.) Acquisition of BuyGolf.com Amortization of deferred compensation Anti-Takeover Provisions Balance Sheets Business Capitalization Charge for warrants Consolidated Balance Sheets Consolidated Statements of Cash Flows Consolidated Statements of Operations Consolidated Statements of Stockholders' Equity (Deficit) Cost of goods sold Description of Capital Stock Dilution Dividend Policy Employee Benefit Plans Executive Compensation Experts Forward-Looking Statements Index to Financial Statements International Operations Legal Matters Legal Proceedings Liquidity and Capital Resources Management Management's Discussion and Analysis of Financial Condition and Results of Operations Net loss Net revenues Notes to Consolidated Financial Statements Notes to Financial Statements Offering, The Option Grants in Last Fiscal Year Principal Stockholders Prospectus Summary Related Party Transactions Risk Factors Selected Consolidated Financial Data Selected Unaudited Pro Forma Condensed Combined Financial Information Shares Eligible for Future Sale Special Executive Stock Option Plan Statements of Cash Flows Statements of Operations Statements of Operations and Accumulated Deficit Statements of Stockholders' Equity The Offering Transactions with Scott Blum and His Immediate Family UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS Basis of Presentation Underwriting Use of Proceeds Where You Can Find More Information 1998 Stock Option/Stock Issuance Plan 1999 Stock Plans
1	1st Page - Filing Submission
5	Prospectus Summary
7	The Offering
10	Risk Factors
23	Forward-Looking Statements
24	Use of Proceeds
"	Dividend Policy
25	Capitalization
26	Dilution
27	Selected Consolidated Financial Data
28	Selected Unaudited Pro Forma Condensed Combined Financial Information
31	Management's Discussion and Analysis of Financial Condition and Results of Operations
33	Net revenues
34	Cost of goods sold
35	Amortization of deferred compensation
"	Charge for warrants
"	Net loss
37	Liquidity and Capital Resources
40	Business
47	Acquisition of BuyGolf.com
"	International Operations
55	Legal Proceedings
56	Management
60	Executive Compensation
61	Option Grants in Last Fiscal Year
62	Employee Benefit Plans
"	1998 Stock Option/Stock Issuance Plan
63	Special Executive Stock Option Plan
64	1999 Stock Plans
70	Related Party Transactions
71	Transactions with Scott Blum and His Immediate Family
74	Principal Stockholders
76	Description of Capital Stock
77	Anti-Takeover Provisions
80	Shares Eligible for Future Sale
82	Underwriting
85	Legal Matters
"	Experts
"	Where You Can Find More Information
86	Index to Financial Statements
88	Consolidated Balance Sheets
89	Consolidated Statements of Operations
90	Consolidated Statements of Stockholders' Equity (Deficit)
91	Consolidated Statements of Cash Flows
93	Notes to Consolidated Financial Statements
112	Balance Sheets
113	Statements of Operations
114	Statements of Stockholders' Equity
115	Statements of Cash Flows
116	Notes to Financial Statements
126	Statements of Operations and Accumulated Deficit
133	UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS Basis of Presentation

424B4 1st Page of 137 TOC ↑Top Previous Next ↓Bottom Just 1st
FILED PURSUANT TO RULE 424(b)(4)
REGISTRATION NUMBER 333-89737

PROSPECTUS
----------
14,000,000 Shares

[LOGO OF BUY.COM APPEARS HERE]

Common Stock

-----------------

This is BUY.COM INC.'s initial public offering of common stock.

Currently, no public market exists for our stock. The common stock has
been approved for quotation on the Nasdaq National Market under the symbol
"BUYX."

Investing in the common stock involves risks which are described in the
"Risk Factors" section beginning on page 6 of this prospectus.

----------------

[Download Table]

Per Share Total
--------- -----

Public offering price........................... $13.00 $182,000,000
Underwriting discount........................... $.91 $12,740,000
Proceeds, before expenses, to BUY.COM........... $12.09 $169,260,000

The underwriters may also purchase up to an additional 2,100,000 shares
of common stock at the public offering price, less the underwriting discount,
within 30 days from the date of this prospectus to cover over-allotments.

At our request, the underwriters have reserved up to 10% of the shares
of our common stock offered by this prospectus for sale, at the initial public
offering price, to some of our employees, officers, directors, distributors,
dealers, business associates and related persons. The number of shares of
common stock for sale to the general public in this offering will be reduced to
the extent those persons purchase the reserved shares.

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.

The shares of common stock will be ready for delivery on or about
February 11, 2000.

----------------

Merrill Lynch & Co.
Bear, Stearns & Co. Inc.
Chase H&Q
U.S. Bancorp Piper Jaffray

----------------

The date of this prospectus is February 7, 2000.

424B4 2nd Page of 137 TOC 1st Previous Next ↓Bottom Just 2nd
Inside Front Cover of Prospectus
1. Flap (outside)
B. Annotations:
a. "buy.com"
b. 4,700,000 unique visitors (Media Metrix - 11/99)
c. 1,900,000 customers (as of 12/99)
d. 850,000 stock keeping units
e. 29,000 computer items
f. 14,000 daily orders (avg. 10/99 - 12/99)
g. 24 hours a day
h. 9 online specialty stores
i. 0 warehouses
j. buy better buy.com

424B4 3rd Page of 137 TOC 1st Previous Next ↓Bottom Just 3rd
2. Flap (inside gatefold)
A. Graphics: A screen shot of BUY.COM's home page and a screen shot
of the home page of the computer store.
B. Annotations for graphics:
a. "buy.com"
b. "Nine online specialty stores" Just one click away. Shoppers
can search by keyword within each store.
c. "Daily product specials" buy.com offers daily product
"give aways" to attract customers and capture user interest,
while featuring significant corporate sponsorships from
companies such as VISA.
d. "Superior customer service" Returning customers are greeted
by name and exposed to buy.com's value proposition: low
prices, secure online shopping, and superior customer
service.
e. "Attractive advertising vehicle" As these "Trigger Buttons"
illustrate, buy.com provides an easy and attractive vehicle
for advertisers seeking to reach shoppers who spend
relatively large amounts online.
f. "Over 29,000 computer items" With easy to navigate category
keys, customers can move easily throughout the buy.com store
to select from among a broad selection of computer hardware
products. All items from each of the nine specialty stores
can be bundled in one online shopping basket for easy
purchase and delivery.
g. "Featured product spotlights" Shoppers get a quick snapshot
of the product and a fast link to further information and
the checkout page.
h. "Store within a store" One example of a premium
merchandising and advertising opportunity: clicking on this
IBM product will take the customer directly to an IBM
"store within a store" featuring an extensive selection of
branded merchandise and product information.
i. "buy better buy.com"

C. Annotation in the footer:

"This prospectus contains product names, trade names, service marks
and trademarks of BUY.COM and other organizations, all of which are
the property of their respective owners. In addition, the prices
and product information contained in the screen shots of our web
pages are provided for illustrative purposes only and are not
necessarily effective or representative of current products or
prices."

424B4 4th Page of 137 TOC 1st Previous Next ↓Bottom Just 4th
TABLE OF CONTENTS

[Download Table]

Page
----

Prospectus Summary....................................................... 1
Risk Factors............................................................. 6
Forward-Looking Statements............................................... 19
Use of Proceeds.......................................................... 20
Dividend Policy.......................................................... 20
Capitalization........................................................... 21
Dilution................................................................. 22
Selected Consolidated Financial Data..................................... 23
Selected Unaudited Pro Forma Condensed Combined Financial Information.... 24
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 27
Business................................................................. 36
Management............................................................... 52
Related Party Transactions............................................... 66
Principal Stockholders................................................... 70
Description of Capital Stock............................................. 72
Shares Eligible for Future Sale.......................................... 76
Underwriting............................................................. 78
Legal Matters............................................................ 81
Experts.................................................................. 81
Where You Can Find More Information...................................... 81
Index to Financial Statements............................................ F-1

----------------

You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate as of the date on the
front cover of this prospectus only. Our business, financial condition, results
of operations and prospects may have changed since that date.

424B4 5th Page of 137 TOC 1st Previous Next ↓Bottom Just 5th
PROSPECTUS SUMMARY

This summary may not contain all the information that may be important to
you. You should read the entire prospectus, including the consolidated
financial statements and related notes, before making an investment decision.

BUY.COM INC.

BUY.COM is a leading multi-category Internet superstore based on our net
revenues and the amount of traffic to our Web site. We offer a comprehensive
selection of brand name computer hardware and peripherals, software, books,
videos, DVDs, computer games, music, clearance equipment, golf-related products
and consumer electronics at everyday low prices. Through our nine online
specialty stores, we offer more than 850,000 products identified as separate
stock keeping units or SKUs, using a convenient, easy-to-use shopping interface
that features extensive product information and multi-media presentations. Our
e-commerce portal, www.buy.com, links our nine specialty stores and is designed
to enhance the customer's online shopping experience 24 hours a day, seven days
a week. Our business model includes outsourcing the majority of our operating
infrastructure, such as distribution and fulfillment functions, customer
service and support, credit card processing, and the hosting of our system
infrastructure and database servers. We believe these outsourcing arrangements
provide us with a variety of benefits including cost efficiencies, operating
flexibility and enhanced scalability. By taking advantage of these benefits, we
believe we are able to offer a broader selection of products at lower prices
and operate with significantly lower operating expenses than many of our
competitors. This operating model also allows us to add new product categories
easily and rapidly, minimizes our capital investments and eliminates the costs
and risks of carrying inventory.

Since inception, we have sold our products to more than 1.9 million
customers, of which 616,000 were added during the fourth quarter of 1999.
According to a BUY.COM sponsored survey conducted by Message Media, our
customers are primarily between 18 and 35 years old, and 80% of our customers
visit our stores at least once a week. Additionally, according to this survey,
76% of our customers are college educated and 33% have annual household incomes
in excess of $75,000. During September 1999, approximately 48% of our orders
and over 55% of our total booked revenues came from repeat customers. Media
Metrix estimates that approximately 4.7 million unique visitors came to our
site in November 1999, representing a 129% increase over the estimated 2.1
million unique visitors to our site in October 1999. "Unique visitor" is an
industry term used to describe an individual who has visited a particular
Internet site once or more during a specific period of time. Our net revenues
have increased to $596.8 million for the year ended December 31, 1999 from
$125.3 million for the year ended December 31, 1998. This rapid growth in net
revenues has enabled us to become one of the top five e-commerce providers
according to a number of industry studies. We also incurred net losses of
$17.8 million for the year ended December 31, 1998 and $130.2 million for the
year ended December 31, 1999.

The Internet provides online retailers essentially unlimited shelf space
without significant capital investments, allowing them to quickly build large
global customer bases and to potentially achieve superior economic returns over
the long-term. In addition, the Internet has emerged as a unique advertising
medium that provides advertisers with a cost-effective means of targeting
specific customer groups, interacting with and receiving feedback from
customers and measuring the effectiveness of specific advertising campaigns.
Online advertising also provides advertisers a unique opportunity to use a
variety of advertisements and provide substantial product information. We
believe that the high level of traffic on our site, coupled with the favorable
demographics and purchasing behavior of our customers, will enable us to expand
our advertising revenues to complement our product sales. However, a number of
factors may affect our ability to increase our advertising revenues, including
uncertainty as to market acceptance of Internet advertising and increasing
competition for available advertising revenue.

424B4 6th Page of 137 TOC 1st Previous Next ↓Bottom Just 6th
Our objective is to become the leading e-commerce destination, offering a
broad selection of brand name products and services to consumers and small
businesses at everyday low prices, backed by superior customer service. Our top
priorities include offering superior customer service and improving our
communications with customers. We also plan to continue to work with our
distribution and fulfillment providers to obtain more timely and accurate
product information, shipping and fulfillment. We intend to use our recognized
brand name, BUY.COM, and strong market position in online computer hardware
sales to expand our product offerings to include the most popular product
categories on the Internet, encouraging one-stop shopping for multiple products
and repeat purchases. We intend to expand our offerings through internal
growth, as well as by establishing additional strategic relationships with
leading companies, similar to our joint venture with United Air Lines, Inc.
Through this joint venture, of which we own 50%, we are creating an online
travel service that will offer a full range of airline tickets, automobile
rentals and hotel reservations as well as other travel related services. A
number of factors may affect our ability to implement these strategies,
including the rapidly evolving nature of the e-commerce market, the acceptance
of the Internet as a commerce medium, the significant competition we face in
the e-commerce market and our ability to manage our recent growth.

Our business strategy initially focused on using extremely low prices on a
broad range of products to drive traffic to our site. As customer loyalty and
recognition of our brand name have increased, we have begun to modify our
pricing and merchandising strategy to offer a select group of aggressively
priced, high volume products, while promoting associated higher margin
products. We have added higher margin products to our stores and have also
started to raise prices on many of our products. Since the second quarter of
1999, we have increased our product margins without experiencing a decline in
the growth of overall sales volumes or customer levels. We intend to further
refine this pricing structure over time. However, we cannot assure you that
increases in our product margins will not cause a decrease in traffic to our
Web site, reduce product revenues and make our Web site less attractive to
advertisers.

We are expanding our business into international markets both independently
and through joint ventures with third parties that will provide expertise in
local markets and financial resources to the joint ventures. We began selling
computer hardware and software products in Canada in December 1999. We expect
to begin operations in the United Kingdom in the first quarter of 2000 through
a joint venture with SOFTBANK America, Inc. and a News Corporation affiliate.
In addition, we entered into a binding letter of intent with SOFTBANK America,
Inc. and several of its affiliates and a News Corporation affiliate to form
international joint ventures in Australia, New Zealand and India. We also have
binding letters of intent to form international joint ventures with several
SOFTBANK affiliates in other international territories. Each of the joint
ventures will hire its own management and other personnel and will establish
relationships with local distribution providers for product categories suited
for the particular territory. However, we cannot assure you that we will be
successful in our efforts to expand internationally and a number of factors may
affect our ability to do so, including our ability to staff and manage foreign
operations, tariffs and other trade barriers, and our ability to adapt to
foreign regulatory requirements affecting e-commerce.

In October 1999, we completed the private placement of our Series B
convertible participating preferred stock to a group of investors led by
SOFTBANK Capital Partners, L.P. and its affiliates for approximately
$90.0 million. These investors also purchased common stock for approximately
$75.0 million from a trust controlled by our founder and from two other
stockholders.

BUY.COM was formed as a California limited liability company in June 1997
under the name BuyComp LLC and was incorporated in Delaware as Buy Corp. in
August 1998. In November 1998, we changed our name to BUY.COM INC. Our
executive offices are located at 85 Enterprise, Aliso Viejo, California 92656,
and our telephone number is (949) 389-2000. Our primary Web site is located at
www.buy.com. Information contained on our Web site does not constitute part of
this prospectus.

424B4 7th Page of 137 TOC 1st Previous Next ↓Bottom Just 7th
The Offering

[Enlarge/Download Table]

Common stock offered by BUY.COM.................. 14,000,000 shares

Common stock to be outstanding after this
offering........................................ 129,140,175 shares

Use of proceeds.................................. For repaying indebtedness and for
working capital and other general
corporate purposes, including
developing our infrastructure to
support growth, sales and marketing
activities, and for acquiring and
developing complementary businesses,
technologies and strategic
relationships.

Nasdaq National Market symbol.................... BUYX

The number of shares of common stock outstanding after this offering is
based on 115,140,175 shares outstanding as of December 31, 1999, and does not
include 22,324,104 shares of common stock issuable upon the exercise of options
outstanding as of December 31, 1999 at a weighted average exercise price of
$4.46 per share, or warrants to purchase approximately 1,926,923 shares of
common stock, at a weighted average exercise price of $13.67 per share.

424B4 8th Page of 137 TOC 1st Previous Next ↓Bottom Just 8th
Summary Consolidated Financial Data
(amounts in thousands, except share and per share data)

The pro forma combined consolidated statement of operations data for the
year ended December 31, 1999 shows our pro forma results of operations as if
the acquisition of BuyGolf.com had occurred on December 1, 1998, the date
BuyGolf.com commenced its business operations, and the pro forma effect of the
PGA TOUR agreement as if it was entered into effective January 1, 1999. The pro
forma basic and diluted weighted average shares outstanding gives effect to the
issuance of common stock for the acquisition of BuyGolf.com and the PGA TOUR
sponsorship agreement as though they had occurred on January 1, 1999, and gives
effect to the conversion of all of our Series A and B convertible participating
preferred stock into shares of common stock as if all shares were outstanding
and converted on January 1, 1999.

[Download Table]

Pro Forma
June 7, 1997 Combined
(Inception) to Year Ended Year Ended Year Ended
December 31, December 31, December 31, December
1997 1998 1999 31, 1999
-------------- ------------ ------------ -----------
(unaudited)

Consolidated Statement
of Operations Data:
Net revenues............ $ 878 $ 125,290 $ 596,848 $ 597,833
Gross profit (loss)..... 46 1,763 (6,847) (6,745)
Operating loss.......... (381) (18,039) (129,022) (144,689)
Net loss................ (390) (17,844) (130,168) (145,829)
Net loss per share:
Basic and diluted..... $ (0.00) $ (0.22) $ (1.45) $ (1.27)
Weighted average shares
used in computing net
loss per share:
Basic and diluted..... 81,331,078 81,815,869 89,597,782 114,719,108

[Enlarge/Download Table]

Three Months Ended
-----------------------------------------------------------
Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1998 1998 1999 1999 1999 1999
--------- -------- -------- -------- --------- --------
(unaudited)

Quarterly Statement of
Operations Data:
Net revenues........... $34,985 $ 61,529 $107,932 $129,280 $158,960 $200,676
Gross profit (loss).... 837 (832) (183) (4,937) (134) (1,593)
Operating loss......... (3,031) (13,354) (19,383) (28,060) (32,434) (49,145)
Net loss............... (3,008) (13,181) (19,252) (28,091) (33,184) (49,641)

[Download Table]

December 31, 1999
--------------------
Pro Forma
Actual As Adjusted
------- -----------
(unaudited)

Consolidated Balance Sheet Data:
Cash ..................................................... $24,693 $166,693
Working capital (deficit)................................. (20,473) 120,727
Total assets.............................................. 119,708 260,908
Long-term debt, net of current portion.................... 1,738 1,738
Total stockholders' equity................................ 23,048 164,248

424B4 9th Page of 137 TOC 1st Previous Next ↓Bottom Just 9th
Our pro forma as adjusted balance sheet data gives effect to the application
of the estimated net proceeds from the sale of the 14,000,000 shares offered by
this prospectus.
--------
Unless otherwise indicated, all information in this prospectus gives effect
to the 15-for-1 stock split effected in July 1999 and a 5-for-8 reverse stock
split effected in January 2000 and assumes that:

. all outstanding shares of Series A convertible participating preferred
stock will be converted into an aggregate of 12,175,706 shares of our
common stock upon consummation of this offering;
. each share of Series B convertible participating preferred stock will be
converted into one share of our common stock, or an aggregate of
9,923,276 shares of common stock, upon the consummation of this offering;
and
. the underwriters will not exercise their over-allotment option and no
other person will exercise any other outstanding options or warrants.

424B4 10th Page of 137 TOC 1st Previous Next ↓Bottom Just 10th
RISK FACTORS

You should consider carefully the following risks before you decide to buy
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.

Ingram Micro's failure to supply and fulfill our computer hardware and software
products could reduce our revenues and harm our business

We depend on Ingram Micro, Inc. to provide all of our computer hardware and
software products and to fulfill our customers' orders. To date, a substantial
majority of our product sales revenues has been derived from computer hardware
and software products acquired from Ingram Micro. We cannot guarantee that
Ingram Micro will continue to supply a sufficient quantity of inventory on a
timely basis to satisfy our order requirements. If Ingram Micro were to
terminate or refuse to renew our distribution arrangement with them, we would
have to purchase our computer hardware and software products from other
distributors. In addition, in the event we do not purchase at least $350.0
million of products from Ingram Micro, our current pricing schedules could be
revised. Ingram Micro's termination of or failure to renew our contract could
cause significant delays in our ability to fulfill our customers' orders, and
we may not be able to locate another distributor that can provide comparable
fulfillment, processing and shipping services in a timely manner, on acceptable
commercial terms, if at all. Our distribution agreement with Ingram Micro
terminates in March 2000.

We are also subject to risks associated with Ingram Micro's ability to
replenish its inventory in a timely manner. To the extent Ingram Micro
maintains computer hardware and software products in-stock, we have an
obligation to purchase these items exclusively from them. Due to this
purchasing arrangement, our customers' orders could be significantly delayed if
we need to seek other distributors to fulfill our customers' orders. Our
distribution agreement with Ingram Micro does 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. Furthermore, some vendors may decide, for
reasons outside our control, not to offer particular products for sale on the
Internet. These vendors may also cause Ingram Micro not to sell products to us.
Ingram Micro's delay or inability to supply our orders would substantially harm
our business.

Our future success also depends on our ability to provide timely and
accurate order fulfillment. We depend on Ingram Micro to process and ship
substantially all of the computer hardware and software products that we sell
to our customers. However, we have limited control over their shipping and
processing procedures. Ingram Micro's systems and operations are vulnerable to
damage or interruption from fire, flood, power loss, telecommunications
failure, physical and electronic break-ins, earthquakes and similar events. We
do not carry sufficient business interruption insurance to compensate us for
any losses that could occur as a result of Ingram Micro's inability to perform
for any reason.

We are dependent on several third party providers to fulfill a number of our
retail functions. If these parties are unwilling or unable to continue
providing services to us, our business could be seriously harmed

We are currently dependent on our distribution and fulfillment providers to
manage inventory, process orders and distribute products to our customers in a
timely manner. In addition to our contract with Ingram Micro for computer
hardware and software products, we have supply and distribution contracts with
Ingram Entertainment Inc. for videos, DVDs, games and the purchase and
fulfillment of our consumer electronics products, Nashville Computer
Liquidators L.P. for our clearance products and Valley Media, Inc. for music
products. We do not have any long-term agreements with any of these third
parties. We purchase all of our books from the Ingram Book Company, which are
shipped and processed by Ingram Fulfillment Services, Inc. and we use Las Vegas
Golf & Tennis, Inc. as the primary source for the golf equipment and
accessories that we sell. If we do not maintain our existing relationships with
these providers on acceptable commercial terms,

424B4 11th Page of 137 TOC 1st Previous Next ↓Bottom Just 11th
we may not be able to continue to offer a broad selection of merchandise at low
prices, and customers may refuse to shop at our online store. In addition,
manufacturers may decide, for reasons outside our control, not to offer
particular products for sale on the Internet. For example, in February 1999,
Compaq Computer Corp. temporarily suspended its authorization of Internet
resellers to sell Compaq products. Other manufacturers, including Dell Computer
Corp., have chosen not to authorize any Internet resellers. If we are unable to
supply products to our customers, or if other product manufacturers refuse to
allow their products to be sold via the Internet, our business would suffer
severely.

We rely on our distributors to fulfill a number of traditional retail
functions, including maintaining inventory and preparing merchandise for
shipment to individual customers. In the future, our vendors may not be willing
to provide these services at competitive rates. In addition, vendors may refuse
to develop the communications technology necessary to support our direct
shipment infrastructure. We also have no effective means to ensure that our
providers will continue to perform these services to our satisfaction. Our
customers could become dissatisfied and cancel their orders or decline to make
future purchases if we or our providers are unable to deliver products on a
timely basis. If our customers become dissatisfied with our distributors and
third party service providers, our reputation and the BUY.COM brand could
suffer.

Our operations are also heavily dependent upon a number of other third
parties for customer service and support, credit card processing, and hosting
our system infrastructure and database servers. In addition, our distributors
and fulfillment providers use the Federal Express Corporation, United Parcel
Service and the United States Postal Service to deliver substantially all of
our products. If the services of any of these third parties become
unsatisfactory, our customers may experience lengthy delays in receiving their
orders, and we may not be able to find a suitable replacement on a timely basis
or on commercially reasonable terms.

We have incurred substantial losses and expect to continue to incur losses for
the foreseeable future

We have not achieved profitability since our inception, and we incurred net
losses of $17.8 million for the year ended December 31, 1998 and $130.2 million
for the year ended December 31, 1999. We expect to continue to incur losses for
the foreseeable future due to additional costs and expenses related to:

. the implementation of our business model and our pricing strategies;

. brand development, marketing and other promotional activities;

. the expansion of our product and service offerings;

. the continued development of our Web site, transaction processing
systems and network infrastructure; and

. the development of strategic relationships.

Because we sell a substantial portion of our products at very competitive
prices, we have extremely low and sometimes negative gross margins on our
product sales. Our ability to become profitable depends on, among other things:

. our ability to generate and sustain substantially higher net sales with
improved gross margins while maintaining reasonable operating expense
levels;

. our ability to generate significant advertising revenue; and

. our ability to provide other higher margin products and services.

We have only been operating our online business since November 1997 and face
challenges related to early stage companies in rapidly evolving markets

We were founded in June 1997 and began our online operations in November
1997. You should consider our prospects in light of the risks and difficulties
frequently encountered by early stage companies in the

424B4 12th Page of 137 TOC 1st Previous Next ↓Bottom Just 12th
rapidly evolving online commerce market. These risks include, but are not
limited to, an unpredictable business environment, the difficulty of managing
growth and the use of our business model. To address these risks, we must,
among other things:

. expand our customer base;

. enhance our brand recognition;

. expand our product and service offerings;

. access sufficient product inventory to fulfill our customers' orders;

. successfully implement our business and marketing strategy;

. provide superior customer service and order processing;

. respond effectively to competitive and technological developments; and

. attract and retain qualified personnel.

Our future operating results may fluctuate and cause the price of our common
stock to decline

Our limited operating history and the emerging nature of the markets in
which we operate make it difficult to accurately predict our future revenues.
We expect that our revenues and operating results will fluctuate significantly
from quarter to quarter, due to a variety of factors, many of which are beyond
our control. If our quarterly revenues 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:

. our ability to build and maintain customer loyalty;

. the introduction of new or enhanced Web pages, services, products and
strategic alliances by us and our competitors;

. price competition on the Internet or higher wholesale prices in general;

. the success of our brand building and marketing campaigns;

. our ability to increase advertising revenues;

. our ability to maintain and expand our distribution relationships;

. fluctuations in the amount of customer spending on the Internet;

. increases in the cost of online or offline advertising;

. unexpected increases in shipping costs or delivery times;

. government regulations related to use of the Internet for commerce;

. our ability to maintain, upgrade and develop our Web site, transaction
processing systems and network infrastructure;

. technical difficulties, system downtime or Internet brownouts;

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

. general economic conditions and economic conditions specific to the
Internet and online commerce.

Our business model is new and unproven, and we may not be able to achieve
profitability

We are subject to risks due to the unproven and evolving nature of our
business model and aggressive pricing strategy. The success of our business
model depends on the volume of customers that visit our Web site and purchase
our products, as well as our ability to generate significant online advertising
revenues. To this end,

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we have worked hard to build our brand name and enhance our customer loyalty by
selling our products at extremely low prices and maintaining very low, and
sometimes negative, gross margins on our product sales. We intend to implement
various strategies to improve our gross margins going forward, which may
include raising prices on products and product categories from time to time. To
the extent we raise the prices on our merchandise, our product sales may
decline. We may also have to increase our prices if distributors receive
pressure from manufacturers to discontinue sales to us as a result of our low
price strategy. If the amount of traffic to our Web site decreases due to price
increases or otherwise, we may become less attractive to our current and
potential advertisers. As a result, our margins and advertising revenues may
decline.

Our recent growth has strained our resources, and if we are unable to manage
and sustain our growth, our operating results will be impaired

We have rapidly expanded our operations and anticipate that we must continue
to expand our operations to address potential market opportunities. If we are
unable to manage growth effectively or if we experience disruptions during our
expansion, our operating results will suffer. Recent increases in our employee
base and the volume of our merchandise sales have placed, and are expected to
continue to place, significant demands on our management, operational and
financial resources. For example, we expanded from seven employees at
December 31, 1997 to 230 employees at December 31, 1999. Our new employees
include a number of key managerial and technical employees who have not yet
been fully integrated into our management team, and we expect to add additional
key personnel in the near future. To manage growth in our operations, we will
need to improve or replace our existing Web site, financial systems, procedures
and controls. In addition, we will need to expand, train and manage our
increasing employee base. We will also need to expand our finance,
administrative and operations staff.

System failures could prevent access to our online store and harm our business
and results of operations

Our sales would decline and we could lose existing or potential customers if
they are not able to access our online store or if our online store,
transaction processing systems or network infrastructure do not perform to our
customers' satisfaction. Any network interruptions or problems with our Web
site could:

. prevent customers from accessing our online stores;

. reduce our ability to fulfill orders;

. reduce the number of products that we sell;

. cause customer dissatisfaction; or

. damage our reputation.

We have experienced brief computer system interruptions in the past, and
these interruptions may recur. If the number of customers visiting our Web site
continues to increase, we will need to expand and upgrade our technology,
transaction processing systems and network infrastructure significantly. We may
not be able to make timely upgrades to our systems and infrastructure to
accommodate increases in the number of customers.

Our systems and operations are also vulnerable to damage or interruption
from a number of sources, including fire, flood, power loss, telecommunications
failure, physical and electronic break-ins, earthquakes and other similar
events. For example, all of our servers are currently located in Southern
California, a seismically active region. Our servers are also vulnerable to
computer viruses, physical or electronic break-ins and similar disruptions. Any
substantial disruption of this sort could completely impair our ability to
generate revenues from our Web site. We do not presently have a formal disaster
recovery plan in effect and do not carry sufficient business interruption
insurance to compensate us for losses that could occur.

We rely on a relatively new management team and need additional personnel to
grow our business

Several of our executive officers are relatively new, and we intend to
continue to hire key management personnel. For example, our future success
depends in part on the continued services of Gregory J. Hawkins,

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our Chief Executive Officer, who was hired in March 1999, and Mitch C. Hill,
our Chief Financial Officer, who was hired in November 1999. We may experience
difficulty assimilating our recently hired managers, and we may not be able to
successfully locate, hire, assimilate and retain other qualified key management
personnel. Our business is also largely dependent on the personal efforts and
abilities of other members of senior management, as well as other key
personnel. Any of our officers or employees can terminate their employment
relationship at any time. We do not maintain key person life insurance on any
member of our management team. The loss of any key employee or our inability to
attract or retain other qualified employees could harm our business and results
of operations.

Our future success depends on our ability to attract, retain and motivate
highly skilled technical, managerial, editorial, merchandising, marketing and
customer service personnel. We plan to hire additional personnel in all areas
of our business. Competition for these types of personnel is intense,
particularly in the Internet industry. As a result, we may be unable to
successfully attract or retain qualified personnel.

Online security risks could seriously harm our business

A significant barrier to e-commerce and online communications 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. 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.

If we are not able to generate significant advertising revenue, we may not be
able to achieve profitability

Our future success will depend in part on the willingness of product
manufacturers and other advertisers to advertise on our Web site. The market
for Internet advertising is new and rapidly evolving. As a result, there is
significant uncertainty about the demand for and market acceptance of Internet
advertising. In addition, the number of Web sites that offer advertising
opportunities has dramatically increased in the last year, thus increasing the
competition for available advertising revenue. We cannot assure you that the
market for Internet advertising will continue to expand, that it will become
sustainable or that we will be able to continue to provide an attractive forum
for advertisers. If the market for Internet advertising fails to develop,
develops more slowly than we expect or if we do not provide an attractive forum
for advertisers, our business may not achieve profitability.

Because our advertising revenues carry higher gross margins than our product
sales, any decline in our advertising revenues would have a disproportionate
impact on our overall gross margin. If our current and potential advertisers
find Internet advertising to be less effective for promoting their products and
services than traditional advertising, they may choose to decrease or
discontinue advertising on the Internet or on our Web site. If our advertising
revenues decline, we may not be able to replace these revenues through other
programs or through our product sales.

Our recent and planned expansion into new product categories and business areas
is costly, risky and may not be profitable

We have pursued an aggressive expansion strategy in the past year, opening
four new online stores and acquiring BuyGolf.com. Continued expansion of our
operations requires substantial expenses and development,

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operations and editorial resources, and strains our management, financial and
operational resources. We may choose to continue to expand our operations by:

. developing new Web sites;

. pursuing new or complementary products, services or sales formats;

. expanding the breadth and depth of the products and services that we
offer; or

. expanding our market presence through relationships with third parties.

As we expand into other product or service offerings, we risk diluting our
brand name, confusing customers and decreasing interest from our advertisers.
In addition, we could be exposed to additional or unexpected risks as we enter
into new business areas and may be forced to abandon our current business model
or alter our strategic plans. If our expansion efforts are unsuccessful, our
business may suffer, and we may lose potential market opportunities.

In addition, we may pursue the acquisition of new or complementary
businesses or technologies, although we have no present understandings,
commitments or agreements with respect to any material acquisitions or
investments. We may not be able to expand our efforts and operations in a cost-
effective or timely manner and these efforts may not achieve market acceptance.
Furthermore, any new business or Web site that we launch that is not favorably
received by customers could damage our reputation or the BUY.COM brand.

If sales from our computer products decline, our operating results will suffer

Our operating results substantially depend on product revenue from the sale
of computer hardware, software products and peripherals. To date, a substantial
majority of our product sales revenues are derived from computer hardware and
software products. We expect that revenue from these products will continue to
represent more than a majority of our total product revenues during the next
twelve months. We could experience declines in these product sales due to
several factors, including, but not limited to:

. decreased customer demand for computer hardware, software and peripheral
products;

. increased price competition from our competitors;

. technological obsolescence of the computer hardware, software and
peripheral products that we offer; or

. decisions by manufacturers of computer products to curtail or eliminate
the sale of products or categories of products over the Internet by us.

If we are unable to maintain our current sales levels of computer hardware,
software and peripheral products, our financial condition and results of
operations would suffer.

We must continue to develop and maintain the BUY.COM brand, which is costly and
may not generate corresponding revenues

Maintaining and strengthening the BUY.COM brand is an important factor in
attracting new customers, building customer loyalty and attracting advertisers.
Accordingly, we intend to continue to pursue an aggressive promotional strategy
to enhance our brand. These initiatives have involved, and are expected to
continue to require, significant expenditures. If we are unsuccessful in our
promotional efforts, we may never be able to recover these expenses or increase
our revenues or margins. We also believe potential customers and advertisers
are driven to our online store because of our strong brand recognition. If
advertisers do not believe our Web site is an effective marketing and sales
channel for their merchandise, or if customers do not perceive us as offering a
desirable way to purchase merchandise, our branding efforts will suffer and we
may lose customers.

Our ability to build and strengthen the BUY.COM brand depends largely on:

. the success of our advertising and promotional efforts;

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. our ability to provide our customers with a broad range of products at
competitive prices; and

. our ability to provide high quality customer service.

To promote the BUY.COM brand in response to competitive pressures, we may
increase our marketing budget or otherwise increase our financial commitment to
creating and maintaining brand loyalty among our customers. For example, we
spent approximately $13.4 million on sales and marketing in the fiscal year
ended December 31, 1998 and approximately $71.3 million for the year ended
December 31, 1999, and we expect these expenses to continue to increase for the
foreseeable future. We cannot be certain that our advertising efforts will be a
successful means of customer acquisition or that this allocation of resources
will provide additional revenues equal to this dedication of our resources. If
we fail to promote and maintain our brand, or if we incur excessive expenses
attempting to promote and maintain our brand, our business may suffer.

If we do not respond to technological change, our stores could become obsolete,
and we could lose customers

The development of our Web site entails significant technical and business
risks. To remain competitive, we must continue to enhance and improve the
responsiveness, functionality and features of our online stores. The Internet
and the e-commerce industry are characterized by:

. rapid technological change;

. changes in customer requirements and preferences;

. frequent new product and service introductions embodying new
technologies; and

. the emergence of new industry standards and practices.

The evolving nature of the Internet could render our existing online stores
and systems obsolete. Our success will depend, in part, on our ability to:

. license or acquire leading technologies useful in our business;

. enhance our existing online stores;

. 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.

Future advances in technology may not be beneficial to, or compatible with,
our business. Furthermore, we may not use new technologies effectively or adapt
our Web site and transaction processing systems to customer requirements or
emerging industry standards on a timely basis. Our ability to remain
technologically competitive may require substantial expenditures and lead time.
If we are unable to adapt to changing market conditions or user requirements in
a timely manner, our stores may become obsolete and we will lose customers.

If the software, hardware, computer technology and other systems and services
we use are not Year 2000 compliant, our operations could suffer and we could
lose customers

Many existing computer systems and software products are coded to accept
only two digit entries in the date code field and cannot distinguish 21st
century dates from 20th century dates. If these systems have not been properly
corrected, there could be system failures or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices or engage in normal business activities.
As a result, many companies' software and computer systems may need to be
upgraded or replaced to become "Year 2000" compliant. In addition, despite the
fact that many computer systems are currently processing 21st century dates
correctly, these companies, including us, could experience latent Year 2000
problems.

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We use and depend on third party equipment and software that may not be Year
2000 compliant. If Year 2000 issues prevent our customers from accessing the
Internet or our Web site, processing orders or using their credit cards, our
business and operations will suffer. We are also entirely dependent upon
distribution and fulfillment providers to supply and distribute the merchandise
we sell in our online stores directly to our customers. We also rely on Federal
Express, United Parcel Service, United States Postal Service and other third
party carriers to deliver orders to our customers. Any failure of our third
party equipment, software or services to operate properly could require us to
incur unanticipated expenses, which could seriously harm our business and
operating results. Our failure to make our Web site, network infrastructure and
transaction processing systems Year 2000 compliant could result in:

. a decrease in our sales;

. a disruption in our ability to fulfill orders;

. an increase in our allocation of resources to address Year 2000 problems
without additional revenue equal to this dedication of resources; and

. an increase in litigation costs relating to losses suffered by our
customers due to Year 2000 problems.

Furthermore, the purchasing patterns of customers or potential customers may
be affected by Year 2000 issues as companies expend significant resources to
correct their current systems. These expenditures may result in reduced funds
available to purchase products on our Web site, thus causing a decrease in our
product sales revenues.

We may be subject to liability for sales and other taxes

We currently collect sales or other similar taxes on the shipment of goods
in the States of California, Massachusetts and Tennessee. However, one or more
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. A number of proposals have been made at state
and local levels that could impose taxes on the sale of products and services
through the Internet or the income derived from these sales. These proposals,
if adopted, could substantially impair the growth of e-commerce and adversely
affect our ability to become profitable. Furthermore, since our service is
available over the Internet in multiple states and in foreign countries, these
jurisdictions may require us to qualify to do business in these states and
foreign countries. If we fail to qualify in a jurisdiction that requires us to
do so, we could face liabilities for taxes and penalties.

We may be unable to protect our Internet domain names, which are essential to
our business

Internet domain names are critical to our brand recognition and our overall
success. We currently hold over 1,200 domain names relating to our brand,
including BUY.COM and each domain name for our specific online stores and
subcategories. If we are unable to protect these domain names, our competitors
could capitalize on our brand recognition. The acquisition and maintenance of
domain names generally are regulated by governmental agencies and their
designees. The regulation of domain names in the United States and in foreign
countries has changed and is subject to further change in the near future. As a
result, we may be unable to acquire or maintain relevant domain names in the
United States and in other countries where we conduct business. Furthermore,
the relationship between regulations governing domain names and laws protecting
trademarks and similar proprietary rights is unclear. Therefore, we may be
unable to protect our own domain names or prevent third parties from acquiring
domain names that are similar to, infringe upon or otherwise decrease the value
of our domain names, trademarks and other intellectual property rights.

Our operating results could be impaired if we become subject to burdensome
government regulations and legal uncertainties concerning the Internet

Due to the increasing popularity and use of the Internet, it is possible
that a number of laws and regulations may be adopted with respect to the
Internet, relating to:

. user privacy;

. pricing, usage fees and taxes;

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. content;

. copyrights;

. distribution;

. characteristics and quality of products and services; and

. online advertising and marketing.

The adoption of any additional laws or regulations may decrease the
popularity or impede the expansion of the Internet and could seriously harm our
business. A decline in the popularity or growth of the Internet could decrease
demand for our products and services, reduce our advertising revenues and
margins and increase our cost of doing business. Moreover, the applicability of
existing laws to the Internet is uncertain with regard to many important
issues, including property ownership, intellectual property, export of
encryption technology, libel and personal privacy. 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 other online services, could also harm our business.

Our growth and operating results could be impaired by the risks associated with
our planned international expansion

A key component of our business strategy is to expand our international
sales, and we intend to establish a physical presence in international markets
in the future. For example, we have already initiated expansion into Europe and
Canada. Conducting business in foreign countries involves inherent risks,
including, but not limited to:

. unexpected changes in regulatory requirements;

. export restrictions;

. tariffs and other trade barriers;

. difficulties in protecting intellectual property rights;

. difficulties in staffing and managing foreign operations;

. problems collecting accounts receivable;

. longer payment cycles;

. political instability;

. fluctuations in currency exchange rates; and

. potentially adverse tax consequences.

If we are unable to successfully defend against pending legal actions against
us, we could face substantial liabilities

We are currently a party to pending legal actions against us, the outcomes
of which are uncertain and could result in significant judgments against us. In
March 1999, a class action suit was filed against us in the Orange County,
California Superior Court alleging that we intentionally mispriced products and
charged for orders knowing the orders could not be fulfilled. Another class
action suit was filed against us in Camden County, New Jersey in March 1999
based on facts similar to the class action pending in Orange County. Defending
against these lawsuits may involve significant expense and diversion of
management's resources. Furthermore, due to the inherent uncertainties of
litigation, we may not prevail in these actions. In addition, the methods that
we use to update our product prices may result in future pricing errors that
may subject us to significant litigation and costs in the future. For a more
detailed description of these legal actions, see "Business--Legal Proceedings."

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The success of our business depends on the continued growth of the Internet as
a viable commercial marketplace

Our success depends upon the widespread acceptance of the Internet as a
vehicle to purchase products. The e-commerce market is at an early stage of
development, and demand and continued market acceptance is uncertain. We cannot
predict the extent to which customers will shift their purchasing habits from
traditional to online retailers. If customers or manufacturers are unwilling to
use the Internet to conduct business and exchange information, our business
will fail. It is possible that the Internet may not become a viable long-term
commercial marketplace due to the potentially inadequate development of the
necessary network infrastructure, the delayed development of enabling
technologies and performance improvements and the high cost of shipping
products. 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. In
addition, concerns over security and privacy may inhibit the growth of the
Internet.

Because we face intense competition in various retail segments and operate in
an industry with limited barriers to entry, some of our competitors may be
better positioned to capitalize on the rapidly growing e-commerce market

The e-commerce market is new, rapidly evolving and intensely competitive.
Many of our current and potential competitors have longer operating histories,
larger customer bases, greater brand recognition and significantly greater
financial, marketing, technical, management and other resources than we do.
Some of our competitors have and may continue to use aggressive pricing or
inventory availability practices and devote substantially more resources to Web
site and system development than us. We expect that competition will further
intensify in the future. Because barriers to entry are limited, current and new
competitors can launch Web sites at a relatively low cost and can expand their
operations rapidly. New technologies and the expansion of existing technologies
may also increase the competitive pressure we face. Increased competition may
result in reduced operating margins, loss of market share and diminished brand
recognition.

We believe that the primary competitive factors in the online market include
brand recognition, price, product selection, ease of use, customer service,
available content and value added services. We currently compete with a variety
of online vendors that specialize in computer hardware and software products,
as well as those who sell books, music, videos, DVDs and other entertainment
products, consumer electronics and golf-related products. Moreover, all of the
products we sell in our online stores are typically available from traditional
retailers. Consequently, we must compete with companies in the online commerce
market as well as the traditional retail industry.

We would also realize significant competitive pressure if any of our
distribution providers were to initiate their own retail operations. Since our
distributors have access to merchandise at very low costs, they could sell
products at lower prices and maintain a higher gross margin on their product
sales than we can. In this event, our current and potential customers may
decide to purchase directly from these distributors. Increased competition from
any distributor capable of maintaining high sales volumes and acquiring product
at lower prices than us could significantly reduce our market share.

Our growth and operating results could be impaired if we are unable to meet our
future capital needs

Based on our current operating plan, we anticipate that the net proceeds of
this offering, together with our available funds, will be sufficient to satisfy
our anticipated needs for working capital, capital expenditures and business
expansion for at least the next twelve months. After that time, we may need
additional capital. Alternatively, we may need to raise additional funds sooner
to:

. fund more rapid expansion;

. develop new product lines or enhanced services;

. fund acquisitions; or

. respond to competitive pressures.

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If we raise additional funds by issuing equity or convertible debt
securities, the percentage ownership of our stockholders will be diluted.
Furthermore, any new securities could have rights, preferences and privileges
senior to those of our common stock. We currently do not have any commitments
for additional financing. We cannot be certain that additional financing will
be available when and to the extent required, or that, if available, it will be
on acceptable terms. If adequate funds are not available on acceptable terms,
we may not be able to fund our expansion, develop or enhance our products or
services or respond to competitive pressures.

If we are unable to successfully manage the transition of our leadership, our
business could suffer

In the fall of 1999, Scott A. Blum, our founder, majority stockholder and
former Chief Executive Officer and Chairman, resigned from our Board of
Directors, deposited all of his shares of our common stock into a voting trust,
and withdrew from participation in our management, business and operations. Mr.
Blum had previously resigned as our Chief Executive Officer and terminated his
employment with us in March 1999. As of December 31, 1999, Mr. Blum's shares
represented approximately 54% of our outstanding capital stock. Prior to
leaving the company, Mr. Blum was primarily responsible for conceiving,
developing and implementing our business model and recruiting our Board of
Directors and our current management team. In addition, Mr. Blum was directly
involved in the creation, development and implementation of our corporate image
and advertising strategy. Mr. Blum's withdrawal from our business and our
inability to replace Mr. Blum could harm our business.

If we are unable to protect our trademarks and 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
critical to our success. We rely on trademark and copyright law, trade secret
protection and confidentiality and/or license agreements with employees,
customers, providers 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 applied for the registration of some of our
trademarks and service marks in the United States and some other countries.
Even if we are able to register these names, registration may not adequately
protect us against infringement by others. Effective trademark, service mark,
copyright and trade secret protection may not be available in every country in
which our products and services are made available online. If we are not able
to protect our trademarks and other intellectual property, we may experience
difficulties in achieving and maintaining brand recognition and customer
loyalty.

Intellectual property claims against us could be costly and result in the loss
of significant rights

Other parties may assert infringement or unfair competition claims against
us. In the past, other parties have sent us notices of claims of infringement
of intellectual property rights, and we expect to receive other notices in the
future. We cannot predict whether third parties will assert claims of
infringement against us, or whether any past or future assertions or
prosecutions will adversely affect our business. If we are forced to defend
against any of these claims, whether meritless or not, we may face costly
litigation and diversion of technical and management personnel. As a result of
these disputes, we may have to expend significant resources to develop or
acquire non-infringing property. Alternatively, we may need to pursue royalty
or licensing agreements, which may not be available on acceptable terms, if at
all.

SOFTBANK and its affiliates control a majority of our outstanding common stock
which will enable them to control many significant corporate actions and may
prevent a change in control that would otherwise be beneficial to our
stockholders

Upon completion of this offering, SOFTBANK and its affiliates will own
approximately 29.7% of our outstanding stock. In addition, as a result of a
voting trust agreement with our largest stockholder, approximately 48.1% of our
outstanding stock after this offering must be voted by the trustees to mirror
the voting of all shares that are not subject to the terms of the voting trust
agreement on significant stockholder actions, as defined in the

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voting trust agreement. On routine stockholder actions, the trustees have the
discretion to vote the trust shares in any manner determined by a majority of
the trustees. Because SOFTBANK and its affiliates will control a majority of
the shares not subject to the voting trust, they will effectively control the
votes of approximately 77.8% of our common stock on significant corporate
actions and 29.7% on routine corporate governance matters immediately after
this offering. This control by SOFTBANK and its affiliates could have a
substantial impact on matters requiring the vote of the stockholders, including
the election of our directors and most of our corporate actions. This control
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 stockholders and us. This control could adversely affect the voting and
other rights of our other stockholders and could depress the market price of
our common stock.

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 $167.3
million. Our management team will retain broad discretion as to the allocation
of the proceeds and may spend these proceeds in ways with which our
stockholders may not agree.

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

The trading price of our common stock is likely to be volatile and could
fluctuate widely in response to many of the following factors, some of which
are beyond our control:

. variations in our operating results;

. announcements of technological innovations, new services or product
lines by us or our competitors;

. changes in expectations of our future financial performance, including
financial estimates by securities analysts and investors;

. changes in operating and stock price performance of other Internet and
online commerce companies;

. conditions or trends in the Internet industry;

. additions or departures of key personnel; and

. future sales of our common stock.

Domestic and international stock markets often experience significant price
and 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. The market prices of the securities of Internet-related and online
companies have been especially volatile. If our common stock trades to high
levels following this offering, it could eventually experience a significant
decline.

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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 substantial amounts of our common stock in the public market after
this offering could reduce the market price of our common stock. These sales
also might make it more difficult for us to sell equity or equity-related
securities in the future at a time and price that we deem appropriate. After
the offering, shares of our common stock will become available for resale in
the public market as shown on the chart below.

[Download Table]

Approximate Number
Days after the Date of Shares Eligible
of this Prospectus for Future Sale Comment
-------------------- ------------------ -----------------------------------

Upon effectiveness.. 14,000,000 Freely tradable shares sold in this
offering
90 days............. 15,684 Shares saleable under Rule 144 that
are not subject to 180-day lock-up
180 days............ 93,233,047 Lock-up released; shares saleable
under Rule 144, 144(k) or 701

For a description of the shares of our common stock that are available for
future sale, see "Shares Eligible for Future Sale."

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

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

424B4 23rd Page of 137 TOC 1st Previous Next ↓Bottom Just 23rd
FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that are based on our
current expectations, assumptions, estimates and projections about us and our
industry. When used in this prospectus, the words "expects," "anticipates,"
"estimates," "intends" and similar expressions are intended to identify forward
looking statements. These statements include, but are not limited to,
statements under the captions "Risk Factors," "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business" and elsewhere in this prospectus concerning, among other things:

. our ability to maintain and expand current distribution, fulfillment and
other strategic relationships and to enter into new relationships;

. our ability to attract advertisers and increase advertising revenue;

. our ability to increase our gross margins;

. our ability to broaden our existing product lines or expand into new
product categories; and

. our Year 2000 readiness.

These forward-looking statements are subject to risks and uncertainties that
could cause actual results to differ materially from those projected. The
cautionary statements made in this prospectus should be read as being
applicable to all related forward-looking statements wherever they appear in
this prospectus.

424B4 24th Page of 137 TOC 1st Previous Next ↓Bottom Just 24th
USE OF PROCEEDS

The net proceeds from the sale of the 14,000,000 shares of common stock sold
by us in this offering are estimated to be approximately $167.3 million, after
deducting underwriting discounts and commissions and estimated offering
expenses payable by us.

At this time, the principal purposes of this offering are to obtain
additional capital to increase our financial flexibility and to create a public
market for our common stock. We presently intend to use the net proceeds of
this offering as follows:

. An estimated $20.0 million to $30.0 million may be used for capital
expenditures associated with technology and systems upgrades and
expansion.

. An estimated $70.0 million to $90.0 million may be used for sales and
marketing activities, particularly advertising campaigns and promotions,
to increase our brand recognition, including $8.5 million during 2000 as
part of our sponsorship of the BUY.COM Tour.

. Approximately $12.5 million will be used to repay our outstanding debt
under our revolving credit facility. Under the terms of the credit
agreement, the loan bears interest at the London Interbank Offer Rate
plus 3.00% and has a maturity date of July 19, 2000. The $12.5 million
currently outstanding under our revolving credit facility has been used
for our short term working capital needs.

. The remainder of the net proceeds will be used to fund operating losses,
for additional working capital and for general corporate purposes
including the introduction of new product categories, the expansion of
existing product categories and expansion into international markets,
including the payment of up to approximately $7.7 million in connection
with the initial funding of three international joint ventures that we
agreed to form with SOFTBANK America, Inc. and its affiliates.

As of the date of this prospectus, we have not allocated any specific amount
of the proceeds for the purposes listed 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. Therefore, we cannot
specify with certainty the amounts that may be allocated to the particular uses
of the net proceeds of this offering, and the amounts we actually spend could
be outside of the ranges set forth above. Our management will have significant
flexibility and discretion in applying the net proceeds of this offering.

Pending any use, the net proceeds of this offering will be invested
generally in short-term, interest-bearing securities.

We may also use an unspecified portion of the net proceeds of this offering
to acquire or invest in complementary businesses, services 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. At this time, however, we do not have any present
understandings, commitments or agreements with respect to any material
acquisition.

DIVIDEND POLICY

We have never declared or paid any cash dividends on our common stock. We
currently intend to retain any future earnings to finance the growth and
development of our business. Therefore, 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.

424B4 25th Page of 137 TOC 1st Previous Next ↓Bottom Just 25th
CAPITALIZATION

The following table indicates our capitalization at December 31, 1999:

. on an actual basis;

. on a pro forma basis to give effect to the conversion of all of our
Series A convertible participating preferred stock and Series B
convertible participating preferred stock into an aggregate of 22,098,982
shares of common stock upon the completion of this offering; and

. on a pro forma as adjusted basis to reflect this conversion and the
issuance of 14,000,000 shares of common stock at the initial public
offering price of $13.00 per share, after deducting underwriting
discounts and commissions and estimated offering expenses payable by us.

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

[Download Table]

December 31, 1999
---------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- ----------- -----------
(unaudited) (unaudited)
(amounts in thousands, except
share and per share data)

Total long-term debt, net of current
portion..................................... $ 1,738 $ 1,738 $ 1,738
Stockholders' equity:
Convertible participating preferred stock,
$.0001 par value; 150,000,000 authorized;
22,098,982 shares issued and outstanding;
no shares issued and outstanding, pro forma
and pro forma as adjusted; including
additional paid-in capital 104,939 -- --
Common stock, $.0001 par value; 850,000,000
shares authorized; 93,041,193 shares issued
and outstanding, actual; 115,140,175 shares
issued and outstanding, pro forma;
129,140,175 shares issued and outstanding,
pro forma as adjusted ..................... 10 12 13
Additional paid-in capital, common.......... 72,659 177,596 344,855
Deferred compensation....................... (8,850) (8,850) (8,850)
Accumulated deficit......................... (145,710) (145,710) (145,710)
-------- --------- --------
Total stockholders' equity................ 23,048 23,048 190,308
-------- --------- --------
Total capitalization..................... $ 24,786 $ 24,786 $192,046
======== ========= ========

These share amounts exclude 22,324,104 shares of common stock issuable upon
the exercise of options outstanding as of December 31, 1999 at a weighted
average exercise price of $4.46 per share and warrants to purchase
approximately 1,926,923 shares of common stock, at a weighted average exercise
price of $13.67 per share. For additional information regarding our capital
structure, see "Management--Employee Benefit Plans," "Description of Capital
Stock" and notes 8 and 9 of notes to consolidated financial statements.

424B4 26th Page of 137 TOC 1st Previous Next ↓Bottom Just 26th
DILUTION

Our pro forma net tangible book value as of December 31, 1999 was
approximately $(5.9) million, or $(0.05) per share of common stock. Pro forma
net tangible book value per share represents our total tangible assets less
total liabilities divided by the pro forma number of shares of common stock
outstanding as of December 31, 1999, after giving effect to the conversion of
all outstanding shares of our convertible participating preferred stock, which
immediately converts upon the closing of this offering into 22,098,982 shares
of common stock. Without taking into account any other changes in pro forma net
tangible book value other than to give effect to our sale of the 14,000,000
shares of common stock offered by this prospectus and the receipt and
application of those net proceeds, our pro forma net tangible book value as of
December 31, 1999 would have been $162.2 million, or $1.26 per share of common
stock. This represents an immediate increase in pro forma net tangible book
value of $1.31 per share to existing stockholders and an immediate dilution in
pro forma net tangible book value of $11.74 per share to investors purchasing
common stock in this offering.

The following table illustrates this per share dilution:

[Download Table]

Initial public offering price per share................. $13.00
Pro forma net tangible book value per share as of
December 31, 1999..................................... $ (0.05)
Increase per share attributable to new investors....... 1.31
---------

Pro forma net tangible book value per share after this
offering............................................... 1.26
------
Dilution per share to new investors..................... $11.74
======

The following table summarizes as of December 31, 1999, on a pro forma
basis, 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, before deducting underwriting
discounts and commissions and estimated offering expenses payable by us:

[Download Table]

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

Existing stockholders.... 115,140,175 89.2% $116,930,000 39.1% $ 1.02
New investors............ 14,000,000 10.8% 182,000,000 60.9% $13.00
----------- ----- ------------ -----
Total................ 129,140,175 100.0% $298,930,000 100.0%
=========== ===== ============ =====

The foregoing discussion and tables assume no exercise of any stock options
or warrants outstanding as of December 31, 1999. To the extent that these
options are exercised, new investors will experience further dilution. As of
December 31, 1999, options to purchase 22,324,104 shares of common stock were
outstanding at a weighted average exercise price of $4.46 per share and
warrants to purchase approximately 1,926,923 shares of common stock were
outstanding, at a weighted average exercise price of $13.67 per share. Assuming
these options and warrants are exercised, new investors will own approximately
9.1% of our outstanding shares while contributing approximately 45.7% of the
total amount paid to fund our company. All of the information above also
assumes no exercise of the underwriters' overallotment option. For additional
information regarding our stock options, see notes 9 and 13 of notes to
consolidated financial statements.

424B4 27th Page of 137 TOC 1st Previous Next ↓Bottom Just 27th
SELECTED CONSOLIDATED FINANCIAL DATA
(amounts in thousands, except share and per share data)

The following selected consolidated financial data as of December 31, 1997,
1998, and 1999, for the period from June 7, 1997 (Inception) to December 31,
1997 and for the years ended December 31, 1998 and 1999 have been derived from
our consolidated financial statements and related notes audited by Arthur
Andersen LLP, independent public accountants, included elsewhere in this
prospectus. The 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.

[Download Table]

June 7, 1997
(Inception) to Year Ended Year Ended
December 31, December 31, December 31,
1997 1998 1999
-------------- ------------ ------------

Consolidated Statement of Operations
Data:
Net revenues........................ $ 878 $ 125,290 $ 596,848
Cost of goods sold.................. 832 123,527 603,695
---------- ---------- ------------
Gross profit........................ 46 1,763 (6,847)
---------- ---------- ------------
Operating expenses:
Sales and marketing................ 130 13,430 71,331
Product development................ 30 950 7,835
General and administrative......... 260 4,250 19,037
Depreciation and amortization...... 7 377 6,566
Amortization of deferred
compensation...................... -- 795 10,215
Charge for warrants................ -- -- 7,191
---------- ---------- ------------
Total operating expenses......... 427 19,802 122,175
---------- ---------- ------------
Operating loss...................... (381) (18,039) (129,022)
---------- ---------- ------------
Other income (expense):
Interest income (expense), net..... (7) 202 (1,141)
Other.............................. -- (4) (2)
---------- ---------- ------------
Total other income (expense)........ (7) 198 (1,143)
---------- ---------- ------------
Loss before provision for income
taxes.............................. (388) (17,841) (130,165)
Provision for income taxes.......... 2 3 3
---------- ---------- ------------
Net loss............................ $ (390) $ (17,844) $ (130,168)
========== ========== ============
Net loss per share:
Basic and diluted.................. $ (0.00) $ (0.22) $ (1.45)
Weighted average shares outstanding:
Basic and diluted.................. 81,331,078 81,815,869 89,597,782
Pro forma net loss per share:
Basic and diluted (unaudited)...... $ (1.13)
Pro forma weighted average shares
outstanding:
Basic and diluted (unaudited)...... 114,719,108

December 31,
----------------------------------------
1997 1998 1999
-------------- ------------ ------------

Consolidated Balance Sheet Data:
Cash ............................... $ 34 $ 9,221 $ 24,693
Working capital (deficit)........... (391) (3,562) (20,473)
Total assets........................ 267 26,837 119,708
Long-term debt, net of current
portion............................ -- 1,175 1,738
Total stockholders' equity
(deficit).......................... (340) 6,635 23,048

Please refer to notes 8 and 10 of the notes to consolidated financial
statements and notes to selected unaudited pro forma condensed combined
financial information for information regarding the method used to compute our
actual basic and diluted net loss per share and our pro forma basic and diluted
net loss per share.

424B4 28th Page of 137 TOC 1st Previous Next ↓Bottom Just 28th
SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION

The selected unaudited pro forma condensed combined financial information is
based upon, and should be read together with, the historical financial
statements of BUY.COM, Speedserve and BuyGolf.com and the related notes to
these financial statements. The selected unaudited pro forma condensed combined
financial information is based upon tentative allocations of purchase price for
the acquisition of BuyGolf.com and may not show the results that would have
been reported had such events actually occurred on the dates specified, nor
does it indicate our future results. The final allocation of purchase price is
not expected to differ materially from the tentative allocation or to have a
material impact on our results of operations or financial position. Purchase
accounting is based upon preliminary asset valuations, which are subject to
change. Furthermore, post-closing adjustments, if any, are not expected to have
a material impact on our results of operations or financial position.

The selected unaudited pro forma condensed combined statement of operations
data for the year ended December 31, 1998 is presented as if BUY.COM had
completed the acquisition of Speedserve as of January 1, 1998.

The selected unaudited pro forma condensed combined statement of operations
data for the year ended December 31, 1999 is presented as if BUY.COM had
completed the acquisition of BuyGolf.com and entered into the PGA TOUR
sponsorship agreement as of January 1, 1999. Since BuyGolf.com did not commence
operations until December 1, 1998, the impact of the acquisition of BuyGolf.com
to the selected unaudited pro forma condensed combined statement of operations
information for the year ended December 31, 1998 is immaterial and has not been
shown.

The BUY.COM balance sheet as of December 31, 1999 includes the assets
acquired and liabilities assumed in connection with the acquisition of
BuyGolf.com.

424B4 29th Page of 137 TOC 1st Previous Next ↓Bottom Just 29th
SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS INFORMATION
(amounts in thousands, except share and per share data)

[Download Table]

Year Ended December 31, 1998
-----------------------------------------------------
BUY.COM Speedserve, Pro Forma Pro Forma
Inc. Inc.(a) Adjustments Combined
----------- ----------- ----------- -----------

Net revenues............ $ 125,290 $ 1,278 $ -- $ 126,568
Cost of goods sold...... 123,527 1,070 124,597
----------- ----------- ----------- -----------
Gross profit............ 1,763 208 -- 1,971
Total operating
expense................ 19,802 3,531 2,820 (b) 26,153
----------- ----------- ----------- -----------
Operating loss.......... (18,039) (3,323) (2,820) (24,182)
Total other income
(expense).............. 198 (5) -- 193
----------- ----------- ----------- -----------
Loss before provision
for income taxes....... (17,841) (3,328) (2,820) (23,989)
Provision for income
taxes.................. 3 (1,011) 1,011 (c) 3
----------- ----------- ----------- -----------
Net loss................ $ (17,844) $ (2,317) $ (3,831) $ (23,992)
=========== =========== =========== ===========
Net loss per share:
Basic and diluted..... $ (0.24)
Weighted average number
of common shares
outstanding:
Basic and diluted(d).. 99,060,348

--------
(a) Speedserve was acquired by BUY.COM on December 3, 1998, in a purchase-type
transaction. BUY.COM issued 5,529,571 shares of common stock pursuant to
the acquisition. This presentation shows the pro forma effects of the
operations of Speedserve as if the acquisition occurred on January 1,
1998.

(b) Represents the amortization of $2.8 million of goodwill that would have
been recorded for the year ended December 31, 1998, if the acquisition of
Speedserve occurred January 1, 1998. Goodwill is amortized on a straight-
line basis over a period of three years. No other significant fair value
purchase price adjustments were recorded in conjunction with the
acquisition of Speedserve.

(d) Reflects conversion of all preferred stock outstanding at December 31,
1998 and the issuance of common stock for the acquisition of Speedserve.

424B4 30th Page of 137 TOC 1st Previous Next ↓Bottom Just 30th
SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS INFORMATION
(amounts in thousands, except share and per share data)

[Enlarge/Download Table]

Year Ended December 31, 1999
-------------------------------------------------------------
BuyGolf.com, Pro Forma Pro Forma
BUY.COM Inc. Inc.(a) Adjustments Combined
------------- ------------ ------------ ------------

Net revenues............ $ 596,848 $ 1,025 $ (40)(b) $ 597,833
Cost of goods sold...... 603,695 883 -- 604,578
------------- ----------- ------------ ------------
Gross profit............ (6,847) 142 (40) (6,745)
Total operating
expense................ 122,175 3,576 12,193 (b)(c) 137,944
------------- ----------- ------------ ------------
Operating loss.......... (129,022) (3,434) (12,233) (144,689)
Total other income
(expense).............. (1,143) 7 -- (1,136)
------------- ----------- ------------ ------------
Loss before provision
for income taxes....... (130,165) (3,427) (12,233) (145,825)
Provision for income
taxes.................. 3 1 -- 4
------------- ----------- ------------ ------------
Net loss................ $ (130,168) $ (3,428) $ (12,233) $ (145,829)
============= =========== ============ ============
Net loss per share:
Basic and diluted..... $ (1.27)
Weighted average number
of common shares
outstanding:
Basic and diluted(d).. 114,719,108

--------
(a) BuyGolf.com was acquired by BUY.COM on October 25, 1999, in a purchase-type
transaction. BUY.COM issued a total of 2,589,329 shares of common stock to
acquire the remaining 95% of the outstanding common stock of BuyGolf.com
that it did not previously own. The results of operations of BuyGolf.com
will be included in our consolidated results commencing October 1, 1999.
The results of operations for BuyGolf.com from October 1, 1999 to October
25, 1999 are immaterial to our consolidated operating results. This
presentation shows the pro forma effects of the operations of BuyGolf.com
as if the acquisition occurred on January 1, 1999.

(b) Represents advertising revenues/expenses, recorded for the nine months
ended September 30, 1999, that should be eliminated upon the acquisition of
BuyGolf.com by BUY.COM.

(c) Represents the amortization of goodwill of $5.8 million that would have
been recorded for the nine months ended September 30, 1999, if the
acquisition of BuyGolf.com occurred on January 1, 1999. Goodwill is
amortized on a straight-line basis over a period of three years. No other
significant fair value purchase price adjustments were recorded in
conjunction with the acquisition of BuyGolf.com. Also includes expense of
$6.4 million for the PGA TOUR sponsorship agreement as though the agreement
was effective January 1, 1999.

(d) Reflects the conversion of all preferred stock outstanding at December 31,
1999, the issuance of common stock for the acquisition of BuyGolf.com and
the issuance of common stock in connection with the PGA TOUR sponsorship
agreement.

424B4 31st Page of 137 TOC 1st Previous Next ↓Bottom Just 31st
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.

Overview

BUY.COM is a leading multi-category Internet superstore based on our net
revenues and the amount of traffic to our Web site. We offer a comprehensive
selection of brand name computer hardware and peripherals, software, books,
videos, DVDs, computer games, music, consumer electronics and golf-related
products at everyday low prices. BUY.COM was formed as a California limited
liability company in June 1997 under the name BuyComp LLC and was incorporated
in Delaware as Buy Corp. in August 1998. In November 1998, we changed our name
to BUY.COM INC. From our inception in June 1997 through mid November 1997, we
had no sales and our operating activities related primarily to the planning and
development of our original Web site, BUYCOMP.COM, which offered computer
hardware and software products. Beginning with the opening of our BUYCOMP.COM
online computer store in November 1997 and continuing through November 1998, we
continued to expand our infrastructure and focused on expanding distributor and
vendor relationships, attracting customers to our Web site, building our brand
and establishing customer service operations.

In December 1998, we acquired Speedserve, Inc., an online retailer of books,
videos, DVDs and video games. Concurrent with this acquisition, we opened our
BUY.COM Web site that consolidated Speedserve's retail Web site with our
existing computer hardware and software online retail store to create five
specialty online retail stores. In late April 1999, we launched the
BUYMUSIC.COM store and an improved version of our Web site that incorporated
increased functionality and speed, broader content and enhanced customer
service. In May 1999, we added BUYCLEARANCE.COM, which offers high quality,
brand name, closeout products at significant discounts and in November 1999, we
launched BUYELECTRONICS.COM, which offers brand name consumer electronics
products. In addition, in October 1999, we acquired BuyGolf.com, Inc., an
online store selling golf equipment and other golf-related merchandise. In
January 2000, we integrated BUYGOLF.COM into our Web site as our ninth online
store.

In October 1999, we declared a common stock dividend of 75% of the capital
stock, on an as converted basis, of one of our wholly-owned subsidiaries,
BUYNOW INC., to our stockholders. BUYNOW provides contract e-commerce service,
including order fulfillment and credit card processing, to its customers. We
intend to enter into a license and services agreement with BUYNOW under which
we will license technology, trademarks and domain names as well as provide
certain administrative and customer support services.

We derive revenues principally from the sale of products and, to a lesser
extent, from paid advertisements on our Web site. We recognize product revenue
upon shipment of products. We generally recognize advertising revenue straight
line over the period of time an advertisement runs on our site. In some
circumstances, our agreements with advertisers require consumer action, in
which cases, we recognize advertising revenue when the consumer action is
completed.

We have employed a business model that includes outsourcing the majority of
our infrastructure to leading national distribution and fulfillment providers
with established expertise. Through this model, we capitalize on the cost
efficiencies achieved by our distribution providers and minimize our
infrastructure and operating expenses, enabling us to pass significant savings
on to our customers. Additionally, by aligning with leading distributors in
each of our product categories, we can use their significant inventories and
distribution capabilities to offer a broader selection of products at lower
costs than traditional retailers can.

Consistent with our merchandising strategy, we have started to raise prices
on many of our products. Since the second quarter of 1999, we have increased
our product margins without experiencing a decline in overall sales volumes or
customer levels. Although we intend to continue these selective price
increases, under our long-term business model, we expect to maintain lower
relative product margins than many other online and offline retailers, while
generating high sales volumes. For this reason, our ability to become and
remain profitable depends upon our ability to substantially increase our net
revenues. We cannot be certain that our sales growth will continue or that we
will ever become profitable.

424B4 32nd Page of 137 TOC 1st Previous Next ↓Bottom Just 32nd
To date, our sales of computer hardware and software products have accounted
for the vast majority of our net revenues. Our sales of products in other
categories constituted less than 15% of our net revenues for the period ended
December 31, 1997 and for the years ended December 31, 1998 and 1999. None of
these other categories individually constituted more than 10% of our net
revenues during these periods. As we continue to expand into new product
categories, we expect sales of products other than computer hardware and
software to be an increasingly larger component of our business in the future.
Product sales, including shipping and handling, accounted for 100% of net
revenues for the period ended December 31, 1997, 98.1% of net revenues for the
year ended December 31, 1998, and 97.3% of net revenues for the year ended
December 31, 1999.

Shipping and handling net revenues were $49,000 for the period ended
December 31, 1997, $6.7 million for the year ended December 31, 1998, and
$30.1 million for the year ended December 31, 1999. The gross profit on our
shipping and handling net revenues during these periods was $36,000, $4.2
million, and $11.9 million, respectively. Shipping and handling results are a
direct function of our product sales and are an integral part of our
merchandising and pricing strategy. Accordingly, we believe shipping and
handling net revenues and the corresponding gross profit on these net revenues
cannot be viewed independent of product sales and gross profit.

We currently generate additional revenues from vendor co-op advertising as
well as media advertising. Vendor co-op advertising is a standard practice in
the retailing sector, where product vendors set aside certain amounts of
advertising funds to be paid to retailers in exchange for specific marketing
and in-store placement of their products. We also generate advertising media
revenue from click-through advertisements that direct the customer to the
advertiser's Web site. These media advertising revenues are generally derived
from short-term advertising contracts in which we typically guarantee a minimum
number of advertising impressions to be delivered to users over a specified
period of time for a fixed fee. In the cases where we guarantee a minimum
number of advertising impressions, we defer a portion of the advertising
revenues until the minimum number of impressions has been achieved. Advertising
sales accounted for 0% of net revenues for the period ended December 31, 1997,
1.9% of net revenues for the year ended December 31, 1998, and 2.7% of net
revenues for the year ended December 31, 1999.

Our net revenues are also net of coupon redemptions. Coupon redemptions
result in a reduction of gross revenues in the period the coupons are redeemed
by an amount equal to the value of the coupons redeemed. Coupon redemptions
were $6.2 million for the year ended December 31, 1999, and we had no coupon
redemptions in 1997 or 1998.

We have incurred significant losses since our inception and our cost of
sales and operating expenses have increased dramatically. This trend reflects
the costs associated with the formation of BUY.COM, as well as our increased
efforts to promote the BUY.COM brand, build market awareness, attract new
customers, recruit personnel, build operating infrastructure, and develop and
expand our Web site and related transaction-processing systems. We intend to
continue to invest heavily in marketing and promotion, Web site development,
and technology and operating infrastructure development. We believe that we
will continue to incur substantial operating losses for the foreseeable future.
Although we have experienced significant revenue growth in recent periods, this
growth may not be sustainable, and we may never achieve profitability.

424B4 33rd Page of 137 TOC 1st Previous Next ↓Bottom Just 33rd
Results of Operations

In view of the rapidly evolving nature of our business and our limited
operating history, we believe that period-to-period comparisons of our
operating results, including our gross profit margin and operating expenses as
a percentage of our net revenues, should not be relied upon as an indication of
our future performance. The following table sets forth statement of operations
data expressed as a percentage of net revenues for the periods indicated:

[Download Table]

June 7, 1997
(Inception) to Year Ended Year Ended
December 31, December 31, December 31,
1997 1998 1999
-------------- ------------ ------------

Net revenues......................... 100.0 % 100.0 % 100.0 %
Cost of goods sold................... 94.8 98.6 101.1
----- ----- -----
Gross profit (loss).................. 5.2 1.4 (1.1)
----- ----- -----
Operating expenses:
Sales and marketing................. 14.8 10.7 12.0
Product development................. 3.4 0.8 1.3
General and administrative.......... 29.6 3.4 3.2
Depreciation and amortization....... 0.8 0.3 1.1
Amortization of deferred
compensation....................... -- 0.6 1.7
Charge for warrants................. -- -- 1.2
----- ----- -----
Total operating expenses......... 48.6 15.8 20.5
----- ----- -----
Operating loss....................... (43.4) (14.4) (21.6)
----- ----- -----
Other income (expense):
Interest income (expense), net...... (0.8) 0.2 (0.2)
Other............................... -- 0.0 0.0
----- ----- -----
Total other income (expense)..... (0.8) 0.2 (0.2)
----- ----- -----
Loss before provision for income
taxes............................... (44.2) (14.2) (21.8)
Provision for income taxes........... (0.2) 0.0 0.0
----- ----- -----
Net loss............................. (44.4)% (14.2)% (21.8)%
===== ===== =====

Period Ended December 31, 1997

Net revenues were $878,000 for the period ended December 31, 1997. Cost of
goods sold were $832,000 and gross margin was 5.2% for the period ended
December 31, 1997. We were formed in June 1997 and did not launch our Web site
until November 1997, and, as a result, our results of operation for the period
ended December 31, 1997 do not bear any significant relationship to our
operating results for the year ended December 31, 1998. The significant changes
in operating results for the year ended December 31, 1998 as compared to the
period ended December 31, 1997 were primarily attributable to the duration and
extent of our operations in those periods.

Years Ended December 31, 1998 and December 31, 1999

Net Revenues

Net revenues consist of product sales, advertising revenue and customer
shipping and handling charges. Net revenues increased to $596.8 million for the
year ended December 31, 1999 from $125.3 million for the year ended December
31, 1998. This increase resulted from the significant growth in our customer
base and repeat purchases from our existing customers. The increase is also due
to the launch of new online stores. Net revenues for the year ended December
31, 1999 include the effect of $6.2 million in coupon redemptions for the year
as compared to no coupon redemptions in the year ended December 31, 1998.

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Cost of Goods Sold

Cost of goods sold consists primarily of the cost of products sold, and the
related distribution and fulfillment costs, including shipping. Cost of goods
sold increased to $603.7 million for the year ended December 31, 1999 from
$123.5 million for the year ended December 31, 1998 as a result of the
significant increase in our net revenues. Gross margin declined to (1.1%) for
the year ended December 31, 1999 from 1.4% for the year ended December 31,
1998. This reduction in gross margin reflects our aggressive product pricing
strategy to build brand recognition and attract customers. While we plan to
increase gross margin in the future by employing more selective pricing and
merchandising strategies, focusing on advertising revenues and emphasizing
higher margin products and services, we may not be able to improve our profit
margins.

Sales and Marketing Expenses

Sales and marketing expenses consist primarily of advertising and
promotional expenses, as well as credit card fees, outsourced customer service
fees, and payroll associated with our advertising and marketing personnel.
Sales and marketing expenses increased to $71.3 million for the year ended
December 31, 1999 from $13.4 million for the year ended December 31, 1998.
Sales and marketing expenses as a percentage of net revenues increased to 12.0%
for the year ended December 31, 1999 from 10.7% for the year ended December 31,
1998. This increase, both as a percentage of net revenues and in absolute
dollars, was primarily attributable to the expansion of our advertising
campaigns both online and in more traditional media. The increase in our sales
and marketing expenses was also due, to a lesser extent, to increased personnel
and related expenses required to implement our marketing strategy. We intend to
continue to pursue an aggressive branding and marketing campaign in order to
attract new customers and retain existing customers. As a result, we expect
marketing and sales expenses to continue to increase in absolute dollars in
future periods.

Product Development Expenses

Product development expenses consist primarily of personnel and other
expenses associated with developing and enhancing our Web site, as well as
associated facilities and related expenses. Product development expenses
increased to $7.8 million for the year ended December 31, 1999 from $950,000
for the year ended December 31, 1998. Product development expenses as a
percentage of net revenues increased to 1.3% for the year ended December 31,
1999 from 0.8% for the year ended December 31, 1998. The increase was primarily
due to increased personnel and outside consulting costs required to enhance the
features, content, and functionality of our online stores and transaction
processing systems. We intend to continue to enhance our technology and
information systems and expect product development expenses to continue to
increase in absolute dollars in future periods.

General and Administrative Expenses

General and administrative expenses consist primarily of payroll and related
expenses for executive and administrative personnel, facilities expenses,
professional fees, telephone charges, and other general corporate expenses.
General and administrative expenses increased to $19.0 million for the year
ended December 31, 1999 from $4.3 million for the year ended December 31, 1998.
General and administrative expenses as a percentage of net revenues decreased
to 3.2% for the year ended December 31, 1999 from 3.4% for the year ended
December 31, 1998. This increase in absolute dollars was primarily attributable
to increased headcount and related expenses associated with the hiring of
additional personnel, and increased professional services expenses. We expect
general and administrative expenses to continue to increase in absolute dollars
as we expand our sales, increase our staff and incur additional costs related
to the growth of our business and our operations as a public company.

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Depreciation and Amortization Expenses

Depreciation and amortization expenses consist primarily of the amortization
of goodwill associated with business acquisitions, as well as fixed asset
depreciation. Depreciation and amortization increased to $6.6 million for the
year ended December 31, 1999 from $377,000 for the year ended December 31,
1998. Depreciation and amortization as a percentage of net revenues increased
to 1.1% for the year ended December 31, 1999 from 0.3% for the year ended
December 31, 1998. This increase is primarily attributable to the amortization
of the acquisition of Speedserve in December 1998 and the acquisition of
BuyGolf in October of 1999, which are both being amortized over a three-year
period. This increase is also attributable, to a lesser extent, to additional
depreciation of fixed assets acquired during the period.

Amortization of Deferred Compensation

Amortization of deferred compensation represents the difference between the
exercise price of stock option grants and the deemed fair value of our stock at
the time of such grants. Such amounts are amortized over the vesting for such
grants, which is typically four years. Amortization of deferred compensation
increased to $10.2 million for the year ended December 31, 1999 from $795,000
for the year ended December 31, 1998. Amortization of deferred compensation
increased to 1.7% for the year ended December 31, 1999 from 0.6% for the year
ended December 31, 1998. The increase was attributable to the grant of stock
options to new employees as well as the increase in the difference between the
grant price and the deemed fair market value of our common stock. At December
31, 1999, we had approximately $8.9 million in deferred compensation that will
be amortized through September 2003.

Charge for Warrants

Charge for warrants primarily represents the cost of warrants granted to
United Air Lines and to a lesser extent warrants issued to a commercial lender.
The charge for warrants was $7.2 million for the year ended December 31, 1999
and there was no charge during the previous year.

Other Income (Expense)

Total other income (expense) decreased to ($1.1 million) for the year ended
December 31, 1999 from $198,000 for the year ended December 31, 1998. The
decrease was largely due to interest expense related to our revolving credit
facility and interest expense related to a loan from our founder.

Net Loss

Our net loss increased to $130.2 million for the year ended December 31,
1999 from $17.8 million for the year ended December 31, 1998. This increase in
net loss was due to increased operating expenses and an increased in
amortization of goodwill, amortization of deferred compensation and charge for
warrants.

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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 revenues, for the last six 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.

[Enlarge/Download Table]

Three Months Ended
----------------------------------------------------------------
Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1998 1998 1999 1999 1999 1999
--------- -------- -------- -------- --------- --------
(unaudited)
(amounts in thousands)

Statement of Operations
Data:
Net revenues........... $34,985 $ 61,529 $107,932 $129,280 $158,960 $200,676
Cost of goods sold..... 34,148 62,361 108,115 134,217 159,094 202,269
------- -------- -------- -------- -------- --------
Gross profit (loss).... 837 (832) (183) (4,937) (134) (1,593)
------- -------- -------- -------- -------- --------
Operating expenses:
Sales and marketing... 2,151 9,264 12,322 14,459 15,672 28,878
Product development... 220 546 830 1,404 1,617 3,984
General and
administrative....... 1,140 2,025 3,079 4,437 5,356 6,165
Depreciation and
amortization......... 39 316 854 967 1,188 3,557
Amortization of
deferred
compensation......... 318 371 2,115 1,856 1,446 4,798
Charge for warrants... -- -- -- -- 7,021 170
------- -------- -------- -------- -------- --------
Total operating
expenses........... 3,868 12,522 19,200 23,123 32,300 47,552
------- -------- -------- -------- -------- --------
Operating loss......... (3,031) (13,354) (19,383) (28,060) (32,434) (49,145)
------- -------- -------- -------- -------- --------
Other income (expense):
Interest income
(expense), net....... 82 124 114 (39) (796) (420)
Other................. (59) 52 17 8 49 (76)
------- -------- -------- -------- -------- --------
Total other income
(expense).......... 23 176 131 (31) (747) (496)
------- -------- -------- -------- -------- --------
Loss before provision
for income taxes...... (3,008) (13,178) (19,252) (28,091) (33,181) (49,641)
Provision for income
taxes................. -- 3 -- -- 3 --
------- -------- -------- -------- -------- --------
Net loss............... $(3,008) $(13,181) $(19,252) $(28,091) $(33,184) $(49,641)
======= ======== ======== ======== ======== ========
As a Percentage of Net
Revenues:
Net revenues........... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0 %
Cost of goods sold..... 97.6 101.4 100.2 103.8 100.1 100.8
------- -------- -------- -------- -------- --------
Gross profit (loss).... 2.4 (1.4) (0.2) (3.8) (0.1) (0.8)
------- -------- -------- -------- -------- --------
Operating expenses:
Sales and marketing... 6.1 15.1 11.4 11.2 9.9 14.4
Product development... 0.6 0.9 0.8 1.1 1.0 2.0
General and
administrative....... 3.4 3.2 2.8 3.4 3.4 3.0
Depreciation and
amortization......... 0.1 0.5 0.8 0.8 0.7 1.8
Amortization of
deferred
compensation......... 0.9 0.6 2.0 1.4 0.9 2.4
Charge for warrants... -- -- -- -- 4.4 0.1
------- -------- -------- -------- -------- --------
Total operating
expenses........... 11.1 20.3 17.8 17.9 20.3 23.7
------- -------- -------- -------- -------- --------
Operating loss......... (8.7) (21.7) (18.0) (21.7) (20.4) (24.5)
------- -------- -------- -------- -------- --------
Other income (expense):
Interest income
(expense), net....... 0.2 0.2 0.1 0.0 (0.5) (0.2)
Other................. (0.1) 0.1 0.1 0.0 0.0 0.0
------- -------- -------- -------- -------- --------
Total other income
(expense).......... 0.1 0.3 0.2 0.0 (0.5) (0.2)
------- -------- -------- -------- -------- --------
Loss before provision
for income taxes...... (8.6) (21.4) (17.8) (21.7) (20.9) (24.7)
Provision for income
taxes................. -- 0.0 -- -- 0.0 0.0
------- -------- -------- -------- -------- --------
Net loss............... (8.6)% (21.4)% (17.8)% (21.7)% (20.9)% (24.7)%
======= ======== ======== ======== ======== ========

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Our quarterly operating results have fluctuated in the past and may continue
to fluctuate in the future based on a number of factors, not all of which are
in our control.

Liquidity and Capital Resources

Due to our business model, we have generally operated with limited working
capital. Most of our customers pay for their purchases by credit card over the
Internet, and as a result, we typically receive payment for shipments within
four to five business days of purchase. Additionally, we rely on our
distribution providers to manage inventory and ship products to our customers.
We typically pay our distributors within 30 to 60 days after they have shipped
our products, although we may take advantage of early payment discounts from
time to time. As a result of these factors, our business does not experience
the liquidity constraint faced by traditional retailers who must maintain large
inventories.

Since our inception, we have financed our operations with equity
contributions and loans from our founder, loans from a commercial lender, and
debt and equity financings. Net cash used in operating activities was $4.0
million for the year ended December 31, 1998 and $80.0 million for the year
ended December 31, 1999. Net cash used in operating activities in 1998 and for
the year ended December 31, 1999 was primarily attributable to the development
and launch of our Web site, the expansion of our infrastructure, our marketing
campaigns and operations. Net cash provided by financing activities was
$15.9 million for the year ended December 31, 1998 and $109.4 million for the
year ended December 31, 1999. Net cash used in investing activities was $2.8
million for the year ended December 31, 1998 and $13.9 million for the year
ended December 31, 1999. Net cash used in investing activities was primarily
attributable to purchases of property and equipment, partially offset by sales
of equipment in conjunction with sales-leaseback transactions. We anticipate
that we will have negative cash flows for the foreseeable future. We also
currently anticipate that we will invest approximately $20.0 million to $30.0
million in capital expenditures over the next twelve months to expand our
infrastructure. These expenditures will include enhancements in our Web site to
improve functionality and navigation, incorporating features that are intended
to improve the customer shopping experience and scalability and performance of
our Web site. We expect to fund these expenditures with working capital,
including the proceeds from this offering.

In July 1999, we entered into an agreement with United Air Lines, Inc. to
form BuyTravel.com LLC to market and sell travel services and products on the
Internet. Each of us will own 50% of BuyTravel and will make capital
contributions, in proportion to our respective ownership interest, necessary to
provide advertising and marketing support for BuyTravel. We have each agreed to
pay up to $18.0 million over three years from the effective date of the
agreement.

In October 1999, we acquired BuyGolf.com, Inc. in a stock-for-stock
transaction in which the stockholders of BuyGolf.com received 2,589,329 shares
of our common stock as consideration for their shares. In addition to our
acquisition of BuyGolf.com, we entered into a sponsorship agreement with the
PGA TOUR, Inc. and issued 1,125,000 shares of common stock in consideration for
this sponsorship in October 1999. Additionally, we have agreed to pay the PGA
TOUR $8.5 million upon the completion of this offering and to provide a $17.0
million letter of credit as security for payment of the sponsorship fee. In
October 1999, we also completed the private placement of our Series B
convertible participating preferred stock to a group of investors led by
SOFTBANK Capital Partners, L.P. and its affiliates for approximately $90.0
million.

We have also entered into a binding letter of intent with SOFTBANK America,
Inc. and its affiliates to form three separate international joint ventures in
various international territories. Under the letter of intent, we have agreed
to commit approximately $7.7 million of the proceeds of this offering in
connection with the formation of these international joint ventures. We are not
required to make any further capital contributions to these joint ventures.

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In February 2000, SOFTBANK issued a commitment letter to us confirming its
intention to provide the necessary investments in us to permit us to operate in
the ordinary course of business through the closing of this offering. This
commitment is limited to $73.0 million.

We believe that the net proceeds from this offering, along with the proceeds
of our Series B financing, will be sufficient to satisfy our working capital
requirements through the next 12 months. Even if additional funds are not
required, we may seek additional equity or debt financing. We may not be able
to obtain additional funds on acceptable terms, if at all.

Recent Accounting Pronouncements

In March 1998, the Accounting Standards Executive Committee issued Statement
of Position 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. SOP 98-1 requires all costs related to the
development of internal use software other than those incurred during the
application development stage to be expensed as incurred. Costs incurred during
the application development stage are required to be capitalized and amortized
over the estimated useful life of the software. SOP 98-1 is effective for our
fiscal year ended December 31, 1999. We do not expect that the adoption of SOP
98-1 will have a material effect on our consolidated financial statements as
our policies currently are substantially in compliance with SOP 98-1.

In April 1998, the American Institute of Certified Public Accountants issued
SOP 98-5, Reporting on the Costs of Start-Up Activities. SOP 98-5 is effective
for our fiscal year ended December 31, 1999. SOP 98-5 requires costs of start-
up activities and organization costs to be expensed as incurred. We do not
expect that the adoption of SOP 98-5 will have a material effect on our
consolidated financial statements.

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 is
effective for fiscal years beginning after June 15, 2000. SFAS No. 133 requires
that all derivative instruments be recorded on the balance sheet at their fair
value. Changes in the fair value of derivatives are recorded each period in
current earnings or other comprehensive income (loss) depending on whether a
derivative is designed as part of a hedge transaction and, if so, the type of
hedge transaction involved. We do not expect that adoption of SFAS No. 133 will
have a material impact on our consolidated financial statements as we currently
do not hold any derivative financial instruments.

Year 2000 Compliance

Many existing computer systems and software are coded to accept only two
digit entries in the date code field and cannot distinguish 21st century dates
from 20th century dates. If these systems have not been properly corrected,
there could be system failures or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions or engage in normal business activities. As a result, many
companies' software and computer systems may need to be upgraded or replaced to
make them Year 2000 compliant. To date, we have not experienced any Year 2000
problems in our computer systems or operations. However, other companies,
including us, could experience latent Year 2000 problems.

Our State of Readiness. We have assessed the impact that the Year 2000
problem may have on our operations. We have identified the following two areas
of our business that may be affected:

Internal Infrastructure. We have internally developed substantially
all of the systems, transaction processing applications and software, and
networking infrastructure that we use to operate and monitor all aspects
of our business. In addition to these information technology systems, our
non-information technology systems, including heating and air
conditioning, security systems, phone systems and other embedded
technology may be subject to Year 2000 risks. Although we developed or
acquired our software, systems and applications within the last two years
and believe these systems are

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substantially Year 2000 compliant, we have hired an information systems
consultant to verify the Year 2000 readiness of our systems. We have
completed the full review of our systems and infrastructure and believe
that our internal infrastructure, including our non-information
technology systems, is Year 2000 compliant.

Third Party Providers. We use third party equipment and software
that may not be Year 2000 compliant. As a result, our ability to address
Year 2000 issues is, to a large extent, dependent upon the Year 2000
readiness of these third parties' hardware and software products. We have
contacted the third parties from whom we have purchased hardware and
software products and they have represented to us that their products are
Year 2000 compliant.

We are also entirely dependent on our distribution and fulfillment
providers to provide and distribute the merchandise we sell in our online
stores. We have initiated formal communications with all of our
distributors and fulfillment providers to determine the extent to which
we are vulnerable to those third parties' Year 2000 issues. We have
obtained Year 2000 readiness disclosure statements from each of these
providers to confirm that their systems are Year 2000 compliant. Although
we believe that our distributors and fulfillment providers are Year 2000
compliant, in the event they do not maintain Year 2000 compliance, we may
have to retain alternative product and service suppliers.

In addition, we have evaluated the Year 2000 compliance of
CyberSource, our credit card processor, and other financial
intermediaries through which our transactions are processed. We have also
evaluated the Year 2000 compliance of ClientLogic, our customer service
and support provider, and Exodus Communications, our database server
host. We have obtained Year 2000 readiness disclosure statements from
ClientLogic, CyberSource and Exodus Communications verifying that their
systems are Year 2000 compliant. We currently do not have any back-up
systems in place in the event these third party systems become inoperable
due to latent Year 2000 problems.

The Costs of Addressing our Year 2000 Issues. To date, our expenses in
connection with identifying and addressing Year 2000 compliance issues have
been approximately $50,000. Our expenses have generally related to the
operation costs associated with time spent by our employees and a consultant in
the evaluation process and Year 2000 compliance in general. We could incur
additional costs in addressing any unforeseen Year 2000 issues, which could
have a material adverse affect on our business.

Our Contingency Plans. We have identified our worst case scenario as the
interruption of our business resulting from Year 2000 failure of our third
party systems to provide access to our Web site and transaction processing
systems, and the failure of our credit card processing agent to process our
orders. Although we have developed a worst case scenario plan concerning our
Year 2000 issues, we cannot be certain that this plan will be successful. Our
worst case scenario plan provides for the following:

. in the event we lose power, our facility has a standby generator that
will supply power to the building; and

. in the event we lose communication with our suppliers, we will deliver
our customers' orders to our suppliers through other means, including
overnight delivery, traditional mail, courier or facsimile.

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BUSINESS

General

BUY.COM is a leading multi-category Internet superstore based on our net
revenues and the amount of traffic to our site. We offer a comprehensive
selection of brand name computer hardware and peripherals, software, books,
videos, DVDs, computer games, music, clearance products, consumer electronics
and golf-related products at everyday low prices. Through our nine online
specialty stores, we offer more than 850,000 SKUs in a convenient, easy-to-use
shopping interface that features extensive product information and multi-media
presentations. Our e-commerce portal, www.buy.com, links all of our nine
specialty stores and is designed to enhance the customer's online shopping
experience 24 hours a day, seven days a week. We use a business model that
involves outsourcing the majority of our operating infrastructure including
distribution and fulfillment, customer service and support, credit card
processing and the hosting of our system infrastructure and database servers.
This business model allows us to add new product categories easily and rapidly
and eliminates significant capital investments and the costs and risks of
carrying inventory. We intend to expand our product offerings by establishing
strategic relationships with leading companies similar to our BUYTRAVEL.COM
joint venture with United Air Lines, Inc.

Industry Background

Growth of the Internet and E-Commerce

The Internet has rapidly emerged as a significant interactive medium for
worldwide communication, instant access to information and e-commerce.
International Data Corporation estimates that the number of Internet users
worldwide will increase from approximately 196 million at the end of 1999 to
more than 502 million by the end of 2003. We believe this rapid growth is
primarily attributable to the increasing number of personal computers in homes
and offices, technological advancements that provide easier, faster and cheaper
access to the Internet and the proliferation of products, content and services
available on the Internet at competitive prices.

We believe increasing numbers of customers will engage in e-commerce as
online retailers take advantage of the recent technological improvements
associated with the Internet that allow the integration of one-click buying,
intelligent product recommendations and near real-time customer service.
International Data Corporation estimates that the number of customers making
purchases on the Internet will grow from approximately 48 million in 1999 to
approximately 183 million in 2003. In addition, International Data Corporation
predicts the total value of goods and services purchased annually over the
Internet will increase from approximately $111.4 billion in 1999 to
approximately $1.3 trillion in 2003.

Limitations of Traditional and Catalog Retailers

The emergence of the Internet as an alternative shopping channel has
highlighted the limitations associated with shopping at traditional and catalog
retailers. Traditional retailers face inherent structural limitations that may
inhibit their ability to capitalize on the growing worldwide market for their
goods and services. The space available in a traditional retail store limits
merchandising flexibility and constrains the number of SKUs that a traditional
retailer can offer at any given time. Traditional retailers must make
significant investments in inventory that may quickly become obsolete. These
retailers also face challenges in hiring, training and maintaining
knowledgeable sales staff and preventing losses due to theft by customers and
employees. Personnel costs typically limit operating hours, reducing customer
convenience. Furthermore, traditional retailers generally have difficulties
gathering customer demographics and preferences, and their potential customer
base is typically limited to those who live within a reasonable geographic
distance from the retail locations.

While catalog retailers provide customers with the convenience of shopping
from anywhere at anytime, the number of SKUs they can feature and the product
information they can provide is limited due to catalog

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mailing, printing and other related expenses. Since catalogs must be printed
and mailed far in advance of sales, catalog retailers cannot readily change
their product offerings or prices to adapt to an evolving market. Furthermore,
the catalog shopping experience is, in general, neither interactive nor
personalized, yet requires extensive personnel support to take and process
orders.

The Online Retail Opportunity

In contrast to traditional retail channels, the Internet provides online
retailers with the opportunity to offer a broad and evolving selection of
merchandise to customers worldwide, while enabling customers to shop at their
convenience without leaving their homes or offices. The Internet provides
essentially unlimited shelf space without significant capital investments,
allowing online retailers to build large global customer bases at an
unprecedented pace and to potentially achieve superior economic returns over
the long-term. The flexible structure of the Internet also enables online
retailers to update product descriptions quickly and make new products
immediately available for sale without incurring significant expenses. In
addition, online retailers can easily obtain demographic and behavioral data
about customers, increasing opportunities for targeted marketing.

Forrester Research estimates that the online sale of computer hardware is
one of the largest domestic Internet retail opportunities for the consumer and
small office/home office market. According to Forrester Research, annual online
computer hardware sales are expected to grow from approximately $2.4 billion in
1999 to approximately $15.0 billion in 2003, representing approximately 14% of
the entire computer hardware market in 2003. Media products such as software,
books, videos and music also represent a fast growing segment of the online
retail market. Forrester Research estimates that domestic annual online sales
of these products will grow from approximately $3.0 billion in 1999 to more
than $10.0 billion by 2003.

The Online Advertising and Merchandising Opportunity

The significant increase in online shopping has coincided with technological
advances that provide advertisers with cost-effective means of targeting
specific customer groups, interacting with and receiving feedback from
customers and measuring effectiveness of the specific advertising campaigns.
Online advertising also provides advertisers a unique opportunity to use a
variety of advertisements and provide substantial product information. Because
these methods generally are not economically available in traditional media,
the Internet has rapidly emerged as a compelling vehicle for advertisers as Web
sites have begun to aggregate a large number of visitors with attractive
demographics. Accordingly, Forrester Research estimates that the amount of
Internet advertising worldwide will grow from approximately $3.3 billion in
1999 to more than $24.1 billion by 2003.

Challenges Faced by Online Retailers

The Internet addresses many of the limitations faced by traditional and
catalog retailers by providing unlimited shelf space, worldwide geographic
reach for potential customers, customer convenience, significant flexibility
with regard to vendor promotion and cross-merchandising opportunities, and on a
comparable basis, extremely low costs. However, online retailing is new and
evolving and presents a number of challenges, including:

. Limited Brand Awareness and Customer Loyalty. Online retailers must
build their brand recognition to attract potential new customers, to
develop customer trust and loyalty in the absence of face-to-face
interaction and to maintain high levels of customer traffic to their Web
sites. Creating a strong brand, however, can be difficult and expensive,
and many online retailers have had limited success developing their
brand name.

. Significant Price Competition. Online pricing engines enable customers
to easily determine the lowest price for a particular product. Because
online shoppers can quickly access pricing information with little
effort, online retailers must be able to offer competitive prices to
continue to draw traffic to their Web sites.

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. Limited Product Offerings and Customer Convenience. Many online
retailers focus on a single product category, which may frustrate
customers who must visit a variety of online stores and pay multiple
shipping fees to accommodate all of their online shopping needs. Among
those online retailers who provide multiple product offerings, many have
sites that are difficult to navigate, do not use sophisticated search
capabilities and do not allow customers to purchase products using a
single check-out process.

. Inability to Rapidly Increase Operations and Infrastructure. Many online
retailers choose to handle most aspects of the online retail channel
internally, including maintaining a large inventory of products,
shipping and processing orders, and providing customer service. This
requires significant time, capital investment and operating overhead
that constrain the online retailers' ability to increase sales or expand
into new product categories. Unexpected increases in sales can also
strain the retailer's infrastructure, resulting in delayed or improper
shipments, slow response time and dissatisfied customers.

. Limited Content and Customer Service. Due to the increasing number of
Web sites, online retailers must provide compelling content and other
attractive features to differentiate their sites. Many first time online
shoppers may experience concern over the absence of the face-to-face
communication associated with e-commerce transactions. We believe a
successful online retailer must provide immediate customer support,
timely shipments, frequent status updates and knowledgeable advice.

Competition among online retailers has increased as a result of the
attractive commercial medium provided by the Internet and the relatively low
barriers to enter this market. Therefore, we believe the success of online
retailers will depend on their ability to develop brand awareness, offer
competitive prices on a broad selection of products, and provide compelling
content and superior customer service.

The BUY.COM Solution

BUY.COM is a leading multi-category Internet superstore offering a broad
selection of brand name products to consumers and small businesses at everyday
low prices. Through word of mouth and aggressive online and traditional media
advertising, we are perceived as a low price leader and believe we have one of
the most widely recognized e-commerce brands. Our easy-to-use Web site provides
a rich shopping experience with extensive content and product information,
backed by our commitment to superior customer service. Our key operating
advantages include the following:

. Leading Multi-Category Internet Superstore. We operate nine integrated
online specialty stores that feature a broad range of brand name
products and approximately 850,000 SKUs. Our sophisticated search engine
allows customers to locate products by name or category, and our site
facilitates easy navigation among our stores. Our customers can make
purchases from any of our online stores using a single shopping basket,
simplifying the check-out process. We believe the broad product
offerings at our Internet superstore, combined with our convenient
shopping experience, enables customers to save time by addressing many
of their shopping needs at one site. We believe this one-stop shopping
convenience also encourages repeat purchases from our Web site. During
September 1999, approximately 48% of our orders and over 55% of our
booked revenues have come from repeat customers. In addition, Media
Metrix estimates that the number of unique visitors to our Web site in
November 1999 was approximately 4.7 million, which represents an
increase of 129% over the 2.1 million estimated unique visitors in
October 1999. The rapid growth of our business has enabled us to become
one of the top five e-commerce providers, according to a number of
industry studies.

. Highly Flexible Business Model. We use a business model that includes
outsourcing the majority of our operating infrastructure to leading
national distribution and fulfillment firms and other service providers
with established expertise. This business model allows us to make
adjustments quickly within existing product lines and to add new product
categories easily and rapidly without significant capital investments or
the costs or risks of carrying inventory. By aligning with leading
distributors in each of our product categories, we have access to their
significant inventories and distribution capabilities.

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. Low Operating Costs. We minimize our infrastructure and operating
expenses by taking advantage of the cost efficiencies achieved by our
distribution and fulfillment providers. By keeping our costs low, we are
able to focus our efforts and resources on developing our brand name and
enhancing our customers' overall shopping experience. We believe our low
operating overhead will enable us to continue to offer most products at
prices below those of other leading online retailers.

. Superior Customer Experience. To build customer loyalty, we provide
compelling content and extensive product information backed by superior
customer service throughout the shopping experience. We are committed to
customer satisfaction and regularly upgrade our services to ensure total
customer care. Our user-friendly Web site provides a seamless shopping
experience across all of our specialty stores and provides expanded
content, including video and sound clips, detailed product information,
professional and customer product reviews, and access to the first
chapter of many of the books offered on our site. Our customer service
representatives provide telephone and e-mail support 24 hours a day,
seven days a week. Shoppers can also engage in e-mail interactions with
our customer service representatives while online to enhance
communication regarding order status, service, returns and product
information.

. Attractive Advertising Vehicle. We believe that our Web site, given the
significant number of visitors, attracts advertisers seeking a large
target audience of likely purchasers who spend relatively large amounts
of money online. During December 1999, our average order size was more
than $134 and our average daily product sales were over $2.7 million.
Advertisers can place many different types of advertisements on our
site, including supplemental product information that reaches customers
at the point of purchase. Furthermore, we provide advertisers with
demographic information and traffic feedback to enable them to evaluate
the effectiveness of an advertising campaign.

We also believe our business model, the strength of the BUY.COM brand name
and our rich shopping experience provide us with significant competitive
advantages and offer a compelling value proposition to both customers and
advertisers that will enable us to apply our business model to a broad range of
products and services.

Strategy

Our objective is to become the leading e-commerce destination offering a
broad selection of brand name products and services to consumers and small
businesses at everyday low prices. To achieve this objective, the key elements
of our strategy include the following:

. Build the BUY.COM Brand. We believe BUY.COM is one of the most widely
recognized e-commerce brands. We intend to further increase customer
loyalty and brand recognition by offering multiple comprehensive product
lines at everyday low prices backed by superior customer service. In
addition to our aggressive pricing strategy, we plan to continue to
promote our brand through a variety of marketing and promotional
campaigns, including television, print, radio, direct mail and outdoor
advertisements, as well as strategically placed online advertisements
and promotional campaigns.

. Pursue Additional E-Commerce Opportunities. We intend to expand our
product offerings to include the most popular product categories on the
Internet, encouraging one-stop shopping for multiple products and repeat
purchases. We plan to use our strong market position in online computer
hardware sales to increase sales in other product categories. We also
plan to continue to pursue and expand relationships with leading
distributors in each of our existing product categories and in new
product categories, to establish joint ventures and strategic
relationships with major manufacturers and service providers, and to
enter into referral arrangements with other e-commerce companies.

. Improve Profitability and Achieve Higher Return on Capital. The cost
efficiencies and economies of scale of our distribution and fulfillment
providers enable us to operate with significantly lower operating
expenses than many of our competitors. As our brand strengthens and we
add additional products and services, we believe we will be able to
capture even greater efficiencies while improving gross margins

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on existing products. We will continue to modify our pricing strategy to
maintain a group of aggressively priced, high volume items, as well as
promoting associated higher margin products and emphasizing advertising
revenues. Because our business model enables the addition of higher margin
products and services without significant capital investment in
distribution infrastructure and inventory, we expect to be able to achieve
higher returns on invested capital.

. Continue to Improve the Customer Shopping Experience. Offering superior
customer service and continually improving our communications with
customers are among our top priorities. We intend to continuously update
our Web site to increase its speed and functionality and to provide
greater product information in a more user friendly, intuitive format.
We plan to provide increased training for our customer service
representatives and to continue to invest in technology that will
improve our customer service and provide a more enjoyable shopping
experience.

. Expand Advertising and Merchandising Opportunities for Advertisers. We
plan to aggressively pursue high margin advertising revenues by
providing advertisers with opportunities to reach our large and
attractive customer base. We currently offer a variety of options for
advertisers, ranging from banner advertisements to tailored advertising
and merchandising programs that target specific audiences. In addition,
we can provide advertisers with detailed demographic information that
enables them to measure and improve the effectiveness of their
advertisements. We plan to continue to develop innovative programs for
advertisers and expand our sales force to aggressively market these
programs.

. Expand and Improve Relationships with Distribution and Fulfillment
Providers to be a Low Cost Supplier. We plan to continue to work with
our distribution and fulfillment providers to obtain more timely and
accurate product information, shipping and fulfillment. As our sales
increase, we believe we will be able to achieve more favorable terms and
pricing from our providers. We also intend to pursue new relationships
with leading distributors and service providers as we expand into other
categories.

. Expand Internationally. The Internet offers a unique opportunity for
retailers to quickly reach the international market. We believe our
business model will enable us to pursue this large market without
significant investment by aligning ourselves with established
international distributors. We intend to expand our presence in the
international marketplace by initially targeting countries with high
Internet usage and distribution networks complementary to our business
model. We recently launched BUY.COM Canada and entered into a binding
letter of intent with SOFTBANK America, Inc. and several of its
affiliates and a News Corporation affiliate to form international joint
ventures in the United Kingdom, Australia, New Zealand and India. We
expect to begin operations in the United Kingdom in the first quarter of
2000. In addition, we have binding letters of intent to form
international joint ventures with several SOFTBANK affiliates in other
international territories.

The BUY.COM Online Shopping Experience

Our Web site is a multi-category Internet superstore offering a broad range
of products. We have included compelling content in each of our online stores
to allow customers to enjoy their visit to our Web site and make more informed
purchase decisions. We believe that shopping at www.buy.com offers attractive
benefits to customers, including convenience, ease of use, a broad selection,
in-depth product information and content, and everyday low prices. The
following highlights the key features of our online shopping experience:

. Browsing. We have created a seamless interface between each of our nine
online specialty stores that provides consistent functionality, look and
feel. By clicking on the tabs at the top of every Web page, customers
can move between stores quickly and easily. At the home page for each
store, customers can view promotions and featured products or use a
keyword search to locate a specific product. Our Web site also allows
customers to conduct sophisticated searches based on pre-selected
criteria designated in each store. We have organized our product
offerings into a simple set of categories and subcategories within each
store, each using the "BUY[product name]" format to promote a uniform
shopping experience and to make it easier for the customer to link
directly to a particular store. This simple structure also allows
customers to click on the designated category or subcategory to go to
the desired location immediately.

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. Accessing Information. One of the key advantages of online shopping is
the ability to access a broad range of information quickly and easily.
On our Web site, customers can find detailed product information and
specifications, as well as other value added features, including product
pictures, video and music clips, book previews, professional and
customer product reviews, supplemental information from the
manufacturers, gift ideas and specialty shops. We believe this extensive
information enables the customer to make a more educated purchase
decision and enhances the overall shopping experience.

. Selecting a Product and Checking Out. Customers can purchase products
from each of our online stores using the same virtual shopping basket
that is accessible from any product page on our Web site. Similar to a
traditional retail store, customers can add and subtract products from
their shopping basket as they browse, prior to making a final purchase
decision. To execute orders, customers click on the "checkout" button.
New customers are prompted to create an account and supply shipping and
payment information. Repeat customers, through their personally created
username and password, can access their account to view order status,
view their history of previous orders or update their personal
information. We store our customers' account information on our secure
network, including multiple shipping addresses and billing options,
which eliminates the need for repeat customers to complete their order
information during future transactions. We charge our customer's credit
card only after we have shipped the product. We also provide updated
product information for each of our online stores to indicate product
availability and the approximate amount of time until a particular
product will be shipped. When purchased products are in stock, we
generally ship orders received before 4:00 p.m. Eastern Time at the
BUYCOMP.COM and BUYSOFT.COM stores on the same day as the order is
placed. We generally ship orders for other in-stock products within 24
hours of our receipt of the order.

. Monitoring Order Status. To provide the highest level of customer
service, we attempt to maintain communication with our customers
throughout the purchase and fulfillment process. We confirm each order
via an automatic e-mail within minutes of the order placement, and we
notify our customers via e-mail with the shipper's tracking number when
their product has been shipped. We send additional e-mail communications
to our customers regarding the status of their orders and to follow up
after the order has been received by the customer.

. Obtaining Assistance. Customers can access online assistance on our site
by clicking on either the "Customer Service" button or the "Help" button
on each page in our specialty stores. Our online e-mail feature also
enables customers to ask a customer service representative questions
while online via a chat format. In addition, customers can call our
prominently displayed toll-free phone number found throughout our Web
site to reach our customer service representatives 24 hours a day, seven
days a week.

Our Online Specialty Stores

We have selected our nine online specialty stores based upon product lines
that have large market potential, that are well suited for e-commerce, and that
are in industries that allow us to establish a relationship with a dominant
distributor. Our current online specialty stores include the following:

. BUYCOMP.COM. This store offers over 29,000 computer products, including
computers, printers, monitors, modems and peripherals from manufacturers
such as Compaq, Hewlett-Packard, IBM, Viewsonic and 3COM. Customers may
obtain detailed product descriptions, product pictures and reviews, as
well as rebates and other promotional information. This store also
offers extended warranties and permits customers to link from the store
directly to the manufacturers' technical support pages. In addition,
this store features vendor specific sub-stores that allow customers to
browse products within the manufacturer's designated storefront.

. BUYSOFT.COM. This store offers over 9,000 computer software titles from
leading manufacturers, including Microsoft, Symantec, Corel and Adobe.
Similar to our BUYCOMP.COM store, we feature manufacturer's sub-stores,
and our customers may link from this store directly to manufacturers'
technical support pages. In addition, customers may obtain information
on weekly specials, rebates and promotions, as well as reviews for top
selling software products.

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. BUYBOOKS.COM. This store offers over 490,000 hardback, paperback and
audio book titles. Customers may browse a variety of categories,
including subject matter, New York Times bestsellers and new releases.
Customers may also conduct targeted searches for their favorite authors
or titles. Our site enables customers to read the first chapter of many
books, to submit their own book reviews and to read professional reviews
and reviews submitted by other customers. We also offer customers the
opportunity to preorder upcoming releases.

. BUYVIDEOS.COM. This store offers over 55,000 DVD and VHS titles from
multiple categories, including comedy, action, drama, documentary and
foreign films. The BUYVIDEOS.COM store includes video clips on many
titles, preorder capabilities and a limited selection of video hardware.
Customers may also focus their search on DVD titles within the DVD Only
subcategory, accessible by a direct link from the home page.

. BUYGAMES.COM. This store offers over 1,700 games for the Nintendo64,
PlayStation, Sega Saturn, Dreamcast and Game Boy systems. This store
offers PC and Mac games, strategy guides and gaming hardware. We provide
detailed product descriptions, screen shots, video clips, professional
and customer reviews, codes and game hints, as well as recommendations
for related games.

. BUYMUSIC.COM. This store offers over 260,000 music titles in both CD and
cassette formats. Customers may order titles from various categories
including pop/rock, alternative, electronica, heavy metal, rhythm and
blues/soul, classical, jazz, country, rap/hip hop, folk, new age and
soundtracks. This store offers detailed product descriptions, music
clips, full song listings, recommended albums and customer reviews. The
store also includes upcoming releases and new artist features.

. BUYCLEARANCE.COM. This store offers brand name close-out inventory from
some of the most popular manufacturers, including Compaq, Toshiba,
Hewlett-Packard, Philips, NEC and Canon. Our inventory consists mainly
of home electronics and computer hardware. We obtain this merchandise at
substantial discounts through liquidations, overages and promotions. We
also work with our vendors to ensure that this store's product selection
serves to complement our other online stores.

. BUYELECTRONICS.COM. This store was launched in November 1999 and offers
brand name consumer electronic products, including cameras, DVD players,
telephones and televisions. This store offers detailed product
descriptions and customer reviews. In addition, customers may browse by
product category, reviewing other top selling products or by reviewing
new products offered for sale.

. BUYGOLF.COM. This store was integrated into our Web site in January 2000
and offers brand name golf equipment and other golf-related products and
accessories, including golf clubs, bags, balls, shoes, clothes and
memorabilia. Customers may browse by product vendor and product category
and may view various tournament statistics.

We plan to expand our product offerings within existing product categories
and to add new product categories from time to time to increase the overall
shopping convenience for our customers.

Strategic Relationship with United Air Lines, Inc.

In July 1999, we formed a joint venture with United Air Lines, Inc. to
create an online travel service that will offer a full range of airline
tickets, automobile rentals and hotel reservations as well as other travel
related services through the "BUYTRAVEL.COM" Web site. BUYTRAVEL.COM will be
operated through a newly-formed limited liability company, in which we have a
50% ownership interest. In connection with the formation of BUYTRAVEL.COM, we
entered into a Marketing and Services Agreement with United. Under this
agreement, we will provide a storefront on our Web site, marketing and
advertising sales support by our personnel, systems and technology support by
our development personnel, and credit card processing services through our
third party vendors. Under the agreement, United will provide availability to
all of its fares, including all excess inventory or E-fares. United will also
coordinate third party relationships with selected ticketing and infrastructure
vendors. In addition, each of us has agreed to provide specified marketing and

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advertising support over the initial three years of the agreement. As
consideration for United's commitment to this venture, we issued to United a
warrant to purchase 1,250,000 shares of our common stock at an exercise price
of $16.00 per share. The BUYTRAVEL.COM operating agreement requires both
parties to approve various matters related to corporate governance including
approval of the annual budget and business plan, material expenditures, the
sale or purchase of material assets, the admission of new members, the
dissolution of the company, electing or removing the Chief Executive Officer of
the company and changing the number of directors of the company. In the event
we are unable to agree with United on one of these matters after the initial
three years of this agreement, United has the right to require us to purchase
its interest in BUYTRAVEL.COM at a price equal to the fair market value of its
interest at the time of our purchase. We intend to launch the BUYTRAVEL.COM
service during the first quarter of 2000.

Acquisition of BuyGolf.com

On October 25, 1999, we acquired BuyGolf.com, Inc. for an aggregate purchase
price of $23.5 million in a stock-for-stock transaction in which the current
stockholders of BuyGolf.com received shares of our common stock as
consideration for their shares. Our acquisition of BuyGolf.com enables us to
offer a variety of golf equipment and other golf-related products and
accessories, including golf clubs, bags, balls, shoes, clothes and memorabilia.
As a result of the acquisition, we acquired a four year supply and distribution
agreement with Las Vegas Golf & Tennis, Inc. through which they are the primary
source for the golf equipment and accessories that we sell. The acquisition was
accounted for as a purchase transaction and the operating results of
BuyGolf.com are included in our consolidated financial statements from the date
of the acquisition.

In October 1999, we also entered into a five year sponsorship agreement with
the PGA TOUR in which we will become the exclusive title sponsor of the
professional tour previously known as the Nike Tour. Our sponsorship of the
BUY.COM Tour provides for television coverage of various BUY.COM Tour events,
prominent featuring in the PGA TOUR's controlled media, including "Inside the
PGA TOUR," prominent display of the BUY.COM Tour logo on the PGA TOUR's Web
site and other sponsorship and media opportunities. We will also be authorized
to merchandise and sell products in our online store that are branded with the
"Official World Golf Championships" logos and designs. In connection with this
sponsorship and subject to the PGA TOUR's existing contractual relationships,
we also have a non-exclusive right to sell branded PGA TOUR merchandise on our
Web site. In addition, the PGA TOUR has agreed that we will be the only online
store authorized to sell branded BUY.COM Tour merchandise. In consideration for
this sponsorship agreement, we issued the PGA TOUR 1,125,000 shares of our
common stock and agreed to pay $8.5 million upon the completion of this
offering and to provide a $17.0 million letter of credit as security for
payment of the sponsorship fee. The letter of credit will be secured by a cash
account and will terminate in June 2001, but will be subject to renewal
periods. We believe this sponsorship provides an attractive marketing vehicle
that enables us to target a customer demographic that is consistent with the
customer demographics of our other online stores.

International Operations

In September 1999, we entered into a letter of intent with SOFTBANK America,
Inc. and several of its affiliates and a News Corporation affiliate to form
international joint ventures in the United Kingdom, Australia, New Zealand and
India. In addition, we have a binding letter of intent with SOFTBANK America
and its affiliates and Vivendi to form an international joint venture in
continental Europe, and a joint venture with SOFTBANK America and its
affiliates in Japan. We intend to have a 51% interest in each of these joint
ventures and, under the terms of the letter of intent, have committed
approximately $2.7 million in connection with the formation of the joint
venture in continental Europe, approximately $2.0 million for the formation of
the joint venture in the United Kingdom and approximately $3.0 million for the
formation of the joint venture in Japan. We are not required to make any
further capital contributions to these joint ventures. Each of the joint
ventures will hire its own management and other personnel and will establish
relationships with local distributors for product categories suited for the
particular territory. Each joint venture Web site is expected to have the same
look and feel as the BUY.COM Web site. We intend to license, on a royalty free
basis, our e-commerce technology and the right to use the BUY.COM name to each
of these joint venture entities to use

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in their respective territories. These letters of intent may be terminated by
either party if definitive agreements have not been executed by March 2000 for
the joint ventures in the United Kingdom and continental Europe and by June
2000 for the joint venture in Japan.

We began selling some of our products in Canada in December 1999. BUY.COM
Canada currently includes computer hardware and software specialty stores and
is managed and supported through our existing United States operations.

Distribution Network

We believe that the ability to maintain a primarily outsourced operating
infrastructure is key to an efficient and profitable e-commerce model. As part
of this strategy, we have entered into relationships with leading distributors
in each of our product segments, including Ingram Micro for computer hardware
and software, Ingram Entertainment for videos, DVDs, and video games, Ingram
Book for books, Valley Media for music, Nashville Computer Liquidators for our
clearance products and Las Vegas Golf & Tennis for our golf-related products.
These distributors carry a vast inventory of products located in warehouses
throughout the country from which products are picked, packed and shipped
directly to our customers or our national fulfillment provider. Through this
system, we have been highly effective at leveraging the inventory management
and fulfillment capabilities of each of our providers to deliver products cost-
effectively to our customers nationwide. For example, in September 1999, the
average time for Ingram Micro to ship an in-stock product to a customer was
less than one day. Our key distributors include the following:

. Ingram Micro. In March 1999, we entered into an agreement with Ingram
Micro through which they have agreed to provide, process and distribute
the computer hardware and software products that we sell. Ingram Micro
is one of the leading wholesalers of brand name computer hardware and
software products, with net sales in excess of $22.0 billion for 1998.
As part of our commitment with Ingram Micro, we have agreed to
exclusively purchase all of our requirements for computer hardware and
software from them to the extent that a particular product is available
at the time an order is placed. We believe we receive favorable pricing
for the products we purchase based on our commitment to meet an annual
product sales target of $350.0 million. Also as part of this agreement,
Ingram has agreed to help us secure a minimum dollar amount of marketing
related vendor advertising based on a specified percentage of our net
purchases from Ingram in a twelve month period. This marketing
arrangement is contingent upon our achieving and maintaining
$500.0 million in annual product purchases. This agreement expires in
March 2000, but is subject to automatic one year renewal periods. The
agreement may be terminated by either party for any reason upon 120 days
prior written notice. We are currently in negotiations with Ingram Micro
to renew our agreement with them.

. Ingram Entertainment, Inc. In December 1998, we entered into an
agreement with Ingram Entertainment through which they have agreed to
supply us with the entertainment products for our online stores,
including videos, video games, DVDs, audio books and other multimedia
products and accessories. We believe we receive favorable pricing from
Ingram Entertainment based on the quantity of products that we purchase.
Ingram Entertainment is a leading distributor of videos, video games,
DVD hardware and software and audio books, with net sales of over $1.0
billion in 1998. This agreement expires in December 2001, but they may
terminate our contract if we become past due on our account or otherwise
violate our credit terms with them. In August 1999, we amended this
supply agreement to provide for co-op advertising dollars on some
purchases and include a guarantee that Ingram Entertainment will ship
orders on the same day received if the order is received before 2:00
p.m. Eastern time, and next day shipment for orders placed after 2:00
p.m. This amendment also requires earlier fulfillment and shipment on
orders for overnight or second day delivery service.

In October 1999, we entered into a binding term sheet with Ingram
Entertainment to purchase from a third party supplier, on our behalf, the
consumer electronic products that we sell in our electronics store. Ingram
Entertainment may terminate this agreement for any reason upon 90 days
prior written notice.

. Valley Media, Inc. In February 1999, we entered into an agreement with
iFill, a division of Valley Media, Inc., through which we will
exclusively purchase all of our pre-recorded music products from Valley
Media. Valley Media is a full line distributor of music and video
entertainment products, with net sales in excess of

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$780.0 million for 1998. Valley Media is solely responsible for the order
fulfillment and distribution of these pre-recorded music products. Valley
Media has agreed to ship priority orders that have been received by 10:00
a.m. Pacific Time on the same day, and orders received after 10:00 a.m.
will be shipped the following business day; standard priority orders
received by 1:00 p.m. Pacific Time are shipped on the next business day
and those orders received after 1:00 p.m. will not be shipped until the
second business day after the order is received. In addition, Valley Media
has agreed to sell their products to us at a discount, provided that we
purchase a designated minimum volume of products from them under this
agreement. In the event we do not meet these volume levels, we will be
required to pay an additional fee for the products that we purchase from
them. This agreement expires in February 2001, but is subject to automatic
one year renewal periods. This agreement may also be terminated if Valley
Media discontinues sales to online vendors, or if we terminate online
sales of pre-recorded music products.

. Ingram Book Company. We have entered into agreements with Ingram Book
Company and Ingram Fulfillment Services Inc., through which these
companies have agreed to supply and distribute the books that we sell.
Ingram Book Company is a leading wholesale distributor of books and
stocks approximately 450,000 titles. These agreements expire in September
2003 and there are no provisions providing for the automatic renewal of
these agreements. We issued a warrant to Harpeth Holdings Inc., an
affiliate of the Ingram Book Company, to purchase 625,000 shares of our
common stock at $9.07 per share in consideration for these agreements.

. Nashville Computer Liquidators L.P. In April 1999, we entered into an
agreement with Nashville Computer Liquidators L.P., a subsidiary of
Ingram Entertainment Inc., through which Nashville Computer Liquidators
has agreed to supply and distribute the liquidation products that we
sell, including computers, consumer electronics and entertainment items.
As part of this agreement, Nashville Computer Liquidators has agreed to
process and deliver all of our orders from our online clearance store.
They have also agreed that all orders received by 12:00 p.m. Central Time
will be shipped on the same business day. Orders received after 12:00
p.m. Central Time will be shipped on the following business day. In
addition, as part of our commitment, we have agreed to purchase all of
our liquidation products from them exclusively. This agreement expires in
April 2001, but is subject to automatic one year renewal periods.
Nashville Computer Liquidators may also terminate this agreement
unilaterally if we become more than 15 days past due or otherwise violate
our credit terms with them.

. Las Vegas Golf & Tennis, Inc. In May 1999, we entered into an agreement
with Las Vegas Golf & Tennis through which they have agreed to be our
primary source of the golf equipment, accessories and the other golf-
related merchandise that we sell. As our primary source, Las Vegas Golf &
Tennis is our first contact and supplier of these golf products, subject
to their availability. This agreement expires in May 2000, although
either party may terminate the agreement for any reason upon 60 days
prior written notice. In September 1999, we amended this agreement, to be
effective in April 2000, to modify our payment structure. The amended
agreement expires in March 2003, but is subject to automatic two year
renewal periods. BuyGolf.com issued 540,000 shares of its common stock to
Las Vegas Golf & Tennis in May 1999 in consideration for these
agreements. These shares were exchanged for 175,500 shares of our common
stock upon the completion of our acquisition of BuyGolf.com.

By using a secure electronic connection with each of our providers, orders
placed by our customers are transmitted directly to the appropriate
distributor. These orders are automatically fed into the distributor's system
where they are processed and sent to a warehouse to be picked, packed and
shipped. Orders are often processed and ready for shipment within minutes from
the time a customer places an order at our Web site. In the event the products
on a customer order are not located in the same warehouse, our system will
cascade the order across several warehouses beginning with the one nearest to
the customers' shipping address. By accessing distributor warehouses throughout
the country, we have become more efficient in minimizing shipping costs as well
as quickly delivering products to the customer.

The integrated electronic connection with each of our distribution providers
also provides us with data on inventory quantities, inventory location,
shipping status, shipper tracking numbers and the estimated time of arrival for
back-ordered products. Our Web site also provides a direct link from a
customer's order information to both Federal Express and United Parcel Service
to provide up-to-the-minute information on delivery status.

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Advertising Revenue

Advertising revenue is a key component of our business model. The large
volume of product sales on our site, together with our ability to attract
proven online buyers, provides a high quality audience for our advertisers.
According to a BUY.COM sponsored survey, our customers are primarily between 18
and 35 years old, and 80% of our customers visit our stores at least once a
week. Additionally, according to this survey, 76% of our customers are college
educated and 33% have annual household incomes in excess of $75,000.
Furthermore, the structure of our Web site encourages impulse purchasing of
products in various categories by shoppers who have come to the site to
purchase a specific item. We believe our ability to deliver a high quality
audience of proven online consumers creates a variety of opportunities for
advertisers.

We provide a range of advertising opportunities to reach Internet buyers. We
presently derive advertising revenue from vendor co-op advertising and media
advertising. Vendor co-op advertising is an industry standard practice that
involves vendors who advertise their products for sale in our online stores in
direct proportion to the amount of products sold in our stores. The primary
objective of vendor co-op advertising is to drive product sales on our Web
site. Vendors measure results in terms of the size, growth, breadth and depth
of their product sales. We sell co-op advertising to the sales and/or channel
groups within our vendors' organizations, often with the cooperation and
support of our distributors. Currently, we derive most of our co-op advertising
from our technology and entertainment vendors. However, as we expand into new
product categories, we anticipate additional co-op advertising opportunities in
these new markets.

We derive advertising media revenue from click-through advertisements that
direct the customer to the advertiser's Web site. We sell media advertising to
the marketing groups within our advertisers' organization, as well as the
advertising agencies that represent them. Media advertisers include both
vendors who sell products on our site, as well as other advertisers, such as
eBay and Visa, that want to reach our attractive audience.

Our direct sales organization consists of individuals focused solely on
selling advertising on our network of Web sites. From time to time, we also
engage third party advertising sales representatives to assist us in selling
our Web advertisements. We currently maintain sales offices in San Francisco
and Southern California. Our sales organization is dedicated to maintaining
close relationships with advertisers, advertising agencies and the sales and
marketing organizations of our distribution providers. We work with our
advertisers to build advertising programs that are tailored to their marketing
and merchandising goals. We are also pursuing an increasing number of
opportunities to combine both media and co-op advertising to create synergy for
our vendors.

Merchandising Strategies

We believe that our strong brand name and the breadth and depth of our
product selection in our online stores enable us to pursue unique merchandising
and pricing strategies. Because our stores are not restricted by physical
capacity limitations, we have a significant amount of flexibility with regard
to the presentation and organization of our product categories and the product
selection within each of those categories.

To date, our merchandising and pricing efforts have focused on offering
popular products with high brand awareness at low prices to drive traffic to
our site. As customer loyalty and recognition of our brand name has increased,
we have begun to augment this strategy by implementing the following:

. cross-marketing higher margin products and services to our customers
once they are in our online stores. By operating nine integrated online
specialty stores featuring a broad range of brand name products, we can
often present the customer with other higher margin products, including
accessories and other products that are complementary to the customer's
initial purchase as well as popular point-of-purchase impulse buys;

. offering vendors the ability to create specialized promotional "stores
within a store." We believe this will provide us greater flexibility in
promoting higher margin products while capturing additional co-op
advertising revenues available from our manufacturers; and

. raising prices on selected products. Since June 1999, we have raised
prices on selected products to refine our pricing strategy and increase
our gross margins. For some of these products the increase in price did

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not result in any decline in sales volumes. However, for other products
sales volumes declined. By analyzing the results of these selective price
increases and customer buying pattern data, we believe we can identify
products that are characterized by lower degrees of price sensitivity,
which will provide the opportunity to raise margins through targeted price
increases that do not diminish overall sales volumes.

Within each online store, we organize our products into particular
categories. For example, our online bookstore is divided into multiple subject
areas, including fiction, non-fiction and romance, and our online computer
store includes various product categories, such as computers, notebooks,
scanners and modems. The intuitive nature of our stores is also enhanced by
other product presentations and organization within each of our stores. For
example, several of our online stores contain a top 25 list of products for
sale, identify selected "great buys" and highlight a combination of other
featured offers, including new releases and coming attractions. Products can
also be located by manufacturer or product name.

Marketing and Promotions

We have taken a disciplined and selective approach in our marketing strategy
to develop and strengthen the BUY.COM brand. We attempt to maximize the return
from promotional expenditures by choosing advertising media based on the cost
relative to the likely audience and ability to generate increased traffic for
our Web site.

Online Advertising. We place advertisements on various high profile and
high traffic portal Web sites, including AOL, Excite@Home and Yahoo!, as well
as Web sites targeted at a more focused audience, including About.com,
CNET/Shopper.com, Computer Shopper, MP3.com, Tech Shopper and women.com. Our
advertisements on these sites are typically focused on building brand awareness
or are product-specific permanent placements that encourage visitors to click
through directly to our Web site. In addition, we periodically submit product
data files to search engine Web sites in order to appear within these sites
when visitors conduct product searches. These product listings link directly to
our site and have been an effective means of generating sales.

Traditional Advertising. We advertise in specific major markets and
nationwide in a variety of media focused on our identified demographic of
customers. In an effort to effectively establish the BUY.COM brand in the
marketplace and position ourselves as a leading e-commerce superstore, we are
currently participating in a nationwide media campaign that includes business,
computer trade, general interest and niche publications, including Fortune,
Men's Journal and PC Magazine; newspapers such as the New York Times and The
Wall Street Journal; national television networks such as ABC, CBS and NBC;
national television programs such as ESPN SportsCenter and NBC Dateline; radio
spots with CBS News and Sportstalk; as well as outdoor billboards located in
high traffic areas. We use a variety of advertising campaigns to target
specific demographic customers, including product specific campaigns, branding
and comedy.

Direct Mail. We engage in targeted direct mail campaigns to various
segments of our database. Each month we identify and target a particular
customer demographic for specific promotions designed to increase customer
traffic and sales. In addition to special promotions, the direct mail campaigns
promote our commitment to customer service and include either savings coupons
or a unique gift to reward customers for their support.

Sweepstakes and Giveaways. We have from time to time successfully hosted
sweepstakes that have generated a substantial number of registrants. We
register the entrants, with their approval, in our corporate database for
future marketing opportunities. We plan to continue to offer customers various
sweepstakes opportunities and product giveaways to increase traffic to our Web
site and encourage return visits.

PGA TOUR Sponsorship. We recently entered into a five year sponsorship
agreement with the PGA TOUR in which we will become the exclusive title sponsor
of the professional tour previously known as the Nike Tour. Our sponsorship of
the BUY.COM Tour provides for television coverage of various BUY.COM Tour
events, prominent featuring in the PGA TOUR's controlled media, including
"Inside the PGA TOUR," prominent display of the BUY.COM Tour logo on the PGA
TOUR's Web site and other sponsorship and media opportunities. We believe this
sponsorship provides an attractive marketing vehicle that enables us to target
a customer demographic that is consistent with the customer demographics of our
other online stores.

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Customer Service and Support

We are committed to providing superior customer service and plan to continue
to make technological and systems advancements to enhance the overall shopping
experience. We believe customer support throughout the shopping experience is a
key element in providing a convenient shopping forum for our customers and
establishing customer loyalty. As a result, we have made customer service a
focal point of our operations. Customer service representatives are available
for support 24 hours a day, seven days a week. In addition to offering customer
support on existing orders, service representatives are available to assist
shoppers in placing orders online. We believe this educational process builds
customer loyalty and creates comfort and familiarity with the shopping
experience.

To maintain our business model strategy and enhance our ability to scale our
operations quickly, we have outsourced our first level customer support to
ClientLogic, a provider of customer service support to such technology
organizations as Dell, E*Trade, Microsoft and others. This strategy also has
enabled us to minimize capital expenditures, while ensuring that we are staffed
to meet the service needs of our customers. We currently maintain call centers
in Albuquerque, New Mexico and Buffalo, New York where ClientLogic has staffed
over 350 dedicated BUY.COM customer service representatives who are trained and
managed on-site by BUY.COM management personnel. In addition to our outsourced
customer support, we maintain a limited in-house staff of high level customer
service representatives to address more complex customer inquiries. We have
entered into a four year contract with ClientLogic. This contract may be
terminated by either party for any reason upon 30 days written notice. However,
if we terminate the contract without cause, we are obligated to pay a
termination fee.

Customers can interact with our representatives by telephone, email or
"chat" responses while the customer is online. Our contract with ClientLogic
requires that at least 80% of all telephone calls be answered within 90 seconds
and e-mail requests be answered in less than 12 hours. We also strive to keep
customers informed concerning the status of their orders. We automatically send
e-mails confirming receipt of an order, as well as follow-up e-mails to notify
the customer of the product shipment, package tracking information, any back
ordering and to confirm the customers' receipt of a product.

In addition to our telephone and e-mail support, we have built an extensive
self-help environment within our Web site. This tool allows customers to
receive all information regarding their current orders and past order history.
Within the Web site customers may track shipped orders with Federal Express and
United Parcel Service, check the status of orders being processed, and access
links to our technology partners' Web sites for technical support. By providing
this support through the Web site, we realize significant cost savings while
providing the customer more efficient and timely information and service.

Technology and Systems

We have implemented a combination of proprietary technologies and
commercially available licensed technologies. Our current strategy is to
license available technology whenever possible rather than seek internally-
developed solutions and to focus our internal development efforts on creating
and enhancing our specialized, proprietary software.

Our Web site's front-end is built on industry standard technologies,
including IBM NetFinity and other servers. The business logic of the site is
contained in a variety of proprietary programs. These programs handle user
interface, ordering and customer communications and operate on redundant IBM
NetFinity and other servers. We expect to add additional servers and capacity
as needed in the long-term. Our system includes redundant hardware on mission
critical components, which we believe can survive the failure of several entire
servers with relatively little downtime. We also believe we can quickly and
easily expand capacity without significant additional development. We have
historically run our key systems below capacity to support rapid growth.

Consistent with our operating strategy, in June 1998 we entered into an
agreement to outsource the hosting of our Web servers to an Internet data
center specialist, Exodus Communications, which maintains an extensive national
network. Exodus provides redundant Internet connections to multiple Internet
access points, a secure physical environment, climate control and redundant
power. In addition, Exodus provides us with 24 hour a day, seven day a week
system monitoring and escalation. Exodus currently hosts our Web operations in
their

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Irvine, California data center, and we believe Exodus has adequate available
floor space to support our growth in this facility. In addition, we expect to
be able to support a distributed, redundant site by placing some of our servers
in Exodus' other locations across the country. Our one year agreement with
Exodus provides for automatic one year renewal periods, but allows either party
to terminate the agreement for any reason upon 30 days' prior written notice.

Order Processing Applications. We use a set of computer software
applications for processing each customer order. These applications charge
customer credit cards, print order information, transmit order information
electronically to our distributors and deposit transaction information into our
accounting system. All credit card numbers and financial and credit information
are secured using the Internet security protocol Secure Socket Layer, Version
3, an encryption standard, and we maintain credit card numbers behind
appropriate fire walls.

Marketing Applications. We have developed a set of computer software
applications for sending automated broadcast e-mails to customers on a frequent
basis. This software extracts e-mail addresses from our mailing lists, sends e-
mails to the designated recipients and automatically services requests from
customers to remove them from the mailing list.

Ad Reporting. We have developed an application that allows for the
tracking and reporting of customer response to the Web advertisements we place
throughout the Internet. The reports include click-throughs to the
advertisements and orders and sales from those responses on a daily basis.
These reports allow for comparison of similar site's performance, placements
within a single site and the creative/graphic performance of the ads.

Competition

The e-commerce market is new, rapidly evolving and intensely competitive. We
expect that competition will further intensify in the future. Barriers to entry
are limited, and many traditional retailers are beginning to launch their own
online operations. New technologies and the expansion of existing technologies
may also increase competitive pressures. We currently compete with a variety of
online vendors who specialize in computer hardware and software products, as
well as those who sell books, music, videos, DVDs, consumer electronics, golf-
related products and other entertainment products. Moreover, all of the
products we sell in our online stores are available through traditional and
catalog retailers. Consequently, we must compete with companies in the e-
commerce market as well as the traditional retail industry.

In the computer hardware, software, peripheral and clearance product
markets, our primary competitors include, but are not limited to:

. traditional computer retailers such as CompUSA and MicroCenter;

. catalogue retailers such as CDW, Insight and PC Connection;

. online computer retailers such as Cyberian Outpost and Egghead.com; and

. software and hardware manufacturers that market their products through
their own Web sites such as Apple Computer, Dell Computer and Gateway
2000 Inc.

Our current or potential competitors with respect to books, DVDs and videos,
and other entertainment related products include, but are not limited to:

. traditional entertainment product retailers such as Barnes & Noble,
Blockbuster Video and Borders;

. Internet-focused entertainment product retailers such as Amazon.com,
CDNow and Reel.com; and

. non-entertainment retailers that sell a limited selection of
entertainment products at low prices, such as Wal-Mart.

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Our current or potential competitors with respect to consumer electronics
include, but are not limited to:

. traditional consumer electronic retailers such as Best Buy and Circuit
City; and

. online retailers of consumer electronics such as Amazon.com and 800.com.

Our current or potential competitors with respect to golf-related products
include, but are not limited to:

. traditional golf retailers such as Edwin Watts and Roger Dunn Golf Shops;
and

. online retailers of golf products such as chipshot.com and igogolf.com.

We also expect to experience significant competitive pressure if any of our
distributors were to initiate their own retail operations. Since our
distributors have access to merchandise at very low costs, they could sell
products at lower prices than us and maintain a higher gross margin on their
product sales than we are able to achieve. If this were to occur, our current
and potential customers may decide to purchase directly from these
distributors, which could reduce our market share.

We believe that the primary competitive factors in online retailing include
brand recognition, price, product selection, customer service, value-added
services and ease of use. Although we believe that we compete favorably with
respect to these factors, several of our competitors may have an advantage
over us with respect to specific factors. In addition, many of our current and
potential competitors have longer operating histories, larger customer bases,
greater brand recognition and significantly greater financial, marketing,
technical, management and other resources than we do.

Intellectual Property

We regard the protection of our copyrights, service marks, trademarks,
trade secrets and other intellectual property rights as critical to our future
success. We rely on various intellectual property laws and contractual
restrictions to protect our proprietary rights in products and services. We
have acquired and registered many of our domain names with regulatory bodies
in an effort to protect these intellectual property rights. We have also
entered into confidentiality and invention assignment agreements with our
employees and contractors, and nondisclosure agreements with our suppliers and
strategic partners in order to limit access to and disclosure of our
proprietary information. We cannot assure you that these contractual
arrangements or the other steps taken by us to protect our intellectual
property will prove sufficient to prevent misappropriation of our technology
or to deter independent third party development of similar technologies. In
addition, we have pursued the registration of our key trademarks and service
marks in the U.S. and internationally. We currently have pending trademark
registrations for many marks, both internationally and in the U.S., including,
but not limited to, BUY.COM, BUYBOOKS.COM, BUYCLEARANCE.COM, BUYCOMP.COM,
BUYELECTRONICS.COM, BUYGAMES.COM, BUYGOLF.COM, BUYMUSIC.COM, BUYSOFT.COM,
BUYTRAVEL.COM, BUYVIDEOS.COM and "BUY.COM THE INTERNET SUPERSTORE." However,
effective intellectual property protection may not be available in every
country in which our services may be made available in the future. There is
also no guarantee that the trademarks or servicemarks for which we have
applied for registration will offer adequate protection under applicable law.

We have licensed in the past, and expect that we may license in the future,
some of our intellectual property rights, including trademarks or copyrighted
material, to third parties. While we attempt to ensure that the quality of the
BUY.COM brand is maintained by these licensees, they could take actions that
might materially and adversely affect the value of our intellectual property
rights or reputation, which could harm our business. We also rely on
technologies that we license from third parties. These licenses may not
continue to be available to us on commercially reasonable terms in the future,
if at all. As a result, we may be required to obtain substitute technology of
lower quality or at greater cost, which could materially adversely affect our
business, results of operations and financial condition.

As is customary with technology companies, from time to time we have
received, and may continue to receive or become aware of, correspondence
claiming potential infringement of other parties' proprietary rights. We could
incur significant costs and diversion of management time and resources to
defend claims regardless

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of the validity of these claims. We may not have adequate resources to defend
these claims, and any associated costs and distractions could have a material
adverse effect on our business, financial condition and results of operations.
As an alternative to litigation, we may seek licenses for other parties'
intellectual property rights. We may not be successful in obtaining any
necessary licenses on commercially reasonable terms, if at all.

Legal Proceedings

From time to time, we have been subject to legal proceedings and claims in
the ordinary course of our business. These claims, even if not meritorious,
could result in the expenditure of significant financial and managerial
resources. In February 1999, a computer monitor was mistakenly priced on our
Web site for $164.50 rather than the intended price of $564.50. Before we
learned of the error, approximately 8,508 orders were placed for the monitors.
After we discovered the error, we contacted our customers and cancelled all
orders placed at the incorrect price except for those that had already been
shipped. Each affected customer received a full refund. Three weeks after the
error occurred, in March 1999, a class action suit was filed against us in the
Orange County, California Superior Court alleging breach of contract, fraud and
violation of consumer protection laws. Eleven days later, a similar class
action case was filed in Camden County, New Jersey. Both actions claim that we
intentionally mispriced the monitors as a scheme to cause more people to visit
our site. Plaintiffs also claim that we attempted the same scheme with other
products. The plaintiffs are seeking compensatory and punitive damages in
addition to injunctive relief. Neither action sets forth the amount of damages
sought by the plaintiffs. The New Jersey action alleges that the class of
plaintiffs consists of all persons who ordered the computer monitor at the
mistaken price. The California action also focuses on the monitor error and
alleges that the class of plaintiffs consists of all individuals who have
attempted to purchase computer hardware or software and have been unable to do
so because we refused to provide the product at the agreed upon price. The
judge in the New Jersey action has granted a temporary stay of the New Jersey
action to monitor the progress of the California action. Discovery is in its
early stages in the California action and a class has not yet been certified in
either action.

We have received notice from two of our employees that they believe they
will suffer adverse tax consequences as a result of their stock option grants
being classified as non-qualified for federal income tax purposes. Each has
requested additional consideration from us to compensate them for the different
tax treatment between a non-qualified and an incentive stock option. We are
currently investigating these matters. At this time no legal actions have been
filed and we do not believe the resolution of this matter will have a material
impact on our business.

We have been contacted by the Federal Trade Commission and the New York
State Attorney General's office regarding print and Web advertisements we ran
in August and September 1999 for a particular promotion of the Compaq Presario
5304 system. The inquiries concern the location and sufficiency of the
information we provided about the terms of the manufacturer rebate for the
system and the advertised price. We are cooperating with the inquiries, and we
do not expect the results of the inquiries to have a material impact on our
business.

Employees

As of December 31, 1999, we had 230 full-time employees, including 86
employees engaged in engineering and Web development, 37 engaged in sales and
marketing, and 107 engaged in general and administrative activities. We plan to
continue to expand our workforce in the near future. Our employees are not
represented by any collective bargaining agreement, and we have never
experienced a work stoppage. We believe our employee relations are good.

Facilities

Our principal administrative and engineering facility is located in
approximately 50,000 square feet of office space in Aliso Viejo, California
under a lease that expires in January 2006. Our lease agreement for this
facility requires monthly base rental payments of approximately $92,000 for the
first six months of the lease and approximately $126,000 per month thereafter.
We believe our existing facility will be sufficient for our needs for at least
the next twelve months.

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MANAGEMENT

Executive Officers and Directors

The following table provides information with respect to our directors,
executive officers and certain of our significant employees as of December 31,
1999:

[Download Table]

Name Age Position(s)
---- --- ----------

Gregory J. Hawkins....... 45 Chief Executive Officer, President and Chairman of
the Board

Mitch C. Hill............ 40 Chief Financial Officer

Keven F. Baxter.......... 40 Vice President, Corporate Affairs, General Counsel
and Secretary

Robb Brock............... 36 Vice President, Technology

Travis Fagan............. 28 Vice President, Customer Service

John C. Herr............. 33 Vice President, Advertising and Marketing

Anthony A. McAlister..... 40 Vice President, Information Services

Brent Rusick............. 37 Vice President, Sales Operations

Michael D. Walkey........ 35 General Manager, Small Business and Vice
President, Product Management

Murray H. Williams....... 29 Vice President, Global Business Development

Thomas A. Wright......... 39 Vice President, Fulfillment Operations

William L. Burnham....... 28 Director

David B. Ingram.......... 37 Director

Donald M. Kendall(1)..... 78 Director

Charles W. Richion(1).... 63 Director

James B. Roszak(2)....... 58 Director

Edward S. Russell(2)..... 39 Director

John Sculley(2).......... 60 Director

Wayne T. Thorson(1)...... 73 Director

--------
(1) Member of the Compensation Committee

(2) Member of the Audit Committee

Gregory J. Hawkins has been our Chief Executive Officer and a Director
since March 1999. Mr. Hawkins became our Chairman of the Board in September
1999 and was elected President in December 1999. From 1991 to February 1999,
Mr. Hawkins served as a Senior Vice President at Ingram Micro, Inc., a large
computer hardware and software distributor. Mr. Hawkins received his B.S. in
Business Administration from Oregon State University.

Mitch C. Hill has been our Chief Financial Officer since November 1999.
Mr. Hill served as the Chief Financial Officer and Senior Vice President at
Walt Disney Imagineering from May 1996 to October 1999. From March 1995 to May
1996, Mr. Hill served as the Chief Financial Officer and Vice President of
Disney Development Company, and from April 1992 to May 1995 he served as the
Director of Finance and New Business. From 1987 to 1991, Mr. Hill worked as an
associate in the investment banking group at Goldman, Sachs & Co. Mr. Hill
received his B.S. in Business Accounting from Brigham Young University and his
M.B.A. from the Harvard Graduate School of Business Administration.

Keven F. Baxter has been our Vice President, Corporate Affairs and General
Counsel since November 1999. Mr. Baxter was elected Secretary in December 1999.
From January 1999 to November 1999, Mr. Baxter

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practiced corporate and securities law in the Business and Technology Group of
Brobeck, Phleger & Harrison LLP. From June 1995 to December 1998, Mr. Baxter
served in several management roles at Interplay Entertainment Corp., a software
publisher, including Vice President, Corporate Affairs and General Counsel.
From 1988 to 1994, Mr. Baxter practiced corporate and securities law at
Brobeck, Phleger & Harrison LLP. Mr. Baxter received his B.A. in Economics from
the University of California, Santa Barbara and his M.B.A. and J.D. from the
University of California, Berkeley.

Robb Brock has been our Vice President, Technology since July 1997. From
April 1985 to December 1996, Mr. Brock served as the Vice President of Software
Development at Data Faction, Inc., a software development company. Mr. Brock
received his B.A. in Computer Science from National University.

Travis Fagan has been our Vice President, Customer Service since December
1999. From June 1998 to December 1999, Mr. Fagan held several management
positions at Wells Fargo Online Financial Services, including Vice President,
Manager of Customer Development and Vice President, Manager of Customer Care.
From August 1996 to June 1998, Mr. Fagan served as a Manager, Customer Service
at U.S. West, and from May 1994 to August 1996, Mr. Fagan served as a Senior
Consultant at Arthur Andersen Business Consulting. Mr. Fagan received his B.A.
in business administration and his Masters in Professional Accounting from the
University of Texas, Austin.

John C. Herr has been our Vice President, Advertising and Marketing since
December 1998. From 1993 to December 1998, Mr. Herr served in several
management roles at Ziff Davis, Inc., including the Vice President of
International and Executive Vice President of Worldwide Marketing. Mr. Herr's
previous experiences include working in consumer marketing as a Johnson &
Johnson brand manager, and as a strategy consultant at Bain & Company. Mr. Herr
received his B.A. in Economics from Harvard University and his M.B.A. from the
Harvard Graduate School of Business Administration.

Anthony A. McAlister has served as our Vice President, Information
Services since November 1998. Prior to joining us, from January 1998 to
November 1998, he was employed as the Vice President of Information Services
for SpeedServe.com, an online retailer of books, movies and games. From
December 1987 to January 1998, Mr. McAlister served as a Director of
Application Development for Ingram Entertainment, Inc. Mr. McAlister holds an
Associate degree in Data Processing from Nashville State Technical Institute.

Brent Rusick has been our Vice President, Sales Operations since November
1997. Prior to that, Mr. Rusick served as a U.S. Channel Sales Manager at
Packard Bell NEC, Inc. from March 1995 to November 1997. From August 1994 to
March 1995, he served as a Regional Sales Manager for Tech Data Corp.
Mr. Rusick received his B.S. in Business Administration and Finance from San
Diego State University.

Michael D. Walkey has been our General Manager, Small Business and Vice
President, Product Management since November 1999. Mr. Walkey served as the
President and Chief Executive Officer of BLT Electronics, Inc. from April 1999
to November 1999. From August 1990 to April 1999, Mr. Walkey served as the Vice
President, Purchasing for Ingram Micro, Inc. Mr. Walkey received his B.S. in
Business Management from Pepperdine University.

Murray H. Williams has been our Vice President, Global Business
Development since December 1999. Prior to that, Mr. Williams served as our Vice
President, Finance from November 1998 to December 1999 and as our Director of
Finance from February 1998 to November 1998. From January 1993 to February
1998, Mr. Williams served in various capacities at KPMG Peat Marwick, LLP, most
recently as a Manager. Mr. Williams received his B.A. in Accounting and Real
Estate from the University of Wisconsin, Madison.

Thomas A. Wright has been our Vice President, Fulfillment Operations since
December 1999. From September 1990 to November 1999, Mr. Wright held several
management positions at Ingram Micro, Inc., including Vice President, Logistics
and Sr. Director North American Operations.

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William L. Burnham has been a Director since September 1999. Since August
1999, Mr. Burnham has been a General Partner of SOFTBANK Capital Partners LP.
From July 1998 to August 1999, Mr. Burnham was a Vice President at Credit
Suisse First Boston. From May 1998 to July 1998, Mr. Burnham served as a Vice
President at Deutsche Morgan Grenfell, and from April 1997 to May 1998, he
served as a Vice President at US Bancorp Piper Jaffray. Prior to this, Mr.
Burnham served as a Senior Associate at Booz Allen & Hamilton from August 1993
to March 1997. Mr. Burnham was elected to our Board as a representative of
SOFTBANK Capital Partners as a result of our Series B preferred stock financing
in October 1999. Mr. Burnham received his A.B. in Political Science from
Washington University.

David B. Ingram has been a Director since December 1998. Since July 1991,
Mr. Ingram has served in various capacities at Ingram Entertainment Inc., most
recently as its Chairman of the Board and President. Mr. Ingram currently
serves on the board of directors of the Video Software Dealers Association,
First American National Bank, Nashville Community Advisory Board, and is a
board member of several privately held companies. Mr. Ingram was elected to our
Board of Directors as a representative of Ingram Entertainment Inc. under a
voting agreement that will terminate upon the closing of this offering. Mr.
Ingram received his B.A. in History from Duke University and his M.B.A. from
the Owen Graduate School of Management, Vanderbilt University.

Donald M. Kendall has been a Director since August 1998. Since 1991, Mr.
Kendall has served as a Consultant and Ambassador at Large for PepsiCo, Inc.,
and from 1986 to 1991, he served as the Chairman of the Executive Committee for
PepsiCo. From 1965 to 1986, Mr. Kendall served as PepsiCo's Chairman of the
Board and Chief Executive Officer. Mr. Kendall attended Western Kentucky
University before becoming a Navy pilot in World War II.

Charles W. Richion has been a Director since August 1998. From June 1997
to July 1998, Mr. Richion served as the Vice President of Corporate Development
for Identix, Inc. From 1965 to 1996, Mr. Richion served as the Vice President
of U.S. Sales and Vice President of Global Partners at Hewlett Packard, Co.
Mr. Richion currently serves on the board of directors of Identix, Inc. He
received his B.S.E.E. from the University of Pennsylvania.

James B. Roszak has been a Director since August 1998. From June 1991 to
June 1997, Mr. Roszak served as the President of the Life Insurance Division of
Transamerica Life Companies. Mr. Roszak received his B.S. in Business from the
University of Southern California.

Edward S. Russell has been a Director since August 1998. Since October
1996, Mr. Russell has served as a General Partner at SOFTBANK Technology
Ventures, Inc. From 1988 to October 1996, Mr. Russell served as the Executive
Director at SBC Warburg. Mr. Russell was elected to our Board as a
representative of SOFTBANK Technology Ventures as a result of our Series A
preferred stock financing in August 1998. Mr. Russell received his B.S. in
Computer Science from Carnegie Mellon University.

John Sculley has been a Director since August 1998. Since 1994, Mr.
Sculley has served as a partner in the investment firm of Sculley Brothers LLC.
From November 1993 to February 1994, Mr. Sculley served as the Chief Executive
Officer of Spectrum Information Technologies, Inc. In January 1995, Spectrum,
together with three of its four operating subsidiaries, filed voluntary
petitions for reorganization under Chapter 11 of the United States Bankruptcy
Code in the United States Bankruptcy Court for the Eastern District of New
York. From 1983 to 1993, Mr. Sculley served as the Chief Executive Officer of
Apple Computer, Inc. Since 1984, Mr. Sculley has also been the Chief Executive
Officer of Sculley Bros., Inc. Mr. Sculley serves on the board of directors of
Netobjects Inc., Talk City, Inc. and NFO Worldwide, Inc. Mr. Sculley received
his B.S. in Architecture from Brown University and his M.B.A. from the Wharton
School of Business.

Wayne T. Thorson has been a Director since August 1998. Since 1958, Mr.
Thorson has served as the Chief Executive Officer of Thorson, Inc., a highway
construction company. Mr. Thorson attended Concordia College where he studied
business administration.

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Classified Board of Directors

Our Board of Directors will be divided into three classes of directors
serving staggered three-year terms upon the closing of this offering. As a
result, approximately one-third of the Board of Directors will be elected each
year. These provisions, together with the provisions of our certificate of
incorporation, allow the Board of Directors to fill vacancies of or increase
the size of the Board of Directors, and may deter our stockholders from
removing incumbent directors and filling these vacancies with its own nominees
to gain control of the Board.

Our Board of Directors has designated that Messrs. Richion, Sculley and
Thorson will serve as Class I Directors, whose terms expire at the 2001 annual
meeting of stockholders. Messrs. Ingram, Kendall and Russell will serve as
Class II Directors, whose terms expire at the 2002 annual meeting of
stockholders. Messrs. Burnham, Hawkins and Roszak will serve as Class III
Directors, whose terms expire at the 2003 annual meeting of stockholders.

Committees of the Board

The Board of Directors has established two standing committees: the audit
committee and the compensation committee. The audit committee consists of
Messrs. Roszak, Russell and Sculley. The audit committee recommends the
appointment of independent public accountants for the annual audit of our
financial statements to the Board of Directors. The audit committee reviews the
scope of the annual audit and other services the auditors are asked to perform.
This committee also reviews the report on our financial statements prepared by
the auditors following the audit, and our accounting and financial policies in
general. The audit committee also reviews management's procedures and policies
with respect to our internal accounting controls.

The compensation committee consists of Messrs. Kendall, Richion and Thorson.
The compensation committee reviews and approves salaries, benefits and bonuses
for all executive officers. It reviews and recommends to the Board of Directors
on matters relating to employee compensation and benefit plans. The
compensation committee also administers our stock purchase, equity incentive
and stock option plans.

Compensation Committee Interlocks and Insider Participation

We did not have a compensation committee for the fiscal year ended December
31, 1998. For the fiscal year ended December 31, 1998, all decisions regarding
executive compensation were made by our Board of Directors. We created our
compensation committee in February 1999 and elected Messrs. Blum, Kendall and
Thorson to serve as members of that committee. Mr. Blum served as our President
and Chief Executive Officer and Director during the fiscal year ended December
31, 1998. However, Mr. Blum resigned his position as President in December
1998, his position as Chief Executive Officer on March 1, 1999, and his
position as a Director in September 1999. No other interlocking relationship
exists between any of our executive officers or any member of our compensation
committee and any member of any other company's board of directors or
compensation committee.

Director Compensation

Our directors receive no cash remuneration for serving on the Board of
Directors or any Board committee. However, Directors are reimbursed for all
reasonable expenses incurred by them in attending Board and committee meetings.
Directors who are also employees are eligible to receive options and be issued
shares of common stock directly under our 1999 Stock Incentive Plan.
Nonemployee directors will also receive automatic option grants under our 1999
Stock Incentive Plan.

Employment Contracts and Termination of Employment and Change of Control
Arrangements

As of March 1, 1999, Gregory J. Hawkins entered into a one year employment
agreement with us to serve as our Chief Executive Officer. Mr. Hawkins' base
salary under this agreement is $240,000 per year. We also

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granted Mr. Hawkins options to purchase 4,542,281 shares of our common stock at
an exercise price of $3.83 per share, the fair market value on the grant date.
We provide Mr. Hawkins with health and related benefits that are generally made
available to our other senior executives and a monthly car allowance of $800.
Mr. Hawkins is an at-will employee and his employment can be terminated at any
time by him or by us. If we terminate Mr. Hawkins' employment for any reason,
other than for cause, Mr. Hawkins will have the right to exercise 1,022,015
options that would otherwise vest in February 2000, and will be entitled to
receive health benefits and monthly payments of his base salary for the
remainder of his one year term, or six months, whichever is longer.

Mitch C. Hill commenced his employment as our Chief Financial Officer on
November 1, 1999. Mr. Hill's base salary is $220,000 per year, and he was
granted an option to purchase 1,211,099 shares of our common stock at an
exercise price of $9.14 per share, the fair market value on the grant date. If
we terminate Mr. Hill's employment for any reason, other than willful
wrongdoing or gross negligence, Mr. Hill will have the right to receive his
annual base salary for one year and the right to exercise any options that
would otherwise vest in the subsequent twelve month period.

We do not currently have any other employment contracts with any of our
named executive officers. Accordingly, our Board of Directors may terminate the
employment of any named executive officer at any time at its discretion. Our
compensation committee has the authority to provide for an accelerated vesting
of any outstanding options if an individual's employment is terminated
following an acquisition or a hostile change in control of BUY.COM.

Executive Compensation

The following table summarizes the compensation earned by, and paid to, our
Chief Executive Officer, our former Chief Executive Officer and founder, our
Chief Financial Officer and our other most highly compensated executive
officers who received compensation in excess of $100,000 for the year ended
December 31, 1998 and December 31, 1999. We provide our officers with non-cash
group life and health benefits generally available to all salaried employees.
These benefits are not included in the table below due to applicable Securities
and Exchange Commission rules. No named executive officer received personal
benefits or perquisites that exceeded the lesser of $50,000 or 10% of his total
annual salary and bonus for 1998 or 1999.

Summary Compensation Table

[Download Table]

Long-Term
Compensation
Annual Compensation Awards
--------------------- ------------
Shares of Common
Other Annual Stock Underlying
Name and Principal Position Year Salary Bonus Compensation Options
--------------------------- ---- -------- ------- ------------ ----------------

Gregory J. Hawkins(1)....... 1999 $217,755 $ -- $ 7,200(4) 4,542,281(5)
Chief Executive Officer

Scott A. Blum(2)............ 1998 24 218 25,440(4) --
Founder 1999 22 -- 21,980(4) --

Mitch C. Hill(3)............ 1999 33,846 -- -- 1,211,099(6)
Chief Financial Officer

John C. Herr................ 1999 184,462 10,000 1,500(4) --
Vice President, Advertising
and Marketing

Brent Rusick................ 1998 179,755 -- -- 468,750
Vice President, Sales 1999 184,731 -- 2,402(4) --
Operations

Murray H. Williams.......... 1998 79,702 45,000 3,000(4) 703,124
Vice President, Global 1999 127,062 -- 6,000(4) --
Business Development

--------
(1) Mr. Hawkins became our Chief Executive Officer in March 1999.

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(2) Mr. Blum served as our Chief Executive Officer from October 1996 until
March 1999. Mr. Blum resigned from the Board of Directors in September
1999.

(3) Mr. Hill became our Chief Financial Officer in November 1999.

(4) Consists of automobile lease payments.

(5) Includes options to purchase 277,115 shares that were transferred to
irrevocable trusts on behalf of Mr. Hawkins' children and his family.

(6) Includes options to purchase 250,000 shares that were transferred to
irrevocable trusts for the benefit of Mr. Hill's children and options to
purchase 13,125 shares that were transferred to members of his family.

Option Grants in Last Fiscal Year

Each option listed in the table below was granted under, or has been assumed
under, the 1998 Stock Option/Stock Issuance Plan and the Special Executive
Stock Option Plan. All options granted under these plans are immediately
exercisable. The following table indicates information regarding options
granted to the named executive officers during 1999. We have not granted any
stock appreciation rights.

[Enlarge/Download Table]

Individual Grants
---------------------------------------------------
Potential Realizable Value
Number of % of Total at Assumed Annual Rates
Securities Options Market of Stock Price Appreciation
Underlying Granted to Exercise Price on for Option Term
Options Employees Price Per Grant Expiration ----------------------------
Name Granted in 1999 Share Date Date 5% 10%
---- ---------- ---------- --------- -------- ---------- ------------- --------------

Gregory J. Hawkins...... 4,542,281 35.3% $3.83 $3.83 03/01/09 $10,940,840 $27,726,236

Scott A. Blum........... -- -- -- -- -- -- --

Mitch C. Hill........... 1,211,099 9.4% 9.14 9.14 10/11/09 6,961,514 17,641,844

John C. Herr............ -- -- -- -- -- -- --

Brent Rusick............ -- -- -- -- -- -- --

Murray H. Williams...... -- -- -- -- -- -- --

Potential realizable values are net of exercise price, but before the
payment of taxes associated with exercise. Amounts represent hypothetical gains
that could be achieved for the respective options if exercised at the end of
the option term. The 5% and 10% assumed annual rates of compounded stock price
appreciation are mandated by rules of the Securities and Exchange Commission
and do not represent our estimate or projection of our future common stock
prices. These amounts represent assumed rates of appreciation in the value of
the common stock from the fair market value on the date of grant. Actual gains,
if any, on stock option exercises are dependent on the future performance of
our common stock and overall stock market conditions. The amounts reflected in
the table may not necessarily be achieved.

Upon commencement of Mr. Hill's employment with us in November 1999, he was
granted an option to purchase an aggregate of 1,211,099 shares of common stock
at an exercise price of $9.14 per share. All of these shares are immediately
exercisable and 898,599 shares are subject to our right of repurchase. This
repurchase right lapses over a four year period.

Upon commencement of Mr. Hawkins' employment with us in March 1999, he was
granted an option to purchase an aggregate of 4,542,281 shares of common stock
at an exercise price of $3.83 per share. All of these options are immediately
exercisable, and 4,088,053 of the shares are subject to our right to repurchase
these shares at the exercise price in the event Mr. Hawkins ceases to be
employed by us; 454,228 options were immediately vested upon the commencement
of Mr. Hawkins employment. This repurchase right lapses over a four year
period.

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Year-End Option Holdings

The following table indicates aggregated option information for the named
executive officers for the year ended December 31, 1999.

Aggregated Option Exercises in Last Fiscal Year and Year End Option Holdings

[Enlarge/Download Table]

Number of Securities
Underlying Unexercised Value of Unexercised
Options In-the-Money Options(4)
Shares Acquired Value Received ------------------------- -------------------------
Name on Exercise on Exercise(3) Exercisable Unexercisable Exercisable Unexercisable
---- --------------- -------------- ----------- ------------- ----------- -------------

Gregory J. Hawkins(1)... -- -- 4,542,281 -- $41,652,716 --
Scott A. Blum........... -- -- -- -- -- --
Mitch C. Hill(2)........ -- -- 1,211,099 -- 4,674,842 --
John Herr............... -- -- 539,061 -- 4,943,189 --
Brent Rusick............ -- -- 937,500 -- 12,178,125 --
Murray Williams......... 703,124 $2,685,934 -- -- -- --

--------
(1) Includes options to purchase 277,115 shares that were transferred to
irrevocable trusts on behalf of Mr. Hawkins' children and his family.

(2) Includes options to purchase 250,000 shares that were transferred to
irrevocable trusts for the benefit of Mr. Hill's children and options to
purchase 13,125 shares that were transferred to members of his family.

(3) Based on the estimated fair value of our common stock of $3.83 at the time
of exercise less the exercise price, multiplied by the number of shares
purchased.

(4) Based on the initial public offering price of $13.00 per share less the
exercise price, multiplied by the number of shares underlying the options.

All of the options in the table above are immediately exercisable, but are
subject to our right of repurchase which lapses periodically over time and in
some cases upon the completion of our initial public offering. See "--Option
Grants in Last Fiscal Year."

Employee Benefit Plans

1998 Stock Option/Stock Issuance Plan

In August 1998, we adopted the 1998 Stock Option/Stock Issuance Plan. The
Board of Directors and our stockholder approved the 1998 plan in August 1998. A
total of 21,587,475 shares of common stock have been authorized and reserved
for issuance under the 1998 plan. As of December 31, 1999, options to purchase
an aggregate of 19,053,955 shares were outstanding and 553,398 shares are
available for option grants under the 1998 plan. To the extent we cancel,
terminate or repurchase any unvested shares of common stock issued under the
1998 plan, these shares will become available for future issuance under this
plan.

The 1998 plan is divided into two separate components: (i) the discretionary
option grant program under which employees, non-employee members of the Board
and consultants may be granted options to purchase shares of common stock; and
(ii) the stock issuance program under which eligible individuals may purchase
shares of common stock at a price not less than 85% of the fair market value at
the time of issuance, or be issued shares of common stock as a bonus tied to
the performance of services rendered. Both of these programs are administered
by the Board of Directors or one or more committees appointed by the Board of
Directors. The Board of Directors has complete discretion to determine which
eligible individuals will receive option grants or stock issuances under those
programs, determine the type, number, vesting requirements and other features
and conditions of awards under the 1998 plan, interpret this plan and make all
other decisions relating to the operation of the 1998 plan.

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Options may be either incentive stock options within the meaning of Section
422 of the Internal Revenue Code, which permits the deferral of taxable income
related to the exercise of these options, or nonqualified options not entitled
to this deferral. Incentive stock options may only be granted to employees and
the term of an incentive stock option cannot exceed ten years. The exercise
price of incentive stock options granted under the 1998 plan will in no event
be less than 100% of the fair market value of the common stock on the date of
grant, and the exercise price for non-statutory stock options will be no less
than 85% of the fair market value of the common stock on the grant date. The
exercise price for the shares of common stock subject to the option grants made
under the 1998 plan may be paid in cash, check or in shares of common stock
valued at the fair market value on the exercise date. The option may also be
exercised through a same day sale program or delivery of a full recourse,
interest bearing promissory note.

In the event we are acquired by merger or sale of substantially all of our
assets, outstanding options under the 1998 plan may be subject to one or more
of the provisions described below. The 1998 plan provides that the outstanding
options under the discretionary option grant program not assumed by the
successor corporation or otherwise continued in effect will automatically
accelerate and become immediately vested and exercisable. Also, outstanding
repurchase rights will automatically terminate, and the shares subject to those
repurchase rights will immediately vest, except to the extent our repurchase
rights with respect to those shares are assigned to the successor corporation
or otherwise prohibited at the time the option was granted or the repurchase
right was created. Vesting under outstanding options will automatically
accelerate in the event of the termination of the optionee's services within a
designated period, not to exceed 18 months, following an acquisition in which
those options are assumed or continued in effect and do not otherwise
accelerate. Also, outstanding repurchase rights will automatically lapse and
cease to be exercisable in the event the optionee or participant's service is
terminated within a designated period, not to exceed 18 months, following the
effective date of an acquisition in which those repurchase rights are assigned
or otherwise continued. The plan administrator has the discretion to modify
these provisions for each optionee at the time of the option grant.

In some cases, a change in control of BUY.COM by acquisition of beneficial
ownership of securities possessing more than 50% of the total combined voting
power of our outstanding securities will result in each outstanding option
accelerating and becoming vested. Also, any outstanding repurchase rights shall
automatically terminate and these unvested shares shall become fully vested.

The Board of Directors may amend or modify the 1998 plan at any time subject
to any required stockholder approval. The 1998 plan will terminate on the
earliest of (a) August 10, 2008, (b) the date on which all shares available for
issuance under the 1998 plan shall have been issued as fully vested shares, or
(c) the termination of all outstanding options in connection with a change in
control or ownership of BUY.COM.

All outstanding options under the 1998 plan will be transferred to the
successor 1999 Stock Incentive Plan at the time the underwriting agreement for
this offering is signed, and no further option grants or share issuances will
be made under the 1998 plan.

BuyGolf.com, Inc. 1998 Stock Option Plan

In connection with our acquisition of BuyGolf.com, Inc., we assumed the
BuyGolf.com, Inc. 1998 Stock Option Plan. Participation in the assumed BuyGolf
plan is limited to officers, key employees, directors and service providers of
BuyGolf. As of December 31, 1999, options for 162,175 shares of common stock
were outstanding under the assumed BuyGolf plan. We do not intend to grant any
new options under the BuyGolf plan.

Special Executive Stock Option Plan

Our Special Executive Stock Option Plan was adopted by the Board of
Directors in October 1999 and approved by our stockholders in January 2000.
Participation in the executive plan is limited to our non-employee directors,
officers and other highly compensated employees, and a reserve of 3,125,000
shares of our common stock has been set aside for issuance under the executive
plan. As of December 31, 1999, options for 3,107,974 shares of common stock
were outstanding under the executive plan, and 17,026 shares remained available
for future issuance. To the extent we cancel, terminate or repurchase any
unvested shares of common stock issued under the executive plan, those shares
will become available for future issuance under this plan.

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All outstanding options under the executive plan will be transferred to the
successor 1999 Stock Incentive Plan at the time the underwriting agreement for
this offering is signed, and no further option grants or share issuances will
be made under the executive plan.

Our executive plan is administered by our Board of Directors. The Board of
Directors has complete discretion under the executive plan to determine which
eligible individuals are to receive option grants, the time or times when such
grants are to be made, the number of shares subject to each such grant, the
status of any granted option as either an incentive stock option or a non-
statutory option under the federal tax laws, the vesting schedule (if any) to
be in effect for the option grant and the maximum term for which any granted
option is to remain outstanding.

Incentive stock options permit the deferral of taxable income related to the
exercise of those options. Non-statutory options are not entitled to this
deferral. Incentive stock options may only be granted to employees, and the
term of an incentive stock option cannot exceed ten years. The exercise price
of an incentive stock option will in no event be less than 100% of the fair
market value of the common stock on the date of grant. Each non-statutory
option will have an exercise price per share not less than 85% of the fair
market value per share of common stock on the option grant date, and will not
have a term in excess of ten years.

The options granted under the executive plan generally have been structured
so that those options are immediately exercisable for all the option shares.
However, any shares purchased under those options will be subject to repurchase
by us, at the exercise price paid per share, if the optionee ceases service
with us prior to vesting in those shares. Vesting of the option shares
generally occurs over a four year period of service.

The exercise price may be paid in cash, check or in shares of our common
stock. The Board of Directors may allow one or more optionees to pay the
exercise price by delivering a full-recourse note payable to us and secured by
the purchased shares. Following the initial public offering of the common
stock, outstanding options may also be exercised through a same-day sale
program pursuant to which a designated brokerage firm will effect an immediate
sale of the shares purchased under the option and pay over to us, out of the
sale proceeds available on the settlement date, sufficient funds to cover the
exercise price for the purchased shares plus all applicable withholding taxes.

In the event that we are acquired by merger or asset sale, the shares
subject to each outstanding option under the executive plan will vest, unless
our repurchase rights with respect to those option shares are assigned to the
acquiring entity, and the option will terminate except to the extent assumed by
that entity. In addition, all unvested shares under the executive plan will
immediately vest prior to such merger or asset sale, except to the extent our
repurchase rights with respect to those shares are to be assigned to the
acquiring entity.

Options held by several of our officers have special vesting acceleration
provisions which will result in the immediate vesting of their option shares in
the event their employment terminates within a designated period following a
merger or asset sale in which the vesting of their options does not accelerate.

The Board of Directors may amend or modify the executive plan at any time,
subject to any shareholder approval required under applicable law or
regulation.

1999 Stock Plans

1999 Stock Incentive Plan

Introduction. The 1999 Stock Incentive Plan is intended to serve as the
successor program to our 1998 Stock Option/Stock Issuance Plan, our Special
Executive Stock Option Plan and the BuyGolf.com, Inc. 1998 Stock Option Plan.
The 1999 plan was adopted by the Board in December 1999 and approved by the
stockholders in January 2000. The 1999 plan will become effective when the
underwriting agreement for this

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offering is signed. At that time, all outstanding options under our existing
1998 Stock Option/Stock Issuance Plan, our Special Executive Stock Option Plan
and the BuyGolf.com, Inc. 1998 Stock Option Plan will be transferred to the
1999 plan, and no further option grants will be made under either the 1998
plan, the executive plan or the BuyGolf plan. The transferred options will
continue to be governed by their existing terms, unless our compensation
committee decides to extend one or more features of the 1999 plan to those
options.

Share Reserve. We have authorized up to 24,769,525 shares of our common
stock for issuance under the 1999 plan. The share reserve consists of the
number of shares we estimate will be carried over from the 1998 plan, the
executive plan and the BuyGolf.com plan plus an additional increase of
approximately 1,875,000 shares. The share reserve under our 1999 plan will
automatically increase on the first trading day in January each calendar year,
beginning with calendar year 2001, by an amount equal to three percent of the
total number of shares of our common stock outstanding on the last trading day
of December in the prior calendar year, but in no event will this annual
increase exceed 4,000,000 shares. In addition, no participant in the 1999 plan
may be granted stock options or direct stock issuances for more than 1,500,000
shares of common stock in total in any calendar year.

Programs. Our 1999 plan has five separate programs:

. the discretionary option grant program, under which eligible individuals
in our employ may be granted options to purchase shares of our common
stock at an exercise price not less than the fair market value of those
shares on the grant date;

. the stock issuance program, under which eligible individuals may be
issued shares of common stock directly, upon the attainment of
performance milestones or the completion of a specified period of
service or as a bonus for past services;

. the salary investment option grant program, under which our executive
officers and other highly compensated employees may be given the
opportunity to apply a portion of their base salary each year to the
acquisition of special below market stock option grants;

. the automatic option grant program, under which option grants will
automatically be made at periodic intervals to eligible non-employee
Board members to purchase shares of common stock at an exercise price
equal to the fair market value of those shares on the grant date; and

. the director fee option grant program, under which our non-employee
Board members may be given the opportunity to apply a portion of any
retainer fee otherwise payable to them in cash each year to the
acquisition of special below-market option grants.

Eligibility. The individuals eligible to participate in our 1999 plan
include our officers and other employees, our Board members and any consultants
we hire.

Administration. The discretionary option grant and stock issuance programs
will be administered by our compensation committee. This committee will
determine which eligible individuals are to receive option grants or stock
issuances under those programs, the time or times when the grants or issuances
are to be made, the number of shares subject to each grant or issuance, the
status of any granted option as either an incentive stock option or a
nonstatutory stock option under the federal tax laws, the vesting schedule to
be in effect for the option grant or stock issuance and the maximum term for
which any granted option is to remain outstanding. The compensation committee
will also have the authority to select the executive officers and other highly
compensated employees who may participate in the salary investment option grant
program in the event that program is put into effect for one or more calendar
years.

Plan Features. Our 1999 plan will include the following features:

. The exercise price for any options granted under the plan may be paid in
cash or in shares of our common stock valued at fair market value on the
exercise date. The option may also be exercised through a same-day sale
program without any cash outlay by the optionee.

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. The compensation committee will have the authority to cancel outstanding
options under the discretionary option grant program, including any
transferred options from our predecessor plans, in return for the grant
of new options for the same or different number of option shares with an
exercise price per share based upon the fair market value of our common
stock on the new grant date.

. Stock appreciation rights may be issued under the discretionary option
grant program. These rights will provide the holders with the election
to surrender their outstanding options for a payment from us equal to
the fair market value of the shares subject to the surrendered options
less the exercise price payable for those shares. We may make the
payment in cash or in shares of our common stock.

Change in Control. The 1999 plan will include the following change in
control provisions which may result in the accelerated vesting of outstanding
option grants and stock issuances:

. In the event that we are acquired by merger or asset sale, each
outstanding option under the discretionary option grant program which is
not to be assumed by the successor corporation will immediately become
exercisable for all the option shares, and all outstanding unvested
shares will immediately vest, except to the extent our repurchase rights
with respect to those shares are to be assigned to the successor
corporation.

. The compensation committee will have complete discretion to grant one or
more options which will become exercisable for all the option shares in
the event those options are assumed in the acquisition but the
optionee's service with us or the acquiring entity is subsequently
terminated. The vesting of any outstanding shares under our 1999 plan
may be accelerated upon similar terms and conditions.

. The compensation committee may grant options and structure repurchase
rights so that the shares subject to those options or repurchase rights
will immediately vest in connection with a successful tender offer for
more than fifty percent of our outstanding voting stock or a change in
the majority of our Board through one or more contested elections. This
accelerated vesting may occur either at the time of the transaction or
upon the subsequent termination of the individual's service.

Salary Investment Option Grant Program. In the event the compensation
committee decides to put this program into effect for one or more calendar
years, each of our executive officers and other highly compensated employees
may elect to reduce his or her base salary for the calendar year by an amount
not less than $10,000 nor more than $50,000. Each selected individual who makes
this election will automatically be granted, on the first trading day in
January of the calendar year for which his or her salary reduction is to be in
effect, an option to purchase that number of shares of common stock determined
by dividing the salary reduction amount by two-thirds of the fair market value
per share of our common stock on the grant date. The option will have an
exercise price per share equal to one-third of the fair market value of the
option shares on the grant date. As a result, the option will be structured so
that the fair market value of the option shares on the grant date less the
exercise price payable for those shares will be equal to the amount of the
salary reduction. The option will become exercisable in a series of twelve
equal monthly installments over the calendar year for which the salary
reduction is to be in effect.

Automatic Option Grant Program. Each individual who first becomes a non-
employee Board member at any time after the effective date of this offering
will receive an option grant to purchase 24,000 shares of common stock on the
date the individual joins the Board. In addition, on the date of each annual
stockholders meeting held after the effective date of this offering, each non-
employee Board member who is to continue to serve as a non-employee Board
member, including each of our current non-employee Board members, will
automatically be granted an option to purchase 8,000 shares of common stock,
provided that the individual has served on the Board for at least six months.

Each automatic grant will have an exercise price per share equal to the fair
market value per share of our common stock on the grant date and will have a
term of 10 years, subject to earlier termination following the optionee's
cessation of Board service. The option will be immediately exercisable for all
of the option shares;

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however, we may repurchase, at the exercise price paid per share, any shares
purchased under the option which are not vested at the time of the optionee's
cessation of Board service. The shares subject to each initial 24,000 share
automatic option grant will vest 25% after one year of Board service and the
remainder in equal monthly installments over the next thirty-six months.
However, the shares will immediately vest in full upon changes in control or
ownership or upon the optionee's death or disability while a Board member. The
shares subject to each annual 8,000 share automatic grant will vest based on
the same schedule.

Director Fee Option Grant Program. If this program is put into effect in
the future, then each non-employee Board member may elect to apply all or a
portion of any cash retainer fee for the year to the acquisition of a below-
market option grant. The option grant will automatically be made on the first
trading day in January in the year for which the non-employee Board member
would otherwise be paid the cash retainer fee in the absence of his or her
election. The option will have an exercise price per share equal to one-third
of the fair market value of the option shares on the grant date, and the number
of shares subject to the option will be determined by dividing the amount of
the retainer fee applied to the program by two-thirds of the fair market value
per share of our common stock on the grant date. As a result, the option will
be structured so that the fair market value of the option shares on the grant
date less the exercise price payable for those shares will be equal to the
portion of the retainer fee applied to that option. The option will become
exercisable in a series of twelve equal monthly installments over the calendar
year for which the election is in effect. However, the option will become
immediately exercisable for all the option shares upon the death or disability
of the optionee while serving as a Board member.

Additional Program Features. Our 1999 plan will also have the following
features:

. Outstanding options under the salary investment and director fee option
grant programs will immediately vest if we are acquired by a merger or
asset sale or if there is a successful tender offer for more than 50% of
our outstanding voting stock or a change in the majority of our Board
through one or more contested elections.

. Limited stock appreciation rights will automatically be included as part
of each grant made under the salary investment option grant program and
the automatic and director fee option grant programs, and these rights
may also be granted to one or more officers as part of their option
grants under the discretionary option grant program. Options with this
feature may be surrendered to us upon the successful completion of a
hostile tender offer for more than 50% of our outstanding voting stock.
In return for the surrendered option, the optionee will be entitled to a
cash distribution from us in an amount per surrendered option share
based upon the highest price per share of our common stock paid in that
tender offer.

. The Board may amend or modify the 1999 plan at any time, subject to any
required stockholder approval. The 1999 plan will terminate no later
than December 2009.

1999 Employee Stock Purchase Plan.

Introduction. Our 1999 Employee Stock Purchase Plan was adopted by the
Board in December 1999 and approved by the stockholders in January 2000. This
plan will become effective immediately upon the signing of the underwriting
agreement for this offering. The plan is designed to allow our eligible
employees and the eligible employees of our participating subsidiaries to
purchase shares of our common stock, at semi-annual intervals, with their
accumulated payroll deductions.

Share Reserve. We have initially reserved 1,250,000 shares of our common
stock for issuance under this purchase plan. The reserve will automatically
increase on the first trading day in January each calendar year, beginning in
calendar year 2001, by an amount equal to one percent of the total number of
outstanding shares of our common stock on the last trading day in December in
the prior calendar year. In no event will any annual increase exceed 1,300,000
shares.

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Administration. The purchase plan will be administered by our compensation
committee. The compensation committee shall have full authority to interpret
and construe any provisions of the purchase plan and adopt such rules and
regulations for administering the purchase plan as it may deem necessary in
order to comply with the requirements of Section 423 of the Internal Revenue
Code.

Offering Periods. The purchase plan will have a series of successive
offering periods, each with a maximum duration of 24 months. The initial
offering period will start on the date the underwriting agreement for this
offering is signed and will end on the last business day in January 2002. The
next offering period will start on the first business day in February 2002, and
subsequent offering periods will set by our compensation committee.

Eligible Employees. Individuals scheduled to work more than 20 hours per
week for more than five calendar months per year may join an offering period on
the start date or any semi-annual entry date within that period. Semi-annual
entry dates will occur on the first business day of May and November each year.
Individuals who become eligible employees after the start date of an offering
period may join the plan on any subsequent semi-annual entry date within that
offering period.

Payroll Deductions. A participant may contribute up to the lesser of (i)
10% of his or her base salary or (ii) $10,000 per calendar year through payroll
deductions, and the accumulated deductions will be applied to the purchase of
shares on each semi-annual purchase date. The purchase price per share will be
equal to 85% of the fair market value per share on the participant's entry date
into the offering period or, if lower, 85% of the fair market value per share
on the semi-annual purchase date. Semi-annual purchase dates will occur on the
last business day of January and July each year. However, a participant may not
purchase more than 550 shares on any purchase date, and not more than 312,500
shares may be purchased in total by all participants on any purchase date. Our
compensation committee will have the authority to change these limitations for
any subsequent offering period.

Reset Feature. If the fair market value per share of our common stock on
any purchase date is less than the fair market value per share on the start
date of the two-year offering period, then that offering period will
automatically terminate, and a new two-year offering period will begin on the
next business day. All participants in the terminated offering will be
transferred to the new offering period.

Change in Control. Should we be acquired by merger or sale of
substantially all of our assets or more than fifty percent of our voting
securities, then all outstanding purchase rights will automatically be
exercised immediately prior to the effective date of the acquisition. The
purchase price will be equal to the lesser of 85% of the market value per share
on the participant's entry date into the offering period in which an
acquisition occurs or 85% of the fair market value per share immediately prior
to the acquisition.

Plan Provisions. The following provisions will also be in effect under the
plan:

. The plan will terminate no later than the last business day of January
2010.

. The Board may at any time amend, suspend or discontinue the plan.
However, some amendments may require stockholder approval.

Limitation on Liability and Indemnification Matters

The certificate of incorporation that we will adopt immediately prior to the
closing of this offering provides that, except to the extent prohibited by the
Delaware General Corporation Law, our directors will not be personally liable
to us or our stockholders for monetary damages for any breach of fiduciary duty
as directors. Under the Delaware General Corporation Law, the directors have a
fiduciary duty to BUY.COM which is not eliminated by this provision of the
certificate of incorporation and, in appropriate circumstances, equitable
remedies including injunctive or other forms of nonmonetary relief will remain
available. In addition, each director will continue to be subject to liability
under the Delaware law for:

. breach of the director's duty of loyalty;

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. acts or omissions which are found by a court of competent jurisdiction
to be not in good faith or which involve intentional misconduct, or
knowing violations of law;

. actions leading to improper personal benefit to the director; and

. payment of dividends or approval of stock repurchases or redemptions
that are prohibited by Delaware law.

This provision also does not affect a director's responsibilities under any
other laws, including the federal securities laws or state or federal
environmental laws. We have obtained liability insurance for our officers and
directors.

Section 145 of the Delaware law empowers a corporation to indemnify its
directors and officers and to purchase insurance with respect to liability
arising out of their capacity or status as directors and officers, provided
that this provision shall not eliminate or limit the liability of a director:

. for any breach of the director's duty of loyalty to the corporation or
its stockholders;

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

. for payment of dividends or approvals of stock repurchases or
redemptions that are unlawful under Delaware law; or

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

The Delaware law provides further that the indemnification permitted
thereunder shall not be deemed exclusive of any other rights to which the
directors and officers may be entitled under the corporation's bylaws, any
agreement, a vote of stockholders or otherwise. The certificate of
incorporation provides that we will indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding by reason of the fact that the person is or was a
director or officer, or is or was serving at our request as a director or
officer of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise, against expenses, judgements, fines and
amounts paid in settlement actually and reasonably incurred by the person in
the action, suit or proceeding.

We plan to enter into indemnification agreements with our directors and our
executive officers containing provisions that may require us, among other
things, to indemnify our directors and officers against liabilities that may
arise by reason of their status or service as directors or officers other than
liabilities arising from willful misconduct of a culpable nature, to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified, and to obtain directors and officers' liability
insurance if maintained for other directors or officers.

At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted. We are not aware of any threatened litigation or
proceeding which may result in a claim for indemnification.

The Securities and Exchange Commission is of the opinion that
indemnification of directors, officers and persons controlling BUY.COM for
violations of the Securities Act is against public policy as expressed in the
Securities Act and is therefore unenforceable.

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RELATED PARTY TRANSACTIONS

Since our formation in June 1997, there has not been, nor is there any
proposed transaction where we were or will be a party in which the amount
involved exceeded or will exceed $60,000 and in which any director, executive
officer, holder of more than 5% of any class of our voting securities, or any
member of the immediate family of any of the foregoing persons had or will have
a direct or indirect material interest, other than the compensation agreements
and other agreements and transactions which are described in "Management" and
the transactions described below. These related party transactions were each
negotiated at an arms length basis and were on no less favorable terms to us
than would have been given to a third party. Furthermore, for each sale or
other issuance of securities to a related party, the shares were sold at the
then current fair market value determined in good faith by the Board of
Directors.

Sales of Securities

In June 1997, BuyComp, LLC, a California limited liability company and our
predecessor, issued 9,000,000 ownership units to Scott and Audrey Blum in
exchange for $50,000. In August 1998, we issued 81,331,078 shares of common
stock to the Scott A. Blum Separate Property Trust u/d/t 8/2/95 ("The Blum
Trust") in exchange for approximately 96% of Scott and Audrey Blum's interest
in BuyComp, LLC. Scott A. Blum is our founder and served as our President until
December 1998, our Chief Executive Officer until March 1999, and one of our
directors until September 1999.

In August 1998, we issued (i) 3,043,921 shares of Series A convertible
participating preferred stock to The Blum Trust in exchange for approximately
4% of Scott and Audrey Blum's interest in BuyComp, LLC.; and (ii) 9,131,785
shares of Series A convertible participating preferred stock to SOFTBANK
Technology Ventures IV L.P. and SOFTBANK Technology Advisors Fund L.P. at a
purchase price of $1.64 per share. The Blum Trust sold a total of 3,043,921
shares of Series A convertible participating preferred stock to SOFTBANK
Technology Ventures IV L.P. and SOFTBANK Technology Advisors Fund L.P. at $1.64
per share, and in September 1998, a total of 10,456,771 shares of common stock
to SOFTBANK Holdings, Inc., SOFTBANK Ventures, Inc. and SOFTBANK Contents Fund
at $3.83 per share. In connection with the SOFTBANK affiliates' investment,
they entered into an investors' rights agreement that provides for, among other
things, registration rights and rights of first offer to purchase common stock
upon our issuance of additional securities.

In December 1998, we issued a total of 5,529,571 shares of common stock, for
an aggregate purchase price valued at approximately $9.1 million, to Ingram
Entertainment, Inc. and the other two stockholders of SpeedServe, Inc. in
consideration for our acquisition of all of the outstanding capital stock of
SpeedServe. In connection with this acquisition, our wholly-owned subsidiary,
BUY.COM ENTERTAINMENT Inc., entered into various agreements with Ingram
Entertainment Inc. and a non-competition agreement with David Ingram. David
Ingram, who is one of our directors, is a majority stockholder, Chairman and
President of Ingram Entertainment Inc. Mr. Ingram is also a minority
stockholder of Ingram Micro, our largest distributor.

The material ancillary agreements between Ingram Entertainment and BUY.COM
ENTERTAINMENT as a part of our acquisition of SpeedServe included a non-
competition agreement, a voting agreement, a system use agreement, an
intercompany services agreement, a supply agreement, a sublease, a database
license agreement and a rebranding agreement. These agreements primarily
facilitated the transition of SpeedServe's existing business relationships with
Ingram Entertainment to BUY.COM ENTERTAINMENT. Ingram Entertainment also
entered into an investors' rights agreement that provides for, among other
things, registration rights and rights of first offer to purchase common stock
upon our issuance of additional securities, and a stockholders agreement, which
will terminate upon the completion of this offering.

Between March 1999 and July 1999, we issued a total of 90,590 shares of
common stock to Ingram Entertainment Inc., for an aggregate purchase price of
approximately $563,000, 222,440 shares of common stock to SOFTBANK Technology
Ventures IV, L.P. for an aggregate purchase price of approximately

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$1.4 million and 4,265 shares to SOFTBANK Technology Advisors Fund, L.P. for an
aggregate purchase price of approximately $26,000 in connection with their
exercise of a contractual right of first offer to purchase shares of our common
stock, based upon their percentage ownership, upon our issuance of additional
securities to third parties. These rights of first offer do not apply to, and
will terminate upon the completion of this offering. Edward S. Russell, who is
one of our directors, is a General Partner of these SOFTBANK Technology
Ventures funds.

In October 1999, we issued 9,923,276 shares of our Series B convertible
participating preferred stock at a purchase price of $9.07 per share to a group
of investors led by SOFTBANK Capital Partners L.P. and its affiliates. In this
financing, The Blum Trust also sold an aggregate of 8,242,937 shares of our
common stock to SOFTBANK Capital Partners L.P. and its affiliates at a purchase
price of $9.07 per share.

Transactions with Ingram Micro and Ingram Entertainment

In June 1998, and again in March 1999, we entered into a contract with
Ingram Micro to supply and distribute the computer hardware, software and
peripheral products that we sell in our stores and to assist us with marketing
related vendor advertising. We also maintain a line of credit with Ingram Micro
to purchase these goods and merchandise. As a part of that line of credit, we
granted Ingram Micro a security interest in the inventory we purchase from
them, the proceeds from this inventory and all of our accounts receivable.

In connection with our acquisition of SpeedServe in December 1998, we
entered into a supply agreement with Ingram Entertainment, under which they
supply the videos, DVDs and video games that we sell. In August 1999, we
amended this agreement to provide for co-op advertising dollars and to include
guarantees for the shipping of the products that we sell through them. In April
1999, we entered into an agreement with Nashville Computer Liquidators to
supply and distribute the products we sell in our online clearance store.
Nashville Computer Liquidators is a subsidiary of Ingram Entertainment.

In October 1999, we issued a total of 2,589,329 of common stock, for an
aggregate purchase price of approximately $23.5 million in connection with our
acquisition of BuyGolf.com, Inc. Both Scott Blum and David Ingram were
directors of BuyGolf.com. Ingram Entertainment Holdings, Inc., of which David
Ingram is the Chairman and President, and The Blum Trust were stockholders of
BuyGolf.com and received a total of 272,658 shares of our common stock in the
merger. For a more detailed description of the terms of this acquisition see
"Business--Acquisition of BuyGolf.com."

In October 1999, we entered into agreements with the Ingram Book Company and
Ingram Fulfillment Services, Inc. to supply and distribute the books that we
sell in our online store. In connection with this transaction, we issued
Harpeth Holdings, Inc. a warrant to purchase 625,000 shares of our common
stock. Although David Ingram does not have an ownership interest in any of
these entities, Ingram Book Company, Ingram Fulfillment Services Inc. and
Harpeth Holdings, Inc. are each affiliated with Ingram Industries, Inc., which
is controlled by several members of David Ingram's immediate family.

In October 1999, we entered into a binding term sheet with Ingram
Entertainment to purchase, from a third party supplier on our behalf, the
consumer electronic products that we sell in our electronics store.

Transactions with Scott Blum and His Immediate Family

On December 31, 1997, BuyComp LLC borrowed approximately $211,000 from Scott
Blum. The loan was payable upon demand and accrued interest at the rate of
10.00% per annum. This loan was repaid in full in September 1998. On October 8,
1998, we loaned Mr. Blum $1.0 million. This loan was also payable on demand and
accrued interest at the rate of 8.00% per annum. This loan was repaid in
October 1998. In May 1999, we borrowed $10.0 million from The Blum Trust. The
loan was payable upon demand and accrued interest at a rate of 10.00% per
annum. This loan was repaid in July 1999 with the proceeds from our credit
facility with a commercial lending institution. In August 1999, we borrowed
$5.0 million from The Blum Trust pursuant to a

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note that is payable upon demand and accrues interest at a rate of 10.00% per
annum. In addition, The Blum Trust has guaranteed our $15.0 million credit
facility and our $1.2 million loan from The Bank of Yorba Linda.

In May 1999, we entered into a one year lease agreement with The Blum Trust
for our facility located at 27 Brookline, Aliso Viejo, California. Under this
lease, our monthly rental obligation is approximately $12,000. We are proposing
to sell an office building that was previously used as our facility to Scott
Blum for approximately $1.3 million. In addition, we intend to terminate the
lease discussed above for an adjacent building effective in January 2000.

In October 1999, we entered into a voting trust agreement with Scott A.
Blum, The Blum Trust, and three other trusts affiliated with Scott A. Blum, as
grantor, and our outside directors, Donald Kendall, James Roszak and Wayne
Thorson, as trustees under the voting trust agreement. At the time the voting
trust agreement was executed, The Blum Trust and the other affiliated trusts
held a total of 62,107,790 shares of our common stock, which represented
approximately 54% of our total shares outstanding after giving effect to the
conversion of all of our outstanding preferred stock into our common stock. At
that time and as of the date of this prospectus, Mr. Blum did not directly own
any shares of our capital stock.

The voting trust agreement established a trust into which all shares held by
The Blum Trust and the other affiliated trusts were deposited. The voting trust
agreement requires that any shares of our capital stock that are acquired by
The Blum Trust, the other affiliated trusts, Mr. Blum or his "affiliates," as
that term is defined in the voting trust agreement, after the date of the
voting trust agreement be immediately deposited into the trust. The voting
trust agreement further requires that any shares of our capital stock
previously deposited into The Blum Trust or the other affiliated trusts that
are purchased by any individual or entity affiliated with Mr. Blum also be
immediately deposited into the voting trust. This voting trust terminates upon
the earlier of (a) the unanimous approval of our Board, two-thirds vote of our
stockholders and the consent of our independent auditors, or (b) on the tenth
anniversary of the closing of this offering, unless otherwise required by law
or regulation.

The voting trust agreement does not restrict the ability of The Blum Trust,
the other affiliated trusts, Mr. Blum or any of his affiliates to sell, assign,
transfer or pledge any of the shares deposited into the voting trust, nor does
it prohibit The Blum Trust, the other affiliated trusts, Mr. Blum or his
affiliates from purchasing additional shares of our common stock, provided any
shares purchased by such parties also become subject to the voting trust
agreement.

The trustees of the voting trust agreement are required to be outside
directors of BUY.COM who are not affiliated with Mr. Blum, or individuals
nominated by our outside directors. On significant stockholder actions the
trustees are required to vote all of the shares in the voting trust for the
matter, against the matter or abstain or cause to have the same effect as
broker non-votes, in the same proportion as the non-affiliated votes are cast
on such matter. The voting trust agreement provides that significant
stockholder actions include the election of directors, the dissolution,
consolidation, merger, reorganization, or recapitalization of BUY.COM, the
lease, sale or license of all or a substantial portion of our assets, the
issuance or sale of securities by us or our affiliate or the amendment to the
voting trust agreement, in each case to the extent a stockholder vote is
otherwise required by law. The voting trust agreement provides that non-
affiliated shares include all shares of our outstanding capital stock other
than shares held in the voting trust. On routine stockholder actions the
trustees have the discretion to vote the shares held in the trust in any manner
determined by a majority of the trustees.

Mr. Blum resigned as our Chief Executive Officer in March 1999, and resigned
from our Board of Directors in September 1999. He is not an employee of ours
and he has no authority to bind us as to any contracts, to commit funds or
resources, or supervise or direct the activities of any of our officers or
employees. In accordance with the terms of the voting trust agreement, Mr. Blum
has withdrawn from participating in the management, business and operations of
BUY.COM, and is required to cease all involvement with BUY.COM and with our
operations, our advertising and product sales activities or efforts, our
investor relations program and our financial and accounting matters, including
personnel matters, accounting methodologies or practices.

In July 1999, Scott Blum's father, William Blum, purchased 28,125 shares of
common stock from one of our employees at a purchase price of $3.83 per share.
Under the terms of the voting trust agreement, these shares are excluded from
the voting trust.

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Transactions With Pinnacle Micro

On October 1, 1997, we entered into a consulting agreement with Pinnacle
Micro, Inc. Scott Blum's father, William Blum, was the President, Chief
Executive Officer and Chairman of the Board of Directors of Pinnacle Micro at
the time this agreement was executed. In addition, before founding BUY.COM,
Scott Blum served as an Executive Vice President of Pinnacle Micro. The
payments made under this agreement suspended Pinnacle Micro's severance
payments to Mr. Blum. On March 21, 1998, we entered into another consulting
agreement with Pinnacle Micro, Inc. under which Scott Blum agreed to provide
marketing and consulting services to Pinnacle Micro. In addition, several of
our other employees consulted for Pinnacle Micro during the three month
duration of this agreement. Under both consulting agreements, Pinnacle Micro
made total payments of approximately $161,000 to us between October 1997 and
June 1998.

From September 1997 through December 1998, we made payments of approximately
$155,000 on behalf of Pinnacle Micro for advertisements. Pinnacle Micro has
repaid all such payments in full.

Dividend of BUYNOW INC.

In October 1999, we declared a common stock dividend of 75% of the capital
stock, on an as converted basis, of one of our wholly-owned subsidiaries,
BUYNOW INC., to all of our stockholders of record as of October 13, 1999 on a
pro rata basis. In the pro rata dividend among all of our stockholders, Murray
Williams, our Vice President, Global Business Development, will receive 467,804
shares, Robb Brock, our Vice President, Technology, will receive 207,767
shares, each of Messrs. Kendall, Richion, Roszak, Sculley and Thorson,
directors of BUY.COM, will receive 86,968 shares, and Ingram Capital, Inc.,
with which Mr. Ingram is affiliated, will receive an aggregate of 3,297,726
shares. We have retained Series A preferred stock representing 25% of the
capital stock of BUYNOW on an as converted basis. The Series A preferred stock
has a $7.5 million liquidation preference over the common stock and is
convertible into common stock of BUYNOW.

The certificate of incorporation of BUYNOW provides that the number of
directors be set at five and that the holders of the Series A Preferred Stock
are entitled to elect three directors, provided that one director must be a
representative of SOFTBANK, and the holders of common stock are entitled to
elect two directors.

We intend to enter into a license agreement with BUYNOW under which we will
license our e-commerce technology related to the BUYNOW business to BUYNOW on a
royalty free basis. In addition, we intend to license to BUYNOW, on a royalty
free basis, the "BUYNOW" trademark and domain name rights, which license may be
terminated by us at any time. In addition, we have agreed to provide limited
customer support and system support to BUYNOW.

BUYNOW will be entering into a non-competition agreement prohibiting BUYNOW
from soliciting any of our employees without obtaining our prior consent or
from providing services to any computer equipment manufacturer without first
obtaining our consent.

International Joint Ventures

In September 1999, we entered into a binding letter of intent with SOFTBANK
America, Inc. to form three separate international joint ventures in various
international territories in which we will have 51% ownership interests.
Messrs. Burnham and Russell are affiliated with SOFTBANK and are directors of
BUY.COM. For a more complete discussion of our international joint ventures
please refer to "Business--International Operations."

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PRINCIPAL STOCKHOLDERS

The following table indicates information as of December 31, 1999 regarding
the ownership of our common stock by:

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

. each named executive officer;

. each of our directors; and

. all of our directors and officers as a group.

The number of shares beneficially owned and the percentage of shares
beneficially owned are based on 115,140,175 shares of common stock outstanding
as of December 31, 1999, assuming the conversion of all outstanding shares of
preferred stock into common stock, which will occur automatically upon the
consummation of this offering, and 129,140,175 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 currently
or within 60 days following December 31, 1999 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.

[Download Table]

Percent of Shares
Beneficially
Owned
-----------------
Number of Shares Prior to After
Name and Address of Beneficial Owners (1) Beneficially Owned Offering Offering
----------------------------------------- ------------------ -------- --------

Scott A. Blum(2)(15)...................... 62,107,790 53.9% 48.1%
SOFTBANK Affiliates
William L. Burnham(3)................... 24,239,436 21.1 18.8
Edward S. Russell(4).................... 14,055,845 12.2 10.9
Total SOFTBANK Affiliates(5)............ 38,295,281 33.3 29.7
David B. Ingram(6)........................ 5,258,633 4.6 4.1
Gregory J. Hawkins(7)..................... 4,542,281 3.8 3.4
John C. Herr(8)........................... 539,061 * *
Mitch C. Hill(9).......................... 1,211,099 1.0 *
Brent Rusick(10).......................... 937,500 * *
Murray H. Williams(11).................... 703,124 * *
Donald M. Kendall(12)..................... 62,416,630 54.1 48.3
Wayne T. Thorson(12)...................... 62,416,630 54.1 48.3
James B. Roszak(12)....................... 62,416,630 54.1 48.3
John Sculley(13).......................... 308,840 * *
Charles W. Richion(13).................... 308,840 * *
All directors and officers as a group
(19 persons)(14)(15)..................... 117,845,747 93.6% 84.2%

--------
* Less than one percent

(1) The address for each of our officers and directors is c/o BUY.COM at 85
Enterprise, Aliso Viejo, California 92656. The address for the SOFTBANK
Technology Funds is 200 West Evelyn Avenue, Suite 200, Mountain View,
California 94043. The address for the other SOFTBANK funds is 10 Langley
Road, Suite 403, Newton Center, Massachusetts 02159.

(2) Consists of shares held by the Scott A. Blum Separate Property Trust, the
Will Scott Blum Trust, the Emma Rose Blum Trust and the Scott Blum GRAT.
The address for the Blum Trusts is 33971 Selva Road, Suite 200, Dana
Point, California 92629.

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(3) Includes 10,741,324 shares, 2,091,356 shares, 3,137,025 shares, 8,151,474
shares and 118,257 shares held by SOFTBANK America, Inc., SOFTBANK
Ventures, Inc., SOFTBANK Contents Fund, SOFTBANK Capital Partners L.P. and
SOFTBANK Capital Advisors Fund, respectively. William Burnham is a
Managing Director of the general partner of each of these SOFTBANK
entities. Mr. Burnham disclaims beneficial ownership of these shares,
except to the extent of his pecuniary interest.

(4) Includes 12,980,426 shares, 248,706 shares and 792,158 shares, 21,576
shares and 12,979 shares held by SOFTBANK Technology Ventures IV, L.P.,
SOFTBANK Technology Advisors Fund, L.P., SOFTBANK Technology Ventures V,
L.P., SOFTBANK Technology Advisors Fund V, L.P. and SOFTBANK Technology
Entrepreneurs Fund V, L.P. respectively. Edward S. Russell is the Managing
Director of the general partner of each of these SOFTBANK entities. Mr.
Russell disclaims beneficial ownership of these shares except to the
extent of his pecuniary interest.

(5) Includes 10,741,324 shares, 2,091,356 shares, 3,137,025 shares, 12,980,426
shares, 248,706 shares, 8,151,474 shares, 118,257 shares, 792,158 shares,
21,576 shares and 12,979 shares held by SOFTBANK America, Inc., SOFTBANK
Ventures, Inc., SOFTBANK Contents Fund, SOFTBANK Technology Ventures IV,
L.P. and SOFTBANK Technology Advisors Fund, L.P., SOFTBANK Capital
Partners L.P., SOFTBANK Capital Partners Advisors Fund L.P., SOFTBANK
Technology Ventures V, L.P., SOFTBANK Technology Advisors Fund V and
SOFTBANK Technology Entrepreneurs Fund V, respectively.

(6) Includes 5,099,258 shares held by Ingram Capital, Inc. Mr. Ingram is the
majority stockholder of Ingram Entertainment Holdings, Inc., which is the
parent corporation of Ingram Capital, Inc. Mr. Ingram disclaims beneficial
ownership of these shares, except to the extent of his pecuniary interest.
Also includes 159,375 shares issuable upon exercise of options that are
exercisable within 60 days of December 31, 1999.

(7) Consists solely of shares issuable upon exercise of options that are
exercisable within 60 days of December 31, 1999. This amount also includes
a total of 277,115 shares of common stock, subject to an option, that has
been transferred to irrevocable trusts on behalf of Mr. Hawkins' children
and his family.

(8) Consists solely of shares issuable upon exercise of options that are
exercisable within 60 days of December 31, 1999.

(9) Consists solely of shares issuable upon exercise of an option that is
exercisable within 60 days of December 31, 1999. This amount also includes
a total of 250,000 shares of common stock subject to an option that has
been transferred to five irrevocable trusts for the benefit of each of Mr.
Hill's children and 13,125 shares subject to options that have been
transferred to members of his family.

(10) Consists solely of shares issuable upon exercise of options that are
exercisable within 60 days of December 31, 1999.

(11) This amount includes 660,937 shares of common stock that have been
transferred to the Murray Williams Separate Property Trust and a total of
42,187 shares of common stock transferred to the Murray Williams
Children's Trust, the Murray Williams Sibling's Trust and the Murray
Williams College Fund Trust.

(12) Includes 178,125 shares issuable upon exercise of options that are
exercisable within 60 days of December 31, 1999. Includes 62,107,790
shares of common stock that are held in a voting trust for which such
person is a trustee. However, no single trustee has the power to vote such
shares. The voting trust agreement requires the approval of at least two
trustees to vote the shares. Each trustee disclaims beneficial ownership
of the shares held in the trust.

(13) Includes 178,125 shares issuable upon exercise of options that are
exercisable within 60 days of December 31, 1999.

(14) Includes 10,745,566 shares issuable upon exercise of options that are
exercisable within 60 days of December 31, 1999.

(15) Includes Mr. Blum's shares of common stock that are held in a voting trust
for which three of our outside directors serve as trustees. The voting
trust, among other things, provides that the trustees of the voting trust
will have the discretion to vote all of Mr. Blum's shares on issues
related to routine corporate governance. However, in some instances, the
trustees must vote Mr. Blum's shares in the same proportion as the votes
cast for and against by the non-affiliated shares. For a more detailed
discussion of this voting trust, see "Related Party Transactions--
Transactions with Scott Blum and His Immediate Family."

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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 990,000,000 shares of common stock, par value $0.0001, and 10,000,000 shares
of preferred stock, par value $0.0001.

Common Stock

Currently, we are authorized to issue 850,000,000 shares of common stock. At
December 31, 1999, 115,140,175 shares of common stock were deemed outstanding
and held of record by approximately 55 holders, assuming the conversion of all
shares of preferred stock into common stock. Under the certificate of
incorporation and bylaws, holders of common stock do not have cumulative voting
rights. Holders of shares representing a majority of the voting power of common
stock can elect all of the directors. The holders of the remaining shares will
not be able to elect any directors. The shares of common stock offered by this
prospectus, when issued, will be fully paid and non-assessable and will not be
subject to any redemption or sinking fund provisions. Holders of common stock
do not have any preemptive, subscription or conversion rights.

Holders of common stock are entitled to receive dividends declared by the
Board of Directors out of legally available funds, subject to the rights of
preferred stockholders and the terms of any existing or future agreements
between us and our lenders. Since our inception, we have not declared or paid
any cash dividends on our common stock. 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.

Preferred Stock

Upon the closing of this offering, all 12,175,706 shares of our Series A
convertible participating preferred stock and 9,923,276 shares of our Series B
convertible participating preferred stock will convert into shares of common
stock. Thereafter, the Board of Directors is 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 BUY.COM 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 to others. We
currently have no plans to issue any shares of preferred stock.

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

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judgment as to the best interests of BUY.COM and its 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 BUY.COM. 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:

. enhance the likelihood of continuity and stability in the composition of
the Board and in the policies formulated by the Board;

. discourage transactions which may involve an actual or threatened change
in control of BUY.COM;

. discourage tactics that may be used in proxy fights;

. encourage persons seeking to acquire control of BUY.COM to consult first
with the Board of Directors to negotiate the terms of any proposed
business combination or offer; and

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

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

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

. the Chairman of the Board; or

. a majority of the entire Board.

A special meeting of the stockholders may not be held absent a written request
of this nature. The request shall state the purpose or purposes of the proposed
meeting. This limitation on the right of stockholders to call a

424B4 78th Page of 137 TOC 1st Previous Next ↓Bottom Just 78th
special meeting could make it more difficult for stockholders to initiate
actions that are opposed by the Board of Directors. These actions could include
the removal of an incumbent director or the election of a stockholder nominee
as a director. They could also include the implementation of a rule requiring
stockholder ratification of specific defensive strategies that have been
adopted by the Board of Directors with respect to unsolicited takeover bids. In
addition, the limited ability of the stockholders to call a special meeting of
stockholders may make it more difficult to change the existing Board and
management.

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

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

. the removal or appointment of directors;

. the authority of stockholders to act by written consent;

. the required vote to amend the certificate of incorporation;

. calling a special meeting of stockholders;

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

. director nominations by stockholders.

These voting requirements will make it more difficult for minority stockholders
to make changes in the certificate of incorporation that could be designed to
facilitate the exercise of control over us. Furthermore, SOFTBANK and its
affiliates will effectively control the voting power with respect to
approximately 77.8% of our common stock on significant stockholder actions,
based on the terms of the voting trust agreement covering shares beneficially
owned by our founder. This gives them absolute power with respect to any
stockholder action or approval requiring either a two-thirds vote or a simple
majority. For a more detailed discussion of this voting trust, see "Related
Party Transactions--Transactions with Scott Blum and His Immediate Family."

Options

As of December 31, 1999, options to purchase a total of 22,324,104 shares of
common stock were outstanding, and up to 570,424 additional shares of common
stock may be subject to options granted in the future under our stock plans,
excluding the 1999 Stock Incentive Plan and 1999 Employee Stock Purchase Plan,
which will become effective upon the signing of the underwriting agreement in
connection with this offering. For a more complete discussion of our stock
option plans, please see "Employee Benefit Plans."

Warrants

In July 1999, we issued a warrant to United Air Lines to purchase 1,250,000
shares of common stock at an exercise price of $16.00 per share. This warrant
is fully vested and may be exercised at any time and expires in July 2004.

In July 1999, we issued a warrant to our commercial lending institution to
purchase 51,923 shares of common stock at an exercise price of $13.00 per
share. This warrant is exercisable any time after the completion of this
offering and expires in July 2001. However, this warrant terminates if the
lender perfects a security interest in Mr. Blum's investment portfolio or
otherwise enforces any of its rights under its credit facility with us. In
October 1999, we issued a warrant to another party to purchase 625,000 shares
of common stock at an exercise price of $9.07 per share. This warrant may be
exercised at any time and expires in December 2001.

424B4 79th Page of 137 TOC 1st Previous Next ↓Bottom Just 79th
Registration Rights

After this offering, holders of approximately 97,529,472 shares of common
stock will be entitled to registration rights with respect to their shares.
Beginning 180 days after this offering, these holders may require us to
register all or part of their shares. In addition, these holders may require us
to include their shares in future registration statements that we file and may
require us to register their shares on Form S-3. Upon registration, these
shares will be freely tradable in the public market without restriction.

United Air Lines also holds registration rights with respect to the
1,250,000 shares of common stock subject to their outstanding warrant, and
subject to conditions, may require us to register all or a part of their
shares. Two other holders of warrants to purchase 676,923 shares of common
stock have piggyback registration rights with respect to the common stock
issuable under their warrants.

Transfer Agent and Registrar

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

424B4 80th Page of 137 TOC 1st Previous Next ↓Bottom Just 80th
SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the offering, we will have approximately 129,140,175
shares of common stock outstanding assuming no exercise of options or warrants
after December 31, 1999. Of this amount, the 14,000,000 shares offered by this
prospectus will be available for immediate sale in the public market as of the
date of this prospectus. Following the expiration of 180-day lockup agreements
with the representatives of the underwriters or BUY.COM, 93,233,047 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.

[Download Table]

Approximate Number
Days after the Date of Shares Eligible
of this Prospectus for Future Sale Comment
-------------------- ------------------ -----------------------------------

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:

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

. 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 his or her 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.

BUY.COM, its directors, executive officers, stockholders with registration
rights and other stockholders and optionholders have agreed, under the purchase
agreement and other agreements, that they will not sell any common stock
without the prior written consent of Merrill Lynch for a period of 180 days
from the date of this prospectus, except that we may, without consent, grant
options and sell shares under our stock plans.

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, 1999, the holders of options to purchase approximately 22,324,104
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 up
to 24,769,525 shares of common stock subject to outstanding stock

424B4 81st Page of 137 TOC 1st Previous Next ↓Bottom Just 81st
options or reserved for issuance under our stock plans. This registration will
permit the resale of these shares by nonaffiliates in the public market without
restriction under the Securities Act, upon completion of the lock-up period
described above. Shares registered under the Form S-8 registration statement
held by affiliates will be subject to Rule 144 volume limitations. See
"Management--Executive Compensation," "--Employee Benefit Plans--1998 Stock
Option/Stock Issuance Plan" "--Employee Benefit Plans--Special Executive Stock
Option Plan" and "--Employee Benefit Plans--1999 Stock Plans."

In addition, holders of approximately 97,529,472 shares of common stock have
registration rights with respect to their shares. Registration of these
securities would enable these shares to be freely tradable without restriction
under the Securities Act. We also have given registration rights to our warrant
holders with respect to approximately 1,926,923 shares of common stock. See
"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."

424B4 82nd Page of 137 TOC 1st Previous Next ↓Bottom Just 82nd
UNDERWRITING

General

Merrill Lynch, Pierce, Fenner & Smith Incorporated, Bear, Stearns & Co.
Inc., Hambrecht & Quist LLC and U.S. Bancorp Piper Jaffray Inc. are acting as
representatives of each of the underwriters named below. Subject to the terms
and conditions set forth in a purchase agreement among us and the underwriters,
we have agreed to sell to the underwriters, and each of the underwriters has
agreed to purchase from us, the number of shares of common stock set forth
opposite its name below.

[Download Table]

Number
Underwriter of Shares
----------- ---------

Merrill Lynch, Pierce, Fenner & Smith
Incorporated......................................... 6,100,000
Bear, Stearns & Co. Inc.......................................... 2,440,000
Hambrecht & Quist LLC............................................ 2,440,000
U.S. Bancorp Piper Jaffray Inc................................... 1,220,000
Deutsche Bank Securities Inc..................................... 200,000
FleetBoston Robertson Stephens Inc............................... 200,000
Goldman, Sachs & Co.............................................. 200,000
PaineWebber Incorporated......................................... 200,000
Prudential Securities Incorporated............................... 200,000
Salomon Smith Barney Inc......................................... 200,000
SoundView Technology Group, Inc.................................. 200,000
Crowell, Weedon & Co............................................. 100,000
Dain Rauscher Incorporated....................................... 100,000
Pacific Crest Securities, Inc.................................... 100,000
Utendahl Capital Partners, L.P................................... 100,000
----------
Total.................................................... 14,000,000
==========

In the purchase agreement, the several underwriters have agreed, subject to
its terms and conditions, to purchase all of the shares of common stock being
sold under the terms of the agreement if any of the shares of common stock are
purchased. In the event of a default by an underwriter, the purchase agreement
provides that, in some circumstances, the purchase commitments of the non-
defaulting underwriters may be increased or the purchase agreement may be
terminated.

We have agreed to indemnify the underwriters against specified liabilities,
including some liabilities under the Securities Act, or to contribute to
payments the underwriters may be required to make in respect of those
liabilities.

The shares of common stock are being offered by the several underwriters,
subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of legal matters by counsel for the underwriters and other
conditions set forth in the purchase agreement. The underwriters reserve the
right to withdraw, cancel or modify this offer and to reject orders in whole or
in part.

Commissions and Discounts

The representatives have advised us that the underwriters propose initially
to offer the shares of common stock to the public at the initial public
offering price set forth on the cover page of this prospectus, and to selected
dealers at such price less a concession not in excess of $.55 per share of
common stock. The underwriters may allow, and such dealers may reallow, a
discount not in excess of $.10 per share of common stock to other dealers.
After the initial public offering, the public offering price, concession and
discount may be changed.

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The following table shows the per share and total public offering price,
underwriting discount to be paid by us to the underwriters and the proceeds
before expenses to us. This information is presented assuming either no
exercise or full exercise by the underwriters of their over-allotment option.

[Download Table]

Per Share Without Option With Option
--------- -------------- -----------

Public offering price................ $13.00 $182,000,000 $209,300,000
Underwriting discount................ $.91 $12,740,000 $14,651,000
Proceeds, before expenses, to
BUY.COM............................. $12.09 $169,260,000 $194,649,000

The expenses of this offering, exclusive of the underwriting discount and
commissions, are estimated at $2.0 million and are payable by us.

Over-Allotment Option

We have granted an option to the underwriters, exercisable for 30 days after
the date of this prospectus, to purchase up to an aggregate of 2,100,000
additional shares of common stock at the public offering price set forth on the
cover page of this prospectus, less the underwriting discount. The underwriters
may exercise this option solely to cover over-allotments, if any, made on the
sale of the common stock offered hereby. To the extent that the underwriters
exercise this option, each underwriter will be obligated, subject to specified
conditions, to purchase a number of additional shares of common stock
proportionate to such underwriter's initial amount reflected in the foregoing
table.

Reserved Shares

At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 10% of the shares offered hereby to be sold to
some of our directors, officers, employees, distributors, dealers, business
associates and related persons. The number of shares of common stock available
for sale to the general public will be reduced to the extent such persons
purchase such reserved shares. Any reserved shares which are not orally
confirmed for purchase within one day of the pricing of this offering will be
offered by the underwriters to the general public on the same terms as the
other shares offered in this prospectus.

No Sales of Similar Securities

For a period of 180 days after the date of this prospectus, we, our
executive officers, directors and other stockholders beneficially owning
substantially all of the outstanding shares of common stock have agreed,
subject to a few exceptions, not to directly or indirectly:

. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant for the sale of or otherwise dispose of or transfer any
shares of common stock or securities convertible into or exchangeable or
exercisable for common stock, whether now owned or thereafter acquired by
the person executing the agreement or with respect to which the person
executing the agreement thereafter acquires the power of disposition, or
file a registration statement under the Securities Act with respect to
the foregoing;

. enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of the common stock whether
any swap or transaction is to be settled by delivery of common stock or
other securities, in cash or otherwise; or

. make any demand for, or exercise any right with respect to, the
registration of any share of common stock or any securities convertible
into or exchangeable for common stock, without the prior written consent
of Merrill Lynch on behalf of the underwriters.

Nasdaq National Market Listing

Prior to this offering, there has been no public market for our common
stock. The initial public offering price was determined through negotiations
between us and the representatives. The factors considered in

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determining the initial offering price, in addition to prevailing market
conditions, include the valuation multiples of publicly-traded companies that
the representatives believe to be comparable to us, our financial information,
the history of, and the prospects for, our company and the industry in which we
compete, and an assessment of our management, its past and present operations,
the prospects for, and timing of, our future revenues, the present state of our
development and the above factors in relation to market values and various
valuation measures of other companies engaged in activities similar to ours.
There can be no assurance that an active trading market will develop for our
common stock or that our common stock will trade in the public market
subsequent to this offering at or above the initial public offering price.

Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol "BUYX."

The underwriters do not expect sales of the common stock to be made to any
accounts over which they exercise discretionary authority to exceed five
percent of the number of shares being offered in this offering.

Price Stabilization and Short Positions

Until the distribution of the common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters
and some selling group members to bid for and purchase our common stock. As an
exception to these rules, the representatives are permitted to engage in
selected transactions that stabilize the price of our common stock in
connection with this offering. These transactions consist of bids or purchases
for the purpose of pegging, fixing or maintaining the price of our common
stock.

If the underwriters create a short position in our common stock in
connection with the offering contemplated hereby, i.e., if they sell more
shares of common stock than are set forth on the cover page of this prospectus,
the representatives may reduce that short position by purchasing our common
stock in the open market. The representatives may also elect to reduce any
short position by exercising all or part of the over-allotment option described
above.

Penalty Bids

The representatives may also impose a penalty bid on some underwriters and
selling group members under limited circumstances. This means that if the
representatives purchase shares of our common stock in the open market to
reduce the underwriters' short position or to stabilize the price of our common
stock, they may reclaim the amount of the selling concession from the
underwriters and selling group members who sold those shares.

In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of these purchases. The imposition of a penalty bid
might also have an adverse effect on the price of our common stock to the
extent that it discourages resales of our common stock by selling group
members.

Neither we nor any of the underwriters can predict 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
makes any representation that the representatives will engage in such
transactions or that such transactions, once commenced, will not be
discontinued.

Electronic Distribution

A prospectus in electronic format is being made available on a Web site
maintained by Soundview Technology Group, Inc.'s affiliate Wit Capital
Corporation. Other than the prospectus in electronic format, the information on
Wit Capital Corporation's Web site is not a part of this prospectus or the
registration statement of which this prospectus is a part, has not been
approved and/or endorsed by BUY.COM or any underwriter in its capacity as
underwriter and should not relied upon by investors.

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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 Brobeck, Phleger & Harrison LLP,
Irvine, California. Legal matters relating to the sale of common stock in this
offering will be passed upon for the underwriters by Wilson Sonsini Goodrich &
Rosati, Professional Corporation, Palo Alto, California.

EXPERTS

The consolidated balance sheets of BUY.COM INC. as of December 31, 1997,
1998, and 1999, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the period from June 7, 1997
(inception) to December 31, 1997, and for the years ended December 31, 1998 and
1999 included in this prospectus and elsewhere in the registration statement,
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving such reports.

The balance sheets of BuyGolf.com, Inc. as of December 31, 1998 and June 30,
1999 and the related statements of operations, stockholders' equity, and cash
flows for the period from December 1, 1998 (Inception) to December 31, 1998,
and for the six months ended June 30, 1999, included in this prospectus and
elsewhere in the registration statement, have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving such reports.

The financial statements of SpeedServe Inc. as of December 31, 1997 and
December 31, 1996 and for the year ended December 31, 1997 and the period from
October 17, 1996 (inception) through December 31, 1996 included in this
prospectus have been so included in reliance on the report (which contains an
explanatory paragraph relating to BUY.COM's purchase of SpeedServe) of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.

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 does not contain all of the
information in the registration statement and its exhibits and schedules. 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 concerning the
contents of any contract or other document referred to are not necessarily
complete. Please refer to the copies of these contracts or other documents
filed as an exhibit to the registration statement. Each of these statements is
qualified in all respects by this reference. The registration statement,
including its exhibits and schedules, may be inspected without charge at the
principal office of the Commission in Washington, D.C. Copies of all or any
part of the registration statement may be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549. These copies may also be inspected and
copied at the Commission's Regional Offices located at:

. Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511; and

. 7 World Trade Center, Suite 1300, New York, New York 10048.

Copies of this material may be obtained at prescribed rates by mail from the
public reference section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. In addition, the Securities and Exchange Commission
maintains an Internet site at http://www.sec.gov that contains reports, proxy
and information statements and other information regarding registrants,
including us, that file electronically.

424B4 86th Page of 137 TOC 1st Previous Next ↓Bottom Just 86th
INDEX TO FINANCIAL STATEMENTS

[Download Table]

Page
----

CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants................................. F-2
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Operations.................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)................ F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-8

FINANCIAL STATEMENTS OF BUYGOLF.COM, INC.
Report of Independent Public Accountants................................. F-26
Balance Sheets........................................................... F-27
Statements of Operations................................................. F-28
Statements of Stockholders' Equity....................................... F-29
Statements of Cash Flows................................................. F-30
Notes to Financial Statements............................................ F-31

FINANCIAL STATEMENTS OF SPEEDSERVE INC.
Report of Independent Accountants........................................ F-39
Balance Sheets........................................................... F-40
Statements of Operations and Accumulated Deficit......................... F-41
Statements of Cash Flows................................................. F-42
Notes to Financial Statements............................................ F-43

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Basis of Presentation.................................................... PF-1
Unaudited Pro Forma Condensed Combined Statement of Operations for the
year ended December 31, 1998............................................ PF-2
Unaudited Pro Forma Condensed Combined Statement of Operations for the
year ended December 31, 1999............................................ PF-3

F-1

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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors
BUY.COM INC.:

We have audited the accompanying consolidated balance sheets of BUY.COM INC. (a
Delaware corporation) and subsidiaries as of December 31, 1997, 1998, and 1999,
and the related statements of operations, stockholders' equity (deficit) and
cash flows for the period from June 7, 1997, (Inception) to December 31, 1997,
and the years ended December 31, 1998 and 1999. 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 generally accepted auditing
standards. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of BUY.COM INC. and
subsidiaries as of December 31, 1997, 1998, and 1999, and the results of their
operations and their cash flows for the period from June 7, 1997, (Inception)
to December 31, 1997, and the years ended December 31, 1998 and 1999, in
conformity with generally accepted accounting principles.

/s/ Arthur Andersen LLP

Orange County, California
February 1, 2000

F-2

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BUY.COM INC.

CONSOLIDATED BALANCE SHEETS

(amounts in thousands, except share and per share data)

[Enlarge/Download Table]

Pro Forma
December 31, Stockholders'
------------------------------------------- Equity (Deficit) at
1997 1998 1999 December 31, 1999
------------- -------------- ------------ -------------------
(unaudited)
(note 8)

Assets
Current Assets:
Cash......................................... $ 34 $ 9,221 $ 24,693
Accounts receivable, net of allowances of $0,
$50, and $1,104 at December 31, 1997, 1998,
and 1999, respectively...................... 178 4,986 18,151
Prepaid expenses and other current assets.... 4 1,258 31,605
------------- -------------- ------------
Total current assets....................... 216 15,465 74,449
Property and equipment, net................... 50 2,895 16,607
Intangibles, net.............................. -- 8,212 28,156
Other noncurrent assets....................... 1 265 496
------------- -------------- ------------
$ 267 $ 26,837 $ 119,708
============= ============== ============

Liabilities and Stockholders' Equity (Deficit)

Current Liabilities:
Accounts payable............................. $ 361 $ 16,270 $ 71,231
Line of credit............................... -- -- 12,377
Accrued expenses............................. 11 438 4,768
Deferred revenue............................. 22 2,295 1,222
Income taxes payable......................... 2 3 3
Note payable to stockholder.................. 211 -- 5,000
Current portion of long-term debt............ -- 21 321
------------- -------------- ------------
Total current liabilities.................. 607 19,027 94,922
------------- -------------- ------------
Long-Term Debt, net of current portion........ -- 1,175 1,738
------------- -------------- ------------
Commitments and Contingencies
Stockholders' Equity (Deficit):
Convertible preferred stock--Series A and
Series B, $0.0001 par value;
Authorized shares--150,000,000 at December
31, 1999; Issued and outstanding--
12,175,706 at December 31, 1998, 22,098,982
at December 31, 1999, and 0 pro forma
(unaudited), including additional paid-in
capital..................................... -- 14,943 104,939 --
Common stock, $0.0001 par value;
Authorized shares--850,000,000 at December
31, 1999; Issued and outstanding--
86,860,649 at December 31, 1998, 93,041,193
at December 31, 1999, and 115,140,175
pro forma (unaudited)....................... -- 9 10 12
Additional paid-in capital................... -- 9,664 72,659 177,596
Deferred compensation........................ -- (2,439) (8,850) (8,850)
Members' capital, no par value; Authorized
units--11,000,000 at December 31, 1997;
Issued and outstanding--9,000,000 at
December 31, 1997........................... 50 -- -- --
Accumulated deficit.......................... (390) (15,542) (145,710) (145,710)
------------- -------------- ------------ -----------
Total stockholders' equity (deficit)....... (340) 6,635 23,048 23,048
------------- -------------- ------------ -----------
$ 267 $ 26,837 $ 119,708
============= ============== ============

The accompanying notes are an integral part of these consolidated balance
sheets.

F-3

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BUY.COM INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(amounts in thousands, except share and per share data)

[Download Table]

June 7, 1997 Year Ended
(Inception) to Year Ended December
December 31, December 31, 31,
1997 1998 1999
-------------- ------------ -----------

Net revenues.......................... $ 878 $ 125,290 $ 596,848
Cost of goods sold.................... 832 123,527 603,695
---------- ---------- -----------
Gross profit (loss)................... 46 1,763 (6,847)
---------- ---------- -----------
Operating expenses:
Sales and marketing.................. 130 13,430 71,331
Product development.................. 30 950 7,835
General and administrative........... 260 4,250 19,037
Depreciation and amortization........ 7 377 6,566
Amortization of deferred
compensation........................ -- 795 10,215
Charge for warrants.................. -- -- 7,191
---------- ---------- -----------
Total operating expenses............ 427 19,802 122,175
---------- ---------- -----------
Operating loss........................ (381) (18,039) (129,022)
---------- ---------- -----------
Other income (expense):
Interest income (expense), net....... (7) 202 (1,141)
Other................................ -- (4) (2)
---------- ---------- -----------
Total other income (expense)........ (7) 198 (1,143)
---------- ---------- -----------
Loss before provision for income
taxes................................ (388) (17,841) (130,165)
Provision for income taxes............ 2 3 3
---------- ---------- -----------
Net loss.............................. $ (390) $ (17,844) $ (130,168)
========== ========== ===========
Net loss per share:
Basic and diluted.................... $ (0.00) $ (0.22) $ (1.45)
Weighted average number of common
shares outstanding:
Basic and diluted................... 81,331,078 81,815,869 89,597,782
Pro forma (note 8):
Net loss per share:
Basic and diluted (unaudited)....... $ (1.13)
Weighted average number of common
shares outstanding:
Basic and diluted (unaudited)....... 114,719,108

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

F-4

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BUY.COM INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

(amounts in thousands, except share data)

[Enlarge/Download Table]

Convertible
Members' Capital Preferred Stock Common Stock
------------------- -------------------- --------------------------- Total
Additional Stockholders'
Preferred Paid-in Deferred Accumulated Equity
Units Capital Shares Stock Shares Par Capital Compensation Deficit (Deficit)
---------- ------- ---------- --------- ---------- ---- ---------- ------------ ----------- -------------

Inception of
Company, June 7,
1997
Members'
contributions.... 9,000,000 $ 50 -- $ -- -- $ -- $ -- $ -- $ -- $ 50
Net loss......... -- -- -- -- -- -- -- -- (390) (390)
---------- ---- ---------- -------- ---------- ---- ------- -------- --------- ---------
Balance, December
31, 1997......... 9,000,000 50 -- -- -- -- -- -- (390) (340)
Reorganization of
Company, August
3, 1998:
Retirement of
members' units.. (9,000,000) (50) -- -- -- -- -- -- -- (50)
Allocation of
accumulated loss
to paid-in
capital......... -- -- -- -- -- -- (2,692) -- 2,692 --
Issued Series A
preferred
stock........... -- -- 3,043,921 2 -- -- -- -- -- 2
Issued common
stock........... -- -- -- -- 81,331,078 8 40 -- -- 48
Issuance of
Series A
preferred stock
for cash......... -- -- 9,131,785 14,941 -- -- -- -- -- 14,941
Issuance of
common stock for
acquisition of
Speedserve....... -- -- -- -- 5,529,571 1 9,082 -- -- 9,083
Deferred
compensation
related to stock
options granted.. -- -- -- -- -- -- 3,234 (3,234) -- --
Amortization of
deferred
compensation..... -- -- -- -- -- -- -- 795 -- 795
Net loss......... -- -- -- -- -- -- -- -- (17,844) (17,844)
---------- ---- ---------- -------- ---------- ---- ------- -------- --------- ---------
Balance, December
31, 1998......... -- -- 12,175,706 14,943 86,860,649 9 9,664 (2,439) (15,542) 6,635
Exercise of stock
options for
cash............. -- -- -- -- 1,980,122 -- 22 -- -- 22
Issuance of
Series B
preferred stock
for cash......... -- -- 9,923,276 89,996 -- -- -- -- -- 89,996
Issuance of
common stock for
acquisition of
BuyGolf.......... -- -- -- -- 2,589,329 1 23,489 -- -- 23,490
Issuance of stock
for sponsorship
agreement........ -- -- -- -- 1,125,000 -- 10,278 -- -- 10,278
Issuance of
common stock for
cash............. -- -- -- -- 317,296 -- 1,974 -- -- 1,974
Common stock
issued for
purchases of
domain names .... -- -- -- -- 168,809 -- 861 -- -- 861
Issuance of
warrants for
supply and debt
agreements....... -- -- -- -- -- -- 9,745 -- -- 9,745
Deferred
compensation
related to stock
options granted.. -- -- -- -- -- -- 16,626 (16,626) -- --
Amortization of
deferred
compensation..... -- -- -- -- -- -- -- 10,215 -- 10,215
Reduction of
outstanding
shares due to
reverse stock
split............ -- -- -- -- (12) -- -- -- -- --
Net loss......... -- -- -- -- -- -- -- -- (130,168) (130,168)
---------- ---- ---------- -------- ---------- ---- ------- -------- --------- ---------
Balance, December
31, 1999......... -- $ -- 22,098,982 $104,939 93,041,193 $ 10 $72,659 $ (8,850) $(145,710) $ 23,048
========== ==== ========== ======== ========== ==== ======= ======== ========= =========

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

F-5

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BUY.COM INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

[Download Table]

June 7, 1997
(Inception) to Year Ended Year Ended
December 31, December 31, December 31,
1997 1998 1999
-------------- ------------ ------------

Cash flows from operating activities:
Net loss............................. $ (390) $ (17,844) $ (130,168)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization........ 7 377 6,566
Gain on sale of fixed assets......... -- -- (221)
Amortization of deferred
compensation........................ -- 795 10,215
Charge for warrants.................. -- -- 7,191
Changes in assets and liabilities:
Accounts receivable................. (178) (4,211) (13,134)
Prepaid expenses and other current
assets............................. (4) (1,128) (17,461)
Other noncurrent assets............. (1) (264) (207)
Accounts payable.................... 361 15,641 53,972
Accrued expenses.................... 11 384 4,319
Deferred revenue.................... 22 2,272 (1,073)
Income taxes payable................ 2 1 --
---------- ---------- ----------
Net cash used in operating
activities........................ (170) (3,977) (80,001)
---------- ---------- ----------
Cash flows from investing activities:
Purchase of property and equipment... (57) (2,681) (14,489)
Proceeds from sale of equipment...... -- -- 735
Proceeds received in connection with
acquisition......................... -- -- 225
Costs incurred in connection with
acquisition......................... -- (81) --
Acquisition of domain names.......... -- -- (380)
---------- ---------- ----------
Net cash used in investing
activities........................ (57) (2,762) (13,909)
---------- ---------- ----------
Cash flows from financing activities:
Formation of Company................. 50 -- --
Borrowings from (repayments to)
stockholder, net.................... 211 (211) 5,000
Proceeds from issuance of preferred
stock............................... -- 14,941 89,996
Proceeds from issuance of common
stock............................... -- -- 1,974
Exercise of stock options............ -- -- 22
Borrowings under line of credit,
mortgage and other obligations...... -- 1,196 12,390
---------- ---------- ----------
Net cash provided by financing
activities........................ 261 15,926 109,382
---------- ---------- ----------
Net increase in cash and cash
equivalents.......................... 34 9,187 15,472
Cash, beginning of period............. -- 34 9,221
---------- ---------- ----------
Cash, end of period................... $ 34 $ 9,221 $ 24,693
========== ========== ==========

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

F-6

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BUY.COM INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS -- (Continued)

(amounts in thousands)

[Download Table]

June 7, 1997
(Inception) to Year Ended Year Ended
December 31, December 31, December 31,
1997 1998 1999
-------------- ------------ ------------

Supplemental cash flow information:
Cash paid during the year for:
Interest............................ $ -- $ 15 $ 618
========= =========== ==========
Income taxes........................ $ -- $ 2 $ 8
========= =========== ==========
Summary of non-cash investing and
financing activity:
Equipment acquired under capital
lease.............................. $ -- $ -- $ 850
========= =========== ==========
Stock issued in connection with
domain name purchases.............. $ -- $ -- $ 861
========= =========== ==========
Stock issued in connection with
sponsorship agreement.............. $ -- $ -- $ 10,278
========= =========== ==========
ACQUISITIONS:
1998--Acquired all of the outstanding
capital stock of
Speedserve.com, Inc.
1999--Acquired all of the outstanding
capital stock of BuyGolf.com
Inc.
The following table outlines the
assets acquired, liabilities assumed
and cash paid:
Fair value of assets acquired....... $ -- $ 9,476 $ 24,265
Less:
Liabilities assumed................ -- (312) (1,000)
Fair value of common stock issued.. -- (9,083) (23,490)
--------- ----------- ----------
Cash paid (received) in connection
with acquisitions.................. $ -- $ 81 $ (225)
========= =========== ==========

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

F-7

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BUY.COM INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Company Background

BUY.COM INC. and subsidiaries, collectively (the "Company" or "BUY.COM"), is
a multi-category Internet superstore, offering a selection of brand name
computer hardware and peripherals, software, books, videos, DVDs, computer
games, music, clearance equipment, golf-related products and consumer
electronics. Through nine online specialty stores, the Company offers products
through a shopping interface that features extensive product information and
multi-media presentations. The Company's e-commerce portal, www.buy.com, links
all of the nine specialty stores and is designed to enhance the customer's
online shopping experience 24 hours a day, seven days a week. BUY.COM uses a
business model that includes outsourcing the majority of its operating
infrastructure, such as distribution and fulfillment functions, customer
service and support, credit card processing, and the hosting of the Company's
system infrastructure and database servers.

BUY.COM (formerly BuyComp, LLC and Buy Corp.) was formed in June 1997 and
began offering products for sale through its Web site in November 1997. From
BUY.COM's inception through mid-November 1997, the Company had no sales. During
this period, the Company's operating activities primarily involved the
development of the necessary infrastructure and the original BuyComp.com Web
site. In August 1998, the Company changed its Web site designation to
www.buy.com.

In December 1998, the Company formed BUY.COM Entertainment, Inc., a wholly
owned subsidiary, for the purpose of acquiring Speedserve, Inc. ("Speedserve"),
an online retailer of books, videos, DVD's and video games. As a result,
effective December 1998, the operations of Speedserve's retail Web sites were
consolidated with the operations of the Company's existing computer hardware,
software and peripheral retail Web sites.

2. Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of the Company
and its wholly owned and majority controlled subsidiaries, including, BuyCorp
Europe, Inc., BUY.COM Entertainment, Inc., Computerstore.com Inc., BUYNOW INC.
and InternetComputerstore.com, Inc. The Company's investments in joint ventures
and related companies that represent a 20% to 50% ownership interest over which
the Company has significant influence, but not control, are accounted for using
the equity method. All significant intercompany balances and transactions have
been eliminated.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosures of contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Accounts Receivable

Accounts receivable consist of credit card and trade receivables arising in
the normal course of business as well as an accrual for products shipped to
customers but not yet billed by the Company. The Company has arranged with its
vendors that goods sold to customers are shipped directly from vendor warehouse
facilities. BUY.COM typically does not bill customers' credit cards until the
Company has received confirmation from the applicable vendors that the goods
have been shipped.

Substantially all of the Company's accounts receivable serve as collateral
for purchases made from Ingram Micro, Inc. ("Ingram"), one of the Company's
vendors.

F-8

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BUY.COM INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

Property and Equipment

Property and equipment is stated at cost. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the
assets. Fixed assets purchased under capital leases are amortized on a
straight-line basis over the lesser of the estimated useful life of the asset
or the lease term. When assets are retired or otherwise disposed of, the cost
and related accumulated depreciation are removed and any gain or loss is
reflected in the results of operations. Maintenance and repair expenditures are
charged to operations as incurred.

Intangibles

Intangible assets consist of the portion of the purchase price of businesses
acquired in excess of the fair value of identifiable net tangible assets
acquired and the cost of internet domain names acquired. Amortization is
computed using the straight-line method over the estimated useful lives of the
assets.

Long-Lived Assets

The Company assesses the recoverability of its long-lived assets on an
annual basis or whenever adverse events of changes in circumstances or business
climate indicate that expected undiscounted future cash flows related to such
long-lived assets may not be sufficient to support the net book value of such
assets. If undiscounted cash flows are not sufficient to support the recorded
assets, an impairment is recognized to reduce the carrying value of the long-
lived assets to the estimated fair value. Cash flow projections, although
subject to a degree of uncertainty, are based on trends of historical
performance and management's estimate of future performance, giving
consideration to existing and anticipated competitive and economic conditions.
Additionally, in conjunction with the review for impairment, the remaining
estimated lives of certain of the Company's long-lived assets are assessed.

Deferred Financing Costs

Costs incurred in connection with obtaining financing are capitalized and
amortized using the effective interest method over the maturity period or
expected term of the debt and are included in prepaid expenses and other
current assets.

Fair Value of Financial Instruments

The carrying amounts for the Company's cash, prepaid expenses and other
current assets, accounts payable, accrued expenses, long-term debt and other
liabilities approximate fair value.

Revenue Recognition

Net revenues include product sales net of returns and allowances,
advertising sales, warranty sales net of amounts paid to the national insurance
provider, and gross outbound shipping and handling charges. The Company
recognizes revenue from product sales, net of discounts, coupon redemption and
estimated sales returns, when the products are shipped to customers. Gross
outbound shipping and handling charges are included in net sales. The Company
provides an allowance for sales returns, which is based on historical
experience. In certain cases, credit card companies require the Company to
charge customers' credit cards to obtain authorization. In such cases, the
Company defers revenue recognition until it has confirmed shipment of the goods
to the customer. For all product sales transactions with its customers, the
Company acts as a principal, takes title to all products sold upon shipment,
bears credit risk, and bears inventory risk for returned products that are not
successfully returned to suppliers, although these risks are mitigated through
arrangements with credit card issuers, shippers and suppliers.

F-9

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BUY.COM INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

The Company recognizes revenue from advertising sales ratably over the term
of the advertising campaigns, which usually range from one to twelve months. To
the extent that advertising customers have paid the Company for advertisements
that have yet to be published on the Company's Web site, the Company defers
revenue recognition until such advertisements are delivered. In September 1999,
the Company entered into a three-year advertising contract. Under the terms of
this contract, the Company will receive monthly payments of equal amounts. This
long-term contract comprised less than 10% of the Company's advertising
revenues for the year ended December 31, 1999. The Company has no other
advertising contract with a term in excess of one year.

For the years ended December 31, 1998 and 1999, the Company recognized
advertising revenues of $2.4 million and $16.4 million, respectively.

The Company recognizes revenue from warranty sales net of amounts paid to
the national insurance provider that underwrites the extended warranties.
Revenue from warranty sales is recognized as the warranty contracts are sold to
customers.

Cost of Goods Sold

Cost of goods sold includes product costs, direct costs associated with
advertising revenues and shipping and handling costs paid by the Company in the
fulfillment of customer orders.

Advertising Costs

The cost of advertising is expensed as incurred. For the years ended
December 31, 1997, 1998, and 1999, the Company incurred advertising expense of
$70,000, $7.8 million, and $42.2 million, respectively.

Income Taxes

The Company recognizes deferred tax assets and liabilities based on
differences between the financial reporting and tax bases of assets and
liabilities using the enacted tax rates and laws that are expected to be in
effect when the differences are expected to be recovered. Under the Tax Reform
Act of 1986, the benefits from net operating losses carried forward may be
impaired or limited in certain circumstances. In addition, a valuation
allowance has been provided for deferred tax assets when it is more likely than
not that all or some portion of the deferred tax asset will not be realized.
The Company has established a full valuation allowance on the aforementioned
deferred tax assets due to the uncertainty of realization.

Loss Per Share

Basic earnings per share is computed using the weighted average number of
common shares outstanding during the period. Diluted earnings per share is
computed using the weighted average number of common stock and common stock
equivalent shares outstanding during the period. Common stock equivalent shares
are excluded from the computation as their effect is antidilutive.

Comprehensive Income (Loss)

As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, Reporting Comprehensive Income, which establishes
standards for the reporting and display of comprehensive income (loss) and its
components in the financial statements. Components of comprehensive income
(loss) include amounts that, under SFAS No. 130, are included in comprehensive
income (loss) but are excluded from net income (loss). There were no
significant differences between the Company's net loss and comprehensive loss.

F-10

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BUY.COM INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

Stock-Based Compensation

The Company has elected to follow Accounting Principles Board Opinion
("APB") No. 25, Accounting for Stock Issued to Employees, and related
interpretations, in accounting for its employee stock options rather than the
alternative fair value accounting allowed by SFAS No. 123, Accounting for
Stock-Based Compensation. APB No. 25 provides that the compensation expense
relative to the Company's employee stock options is measured based on the
intrinsic value of stock options granted. SFAS No. 123 requires companies that
continue to follow APB No. 25 to provide a pro forma disclosure of the impact
of applying the fair value method of SFAS No. 123. This method recognizes the
fair value of stock options granted at the date of grant in earnings over the
vesting period of the options.

Foreign Currency Translation

The functional currency of the Company's foreign subsidiaries is the local
currency. Assets and liabilities of subsidiaries with international operations
are translated into U.S. dollars at year-end exchange rates, and revenues and
expenses are translated at average exchange rates prevailing as they occur.
Translation adjustments, if material, are included in accumulated other
comprehensive income (loss), a separate component of stockholders' equity.
Transaction gains and losses arising from transactions denominated in a
currency other than the functional currency of the entity involved, which are
immaterial, are included in the consolidated statements of operations. The
Company has not entered into any foreign currency exchange contracts or other
derivative financial instruments.

Segment and Geographic Information

The Company operates in one principal business segment across domestic
markets. Substantially all of the operating results and identifiable assets are
in the United States.

Concentration Risks

At December 31, 1997, 1998 and 1999, the Company had no significant
concentrations of credit risk.

The Company purchases substantially all of its products from four major
vendors: Ingram, Ingram Entertainment, Inc. ("Ingram Entertainment"), Ingram
Book Company, Inc. ("Ingram Book") and Valley Media, Inc. ("Valley Media"). The
Company does not have long-term contracts or arrangements with any of these
vendors. Loss of any of these vendors could have a material adverse effect on
the Company's operations.

The Company is heavily dependent upon a number of other third parties for
credit card processing, customer service and support, and hosting its system
infrastructure and database servers. In addition, Federal Express Corporation,
the United Parcel Service of America, Inc. and the United States Postal Service
deliver substantially all of the Company's products. If the services of any of
these third parties is interrupted, it could have a material adverse impact on
the Company's operations.

New Accounting Pronouncements

In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use. SOP 98-1 requires
all costs related to the development of internal use software other than those
incurred during the application development stage to be expensed as incurred.
Costs incurred during the application development stage are required to be
capitalized and amortized over the estimated useful life of the software. SOP
98-1 was adopted by the Company on January 1, 1999. Adoption did not have a
material effect on the Company's consolidated financial position or results of
operations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

In April 1998, the AICPA issued SOP 98-5, Reporting on the Costs of Start-Up
Activities. SOP 98-5 was adopted by the Company on January 1, 1999, and
requires costs of start-up activities and organization costs to be expensed as
incurred. Adoption did not have a material effect on the Company's consolidated
financial position or results of operations.

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 is
effective for fiscal years beginning after June 15, 2000. SFAS No. 133 requires
that all derivative instruments be recorded on the balance sheet at their fair
value. Changes in the fair value of derivatives are recorded each period in
current earnings or other comprehensive income (loss) depending on whether a
derivative is designed as part of a hedge transaction and, if so, the type of
hedge transaction involved. The Company does not expect that adoption of SFAS
No. 133 will have a material impact on its consolidated financial position or
results of operations as the Company does not currently hold any derivative
financial instruments.

3. Business Acquisitions, Dispositions and Investments

Business Acquisitions

In December 1998, the Company acquired all of the outstanding capital stock
of Speedserve. Speedserve was an internet retailer of books, videos, DVD's and
video games. The aggregate purchase price of the acquisition was approximately
$9.1 million. The consideration for the acquisition consisted of 5,529,571
shares of the Company's common stock, with an estimated value of $1.64 per
share based upon the fair value of the Company's common stock as determined by
concurrent equity transactions with unrelated parties. The Speedserve
acquisition was accounted for under the purchase method of accounting, with
approximately $8.4 million of the purchase price allocated to goodwill.

In October 1999, the Company issued a total of 2,589,329 shares of common
stock to acquire the remaining 95% of the outstanding common stock of
BuyGolf.com, Inc. ("BuyGolf") that it did not previously own. The common stock
issued had an estimated fair market value of $9.07 per share determined by
concurrent equity transactions with unrelated parties. BuyGolf is a retailer of
golf supplies and equipment.

The unaudited pro forma combined consolidated financial information, as
though the acquisitions had occurred on June 7, 1997 (Inception), would have
resulted in operating results as follows (amounts in thousands, except per
share data):

[Enlarge/Download Table]

June 7, 1997 (Inception) Year Ended Year Ended
to December 31, 1997 December 31, 1998 December 31, 1999
------------------------ ----------------- -----------------

Net revenues............ $ 992 $ 126,568 $597,833
Net loss................ $ 2,319 $ 23,992 $145,829
Basic and diluted
weighted average net
loss per share......... $ (0.03) $ (0.28) $ (1.27)

The pro forma net losses include amortization of goodwill and purchased
intangibles of approximately $1.6 million, $2.8 million and $10.1 million for
the period ended December 31, 1997, and the years ended December 31, 1998 and
1999, respectively. This unaudited pro forma combined consolidated financial
information is presented for illustrative purposes only and is not necessarily
indicative of the consolidated results of operations in future periods or the
results that actually would have been realized.

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Business Disposition

In October 1999, the Company declared a common stock dividend of 75% of the
capital stock, on an "as converted" basis, of one wholly owned subsidiary,
BUYNOW INC. ("BUYNOW") to all stockholders of record as of October 13, 1999.
The Company has retained preferred stock representing 25% of the capital stock
of BUYNOW, on an "as converted" basis. The BUYNOW preferred stock has a
liquidation preference over the common stock and is convertible into BUYNOW
common stock.

Joint Ventures

In July 1999, the Company entered into an agreement with United Airlines
Inc. ("UA") to form BuyTravel.com LLC ("Buy Travel") to market and sell travel
services and products on the internet. The Company and UA will each own 50% of
BuyTravel. The Company and UA have each agreed to provide advertising and
marketing support to BuyTravel up to a gross amount of $18.0 million over three
years from the effective date of the agreement. Furthermore, the Company and UA
have each committed to contribute capital of $2.0 million within the first four
months of the agreement to establish and support continuing operations. In
addition, as an incentive to execute this agreement, the Company granted UA a
warrant to purchase 1,250,000 shares of the Company's common stock at an
exercise price of $16.00 per share. The estimated fair market value of the
warrant of $7.0 million was expensed as contract costs in the period the
warrant was issued. The fair market value of the warrant was estimated using
the Black-Scholes pricing method using the following assumptions: fair value of
the Company's common stock, of $5.71; risk-free interest rate of 6.00%;
expected life of 5.00 years; volatility of 85.00%; and dividend yield of 0.00%.
The fair value of the Company's common stock was based upon equity transactions
with unrelated parties. The BuyTravel operating agreement requires both parties
to approve various matters related to corporate governance. In the event the
Company and UA are unable to agree on these matters, UA has the right to
require the Company to purchase UA's interest in BuyTravel at a price equal to
the fair market value of UA's interest at the time of the Company's purchase.

In September 1999, the Company entered into a letter of intent with SOFTBANK
America, Inc. ("SOFTBANK America") to form three separate international joint
ventures in which the Company will have 51% ownership interests. It is the
intention of the parties that the Company will maintain sufficient voting
control such that it will consolidate these joint ventures.

Domain Name Transactions

During 1999, the Company entered into several agreements to purchase
Internet domain names. Domain names were purchased in various transactions for
168,809 shares of the Company's common stock the fair value of which was
estimated based upon concurrent equity transactions with non-related parties,
and approximately $380,000 in cash.

On April 15, 1999, the Company entered into an agreement with BuyFlowers.com
LLC ("BuyFlowers"). Under the agreement, the Company granted BuyFlowers an
exclusive, non-transferable, non-sublicensable and royalty-free license to use
domain names owned by the Company solely in connection with the operation of an
internet retail florist selling floral products and related hard goods, gifts,
greeting cards, etc., within the florist category. In consideration for the
license, BuyFlowers agreed to issue the Company a 5% ownership in BuyFlowers.
The Company's investment in this entity has been recorded at cost and is
immaterial to the consolidated statements of position and results of operations
for all periods.

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On May 24, 1999, the Company entered into an agreement with BuyGolf to grant
an exclusive, non-transferable and non-sublicensable license to use domain
names owned by the Company solely in connection with the operation of an
Internet golf product retailer. In consideration for the license, the Company
received a fee of $1 per three-month term and any renewal thereof.
Additionally, the Company received approximately 5% (subject to anti-dilution
provisions) of the outstanding common stock of BuyGolf. Furthermore, the
Company signed a twelve-month portal sponsorship/advertising contract with
BuyGolf. This contract commenced on June 1, 1999 at a rate of $10,000 per
month. The Company's initial investment in this entity was recorded at cost and
is immaterial to the consolidated statements of position and results of
operations for all periods. The agreements between the Company and BuyGolf
continued in effect until the Company acquired BuyGolf on October 25, 1999.

4. Property and Equipment

Property and equipment consists of the following (dollar amounts in
thousands):

[Download Table]

December 31,
Useful -------------------------
Lives 1997 1998 1999
------ ------- ------- -------

Building and improvements................ 20-40 $ -- $ 1,341 $ 1,446
Computers and equipment.................. 3-5 47 1,168 12,728
Furniture and fixtures................... 7 10 404 2,412
Leasehold improvements................... 1-6 -- 131 1,378
------- ------- -------
57 3,044 17,964
Less--accumulated depreciation.......... (7) (149) (1,357)
------- ------- -------
Property and equipment, net.............. $ 50 $ 2,895 $16,607
======= ======= =======

5. Intangible Assets

Intangible assets consist of the following (dollar amounts in thousands):

[Download Table]

December 31,
Useful ---------------------
Lives 1997 1998 1999
------ ----- ------ -------

Domain names................................. 3 $ -- $ -- $ 1,916
Goodwill..................................... 3 -- 8,447 31,958
----- ------ -------
-- 8,447 33,874
Less--accumulated amortization.............. -- (235) (5,718)
----- ------ -------
Intangibles, net............................. $ -- $8,212 $28,156
===== ====== =======

6. Long-Term Debt

In December 1998, the Company borrowed $1.2 million from a bank for the
purchase of an office building. The building serves as collateral on the loan.
Monthly installments of principal and interest are $10,000. The loan bears
interest at a rate of prime plus 1.00% and matures in 2024.

On July 20, 1999, the Company obtained a $15.0 million revolving credit
facility with a commercial bank. The interest rate on the amounts drawn on this
facility is prime plus 2.00% or LIBOR plus 3.00%, at the

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Company's election. In connection with this credit facility, the Company must
pay a non-refundable supplemental fee of $675,000 at the earlier of an initial
public offering of the Company's stock or the six-month anniversary of the
facility. This fee was allocated to deferred financing costs and amortized
using the effective interest rate method as interest expense over the expected
term of the related debt. Additionally, the Company issued a warrant to the
bank to purchase a number of shares of the Company's common stock to be
determined by an agreed-upon formula at an exercise price per share equal to
the price per share of the Company's initial public offering. The estimated
fair market value of the warrant of $71,000 was allocated to deferred financing
costs and amortized over the expected term of the related debt. On July 27,
1999, the Company drew $12.4 million against this credit facility.

On July 21, 1999, the Company obtained an irrevocable standby letter of
credit in the amount of $2.6 million from a commercial bank in order to secure
additional office space to be used by the Company.

7. Commitments and Contingencies

Leases

During 1997 and 1998, the Company leased office facilities and fixed assets
under non-cancelable operating leases. Rental expense under operating lease
agreements for the years ended December 31, 1997, 1998, and 1999 was
approximately $12,000, $195,000 and $511,000, respectively.

In June 1999, the Company entered into a five-year non-cancelable capital
lease agreement for office furniture and equipment with monthly lease payments
of approximately $5,000. In July 1999, the Company also entered into a three-
year non-cancelable capital lease agreement for computer software with monthly
lease payments of approximately $18,000. In September 1999, the Company entered
into a two-year non-cancelable capital lease agreement for telephone systems
with monthly payments of approximately $6,700.

Future minimum commitments on leases are as follows (amounts in thousands):

[Download Table]

Capital Operating
Leases Leases
------- ---------

Year ending December 31,
2000................................................... $ 363 $2,206
2001................................................... 335 2,077
2002................................................... 209 1,854
2003................................................... 63 1,544
2004................................................... 51 1,511
Thereafter............................................. -- 630
------ ------
Total minimum lease payments............................. 1,021 $9,822
======
Less--Amount representing interest....................... 139
------
Present value of net minimum lease payments.............. 882
Less--Current portion.................................... 296
------
$ 586
======

Supply, Fulfillment and Other Arrangements

In June 1998, and again in March 1999, the Company entered into a contract
with Ingram to supply and distribute the computer hardware, software and
peripheral products that are sold in the Company's online stores. The Company
also maintains a line of credit with Ingram to purchase these goods and
merchandise. As a part of that line of credit, the Company granted Ingram a
security interest in the inventory purchased from them, the proceeds from this
inventory, and all of the Company's accounts receivable. Pursuant to this
agreement, if the Company does not

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purchase at least $350.0 million of product annually, Ingram may revise the
pricing schedules. Ingram has also agreed to help the Company secure a minimum
dollar amount of marketing related vendor advertising based on a specified
percentage of the Company's net purchases from Ingram in any twelve month
period. However, this marketing arrangement is contingent upon the Company's
achieving and maintaining $500.0 million in annual product purchases from
Ingram. This agreement expires in March 2000, but is subject to automatic one-
year renewal periods. The agreement may be terminated by either party for any
reason upon 120 days notice.

In December 1998, the Company acquired Speedserve in exchange for shares of
the Company's common stock. In conjunction with this acquisition, the Company
obtained a three-year supply commitment from Ingram Entertainment, Speedserve's
former parent company.

On January 18, 1999, the Company entered into an agreement to provide
extended warranties to customers on computer hardware products sold on the
Company's Web site. In accordance with the terms of the agreement, the
Company's liability on the extended warranties is assumed by a national
insurance provider. The extended warranties are sold on the Company's Web site
and payments are received by the Company. The Company remits a fixed fee based
upon the type of warranty purchased by the customer as mutually agreed upon in
the agreement.

On February 1, 1999, the Company entered into a two-year agreement to
outsource the picking, packing and shipping functions for orders placed on the
Company's BUYMUSIC.COM Web site. Pricing is based on a fee that is contingent
upon sales volume levels, which increase over the term of the agreement. This
agreement expires in February 2001, but is subject to automatic one-year
renewal periods. This agreement may be terminated by the vendor if they
discontinue sales to on-line vendors.

On March 11, 1999, the Company entered into agreements to outsource certain
services and functions related to the fulfillment of customer orders made on
the Company's BUYBOOKS.COM Web site. These agreements expire in September 2003.
Consideration for the services is based on a fixed, per-order fee. The Company
must be notified within six months of any rate increases to be in effect after
the first year of the agreement. The rate increases cannot exceed 8% of the
preceding year's rates. The agreement is terminable by either party with 90
days notice.

In April 1999, the Company entered into an agreement with Nashville Computer
Liquidators L.P. ("NCL"). Under the terms of the agreement, NCL will
merchandise and supply refurbished, open-box and end-of-life computer hardware,
electronics and exceptional value household products to the Company. The
products are offered on the Company's BUYCLEARANCE.COM Web site, which was
launched in the second quarter of 1999. BUYCLEARANCE.COM changed its name from
BUYSURPLUS.COM in October 1999. This agreement expires in April 2001, but is
subject to automatic one-year renewals. This agreement may be terminated if the
Company does not meet certain minimum credit terms.

In October 1999, the Company entered into agreements with a third party
supplier whereby the Company will be entitled to certain discount programs and
fulfillment and cooperative advertising services. These agreements expire in
September 2003. In connection with these agreements, the Company has issued
warrants to purchase 625,000 shares of the Company's common stock at an
exercise price of $9.07 per share. The estimated fair market value of these
warrants of $2.7 million will be recorded as a current asset and will be
amortized over the initial term of the contract. The Company computed the fair
value of the warrants using the Black-Scholes option pricing model with the
following weighted average assumptions: dividend yield of 0.0%; expected
volatility of 85.00%; risk-free rate of 6.00%; and expected lives of 2.00
years.

In connection with the acquisition of BuyGolf, the Company acquired a supply
and distribution contract with Las Vegas Golf & Tennis, Inc. to be the
Company's primary source of the golf equipment and accessories the Company
sells.

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In October 1999, the Company entered a five-year sponsorship agreement with
the PGA TOUR in which the Company will become the exclusive title sponsor of a
circuit of golf tournaments. As partial consideration for this agreement, the
Company issued 1,125,000 shares of common stock valued at $9.07 per share,
aggregating $10.2 million. The Company has agreed to make an advance payment of
$17.0 million, which will be refunded upon obtaining a letter of credit, and to
pay $8.5 million upon the completion of an initial public offering as payment
for the first year sponsorship fee. The Company will take a $8.5 million charge
per year in connection with this agreement. In accordance with the terms of the
agreement, the 1,125,000 shares of common stock are subject to a repurchase
option at a nominal amount.

In October 1999, the Company declared a common stock dividend of 75% of the
capital stock, on an as converted basis, of one of its wholly-owned
subsidiaries, BUYNOW INC., to its stockholders. BUYNOW provides contract e-
commerce service, including order fulfilment and credit card processing, to its
customers. The Company will enter into a license and services agreement with
BuyNow under which the Company will license technology, trademarks and domain
names as well as provide certain administrative and customer support services.

Legal Proceedings

From time to time, the Company has been subject to legal proceedings and
claims in the ordinary course of business. These claims, even if not
meritorious, could result in the expenditure of significant financial and
managerial resources.

In March 1999, a class action suit was filed against the Company in the
Orange County California Superior Court alleging breach of contract, fraud and
violation of consumer protection laws. The plaintiffs in this action allege
that the Company intentionally mispriced products and charged for orders
knowing the orders could not be fulfilled. The plaintiffs are seeking
compensatory and punitive damages in addition to injunctive relief. Also in
March 1999, another class action suit was filed against the Company in Camden
County, New Jersey. The New Jersey plaintiff seeks compensatory and punitive
damages for breach of contract and common law fraud arising out of facts
similar to the Orange County case. The judge in the New Jersey action has
granted a temporary stay of the New Jersey action to monitor the progress of
the California action. Discovery is in its early stages in the California
action and a class has not yet been certified in either action. Neither action
sets forth the amount of damages plaintiffs seek. Therefore, loss is not
reasonably estimable by the Company.

The Company intends to defend all of these lawsuits vigorously even though
they could result in the expenditure of significant financial and managerial
resources. Management is not aware of any other material legal proceedings
pending against the Company.

8. Stockholders' Equity

Incorporation and Authorized Capital

Effective August 3, 1998, the Company terminated its status as a limited
liability company ("LLC") and incorporated in the State of Delaware as Buy
Corp. On November 16, 1998, the Company changed its name to BUY.COM INC. In
conjunction with the reorganization, the State of Delaware authorized the
Company to issue 12,666,542 shares of common stock and 1,298,742 shares of
Series A convertible participating preferred stock, par value $0.0001 per
share, ("Series A Preferred Stock"). The 9,000,000 issued membership units of
the LLC converted into 81,331,078 shares of $0.0001 par value common stock and
3,043,921 shares of Series A Preferred Stock.

Each share of preferred stock is convertible into one share of the Company's
common stock (subject to antidilution protections) and is convertible at the
option of the holder or automatically upon the consummation

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of a corporate transaction that meets certain minimum conditions. Subsequent
stock has liquidation preferences over common stock and accrued dividends only
if declared.

On March 10, 1999, the Board of Directors approved an increase in the number
of authorized common stock, par value $0.0001 per share, from 12,666,542 shares
to 850,000,000 shares. In addition, the Board of Directors approved an increase
in the number of authorized shares of preferred stock from 1,298,742 to
150,000,000 shares. These increases in authorized shares were approved by the
stockholders of the Company by written consent dated March 22, 1999.

On June 29, 1999, the Board of Directors declared a fifteen-for-one common
stock split and a fifteen-for-one Series A Preferred Stock split for all issued
and outstanding shares which was distributed July 14, 1999 to the Company's
stockholders. All share and per share data included in the consolidated
financial statements and the accompanying notes have been adjusted to reflect
this stock split and the reverse stock split that is expected to occur prior to
initial public offering of the Company's common stock (see note 13).

SOFTBANK Investment

The Company and a trust controlled by Scott A. Blum (the
"Founder/Shareholder") entered into an agreement with SOFTBANK Technology
Ventures IV L.P., and SOFTBANK Technology Advisors Fund L.P., ("SOFTBANK") for
an aggregate investment of $20.0 million. In accordance with the terms of the
Series A Preferred Stock Purchase Agreement, dated August 18, 1998, SOFTBANK
received 9,131,785 shares of Series A Preferred Stock for cash of $14.9 million
paid to the Company. Additionally, SOFTBANK received 3,043,921 shares of Series
A Preferred Stock in consideration for its $5.0 million payment to the trust
controlled by the Founder/Shareholder.

On September 2, 1999, the Company entered into an agreement with SOFTBANK.
SOFTBANK and certain of its affiliates received 9,923,276 shares of Series B
convertible participating preferred stock, par value $0.0001 per share ("Series
B Preferred Stock"), from the Company for $90.0 million. This agreement has a
provision which will result in the issuance or transfer of additional shares
and/or an adjustment in the Series B Preferred Stock conversion rate if the
valuation of a proposed initial public offering of the Company's common stock
or of other financing is less than 125% of the Series B Preferred Stock
valuation. This transaction was completed in October 1999.

Unaudited Pro Forma Stockholders' Equity (Deficit) and Loss Per Share

Concurrent with the consummation of an initial public offering of the
Company's common stock as defined by the preferred stock purchase agreements,
the Company will cause the conversion of all existing Series A and Series B
Preferred Stock into common stock. Based on preferred stock outstanding as of
December 31, 1999, 22,098,982 shares of the Company's common stock will be
issued upon conversion of all preferred stock then outstanding. The unaudited
pro forma stockholders' equity (deficit) at December 31, 1999 and the unaudited
pro forma net loss per share and weighted average number of shares outstanding
for the year ended December 31, 1999 gives effect to this conversion as if such
shares were outstanding on January 1, 1999.

9. Stock and Stock Option Plans

1998 Stock Option/Issuance Plan

In August 1998, the Company adopted and approved an incentive stock option
plan (the "1998 ISO Plan"). Under the 1998 ISO Plan, the number of shares of
the Company's common stock to be granted or subject to options or rights may
not exceed 21,587,475 shares.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

The options may be issued as "Incentive Stock Options" (as defined by the
Internal Revenue Code of 1986) or as nonqualified options. The plan provides
that the exercise price for all Incentive Stock Options shall not be less than
100%, and all nonqualified options shall not be less than 85%, of the fair
market value of the shares on the date of grant. Further, no portion of the
options may be exercised beyond 10 years from the grant date. For Incentive
Stock Options granted to individuals who own more than 10% of the total
combined voting power of all classes of the stock of the Company, the option
price shall be at least 110% of the fair value at the date of grant. Options
vest ratably over three to four years from the date of grant.

Subject to Internal Revenue Service limitations, options granted under the
1998 ISO Plan generally become exercisable immediately. Shares issued upon
exercise of options that are unvested are restricted and subject to repurchase
by the Company upon termination of employment or services, and such
restrictions lapse over the original vesting schedule. At December 31, 1999,
there were no shares subject to repurchase.

The following table summarizes the Company's stock option activity:

[Enlarge/Download Table]

June 7, 1997
(Inception) to Year Ended Year Ended
December 31, 1997 December 31, 1998 December 31, 1999
------------------ -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- ---------- -------- ---------- --------

Options outstanding,
Beginning of period... -- $ -- 2,109,375 $0.01 14,530,276 $1.65
Granted.............. 2,109,375 0.01 12,439,651 1.91 12,855,456 6.70
Exercised............ -- -- -- -- (1,980,122) 0.01
Forfeited/expired.... -- -- (18,750) 3.83 (3,081,506) 3.40
--------- ----- ---------- ----- ---------- -----
Options outstanding,
End of period........... 2,109,375 $0.01 14,530,276 $1.65 22,324,104 $4.46
========= ===== ========== ===== ========== =====

Options exercisable at
end of period.......... 2,109,375 $0.01 14,530,276 $1.65 22,324,104 $4.46

All options issued by the Company are immediately exercisable upon grant.
Options exercisable at December 31, 1997, December 31, 1998, and December 31,
1999, of 2,109,375, 13,827,151, and 18,479,185, respectively, are subject to
continued vesting requirements.

The following table summarizes all stock options outstanding as of December
31, 1999:

[Download Table]

Options Outstanding
------------------------------------------------------------------------
Weighted Average
Number of Remaining Weighted
Range of Shares Contractual Life Average
Exercise Price Outstanding (years) Exercise Price
-------------- ----------- ----------------- --------------

$ 0.01 5,024,451 9.48 $0.01
$ 1.64 to $3.83 11,046,713 9.47 $3.61
$ 4.00 to $7.02 175,787 9.36 $6.42
$ 9.14 to $12.58 6,077,153 9.76 $9.65
----------
22,324,104
==========

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Had compensation cost for stock options awarded under this plan been
determined consistent with SFAS No. 123, the Company's net loss and loss per
share would have reflected the following pro forma amounts (amounts in
thousands, except per share data):

[Download Table]

June 7, 1997
(Inception) to Year Ended Year Ended
December 31, December 31, December 31,
1997 1998 1999
-------------- ------------ ------------

Net loss, as reported............. $ (390) $(17,844) $(130,168)
Pro forma compensation expense.... -- (281) (3,033)
------ -------- ---------
Pro forma net loss................ $ (390) $(18,125) $(133,201)
====== ======== =========
Basic and diluted net loss per
share, as reported............... $(0.00) $ (0.22) $ (1.49)
Basic and diluted net loss per
share, pro forma................. $(0.00) $ (0.22) $ (1.61)

The weighted average fair value at the date of grant for options granted
during fiscal 1997, 1998, and 1999, were $0.002, $0.53 and $1.36, respectively,
and were estimated using the minimum value method with the following
assumptions used: weighted average risk-free interest rate of 6.04%, 4.89%, and
5.67%, respectively; expected life of 3.00 years, 3.82 years, and 3.99 years,
respectively; and weighted average volatility and weighted average dividend
yield of 0.00% for all periods.

Special Executive Stock Option Plan

In October 1999, the Company adopted and approved the Special Executive
Stock Option Plan (the "Executive Plan"). Participation in the Executive Plan
is limited to non-employee directors, officers and other highly-compensated
employees of the Company. A reserve of 3,125,000 shares of the Company's common
stock has been made for issuances under the Executive Plan. All options
outstanding under the Executive Plan will be transferred to a successor plan at
the time an underwriting agreement for an initial public offering of the
Company's common stock is signed, at which time no further option grants or
stock issuances will be made under the Executive Plan.

The options may be issued as "Incentive Stock Options" (as defined by the
Internal Revenue Code of 1986) or as nonqualified options. The plan provides
that the exercise price for all Incentive Stock Options shall not be less than
100%, and all nonqualified options shall not be less than 85%, of the fair
market value of the shares on the date of grant. Further, no portion of the
options may be exercised beyond 10 years from the grant date. For Incentive
Stock Options granted to individuals who own more than 10% of the total
combined voting power of all classes of the stock of the Company, the option
price shall be at least 110% of the fair value at the date of grant. Options
vest over a period determined by the Company's board of directors. Subject to
Internal Revenue Service limitations, options granted under the Executive Plan
generally become exercisable immediately.

1999 Stock Incentive Plan

The Company has adopted the 1999 Stock Incentive Plan (the "1999 Plan"). The
1999 Plan was approved by the Company's board of directors in December 1999 and
by its stockholders in January 2000.

F-20

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BUY.COM INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

The 1999 Plan is intended to be the successor plan to the 1998 ISO Plan, the
Executive Plan and the BuyGolf.com, Inc. 1998 Stock Option Plan. The 1999 Plan
will become effective at the time an underwriting agreement for an initial
public offering of the Company's common stock is signed.

The 1999 plan has five separate programs:

. the discretionary option grant program, under which eligible individuals
may be granted options to purchase shares of common stock at an exercise
price not less than the fair market value of those shares on the grant
date;

. the salary investment option grant program, under which executive
officers and other highly compensated employees may be given the
opportunity to apply a portion of their base salary each year to the
acquisition of special below market stock option grants;

. the automatic option grant program, under which option grants will
automatically be made at periodic intervals to eligible non-employee
board members to purchase shares of common stock at an exercise price
equal to the fair market value of those shares on the grant date; and

. the director fee option grant program, under which non-employee board
members may be given the opportunity to apply a portion of any retainer
fee otherwise payable to them in cash each year to the acquisition of
special below-market option grants.

The exercise price for any options granted under the 1999 Plan may be paid
in cash or in shares of the Company's common stock valued at fair market value
at the exercise date. The 1999 Plan also includes provisions which may result
in the accelerated vesting of outstanding option grants and stock issuances
upon a change in control of the Company.

1999 Employee Stock Purchase Plan

The 1999 Employee Stock Purchase Plan (the "Stock Purchase Plan") was
adopted and approved by the Company in September 1999. The Stock Purchase Plan
will become effective at the time an underwriting agreement for an initial
public offering of the Company's common stock is signed. The Stock Purchase
Plan is designed to allow eligible employees of the Company to purchase shares
of common stock at semi-annual intervals with accumulated payroll deductions.

BuyGolf Stock Option Plan

In connection with the acquisition of BuyGolf in October 1999, the Company
has assumed the incentive stock option plan of BuyGolf.

Stock Option Deferred Compensation

The Company recorded aggregate deferred compensation of $0, $3.2 million,
and $16.6 million in the period ended December 31, 1997, the year ended
December 31, 1998, and the year ended December 31, 1999, respectively. The
amounts recorded represent the difference between the grant price and the
estimated fair value of the Company's common stock based upon independent
appraisals. Deferred stock option compensation is charged to operations using
the straight-line method over the vesting period of the underlying options,
which is typically three or four years.

F-21

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BUY.COM INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

Total amortization recognized was $0, $795,000, and $10.2 million,
respectively, for the period ended December 31, 1997 and the years ended
December 31, 1998 and 1999.

10. Loss Per Share

The following is the calculation for net loss per share (amounts in
thousands, except share and per share data):

[Download Table]

June 7, 1997
(Inception) to Year Ended Year Ended
December 31, December 31, December 31,
1997 1998 1999
-------------- ------------ ------------

Basic:
Net loss............................ $ (390) $ (17,844) $ (130,168)
Weighted average common shares...... 81,331,078 81,815,869 89,597,782
----------- ----------- -----------
Net loss per common share........... $ (0.00) $ (0.22) $ (1.45)
=========== =========== ===========
Diluted:
Net loss............................ $ (390) $ (17,844) $ (130,168)
Weighted average common shares...... 81,331,078 81,815,869 89,597,782
Stock options adjustment............ -- -- --
Convertible preferred stock
adjustment......................... -- -- --
----------- ----------- -----------
Average common shares outstanding... 81,331,078 81,815,869 89,597,782
----------- ----------- -----------
Net loss per common share........... $ (0.00) $ (0.22) $ (1.45)
=========== =========== ===========

At December 31, 1997, December 31, 1998, and December 31, 1999,
respectively, options to purchase 2,109,375, 14,530,276, and 22,324,104 shares
of common stock, as well as preferred shares convertible into 0, 12,175,706,
and 22,098,982 shares of common stock were not included in the computation of
diluted earnings per share as the effect would be antidilutive.

11. Income Taxes

The Company incurred taxable losses for federal and state purposes for the
period ended December 31, 1997 and the years ended December 31, 1998 and 1999.
Accordingly, the Company did not incur any federal income tax expense for those
periods other than the minimum required taxes for certain state and local
jurisdictions.

Prior to August 3, 1998, the Company was taxed as a limited liability
company. All tax benefits arising from operating losses as a limited liability
company were passed to the individual shareholders.

At December 31, 1998 and 1999, the Company has net operating loss
carryforwards of approximately $12.8 million and $117.1 million, respectively,
related to federal and state income taxes which can be used to offset future
federal and state taxable income from operations. Substantially all of these
carryforwards will begin to expire in 2004.

F-22

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BUY.COM INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

Significant components of the Company's deferred tax asset at December 31,
1997, 1998, and 1999, are as follows (amounts in thousands):

[Download Table]

December 31,
--------------------------
1997 1998 1999
------- -------- --------

Net operating loss carryforwards................. $ -- $ 5,128 $ 51,979
Depreciation and amortization.................... -- 1,758 1,666
Other............................................ -- 47 3,430
------- -------- --------
Gross deferred tax assets...................... -- 6,933 57,075
Valuation allowance.............................. -- (6,933) (57,075)
------- -------- --------
Net deferred tax assets........................ $ -- $ -- $ --
======= ======== ========

Under the Tax Reform Act of 1986, the benefits from net operating losses
carried forward may be impaired or limited in certain circumstances. Events
which may cause limitations in the amount of net operating losses that the
Company may utilize in any one year include, but are not limited to, a
cumulative ownership change of more than 50.0% over a three year period. The
impact of any limitations that may be imposed for future issuances of equity
securities, including issuances with respect to acquisitions, has not been
determined.

12. Related Party Transactions

Transactions with the Founder/Shareholder and Directors

At December 31, 1997, a loan to the Founder/Shareholder in the amount of
$211,000 was outstanding. This loan was paid in full in 1998. Interest income
earned during 1998 in connection with this loan was $7,000.

On October 8, 1998, the Company loaned the Founder/Shareholder $1.0 million.
The loan was repaid in two equal installments of $500,000 during October 1998.
Interest income earned during 1998 in connection with this loan was $4,000.

On October 15, 1998, the Company paid $125,000 to an unrelated party as
consideration to terminate a building lease early. The Founder/Shareholder
purchased the building with the intent of leasing the building to the Company.
This lease commenced in 1999.

In December 1998, the Company acquired all of the outstanding capital stock
of Speedserve. Speedserve was a subsidiary of Ingram Entertainment, a company
controlled by an outside director of the Company. Ingram Entertainment supplies
books, videos, DVD's and video games to the Company.

In December 1998, the Company borrowed $1.2 million for the purchase of an
office building. A trust controlled by the Founder/Shareholder guaranteed this
loan.

In five separate transactions, the Founder/Shareholder sold 130,715 shares
of common stock to each of five independent directors of the Company. These
sales occurred on various dates from October 1998 through March 1999 and were
at the estimated fair values of the Company's stock based upon independent
appraisals and other third party transactions.

The Company leased three automobiles for use by the Founder/Shareholder and
other key employees of the Company. Total lease expense incurred by the Company
during fiscal year 1998 in connection with these automobiles was approximately
$26,000.

F-23

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BUY.COM INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

On May 26, 1999, a trust controlled by the Founder/Shareholder loaned the
Company $10.0 million. This loan bears interest at a rate of 10.00% per annum
and is payable on demand or subsequent to the closing and funding of a credit
facility obtained from a commercial bank. This loan was repaid in full in
August 1999. Interest paid in connection with this loan was approximately
$194,000.

In May 1999, the Company entered into an agreement with a trust controlled
by the Founder/Shareholder to lease office space in a building owned by the
trust. The lease, which commenced on June 1, 1999, has a term of twelve months
with rent payments, consistent with current market value, of approximately
$12,000 per month.

In July 1999, the Founder/Shareholder's father purchased 28,125 shares of
common stock from an employee of the Company at a purchase price of $3.83 per
share.

On July 20, 1999, a trust controlled by the Founder/Shareholder guaranteed a
$15.0 million credit facility obtained by the Company from a commercial bank.

On August 16, 1999, a trust controlled by the Founder/Shareholder loaned the
Company $5.0 million. This loan bears interest at a rate of 10.00% per annum
and is payable upon the Company's receipt of qualified financing. Interest
accrued in connection with this loan was approximately $188,000 at December 31,
1999.

In October 1999, the Founder/Shareholder entered into an agreement to
transfer all of his shares of the Company's common stock, as well as those of
certain of his affiliates, into an irrevocable voting trust. This agreement
also provides that all shares of the Company's common stock acquired by the
Founder/Shareholder or any of his affiliates be transferred to the trust. The
trustees of the irrevocable voting trust consist of three outside directors of
the Company.

In October 1999, the Company acquired all of the outstanding capital stock
(95%) of BuyGolf, which it did not own at the time of acquisition, in exchange
for shares of the Company's common stock. The Company issued a total of
2,589,329 shares of common stock in connection with our acquisition of BuyGolf.
The Founder/Shareholder of the Company owned 400,000 shares or 4.7% of the
total outstanding shares of BuyGolf prior to the acquisition by the Company.
The Founder/Shareholder and an outside director were stockholders and directors
of BuyGolf and received a total of 272,658 shares of the Company's common stock
in the merger. Shares of the Company received by the Founder/Shareholder
resulting from this transaction are subject to the terms of the irrevocable
voting trust.

In October 1999, the Company declared a dividend of 75% of the capital stock
of BUYNOW. Several directors and officers of the Company were shareholders of
BUYNOW.

The Founder/Shareholder performed consulting services for Pinnacle Micro,
Inc. ("Pinnacle Micro"), a related party, totaling approximately $44,000 and
$117,000 in consulting revenue in 1997 and 1998, respectively.

During 1997 and 1998, the Company paid $8,000 and $147,000, respectively, in
operating expenses on behalf of Pinnacle Micro. These expenses were reimbursed
to the Company by Pinnacle Micro in 1998.

Transactions with SOFTBANK

On September 30, 1998, the trust controlled by the Founder/Shareholder
entered into an agreement with SOFTBANK Holdings, Inc. ("SOFTBANK Holdings") to
sell 10,456,771 shares of the common stock owned by the trust controlled by the
Founder/Shareholder for $40.0 million. This transaction was completed on
October 30, 1998. The Company received no proceeds from this sale.

F-24

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BUY.COM INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

In October 1998, the Company entered into an agreement with Upgrade
Corporation of America d/b/a Softbank Services Group ("SSG"), a related party
to SOFTBANK. Under this agreement, SSG provides certain customer relations
services on the Company's behalf for a monthly fee, a portion of which is based
upon usage volume. These services include, but are not limited to, servicing
questions concerning orders, shipment returns, refunds, inventory levels, and
marketing and demographic surveys. The contract extends through October 2002
with an automatic annual renewal unless terminated by either party. Amounts
paid to SSG for services provided to the Company were $905,000 and $10.5
million for the years ended December 31, 1998 and 1999, respectively.

In September 1999, the Company entered into a letter of intent to form three
international joint ventures with SOFTBANK America. Two outside directors of
the Company are affiliated with SOFTBANK America.

In September 1999, SOFTBANK purchased 8,269,400 shares of common stock from
a trust controlled by the Founder/Shareholder, the Founder/Shareholder as an
individual, and two other employee/shareholders for $75.0 million, or $9.07 per
share. This sale was made at the estimated fair value of the Company's common
stock. This transaction was completed in October 1999. The Company received no
proceeds from the sale of common shares from this sale.

13. Subsequent Event

On January 31, 2000, the Company effected a five-for-eight reverse common
stock split and reverse preferred stock split for all issued and outstanding
shares prior to the initial public offering of the Company's common stock. All
share and per share data included in the consolidated financial statements and
the accompanying notes have been adjusted to reflect this reverse stock split.

F-25

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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors
BuyGolf.com, Inc.:

We have audited the accompanying balance sheets of BuyGolf.com, Inc. (a
Delaware corporation) as of December 31, 1998, and June 30, 1999, and the
related statements of operations, stockholders' equity and cash flows for the
period from December 1, 1998, (Inception) to December 31, 1998, and for the
period ended June 30, 1999. 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.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of BuyGolf.com, Inc. as of
December 31, 1998 and June 30, 1999, and the results of their operations and
their cash flows for the period from December 1, 1998, (Inception) to December
31, 1998, and for the period ended June 30, 1999, in conformity with generally
accepted accounting principles.

/s/ Arthur Andersen LLP

Orange County, California
October 26, 1999

F-26

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BUYGOLF.COM, INC.

BALANCE SHEETS

(amounts in thousands, except share and per share data)

[Download Table]

December 31, June 30, September 30,
1998 1999 1999
------------ ---------- -------------
(unaudited)

Assets
Current Assets:
Cash................................... $ 125 $ 635 $ 225
Accounts receivable, net of allowance
of $0, $2 and $8 at December 31, 1998,
June 30, 1999, and September 30, 1999,
respectively.......................... -- 83 31
Prepaid expenses and other current
assets................................ -- 72 151
---------- ---------- ----------
Total current assets................ 125 790 407
Property and equipment, net............. -- 149 178
Intangibles, net........................ -- 648 469
---------- ---------- ----------
$ 125 $ 1,587 $ 1,054
========== ========== ==========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable....................... $ -- $ 299 $ 778
Accrued expenses....................... -- 16 219
---------- ---------- ----------
Total current liabilities........... -- 315 997
Commitments and Contingencies

Stockholders' Equity:
Common stock, $0.0001 par value;
Authorized shares--10,000,000 at
December 31, 1998, June 30, 1999 and
September 30, 1999; Issued and
outstanding--6,500,000 at December 31,
1998, 8,340,000 at June 30, 1999, and
8,559,473 at September 30, 1999 ...... 1 1 1
Additional paid-in capital............. 125 2,985 3,485
Accumulated deficit.................... (1) (1,714) (3,429)
---------- ---------- ----------
Total stockholders' equity.......... 125 1,272 57
---------- ---------- ----------
$ 125 $ 1,587 $ 1,054
========== ========== ==========

The accompanying notes are an integral part of these balance sheets.

F-27

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BUYGOLF.COM, INC.

STATEMENTS OF OPERATIONS

(amounts in thousands, except share and per share data)

[Download Table]

December 1, 1998 Six Months Three Months
(Inception) to Ended Ended
December 31, 1998 June 30, 1999 September 30, 1999
----------------- ------------- ------------------
(unaudited)

Net revenues............... $ -- $ 220 $ 805
Cost of goods sold......... -- 192 691
---------- ---------- ----------
Gross profit............... -- 28 114
Operating expenses:
Sales and marketing....... -- 680 1,161
General and
administrative........... 1 928 474
Depreciation and
amortization............. -- 134 199
---------- ---------- ----------
Total operating
expenses................ 1 1,742 1,834
---------- ---------- ----------
Operating loss........... (1) (1,714) (1,720)
Other income:
Interest income, net...... -- 2 5
---------- ---------- ----------
Total other income....... -- 2 5
---------- ---------- ----------
Loss before provision for
income taxes.............. (1) (1,712) (1,715)
Provision for income
taxes..................... -- 1 --
---------- ---------- ----------
Net loss................. $ (1) $ (1,713) $ (1,715)
========== ========== ==========
Net loss per share:
Basic and diluted......... $ -- $ (0.24) $ (0.23)
========== ========== ==========
Weighted average number of
common shares outstanding:
Basic and diluted......... 6,456,667 7,086,298 7,553,811
========== ========== ==========

The accompanying notes are an integral part of these statements.

F-28

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BUYGOLF.COM, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY

(amounts in thousands, except share data)

[Download Table]

Common Stock
-----------------------------
Additional
Paid-in Accumulated Stockholders'
Shares Par Capital Deficit Equity
--------- -------- ---------- ----------- -------------

Inception of Company,
December 1, 1998....... -- $ -- $ -- $ -- $ --
Initial capital
contribution........... 6,000,000 1 -- -- 1
Issuance of common stock
in connection with
obtaining license of
domain names........... 400,000 -- -- -- --
Issuance of common stock
for cash............... 100,000 -- 125 -- 125
Net loss................ -- -- -- (1) (1)
--------- -------- -------- -------- --------
Balance, December 31,
1998................... 6,500,000 1 125 (1) 125
Issuance of common stock
for cash............... 1,300,000 -- 1,625 -- 1,625
Issuance of common stock
for services........... -- -- 500 -- 500
Issuance of common stock
for purchase of domain
names.................. -- -- 60 -- 60
Issuance of common stock
in connection with
supply and fulfillment
agreement.............. 540,000 -- 675 -- 675
Net loss................ -- -- -- (1,713) (1,713)
--------- -------- -------- -------- --------
Balance, June 30, 1999.. 8,340,000 1 2,985 (1,714) 1,272
Issuance of common stock
for cash............... 219,473 -- 500 -- 500
Net loss................ -- -- -- (1,715) (1,715)
--------- -------- -------- -------- --------
Balance, September 30,
1999 (unaudited)....... 8,559,473 $ 1 $ 3,485 $ (3,429) $ 57
========= ======== ======== ======== ========

The accompanying notes are an integral part of these statements.

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BUYGOLF.COM, INC.

STATEMENTS OF CASH FLOWS

(amounts in thousands)

[Download Table]

December 1, 1998 Six Months Three Months
(Inception) to Ended Ended
December 31, 1998 June 30, 1999 September 30, 1999
----------------- ------------- ------------------
(unaudited)

Cash flows from operating
activities:
Net loss................... $ (1) $(1,713) $(1,715)
Adjustments to reconcile
net loss to cash used in
operating activities:
Depreciation and
amortization.............. -- 134 199
Noncash expenditure for
services.................. -- 500 --
Changes in assets and
liabilities:
Accounts receivable....... -- (83) 52
Prepaid expenses and other
current assets........... -- (72) (79)
Accounts payable.......... -- 299 479
Accrued expenses.......... -- 16 203
Income taxes payable...... -- -- --
------- ------- -------
Net cash used in
operating activities.... (1) (919) (861)
------- ------- -------
Cash flows from investing
activities:
Purchase of property and
equipment................. -- (165) (49)
Acquisition of domain
names..................... -- (31) --
------- ------- -------
Net cash used in
investing activities.... -- (196) (49)
------- ------- -------
Cash flows from financing
activities:
Formation of Company....... 126 -- --
Proceeds from issuance of
common stock.............. -- 1,625 500
------- ------- -------
Net cash provided by
financing activities.... 126 1,625 500
------- ------- -------
Net increase (decrease) in
cash and cash equivalents.. 125 510 (410)
Cash, beginning of period... -- 125 635
------- ------- -------
Cash, end of period......... $ 125 $ 635 $ 225
======= ======= =======
Supplemental cash flow
information:
Cash paid during the period
for income taxes.......... $ -- $ 1 $ --
======= ======= =======
Summary of non-cash
investing and financing
activity:
Common stock issued in
conjunction with supply
and fulfillment
agreement................. $ -- $ 675 $ --
======= ======= =======
Common stock issued in
conjunction with domain
name purchase............. $ -- $ 60 $ --
======= ======= =======

The accompanying notes are an integral part of these statements.

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BUYGOLF.COM, INC.

NOTES TO FINANCIAL STATEMENTS

1. Company Background

BuyGolf.com, Inc. (the "Company") is an Internet golf superstore offering a
selection of brand name golf equipment and accessories. Through its online
specialty store, the Company offers golf equipment and golf-related products in
a convenient, intuitive shopping interface 24 hours a day, seven days a week.
The Company uses a business model that includes outsourcing the majority of its
operating infrastructure to a national supply and fulfillment provider.

The Company was formed in December 1998 and began offering products for sale
through its web site in May 1999.

In October 1999, the Company was acquired by BUY.COM INC. ("BUY.COM") in a
purchase transaction. In connection with this transaction, BUY.COM acquired all
of the outstanding capital stock (95%) of the Company that BUY.COM did not own
at the time of acquisition, in exchange for 4,142,927 shares (pre-split) of
BUY.COM's common stock.

2. Summary of Significant Accounting Policies

Use of Estimates

Accounts Receivable

Accounts receivable consist of credit card and trade receivables arising in
the normal course of business as well as an accrual for products shipped to
customers but not yet billed by the Company. The Company has arranged with its
vendor that goods sold to customers are shipped directly from vendor warehouse
facilities. It typically does not bill customers' credit cards until it has
received confirmation from the vendor that the goods have been shipped.

Deposits

The Company is required to maintain a security deposit in connection with
its credit card merchant account. The balance of this deposit is approximately
$51,000 at June 30, 1999, and is included in prepaid expenses and other current
assets.

Property and Equipment

Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets. When assets
are retired or otherwise disposed of, the cost and related accumulated
depreciation are removed and any gain or loss is reflected in the results of
operations. Maintenance and repair expenditures are charged to operations as
incurred.

Intangibles

Intangible assets reflect the value of an exclusive supply and fulfillment
agreement and internet domain names acquired. Amortization is computed using
the straight-line method over the estimated useful lives of the assets.

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BUYGOLF.COM, INC.

NOTES TO FINANCIAL STATEMENTS -- (Continued)

Long-Lived Assets

Fair Value of Financial Instruments

The carrying amounts for the Company's cash, prepaid expenses and other
current assets, accounts payable and accrued expenses approximate fair value.

Revenue Recognition

Net revenues includes product sales net of returns and allowances, and gross
outbound shipping and handling charges. The Company recognizes revenue from
product sales, net of discounts and estimated sales returns, upon shipment to
its customers. Gross outbound shipping and handling charges are included in net
sales. For all product sales transactions with its customers, the Company acts
as a principal, takes title to all products sold upon shipment, and bears
credit risk and inventory risk, although these risks are mitigated through
arrangements with credit card issuers, shippers and suppliers.

Cost of Goods Sold

Cost of goods sold includes product costs and shipping and handling costs
paid by the Company in the fulfillment of customer orders.

Advertising Costs

The cost of advertising is expensed as incurred. No advertising expense was
incurred in the period ended December 31, 1998. For the six months ended June
30, 1999, the Company incurred advertising expense of approximately $618,000.

Income Taxes

Under the Tax Reform Act of 1986, the benefits from net operating losses
carried forward may be impaired or limited in certain circumstances. A
valuation allowance has been provided for the deferred tax asset when it is
more likely than not that all or some portion of the deferred tax asset will
not be realized. The Company has established a full valuation allowance on the
aforementioned deferred tax asset due to the uncertainty of realization.

F-32

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BUYGOLF.COM, INC.

NOTES TO FINANCIAL STATEMENTS -- (Continued)

Loss Per Share

Basic earnings per share is computed using the weighted-average number of
common shares outstanding during the period. Diluted earnings per share is
computed using the weighted-average number of common stock and common stock
equivalent shares outstanding during the period. Common stock equivalent shares
are excluded from the computation if their effect is antidilutive.

Stock-Based Compensation

The Company has elected to follow Accounting Principles Board Opinion
("APB") No. 25, Accounting for Stock Issued to Employees, and related
interpretations, in accounting for its employee stock options rather than the
alternative fair value accounting allowed by the Statement of Financial
Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation.
APB No. 25 provides that the compensation expense relative to the Company's
employee stock options is measured based on the intrinsic value of the stock
option. SFAS No. 123 requires companies that continue to follow APB No. 25 to
provide a pro forma disclosure of the impact of applying the fair value method
of SFAS No. 123.

Segment and Geographic Information

The Company operates in one principal business segment across domestic
markets. Substantially all of the operating results and identifiable assets are
in the United States.

Concentration Risks

At December 31, 1998, the Company has no significant concentrations of
credit risk.

The Company purchases substantially all of its products from one major
vendor, Las Vegas Golf and Tennis, Inc. The Company has a long-term contract or
arrangement with this vendor. Loss of this vendor could have a material adverse
effect on the Company's operations.

New Accounting Pronouncements

F-33

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BUYGOLF.COM, INC.

NOTES TO FINANCIAL STATEMENTS -- (Continued)

3. Property and Equipment

Property and equipment consists of the following (amounts in thousands):

[Download Table]

Useful December 31, June 30,
Lives 1998 1999
------ ------------ --------

Computers and equipment......................... 3-5 $ -- $148
Furniture and fixtures.......................... 7 -- 17
---- ----
-- 165
Less--accumulated depreciation.................. -- (16)
---- ----
Property and equipment, net................... $ -- $149
==== ====

4. Intangibles

Intangibles consist of the following (amounts in thousands):

[Download Table]

Useful December 31, June 30,
Lives 1998 1999
------ ------------ --------

Supply and fulfillment agreement................ 1 $ -- $ 675
Domain names.................................... 3 -- 91
---- -----
-- 766
Less--accumulated amortization.................. -- (118)
---- -----
Intangibles, net.............................. $ -- $ 648
==== =====

5. Commitments and Contingencies

Leases

Future minimum commitments on leases, including those leases entered into
subsequent to June 30, 1999, are as follows (amounts in thousands):

[Download Table]

Operating
Leases
---------

Year ending December 31,
1999.......................................................... $22
2000.......................................................... 28
2001.......................................................... 2
2002.......................................................... --
2003.......................................................... --
Thereafter.................................................... --
---
Total future minimum lease payments............................. $52
===

During the six months ended June 30, 1999, the Company leased office
facilities under non-cancelable operating leases. Rental expense under
operating lease agreements for the six months ended June 30, 1999, was $13,000.

F-34

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BUYGOLF.COM, INC.

NOTES TO FINANCIAL STATEMENTS -- (Continued)

Supply and Fulfillment and Arrangement

On May 3, 1999, the Company entered into an exclusive one-year agreement
with Las Vegas Golf and Tennis, Inc. ("LVG"). This agreement provides that LVG
sell goods to the Company at cost plus shipping costs and a $1 per order
packaging fee. Per this agreement, LVG received 7.5% of the Company's
outstanding common stock. An intangible asset has been recognized (based on the
value of the common stock at the time of the transaction) related to this
agreement that is being amortized over the life of the agreement. Amortization
expense related to this agreement was $112,000 in the six months ended June 30,
1999.

Marketing Agreements

The Company has entered into certain marketing agreements, which include
fixed fees payable through the year 2000. The total of these commitments are
$1.0 million for the remaining six months ended December 31, 1999 and $652,000
for the year ended December 31, 2000.

6. Stockholders' Equity

Effective December 1, 1998, the Company incorporated in the State of
Delaware as BuyGolf.com, Inc. The State of Delaware authorized the Company to
issue 10,000,000 shares of common stock and 5,000,000 shares of preferred
stock.

In December 1998 the Company commenced negotiations with BUY.COM to acquire
a non-transferable and non-sublicensable license to use domain names owned by
BUY.COM, solely in connection with the operation of an internet retail
operation selling golf equipment and golf-related products. In consideration
for the license, the Company agreed to issue BUY.COM a 5% ownership (subject to
anti-dilution provisions) in the Company. The distribution of said shares
occurred at the time negotiations commenced. In May 1999, the Company finalized
the agreement with BUY.COM for such license.

During the six months ended June 30, 1999, the Company entered into various
stock purchase agreements with private investors to sell an aggregate of
1,300,000 shares of common stock at $1.25 per share. Total capital raised in
these agreements was $1.6 million. Subsequent to June 30, 1999, the Company has
entered into a stock purchase agreement with a private investor to sell 219,473
shares of common stock at $2.28 per share.

In accordance with the domain name acquisition agreement between the Company
and BUY.COM, and in conjunction with the shares of common stock issued during
the six months ended June 30, 1999, the Company is liable to issue BUY.COM
47,632 shares of common stock to maintain the agreed-upon five percent
ownership, on a fully-diluted basis, of BUY.COM. As of June 30, 1999 the
Company has not issued these shares. BUY.COM's ownership is reflected in
additional paid-in capital at June 30, 1999.

7. Stock Option Plans

On December 2, 1998, the Company adopted and approved an incentive stock
option plan (the "ISO Plan"). Under the ISO Plan, the number of shares of the
Company's common stock to be granted or subject to options or rights may not
exceed 1,000,000 shares.

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BUYGOLF.COM, INC.

NOTES TO FINANCIAL STATEMENTS -- (Continued)

date. For Incentive Stock Options granted to individuals who own more than ten
percent of the total combined voting power of all classes of the stock of the
Company, the option price shall be at least 110 percent of the fair value at
the date of grant. Options vest ratably over three to four years from the date
of grant. No compensation expense was recognized during 1998 and the six months
ended June 30, 1999, as the exercise price of the options was equal to the
estimated fair value of the Company's common stock on the date of grant.

Subject to Internal Revenue Service limitations, options granted under the
ISO Plan generally become exercisable immediately. Shares issued upon exercise
of options that are unvested are restricted and subject to repurchase by the
Company upon termination of employment or services, and such restrictions lapse
over the original vesting schedule. At December 31, 1998, there were no shares
subject to repurchase.

The following table summarizes the Company's stock option activity:

[Download Table]

December 1, 1998
(Inception) to Six Months Ended
December 31, 1998 June 30, 1999
----------------- ------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
-------- -------- -------- --------

Options outstanding,
Beginning of period.................. -- $ -- -- $ --
Granted............................. -- -- 665,000 1.25
Exercised........................... -- -- -- --
Forfeited........................... -- -- (182,000) 1.25
-------- -------- -------- --------
Options outstanding,
End of period........................ -- $ -- 483,000 $ 1.25
======== ======== ======== ========

At June 30, 1999, all options outstanding have an exercise and weighted
average exercise price of $1.25, a weighted average remaining contractual life
of 9.15 years, and none of these options are exercisable.

[Download Table]

December 1,
1998 (Inception) Six Months
to December 31, Ended
1998 June 30, 1999
---------------- -------------

Net loss, as reported..................... $ (1) $ (1,713)
Pro forma compensation expense............ -- (14)
------------ ------------
Pro forma net loss........................ $ (1) $ (1,727)
============ ============

Basic and diluted net loss per share, as
reported................................. $ -- $ (0.24)
Basic and diluted net loss per share, pro
forma.................................... $ -- $ (0.24)

The weighted average fair value at the date of grant for options granted
through the six months ended June 30, 1999, was $0.17, and was estimated using
the minimum value method with the following assumptions used: weighted average
risk-free interest rate of 5.00%; weighted average volatility of 0.00%;
expected life of 3.0 years; and weighted average dividend yield of 0.00%.

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BUYGOLF.COM, INC.

NOTES TO FINANCIAL STATEMENTS -- (Continued)

Subsequent to June 30, 1999, the Company issued 53,000 options to purchase
common shares with an exercise price of $1.25 and 13,000 options to purchase
common shares with an exercise price of $2.28.

8. Loss Per Share

The following is the calculations for net loss per share (amounts in
thousands, except share and per share data):

[Download Table]

December 1,
1998 (Inception) Six Months
to December 31, Ended
1998 June 30, 1999
---------------- -------------

Basic:
Net loss.................................... $ (1) $ (1,713)
Weighted average common shares.............. 6,456,667 7,086,298
--------- ---------
Net loss per common share................... $ (0.00) $ (0.24)
========= =========
Diluted:
Net loss.................................... $ (1) $ (1,713)
Weighted average common shares.............. 6,456,667 7,086,298
Stock option adjustments.................... -- --
--------- ---------
Average common shares outstanding........... 6,456,667 7,086,298
--------- ---------
Net loss per common share................... $ (0.00) $ (0.24)
========= =========

At December 31, 1998, and June 30, 1999, respectively, options to purchase 0
and 483,000 shares of common stock were not included in the computation of
diluted earnings per share as the effect would be antidilutive.

9. Income Taxes

At June 30, 1999, the Company has net operating loss carryforwards of
approximately $1.7 million related to federal and state income taxes which can
be used to offset future federal and state taxable income from operations.
Substantially all of these carryforwards will begin to expire in 2006.

Significant components of the Company's deferred tax asset at December 31,
1998, and June 30, 1999, are as follows (amounts in thousands):

[Download Table]

December 31, June 30,
1998 1999
------------ --------

Net operating loss carryforwards..................... $ -- $ 690
Depreciation, amortization and other................. -- (7)
---- -----
-- 683
Valuation allowance.................................. -- (683)
---- -----
Net deferred tax assets............................ $ -- $ --
==== =====

10. Related Party Transactions

In December 1998 Bradford W. Allen (the "Founder/Shareholder") allocated
400,000 shares of common stock owned by the Founder/Shareholder to a director
in exchange for consulting services to be rendered to the

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BUYGOLF.COM, INC.

NOTES TO FINANCIAL STATEMENTS -- (Continued)

Company from January through June 1999. These shares were issued in June 1999
and the estimated fair value of $500,000 was charged to operations in the
period.

During 1999 the Founder/Shareholder loaned the Company $9,000. The loan was
paid in full prior to June 30, 1999.

In May 1999, the Company entered into a one-year agreement with BUY.COM to
purchase advertising of $10,000 per month commencing in June 1999 and ending in
May 2000. As of June 30, 1999, the Company had incurred $10,000 in advertising
fees under this agreement.

In August 1999, the Company and the Founder/Shareholder entered into a stock
purchase agreement with Ingram Entertainment Holdings, Inc. ("Ingram"), a
company controlled by a director/shareholder, to sell 438,946 shares of common
stock for an aggregate purchase price of $1.0 million. The agreement also
includes preemptive rights for Ingram to purchase additional shares on a pro
rata basis for any new stock issuances.

Effective September 11, 1999, the Company amended its supply and fulfillment
agreement with LVG. The amended terms include an extension of the existing
contract until March 31, 2003, and new pricing terms commencing April 1, 2000.
The new pricing terms call for LVG to sell its products to the Company at its
cost plus a specified percentage.

F-38

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REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and
Stockholders of SpeedServe Inc.

In our opinion, the accompanying balance sheets and the related statements of
operations and accumulated deficit and of cash flows present fairly, in all
material respects, the financial position of SpeedServe Inc. at December 31,
1997 and 1996, and the results of its operations and its cash flows for the
year ended December 31, 1997 and the period from inception (October 17, 1996)
through December 31, 1996 in conformity with accounting principles generally
accepted in the United States. 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 of these statements in accordance with auditing standards generally
accepted in the United States which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.

/s/ PricewaterhouseCoopers LLP
Nashville, Tenessee
August 17, 1998, except as to
Note 8, which is as of
December 3, 1998

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SPEEDSERVE INC.

(a majority-owned subsidiary of Ingram Entertainment Inc.)

BALANCE SHEETS

[Download Table]

December 31,
--------------------
1996 1997
--------- ---------
Assets

Current Assets:
Cash.................................................... $ 32,075 $ 2,440
Accounts receivable, less allowance for doubtful
accounts of $79 and $0 in 1997 and 1996, respectively.. 2,713 5,742
Receivable from Ingram.................................. 18,425 --
Inventories............................................. -- 2,726
Prepaid expenses........................................ 1,940 --
--------- ---------
Total current assets................................... 55,153 10,908
Property and equipment, net.............................. 12,078 606,881
--------- ---------
$ 67,231 $ 617,789
========= =========

Liabilities and Stockholders' Equity

Current Liabilities:
Accounts payable........................................ $ 26,026 $ 67,578
Payable to Ingram....................................... -- 373,520
Accrued expenses........................................ -- 54,591
Deferred income taxes................................... 188 28,704
--------- ---------
Total current liabilities.............................. 26,214 524,393
--------- ---------
Stockholders' Equity:
Common stock, no par value, 10,000 shares authorized,
issued and outstanding.................................. 508,625 508,625
Stock subscriptions receivable........................... (454,276) --
Accumulated deficit...................................... (13,332) (415,229)
--------- ---------
Total stockholders' equity............................. 41,017 93,396
--------- ---------
Commitments and contingencies (Note 7).................
--------- ---------
Total liabilities and stockholders' equity............... $ 67,231 $ 617,789
========= =========

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

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SPEEDSERVE INC.

(a majority-owned subsidiary of Ingram Entertainment Inc.)

STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT

[Download Table]

Period from
Inception
(October 17, 1996)
through Year Ended
December 31, 1996 December 31, 1997
------------------ -----------------

Net sales................................ $ 39,748 $ 178,822
Costs of sales........................... 27,776 145,500
-------- ---------
Gross profit............................. 11,972 33,322
-------- ---------
Operating expenses:
Marketing and sales..................... 10,843 169,098
Technical and system development........ -- 72,099
General and administrative.............. 25,904 411,928
-------- ---------
Total operating expenses............... 36,747 653,125
-------- ---------
Operating loss........................... (24,775) (619,803)
Other income and (expenses):
Interest, net........................... 6,158 5,730
Other................................... (1,864) 579
-------- ---------
Total other income and expenses........ 4,294 6,309
-------- ---------
Loss before income taxes................. (20,481) (613,494)
Benefit for income taxes................. (7,149) (211,597)
-------- ---------
Net loss............................... (13,332) (401,897)
======== =========

Accumulated deficit -- beginning of
year.................................... -- (13,332)
-------- ---------
Accumulated deficit -- end of year....... $(13,332) $(415,229)
======== =========
Net loss per share:
Basic and diluted....................... $ (1) $ (42)
Weighted average number of common shares
outstanding:
Basic................................... 10,000 10,000
Diluted................................. 10,000 10,000

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

F-41

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SPEEDSERVE INC.

(a majority-owned subsidiary of Ingram Entertainment Inc.)

STATEMENTS OF CASH FLOWS

[Download Table]

Period from
Inception
(October 17, 1996) Year Ended
through December December 31,
31, 1996 1997
------------------ ------------

Cash flows from operating activities:
Net loss...................................... $(13,332) $(401,897)
Adjustment to reconcile net loss to net cash
flows from operating activities:
Depreciation and amortization................ 290 55,152
Changes in assets and liabilities:
Trade and other receivables.................. (2,713) (3,029)
Inventories.................................. -- (2,726)
Prepaid expenses............................. 438 1,940
Accounts payable and accrued expenses........ 26,026 96,143
Income taxes payable......................... 188 28,516
Receivable/Payable from/to Ingram............ (18,425) 391,945
-------- ---------
Cash provided by (used in) operating
activities.................................... (7,528) 166,044
Cash flows from investing activities:
Purchase of fixed assets...................... (9,145) (649,955)
Cash flows from financing activities:
Proceeds from issuance of common stock........ 48,748 454,276
-------- ---------
Increase (decrease) in cash.................... 32,075 (29,635)
Cash at beginning of the year.................. -- 32,075
-------- ---------
Cash at end of the year........................ $ 32,075 $ 2,440
======== =========
Cash paid for interest......................... $ -- $ 7,005
======== =========
Cash paid for income taxes..................... $ -- $ --
======== =========

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

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SPEEDSERVE INC.

(a majority-owned subsidiary of Ingram Entertainment Inc.)

NOTES TO FINANCIAL STATEMENTS

1. Nature of Business and Summary of Significant Accounting Policies

SpeedServe Inc. (the "Company") is an Internet entertainment retailer that
sells a large selection of videos, games and books to consumers at competitive
prices. The Company was incorporated on October 17, 1996 as BookServe Inc. and
in July 1997 changed its name to SpeedServe Inc. In connection with the
incorporation of the Company, Ingram Entertainment Inc. ("Ingram") committed to
pay $500,000 for an 88% (8,800 shares of common stock) ownership interest and
two minority shareholders contributed $8,625 in cash, prepaid expenses, and
fixed assets for a 12% (1,200 shares of common stock) ownership interest, which
is divided equally among the two minority shareholders. Ingram remitted $45,724
and $454,276 to the Company for common stock in 1996 and 1997, respectively.

Risks and Uncertainties

The Company is subject to all of the inherent risks in an early stage
business in the technology and retail industries. These risks include, but are
not limited to: limited operating history, management of a changing business,
reliance on merchandise vendors, the competitive nature of the industry,
dependence on the Internet and related security risks, and the uncertain
ability to protect proprietary intellectual properties.

Use of Estimates

The presentation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.

Cash, Payable to Ingram and Receivable from Ingram

The Company has a cash management program with Ingram which provides for the
transfer of available cash balances to meet the Company's working capital
requirements.

Fair Value of Financial Instruments

The carrying value of the Company's financial instruments, which include
accounts receivable, prepaid expenses, accounts payable and accrued expenses is
considered to approximate fair value due to the relatively short maturities of
the respective instruments.

Accounts Receivable

Accounts receivable are valued net of reserves for bad debts, returns,
discounts, and allowances. Calculations of reserves are based on historical
experience.

Inventories

The Company purchases all videos and games from Ingram and a substantial
majority of its book offerings from one vendor (97% and 98% in 1997 and 1996,
respectively). The Company purchases all inventory from Ingram at what
management believes are terms that are not more favorable than other customers
receive. Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market.

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SPEEDSERVE INC.

(a majority-owned subsidiary of Ingram Entertainment Inc.)

NOTES TO FINANCIAL STATEMENTS -- (Continued)

The Company primarily purchases inventory from its vendors when a customer
places an order. Primarily all book inventory is shipped by the Company to the
customer and primarily all video inventory is drop shipped from an Ingram
warehouse to the customer.

Property and Equipment

All fixed assets are recorded at cost. The Company computes depreciation on
a straight-line basis for financial reporting purposes and uses accelerated
depreciation methods for tax purposes, where appropriate.

Revenue Recognition

Revenue from product sales is recognized upon shipment to the customer. The
Company provides an allowance for sales returns, which have been insignificant
based on historical experience.

Earnings (Loss) per Share

Basic earnings (loss) per share is calculated using the average shares of
common stock outstanding, while diluted earnings per share reflects the
potential dilution that could occur if stock options and warrants were
exercised. Stock options and warrants are excluded from the calculation if
their effect would be antidilutive. As of December 31, 1997, the Company has
not issued any stock options or warrants.

Income Taxes

Deferred income taxes are recognized for the tax consequences in future
years arising from differences between the tax bases of assets and liabilities
and their financial reporting amounts at each period end based on enacted tax
laws and statutory tax rates applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amount expected to be
realized. The provision (benefit) for income taxes represents the tax payable
(receivable) for the period and the change during the period in deferred tax
assets and liabilities.

Technical and Systems Development

Development expenses consist primarily of consulting fees and systems
infrastructure related to the Company's Web sites and order fulfillment
systems. Costs incurred for internal-use computer software has been capitalized
in accordance with SOP 98-1 as described below and are depreciated over a three
year useful life. All other technical and system development costs have been
expensed as incurred.

New Accounting Pronouncements

In June 1997, the Financial Accounting Standards Board issued FAS 130,
Reporting Comprehensive Income, which establishes standards for the reporting
and display of comprehensive income and its components. FAS 130 has been
adopted in these financial statements. Adoption had no impact on the Company's
net loss or stockholders' equity as the comprehensive loss was the same as the
net loss.

In June 1997, the Financial Accounting Standards Board issued FAS 131,
Disclosures about Segments of an Enterprise and Related Information. FAS 131
establishes standards for the way that public reporting enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in annual financial reports issued to stockholders. The Company
operates under one segment as defined by FAS 31.

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SPEEDSERVE INC.

(a majority-owned subsidiary of Ingram Entertainment Inc.)

NOTES TO FINANCIAL STATEMENTS -- (Continued)

In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") No. 98-1 Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. SOP 98-1 provides guidance on
accounting for the costs of computer software developed or obtained for
internal use. Costs incurred prior to the initial application of SOP 98-1,
whether capitalized or not, should not be adjusted to the amounts that would
have been capitalized had this SOP been in effect when those costs were
incurred. SOP 98-1 was adopted by the Company for the fiscal year ended
December 31, 1997. For the year ended December 31, 1997, the Company
capitalized approximately $587,000 of software development costs in accordance
with SOP 98-1.

2. Inventories

Inventories consist of the following:

[Download Table]

December 31,
--------------
1996 1997
------- ------

Books....................................................... $ -- $2,039
Videos...................................................... -- 687
------- ------
Total inventories......................................... $ -- $2,726
======= ======

3. Property and Equipment

Property and equipment consist of the following:

[Download Table]

December 31,
----------------- Depreciable
1996 1997 Lives
------- -------- -----------

Computer software......................... $ 2,366 $586,721 3 years
Computer hardware......................... 8,144 40,824 3 years
Leasehold improvements.................... 0 21,616 12 years
Furniture and fixtures.................... 1,438 12,875 5 years
Machinery and equipment................... 420 1,951 5 years
------- --------
12,368 663,987
Less: accumulated depreciation and
amortization............................. (290) (57,106)
------- --------
Net property and equipment................ $12,078 $606,881
======= ========

4. Employee Benefit Plans

The Company participates in a multi-employer defined contribution 401(k)
salary deferral plan sponsored by Ingram. The Company contributes to the 401(k)
plan by matching a percentage of employee voluntary contributions. The plan
covers substantially all full-time employees. Expenses related to the defined
contribution 401(k) plan were $4,403 in 1997 and $0 in 1996.

5. Income Taxes

The Company is included in the consolidated federal income tax return filed
by Ingram. Income taxes related to the Company are determined on a separate
entity basis. A tax sharing agreement between the Company and Ingram permits
Ingram to utilize all tax benefits resulting from operating losses generated by
the Company. All of the Company's net operating losses have been utilized by
Ingram.

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SPEEDSERVE INC.

(a majority-owned subsidiary of Ingram Entertainment Inc.)

NOTES TO FINANCIAL STATEMENTS -- (Continued)

The income tax benefit for the year ended December 31, 1997 and the period
October 17, 1996 through December 31, 1996, was as follows:

[Download Table]

1996 1997
------- ---------

Current benefit
Federal............................................... $(7,337) $(240,113)
State................................................. 0 0
Deferred expense
Federal............................................... 188 28,516
State................................................. 0 0
------- ---------
Total benefit........................................ $(7,149) $(211,597)
======= =========

The benefit for income taxes differs from the amount of income tax
determined by applying the applicable U.S. statutory income tax rate to pretax
losses, as a result of the following differences for the year ended December
31, 1997 and the period October 17, 1996 through December 31, 1996:

[Download Table]

1996 1997
------- ---------

Tax benefit at statutory rates........................ $(7,168) $(214,723)
Other................................................. 19 3,126
------- ---------
Total income tax benefit............................ $(7,149) $(211,597)
======= =========

Deferred income taxes result from temporary differences between the
financial reporting basis and income tax bases of assets and liabilities and
relate principally to certain expenses as follows:

[Download Table]

1996 1997
---- -------

Deferred tax liabilities:
Depreciation................................................ $188 $28,742
Other....................................................... 0 (38)
---- -------
Total deferred tax liabilities............................. $188 $28,704
==== =======

6. Transactions with Ingram

The Company receives administration services, office space, management
information systems and finance services from Ingram. The allocation method
for finance and administration services and management information systems is
based on the actual payroll costs incurred by Ingram. Office space charges
were allocated based on the square footage occupied by the Company in an
Ingram facility and the total facility charges incurred by Ingram. Management
deems this allocation method to be reasonable. All expenses, except for
management information systems, totaled $31,323 in 1997 and are recorded as
general and administrative expenses. Management information systems costs of
$527,315 related to technical and system development services were capitalized
to computer software in 1997. No amounts were charged by Ingram for these
services in 1996 based on the de minimis nature of the charges for the
Company.

The actual expenses for these services that will be incurred by the Company
in the future may be different if either the nature of the control
relationship with Ingram changes or Ingram's allocation method is changed.

The Company purchased $27,230 and $0 of video product from Ingram in 1997
and 1996, respectively.

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SPEEDSERVE INC.

(a majority-owned subsidiary of Ingram Entertainment Inc.)

NOTES TO FINANCIAL STATEMENTS -- (Continued)

7. Commitments and Contingencies

In October 1997, the Company entered into an agreement with a navigational
Web site ("NWS") whereby the NWS will display a link to a Company website,
VideoServe.com, each time a NWS user performs an informational search using a
certain key word or words. This link will permit NWS users to navigate directly
from the NWS to a VideoServe.com web page dedicated to the on-line purchase of
videos through November 1999. In exchange for this service, the Company has
agreed to pay a fee of $3,120,000. The monthly fee escalates over the period of
the contract, as the number of website visitors/purchasers is expected to
increase over time. The Company recorded $90,000 as marketing and sales expense
in 1997 and is committed to pay $1,155,000 and $1,875,000 in 1998 and 1999,
respectively.

In addition to the terms noted above, the Company has agreed to pay the NWS
a referral fee equal to $0.10 per click-through, not to exceed $435,000 through
November of 1999. The number of click-throughs in 1997 was de minis and no
expense was recorded in 1997.

The entire agreement is cancelable by either party under certain terms
depending on the Web site popularity of the NWS or VideoServe.com.

8. Subsequent Events

In January 1998, Ingram and the minority stockholders contributed additional
capital in the amounts of $2,323,200 and $316,800, respectively.

On December 3, 1998, the Company was sold to BUY.COM INC. In exchange for
the net assets of the Company and $1,000,000, the primary shareholder, Ingram,
received approximately 4.4% ownership interest in BUY.COM INC.

F-47

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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

BASIS OF PRESENTATION

In the opinion of our management, all adjustments necessary to fairly
present this pro forma information have been made. The Unaudited Pro Forma
Condensed Combined Financial Statements are based upon, and should be read in
conjunction with, the historical financial statements of BUY.COM, Speedserve
and BuyGolf.com (collectively, the "Company"), and the respective notes to such
financial statements presented elsewhere in this Prospectus. The pro forma
information is based upon tentative allocations of purchase price for the
acquisition of BuyGolf.com and may not be indicative of the results that would
have been reported had such events actually occurred on the dates specified,
nor is it indicative of the Company's future results. The final allocations of
purchase price is not expected to differ materially from the tentative
allocation or to have a material impact on results of operations of financial
position. Purchase accounting is based upon preliminary asset valuations, which
are subject to change. Furthermore, post-closing adjustments, if any, are not
expected to have a material impact on results of operations or financial
position.

The Unaudited Pro Forma Condensed Combined Statements of Operations for the
year ended December 31, 1998 is presented as if BUY.COM had completed the
acquisition of Speedserve as of January 1, 1998.

The Unaudited Pro Forma Condensed Combined Statements of Operations for the
year ended December 31, 1999 is presented as if BUY.COM had completed the
acquisition of BuyGolf.com and entered into the PGA Tour sponsorship agreement
as of January 1, 1999. The impact of the acquisition of BuyGolf.com to the
Unaudited Pro Forma Condensed Combined Statement of Operations for the year
ended December 31, 1998, is immaterial and therefore has not been shown.

The BUY.COM Inc. balance sheet as of December 31, 1999 includes the assets
acquired and liabilities assumed in connection with the acquisition of
BuyGolf.com.

In addition, the Unaudited Pro Forma Condensed Combined Financial Statements
do not reflect purchase price adjustments and future contingent payments
contained in the agreements relating to certain acquisitions. You should read
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

PF-1

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BUY.COM INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(amounts in thousands, except share and per share data)

[Download Table]

Year Ended December 31, 1998
-----------------------------------------------------
Buy.com Speedserve, Pro Forma Pro Forma
Inc. Inc.(a) Adjustments Combined
----------- ----------- ----------- -----------

Net revenues............ $ 125,290 $ 1,278 $ -- $ 126,568
Cost of goods sold...... 123,527 1,070 124,597
----------- ----------- ----------- -----------
Gross profit............ 1,763 208 -- 1,971
----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing... 13,430 1,425 -- 14,855
Product development... 950 1,133 -- 2,083
General and
administrative....... 4,250 600 -- 4,850
Depreciation and
amortization......... 377 373 2,820 (b) 3,570
Amortization of
deferred
compensation......... 795 -- -- 795
----------- ----------- ----------- -----------
Total operating
expense............ 19,802 3,531 2,820 26,153
----------- ----------- ----------- -----------
Operating loss...... (18,039) (3,323) (2,820) (24,182)
----------- ----------- ----------- -----------
Other income (expense):
Interest income
(expense), net....... 202 38 -- 240
Other................. (4) (43) -- (47)
----------- ----------- ----------- -----------
Total other income
(expense).......... 198 (5) -- 193
----------- ----------- ----------- -----------
Loss before provision
for income taxes....... (17,841) (3,328) (2,820) (23,989)
Provision for income
taxes.................. 3 (1,011) 1,011 (c) 3
----------- ----------- ----------- -----------
Net loss................ $ (17,844) $ (2,317) $ (3,831) $ (23,992)
=========== =========== =========== ===========
Net loss per share:
Basic and diluted..... $ (0.24)
Weighted average number
of common shares
outstanding:
Basic and diluted(d).. 99,060,348

(b) Represents the amortization of $2.8 million goodwill that would have been
recorded for the year ended December 31, 1998, if the acquisition of
Speedserve occurred January 1, 1998. Goodwill is amortized on a straight-
line basis over a period of three years. No other significant fair value
purchase price adjustments were recorded in conjunction with the
acquisition of Speedserve.

(d) Reflects conversion of all preferred stock outstanding at December 31, 1998
and the issuance of common stock for the acquisition of Speedserve.

PF-2

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BUY.COM INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(amounts in thousands, except share and per share data)

[Download Table]

Year Ended December 31, 1999
---------------------------------------------------
Buy.com BuyGolf.com, Pro Forma Pro Forma
Inc. Inc.(a) Adjustments Combined
--------- ------------ ----------- ------------

Net revenues............. $ 596,848 $ 1,025 $ (40)(b) $ 597,833
Cost of goods sold....... 603,695 883 -- 604,578
--------- ------- -------- ------------
Gross profit............. (6,847) 142 (40) (6,745)
--------- ------- -------- ------------
Operating expenses:
Sales and marketing.... 71,331 1,841 (40)(b) 73,132
Product development.... 7,835 -- -- 7,835
General and
administrative........ 19,037 1,402 -- 20,439
Depreciation and
amortization.......... 6,566 333 12,233 (c) 19,132
Amortization of
deferred
compensation.......... 10,215 -- -- 10,215
Charge for warrants.... 7,191 -- -- 7,191
--------- ------- -------- ------------
Total operating
expenses............ 122,175 3,576 12,193 137,944
--------- ------- -------- ------------
Operating loss....... (129,022) (3,434) (12,233) (144,689)
--------- ------- -------- ------------
Other income (expense):
Interest income
(expense), net........ (1,141) 7 -- (1,134)
Other.................. (2) -- -- (2)
--------- ------- -------- ------------
Total other income
(expense)........... (1,143) 7 -- (1,136)
--------- ------- -------- ------------
Loss before provision for
income taxes............ (130,165) (3,427) (12,233) (145,825)
Provision for income
taxes................... 3 1 -- 4
--------- ------- -------- ------------
Net loss................. $(130,168) $(3,428) $(12,233) $ (145,829)
========= ======= ======== ============
Net loss per share:
Basic and diluted...... $ (1.27)
Weighted average number
of common shares
outstanding:
Basic and diluted(d)... 114,719,108

--------
(a) BuyGolf.com was acquired by BUY.COM on October 25, 1999, in a purchase-type
transaction. BUY.COM issued a total of 2,589,329 shares of common stock to
acquire the remaining 95% of the outstanding common stock of BuyGolf.com
that it did not previously own. The results of operations of BuyGolf.com
will be included in our consolidated results commencing October 1, 1999.
The results of operations for BuyGolf.com from October 1, 1999, through
October 25, 1999, are immaterial to our consolidated results. This
presentation shows the pro forma effects of the operations of BuyGolf.com
as if the acquisition occurred on January 1, 1999.

(b) Represents advertising revenues/expenses recorded for the nine months ended
September 30, 1999, that should be eliminated upon the acquisition of
BuyGolf.com by BUY.COM.

(c) Represents the amortization of $5.8 million goodwill that would have been
recorded for the nine months ended September 30, 1999, if the acquisition
of BuyGolf.com occurred on January 1, 1999. Goodwill is amortized on a
straight-line basis over a period of three years. No other significant fair
value purchase price adjustments were recorded in conjunction with the
acquisition of BuyGolf.com. Also includes expense of $6.4 million for the
PGA TOUR sponsorship agreement as though the agreement was executed January
1, 1999.

PF-3

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[Inside Back Cover]

Inside Back Cover of Prospectus
1. Annotations:
"buy.com"

424B4 Last Page of 137 TOC 1st Previous Next ↓Bottom Just 137th
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Through and including March 3, 2000 (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.

14,000,000 Shares

[LOGO OF BUY.COM APPEARS HERE]

Common Stock

----------------

PROSPECTUS

----------------

Merrill Lynch & Co.

Bear, Stearns & Co. Inc.

Chase H&Q

U.S. Bancorp Piper Jaffray

February 7, 2000

---------------------------------------------------------------------------
---------------------------------------------------------------------------

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Dates Referenced Herein and Documents Incorporated by Reference

		Referenced-On Page
This ‘424B4’ Filing	Date	First	Last	Other Filings

	8/10/08	63
	3/31/03	123
	12/31/00	100	120	10-K, 10-K/A
	7/19/00	24
	6/15/00	38	97
	4/1/00	123
	3/3/00	137
	2/11/00	1
Filed on:	2/8/00
	2/7/00	1	137	S-1/A
	2/1/00	87
	1/31/00	110
	12/31/99	5	135
	11/1/99	60
	10/26/99	111
	10/25/99	30	135
	10/13/99	73	98
	10/1/99	30	135
	9/30/99	30	135
	9/11/99	123
	9/2/99	103
	8/16/99	109
	7/27/99	100
	7/21/99	100
	7/20/99	99	109
	7/14/99	103
	6/30/99	85	123
	6/29/99	103
	6/1/99	99	109
	5/26/99	109
	5/24/99	99
	5/3/99	120
	4/15/99	98
	3/22/99	103
	3/11/99	101
	3/10/99	103
	3/1/99	59
	2/1/99	101
	1/18/99	101
	1/1/99	8	135
	12/31/98	5	134
	12/3/98	29	134
	12/2/98	120
	12/1/98	8	122
	11/16/98	102
	10/30/98	109
	10/15/98	108
	10/8/98	71	108
	9/30/98	109
	8/18/98	103
	8/17/98	124
	8/3/98	90	107
	3/21/98	73
	1/1/98	28	134
	12/31/97	13	131
	10/1/97	73
	6/7/97	8	107
	12/31/96	85	131
	10/17/96	85	131
				List all Filings

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Filing Submission 0001017062-00-000145 – Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)

Buy Com Inc – IPO: ‘424B4’ on 2/8/00

On: Tuesday, 2/8/00 · Accession #: 1017062-0-145 · File #: 333-89737

Initial Public Offering (IPO): Prospectus — Rule 424(b)(4)Filing Table of Contents

Document Table of Contents

Dates Referenced Herein and Documents Incorporated by Reference

Initial Public Offering (IPO): Prospectus — Rule 424(b)(4)
Filing Table of Contents