<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 3, 1998
REGISTRATION NO. 333-62395
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
XOOM.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
<TABLE>
<CAPTION>
DELAWARE 7310 88-0361536
<S> <C> <C>
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NO.) IDENTIFICATION NO.)
</TABLE>
300 MONTGOMERY STREET, SUITE 300
SAN FRANCISCO, CALIFORNIA 94104
(415) 288-2500
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES AND PRINCIPAL
PLACE OF BUSINESS)
---------------
CHRIS KITZE
CHAIRMAN
XOOM.COM, INC.
300 MONTGOMERY STREET, SUITE 300
SAN FRANCISCO, CALIFORNIA 94104
(415) 288-2500
(NAME, ADDRESS, AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
---------------
COPIES TO:
<TABLE>
<CAPTION>
BRUCE ALAN MANN, ESQ. NORA L. GIBSON, ESQ.
<S> <C>
TAMRA D. BROWNE, ESQ. RANDALL M. LAKE, ESQ.
KRISTIAN E. WIGGERT, ESQ. BARBARA SKAGGS GALLAGHER, ESQ.
JOEL S. FISCH, ESQ. Brobeck, Phleger & Harrison LLP
Morrison & Foerster LLP Spear Street Tower
425 Market Street One Market
San Francisco, California 94105-2482 San Francisco, California 94105
</TABLE>
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_] _____________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] _____________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_] _____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(a), MAY DETERMINE.
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- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED DECEMBER 3, 1998
PRELIMINARY PROSPECTUS 3,000,000 SHARES
XOOM.COM, INC.
COMMON STOCK
All of the 3,000,000 shares of Common Stock, par value $0.0001 per share (the
"Common Stock"), offered hereby (the "Offering") are being sold by XOOM.com,
Inc. ("Xoom.com" or the "Company"). Prior to the Offering, there has been no
public market for the Common Stock of the Company. It is currently estimated
that the initial public offering price for the Common Stock will be between
$9.00 and $11.00 per share. See "Underwriting" for a discussion of the factors
considered in determining the initial public offering price. Application has
been made for quotation of the Common Stock on the Nasdaq National Market under
the symbol "XMCM."
-----------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.................................. $ $ $
- --------------------------------------------------------------------------------
Total(3)................................... $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $1,900,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
450,000 additional shares of Common Stock on the same terms and conditions
set forth above, to cover over-allotments, if any. If such option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions, and Proceeds to Company will be $ , $ , and $
respectively. See "Underwriting."
-----------
The shares of Common Stock are being offered by the Underwriters, subject to
prior sale, when, as and if delivered to and accepted by the Underwriters
against payment therefor and subject to certain other conditions. The
Underwriters reserve the right to withdraw, cancel or modify the Offering and
to reject orders in whole or in part. It is expected that delivery of the
shares will be made against payment therefor on or about , 1998 at
the offices of Bear, Stearns & Co. Inc., 245 Park Avenue, New York, New York
10167.
-----------
BEAR, STEARNS & CO. INC. DEUTSCHE BANK SECURITIES
The date of this Prospectus is , 1998
<PAGE>
[INSIDE FRONT COVER]
[DEPICTIONS OF XOOM.COM WEB SITE WELCOME PAGE AND EXAMPLES OF XOOM.COM MEMBER
SERVICES, WITH TEXT, "FREE SERVICES AND COMMUNITIES MADE XOOM.COM THE 2ND
FASTEST GROWING WEB SITE IN THE FIRST HALF OF 1998."]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
OFFERED HEREBY. SUCH TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF
COMMON STOCK TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
[GATE 1]
[DEPICTIONS OF PROCEDURES FOR HOW MEMBERS JOIN, WITH TEXT, "MEMBERS REGISTER
BY GIVING A VALID E-MAIL ADDRESS AND PERMISSION TO BE CONTACTED WITH NEWS AND
OFFERS." DEPICTIONS OF EXAMPLES OF COMMUNITIES WITH TEXT, "OVER 200 XOOM.COM
COMMUNITIES BRING PEOPLE TOGETHER AND CREATE A CONTEXT FOR BUYING."]
[GATE 2]
[DEPICTION OF PROCEDURES FOR PURCHASING PRODUCTS AND EXAMPLES OF PRODUCTS.]
2
<PAGE>
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified in
its entirety by, the more detailed information including "Risk Factors" and the
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Prospectus. The discussion in this Prospectus contains forward-looking
statements. The outcome of the events described in such forward-looking
statements is subject to risks and uncertainties. The Company's actual results
may differ materially from those discussed in such forward-looking statements.
Factors that may cause or contribute to such differences include those
discussed in "Risk Factors," "Management's Discussion And Analysis Of Financial
Condition And Results Of Operations" and "Business" as well as those discussed
elsewhere in this Prospectus. The information in this Prospectus (i) assumes an
initial public offering price of $10.00 per share, (ii) assumes no exercise of
the Underwriters' over-allotment option, (iii) reflects a 2-for-3 reverse split
of the Common Stock and (iv) reflects the assumed exercise of outstanding
warrants to purchase 306,427 shares of Common Stock prior to the closing of the
Offering.
THE COMPANY
Xoom.com is one of the fastest growing direct marketing companies on the
Internet. The Company attracts members to its community site with a variety of
free services, including homepages, e-mail, chat rooms, clip art and software
libraries and online greeting cards. Xoom.com members can also join topical
communities where they can exchange ideas and information. Upon registration,
members agree to receive periodic offers of products and services via e-mail.
These offerings are competitively priced and continuously updated, and include
computer software, computer accessories and peripherals, consumer electronics
and clip art on CD-ROM. New product offerings will include a DVD movie club,
gift items, health-related products and a travel club. Xoom.com believes that
its rapidly growing base of self-qualified members provides the Company with
highly attractive and effective electronic commerce opportunities. In addition,
the Company believes that its high levels of traffic and online reach present
an attractive platform for advertising.
Xoom.com was the second fastest growing site on the Web measured by online
reach in the first half of 1998 and the twelfth most trafficked site in October
1998, according to Media Metrix. Xoom.com's reach increased to over 13% in
September 1998 from less than 2% in January 1998, according to Media Metrix.
Xoom.com had approximately 4.5 million members as of November 13, 1998, adding
an average of approximately 20,000 new members per day for the last thirty
days. The current growth rates of Xoom.com's reach and new customers are not
necessarily indicative of growth rates the Company may experience in the
future. In the first nine months of 1998, 69% of the Company's net revenue was
derived from electronic commerce and approximately 29% of net revenue was
derived from non-U.S. sales. The Company does not generate revenue from fees
charged to its members.
IDC estimates that the number of Web users will grow from approximately 69
million worldwide in 1997 to approximately 320 million worldwide by the end of
2002 and that transactions on the Internet are expected to increase from
approximately $12 billion in 1997 to approximately $426 billion in 2002. In
addition, the percentage of users that are buyers of products and services is
expected to increase from 26% to 40% in the same period. The same advantages
that facilitate the growth of electronic commerce make the Internet a
compelling medium for direct marketing campaigns. Direct marketing over the
Internet uses e-mail to reach prospective buyers worldwide, potentially
offering them a significantly broader selection of products and services than
is available locally. Internet-based direct marketing also allows marketers to
rapidly collect meaningful demographic information and feedback from consumers,
and to use this information to tailor new messages quickly. Further, the costs
of direct marketing via e-mail are dramatically lower than those of traditional
direct marketing techniques. As a result, Internet-based direct marketing
campaigns can be profitable at response rates that are a fraction of the rates
required for traditional campaigns.
By offering its members a variety of compelling free services and communities
and competitively priced product offerings, the Company believes it has created
an innovative online sales channel with low customer acquisition costs. The key
elements of Xoom.com's approach are to: (i) utilize the cost-effective direct
marketing
3
<PAGE>
capabilities of the Web to sell products to the Xoom.com customer base; (ii)
rapidly formulate effective direct marketing campaigns utilizing proprietary
campaign management software, allowing the Company to maximize response rates
and minimize inventory costs; (iii) provide free services to attract a growing
membership base; (iv) develop a detailed member database; (v) continue to grow
online reach and membership to create an attractive advertising platform; and
(vi) provide customer convenience to encourage purchasing.
The Company's objective is to be a leading community-based direct selling
channel on the Internet. In order to accomplish this objective, the Company
intends to continue to focus on growing its membership base and building strong
brand recognition of the Xoom.com name. The Company believes that promoting
repeat usage and member loyalty through free services will help establish
Xoom.com as a preferred destination among Web users. The Company intends to
make acquisitions and enter into strategic alliances in order to increase its
reach and membership. In addition, the Company intends to increase its
advertising revenue as a result of its growth in online reach.
"XOOM," "XOOM.com" and the "X-in-circle" logo are trademarks of the Company.
This Prospectus contains other product names, trade names and trademarks of the
Company and of other organizations, which are the property of their respective
owners. The Company was incorporated in Delaware on April 16, 1996 under the
name Atomsoft, Inc., changed its name to XOOM, Inc. in February of 1998 and
changed its name to XOOM.com, Inc. in October of 1998. The principal executive
offices of the Company are located at 300 Montgomery Street, Suite 300, San
Francisco, California 94104, and its telephone number at this address is (415)
288-2500.
----------------
This Prospectus includes statistical data regarding the Internet industry.
Such data is taken or derived from information published by sources including
Media Metrix, Inc. ("Media Metrix") and Relevant Knowledge, Inc., ("Relevant
Knowledge") media research firms specializing in market and technology
measurement on the Internet, Jupiter Communications, LLC, a media research firm
focusing on the Internet industry ("Jupiter Communications"), and International
Data Corporation, a provider of market information and strategic information
for the information technology industry ("IDC"). Although the Company believes
that such data are generally indicative of the matters reflected therein, such
data are inherently imprecise and investors are cautioned not to place undue
reliance on such data.
4
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered............................. 3,000,000 shares
Common Stock to be outstanding after the 12,098,024 shares
Offering(1).....................................
Use of proceeds.................................. For repayment of certain
indebtedness, and for
general corporate purposes,
including working capital,
capital expenditures,
potential acquisitions and
promotional campaigns. See
"Use of Proceeds."
Proposed Nasdaq National Market symbol........... XMCM
</TABLE>
- --------
(1) Based on the number of shares outstanding as of September 30, 1998.
Excludes (i) 1,901,198 shares of Common Stock issuable upon the exercise of
options then outstanding with a weighted average exercise price of
$1.11 per share as of such date; (ii) 1,326,135 shares of Common Stock
reserved for issuance under the Company's 1998 Stock Incentive Plan (the
"1998 Plan"), giving effect to the increase in the aggregate number of
shares reserved for issuance from 1,166,667 to 2,000,000 approved as of
November 16, 1998; (iii) 300,000 shares of Common Stock reserved for
issuance under the Company's 1998 Employee Stock Purchase Plan (the "Stock
Purchase Plan"); and (iv) warrants to purchase 183,333 shares of Common
Stock. Assumes (i) the exercise of outstanding warrants to purchase 306,427
shares of Common Stock prior to the closing of the Offering; (ii) the sale
of the 3,000,000 shares of Common Stock offered hereby; and (iii) the
issuance of 60,000 shares of Common Stock pursuant to modifications of
earn-outs in connection with certain of the Company's acquisitions. See
"Capitalization," "Management--Benefit Plans" and Notes 4 and 9 of Notes to
the Company's Consolidated Financial Statements.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth summary consolidated financial data for the
Company. This information should be read in conjunction with the Consolidated
Financial Statements and Notes related thereto and the Selected Unaudited Pro
Forma Condensed Consolidated Financial Information and Notes related thereto
appearing elsewhere in this Prospectus. See "Selected Consolidated Financial
Data" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
PERIOD FROM PRO FORMA
APRIL 16 NINE MONTHS ENDED NINE MONTHS
(INCEPTION) TO YEAR ENDED SEPTEMBER 30, ENDED
DECEMBER 31, DECEMBER 31, ------------------- SEPTEMBER 30,
1996 1997 1997 1998 1998(2)
-------------- ------------ ----------- ------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Net revenue:
Electronic commerce... $ -- $ 327 $ 59 $ 3,366 $ 3,575
Advertising........... -- 60 21 953 1,004
License fees and
other................ -- 454 341 546 575
------ ------- ------- ------- -------
Total net revenue...... -- 841 421 4,865 5,154
Gross profit........... -- 522 213 2,865 3,108
Loss from operations... (440) (3,132) (2,668) (6,409) (6,886)
Net loss............... $ (440) $(3,132) $(2,668) $(6,392) $(6,905)
====== ======= ======= ======= =======
Net loss per share--
basic and diluted(1).. $(0.89) $ (0.64) $ (0.57) $ (0.89) $ (0.92)
====== ======= ======= ======= =======
Number of shares used
in per share
calculation--
basic and diluted(1).. 497 4,874 4,688 7,172 7,483
<CAPTION>
SEPTEMBER 30, 1998
-----------------------
ACTUAL AS ADJUSTED(3)
------- --------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash........................................................... $ 967 $26,209
Working capital (deficit)...................................... (3,215) 23,415
Total assets................................................... 10,415 36,647
Acquisition notes payable, less current portion................ 990 990
Capital lease obligations, less current portion................ 126 126
Total stockholders' equity..................................... 3,782 31,402
</TABLE>
- --------
(1) See Note 1 of Notes to the Company's Consolidated Financial Statements for
an explanation of the determination of the number of shares used to compute
basic and diluted net loss per share and Note D of Notes to the Company's
Selected Unaudited Pro Forma Condensed Consolidated Statements of
Operations for an explanation of the determination of the number of pro
forma shares used to compute pro forma net loss per share--basic and
diluted.
(2) Pro Forma Condensed Consolidated Statement of Operations data for the nine
months ended September 30, 1998 reflects certain adjustments to reflect the
acquisition of Paralogic Corporation, Global Bridges Technologies, Inc. and
Pagecount, Inc. as if the acquisitions had occurred on January 1, 1998. See
Selected Unaudited Pro Forma Condensed Consolidated Statement of Operations
for the nine months ended September 30, 1998. The pro forma condensed
consolidated statement of operations data does not include amortization of
$401,000 related to the purchase of assets of Revolutionary Software, Inc.
and ArcaMax, Inc. that would have been incurred if these assets were
purchased on January 1, 1998.
(3) Adjusted to reflect (i) the assumed exercise of outstanding warrants for
306,427 shares of Common Stock prior to the closing of the Offering for net
proceeds of $920,000; (ii) the repayment of approximately $1.3 million of
notes payable related to an acquisition and a license agreement; (iii) the
sale of the 3,000,000 shares of Common Stock offered hereby, after
deducting the underwriting discount and estimated offering expenses; and
(iv) the issuance of 60,000 shares of Common Stock with an aggregate fair
value of $600,000 and the payment of $390,000 in cash, upon the completion
of the Offering, pursuant to modifications of earn-outs in connection with
certain of the Company's acquisitions. See "Use of Proceeds" and
"Capitalization."
6
<PAGE>
RISK FACTORS
The Offering involves a high degree of risk. In addition to the other
information set forth in this Prospectus, the following risk factors should be
considered carefully in evaluating the Company and its business before
purchasing any of the shares of Common Stock of the Company. This Prospectus
contains certain forward-looking statements that involve risks and
uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The cautionary statements made in this Prospectus
should be read as being applicable to all forward-looking statements wherever
they appear in this Prospectus. The Company's actual results could differ
materially from the results discussed in this Prospectus. Factors that could
cause or contribute to such differences include those discussed below, as well
as those discussed elsewhere in this Prospectus.
LIMITED OPERATING HISTORY; NO ASSURANCE OF PROFITABILITY; ANTICIPATED LOSSES
The Company was incorporated in April 1996, and began generating revenue in
the first quarter of 1997. Accordingly, the Company has a limited operating
history upon which to evaluate the Company, its current business and
prospects. In addition, the Company's revenue model is evolving and relies
substantially upon electronic commerce, primarily through the use of direct e-
mail marketing, licensing and the sale of advertising on its Web site. The
Company's business must be considered in light of the risks, expenses and
problems frequently encountered by companies in their early stages of
development, particularly companies in new and rapidly evolving markets such
as online commerce and the Internet. Specifically, such risks include, without
limitation, the inability of the Company to maintain and increase levels of
traffic on the Xoom.com site, the lack of acceptance by consumers of e-mail
direct marketing as a medium of electronic commerce, the failure by the
Company to continue to develop and extend the Xoom.com brand, the lack of
broad acceptance of the community model on the Internet, the inability of the
Company to attract or retain members, the inability of the Company to generate
significant Web-based commerce revenue or premium service revenue from its
members, the inability of the Company to meet minimum guaranteed impressions
under advertising agreements, the failure of the Company to anticipate and
adapt to a developing market, the level of use of the Internet and online
services and consumer acceptance of the Internet and other online services for
the purchase of consumer products such as those offered by the Company, the
Company's ability to upgrade and develop its systems and infrastructure and
attract new personnel in a timely and effective manner, the inability to
effectively manage rapidly expanding operations, the level of traffic on the
Company's Web site, the failure of its server and networking systems to
efficiently handle the Company's Web traffic, technical difficulties, system
downtime or Internet brownouts, the amount and timing of operating costs and
capital expenditures relating to expansion of the Company's business,
operations and infrastructure, the level of merchandise returns experienced by
the Company, competition, dependence on the Internet, the introduction and
development of different or more extensive communities by direct and indirect
competitors, particularly in light of the fact that many of such competitors
are much larger and have greater financial, technical and marketing resources
than the Company, reductions in market prices for Web-based advertising as a
result of competition or otherwise, the inability of the Company to maintain
or achieve higher rates for advertising, governmental regulation and general
economic conditions and economic conditions specific to the Internet and the
online commerce industry. To address these risks, the Company must, among
other things, maintain and increase its membership base and rates of growth,
implement and successfully execute its business and marketing strategies,
continue to develop and upgrade its technology and transaction-processing
systems, improve its Web site, provide superior customer service and order
fulfillment, respond to competitive developments, and attract, retain and
motivate qualified personnel. There can be no assurance that the Company will
be successful in addressing such risks, and any failure to do so could have a
material adverse effect on the Company's business, results of operations and
financial condition.
As of September 30, 1998, the Company had an accumulated deficit of $10.0
million. Although the Company has experienced growth in net revenue, members,
customers and reach in recent periods, such growth rates are not sustainable,
will decrease in the future and are not indicative of actual growth rates the
Company may experience. The Company has not achieved profitability on a
quarterly or annual basis to date, and the Company anticipates that it will
incur net losses for the foreseeable future. The extent of these losses will
be
7
<PAGE>
dependent, in part, on the amount and rates of growth in the Company's net
revenue from electronic commerce and advertising. The Company expects its
operating expenses to increase significantly, especially in the areas of sales
and marketing and brand promotion, and, as a result, it will need to generate
increased quarterly net revenue if profitability is to be achieved. The
Company believes that period-to-period comparisons of its operating results
are not meaningful and that the results for any period should not be relied
upon as an indication of future performance. To the extent that net revenue
does not grow at anticipated rates or that increases in its operating expenses
precede or are not subsequently followed by commensurate increases in net
revenue, or that the Company is unable to adjust operating expense levels
accordingly, the Company's business, results of operations and financial
condition will be materially and adversely affected. There can be no assurance
that the Company's operating losses will not increase in the future or that
the Company will ever achieve or sustain profitability.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS; SEASONALITY; UNPREDICTABILITY OF
FUTURE NET REVENUE
The Company expects operating results to fluctuate significantly in the
future as a result of a variety of factors, many of which are outside of the
Company's control. These factors include demand for the products the Company
sells through its Web site, consumers' acceptance of electronic commerce and,
in particular, direct e-mail marketing as a medium for the purchase of goods
and services, demand for Web-based advertising, advertisers' market acceptance
of the Web as an advertising medium, the level of traffic on the Xoom.com
site, the budgeting cycles of advertisers, the amount and timing of capital
expenditures and other costs relating to the expansion of the Company's
operations, the introduction of new or enhanced services by the Company or its
competitors, the timing and number of new hires, the availability of desirable
products and services for sale through the Company's Web site, the accuracy of
the Company's predictions regarding optimal inventory levels for products,
pricing changes for Web-based advertising as a result of competition or
otherwise, the loss of a key advertising contract or relationship by the
Company, changes in the Company's pricing policy or those of its competitors,
the mix of products, services and advertisements sold by the Company,
engineering or development fees that may be paid in connection with adding new
Web site development and publishing tools, technical difficulties with the
Xoom.com site, incurrence of costs relating to future acquisitions, general
economic conditions, and economic conditions specific to the Internet or all
or a portion of the technology market. As a strategic response to changes in
the competitive environment, the Company may from time to time make certain
pricing, service or marketing decisions or business combinations that could
have a material adverse effect on the Company's business, results of
operations and financial condition. In order to accelerate the promotion of
the Xoom.com brand, the Company intends to significantly increase its
marketing budget, which could materially and adversely affect the Company's
business, results of operations and financial condition. The Company expects
to experience seasonality in its business, with user traffic on the Xoom.com
site potentially being lower during the summer and year-end vacation and
holiday periods when overall usage of the Web is lower. Additionally,
seasonality may significantly affect the Company's advertising revenue during
the first and third calendar quarters, as advertisers historically spend less
during these periods. Because Web-based commerce and advertising is an
emerging market, additional seasonal and other patterns may develop in the
future as the market matures. Any seasonality is likely to cause quarterly
fluctuations in the Company's operating results, and there can be no assurance
that such patterns will not have a material adverse effect on the Company's
business, results of operations and financial condition.
As a result of the Company's limited operating history, the Company has
limited meaningful historical financial data upon which to base planned
operating expenses. Accordingly, the Company's expense levels are based in
part on its expectations as to future revenue from sales of products and
services, commerce revenue-sharing arrangements, advertising, and anticipated
growth in membership and are, to a large extent, fixed. Sales and operating
results from product sales generally depend on the volume of, timing of and
ability to fulfill orders received, which are difficult to forecast. In
addition, there can be no assurance that the Company will be able to
accurately predict its net revenue, particularly in light of the intense
competition for the sale of products and services on the Web, sales of Web-
based advertisements, revenue-sharing opportunities, the Company's limited
operating history and the uncertainty as to the broad acceptance of the Web as
a commerce and advertising medium. Therefore, although the Company predicted
in May 1998 that its total sales for the year ended
8
<PAGE>
December 31, 1998, taking into account planned acquisitions, would be $7.0
million to $10.0 million, there can be no assurance that such prediction will
prove accurate. The Company may be unable to adjust spending in a timely
manner to compensate for any unexpected revenue shortfall. Any failure by the
Company to accurately make such predictions would have a material adverse
effect on the Company's business, results of operations and financial
condition.
The Company derives a material portion of its net revenue from the sale of
advertising under short-term contracts, averaging one to two months in length.
As a result, the Company's quarterly net revenue and operating results are, to
a significant extent, dependent on advertising revenue from contracts entered
into within the quarter, as well as on the Company's ability to adjust
spending in a timely manner to compensate for any unexpected net revenue
shortfall. To date, a significant portion of the Company's advertising revenue
in any given period has been attributable to a small group of customers, the
composition of which generally changes from period to period. During the nine
months ended September 30, 1998, the Company's five largest advertising
customers accounted for approximately 28% of advertising revenue
(approximately 5% of total net revenue). The Company expects this situation to
continue in the future. The cancellation or deferral of existing advertising
or commerce contracts or the failure to obtain new contracts in any quarter
could materially and adversely affect the Company's business, results of
operations and financial condition for that quarter and future periods.
Furthermore, the Company's advertising revenue is based in part on the amount
of traffic on the Xoom.com site. Accordingly, any significant shortfall in
traffic on the Xoom.com site in relation to the Company's expectations or the
expectations of existing or potential advertisers would have a material
adverse effect on the Company's business, results of operations and financial
condition. In addition, substantially all of the Company's advertising
contracts require the Company to guarantee a minimum number of impressions. In
the event that these minimum impressions are not met, the Company could be
required to provide credit for additional impressions and the ability of the
Company to sell advertising to new or existing advertisers could be adversely
affected, and the Company could be forced to reduce advertising rates.
Due to the foregoing factors, the Company's quarterly net revenue and
operating results are difficult to forecast. Consequently, the Company
believes that period to period comparisons of its operating results will not
necessarily be meaningful and should not be relied upon as an indication of
future performance. It is likely that in some future quarter or quarters the
Company's operating results may fall below the expectations of securities
analysts and investors. In such event, the trading price of the Company's
Common Stock would likely be materially and adversely affected.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING; UNCERTAIN ABILITY
TO CONTINUE AS A GOING CONCERN
The Company has received a report from its independent auditors on their
audit of the Company's financial statements as of September 30, 1998,
containing an explanatory paragraph that describes the uncertainty as to the
ability of the Company to continue as a going concern due to the Company's
lack of sufficient cash to meet its projected operating needs for the next 12
months. The Company believes, however, that the net proceeds from the
Offering, together with available funds, will be sufficient to meet its
anticipated cash needs for working capital, capital expenditures and business
expansion for at least the next 12 months. The Company may need to raise
additional funds in the future in order to fund more aggressive brand
promotions and more rapid expansion, to develop newer or enhanced services, to
respond to competitive pressures or to acquire complementary businesses,
technologies or services. If additional funds are raised through the issuance
of equity or convertible debt securities, the percentage ownership of the
stockholders of the Company will be reduced, stockholders may experience
additional dilution and such securities may have rights, preferences or
privileges senior to those of the rights of the Company's Common Stock. There
can be no assurance that additional financing will be available on terms
favorable to the Company, or at all. If adequate funds are not available or
not available on acceptable terms, the Company may not be able to fund its
expansion, promote its brand as the Company desires, take advantage of
unanticipated acquisition opportunities, develop or enhance services or
respond to competitive pressures. Any such inability could have a material
adverse effect on the Company's business, results of operations and financial
condition.
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UNPROVEN BUSINESS MODEL; DEPENDENCE ON MEMBERS
The Company's business model depends upon its ability to leverage its
community platform and generate multiple revenue streams. The potential
profitability of this business model is unproven, and, to be successful, the
Company must, among other things, develop and market solutions that achieve
broad market acceptance by its members, Internet advertisers, commerce vendors
and Internet users. The Company's business model is substantially dependent
upon its member-generated content, the "grass-roots" promotional efforts of
its members and the voluntary involvement of its members in the maintenance of
communities to attract Web users to its site and to reduce the demands on
Company personnel. There can be no assurance that the Company's member-
generated content or the promotional efforts of its members will continue to
attract users to the Company's Web site. There can also be no assurance that
the Company's community members will continue to devote their time voluntarily
to improving its communities. Moreover, there can be no assurance that
communities on the Internet, direct marketing of products on the Internet or
the Company's services and brand will achieve broad market acceptance.
Accordingly, no assurance can be given that the Company's business model will
be successful or that it can sustain net revenue growth or achieve or sustain
profitability.
RISKS OF CAPACITY CONSTRAINTS; SYSTEM FAILURES; TECHNOLOGICAL RISKS
The performance of the Company's server and networking hardware and software
infrastructure is critical to the Company's business and reputation and its
ability to attract Web users, advertisers, new members and commerce partners
to the Company's Web site. Any system failure that causes an interruption in
service or a decrease in responsiveness of the Company's Web site could result
in less traffic on the Company's Web site and, if sustained or repeated, could
impair the Company's reputation and the attractiveness of its brand. The
Company entered into one-year Web hosting agreements with Exodus
Communications, Inc. ("Exodus") and Frontier Global Center ("Frontier") in
October 1998 and May 1998, respectively. The Exodus agreement is automatically
renewed for subsequent one-year terms unless either party provides notice at
least 30 days prior to the expiration of any term. The Frontier agreement
terminates at the end of the term of each service order entered into under the
agreement. The Company's current service order with Frontier terminates in May
1999. Pursuant to these agreements, Exodus and Frontier provide and manage
power and environmentals for the Company's networking and server equipment.
Exodus and Frontier also provide site connectivity to the Internet via
multiple DS-3 and OC-3 links on a 24 hours-a-day, seven days per week basis.
The agreement with Exodus provides that in the event that the Company's
Internet connectivity is interrupted due to reasons within Exodus' reasonable
control, Exodus must in general provide the Company with additional access at
no charge. Under the Frontier agreement, if such service interruptions occur
for more than specified numbers of hours during a month, the Company will
receive graduated discounts up to 100% on its fees. Neither of the agreements,
however, guarantee that the Company's Internet access will be uninterrupted,
error-free or completely secure. Both Exodus and Frontier have instituted
several policies and procedures to minimize interruptions in service and
maximize connectivity and reliability. Such policies and procedures include
maintaining multiple routes of Internet connectivity via major
telecommunications providers; maintaining uninterrruptible power supplies that
are backed by diesel power generators; locating computer systems and servers
in raised floor centers with fire protection features; limiting access to the
computer systems to authorized personnel; maintaining an inventory of spare
parts for the computer systems on-site; and requiring all vendors of computer
hardware and software to provide support services 24 hours-a-day, seven days
per week. In addition, most services of the Company are accessed through
redundant load balanced server systems. Redundant copies of the contents of
the Company's database and member data are maintained to protect against disk
failures. In addition, certain databases that are critical to the Company's
operations are backed-up on magnetic tape daily. Currently, the Company is
also deploying a magnetic tape back-up system for member data. Although the
Company maintains loss of income insurance, the Company's insurance may not
cover all instances of systems or access failures to which the Company is
exposed or it may not be adequate to indemnify the Company for all losses
arising from such an event. Any disruption in Internet access or any failure
of the Company's server and networking systems to handle current or higher
volumes of traffic would have a material adverse effect on the Company's
business, results of operations and financial condition.
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The Company has in the past experienced system failures related to capacity
constraints, which have been of a short duration and have had a minimal effect
on the Company's operations. An increase in the use of the Company's Web site
could strain the capacity of its systems, which could lead to slower response
time or system failures. System failures or slowdowns adversely affect the
speed and responsiveness of the Company's Web site and would diminish the
experience for the Company's members and visitors and reduce the number of
impressions received by advertisers, and, thus, could reduce the Company's
commerce and advertising revenue. The ability of the Company to provide
effective Internet connections or of its systems to manage substantially
larger numbers of customers at higher transmission speed is as yet unknown,
and, as a result, the Company faces risks related to its ability to scale up
to its expected customer levels while maintaining superior performance. If
Xoom.com's usage of bandwidth increases, Xoom.com will need to purchase
additional servers and networking equipment and rely more heavily on its
equipment and on Exodus and Frontier and their services to maintain adequate
data transmission speeds, the availability of which may be limited or the cost
of which may be significant.
The successful delivery of the Company's services is also dependent in
substantial part upon the ability of Exodus, Frontier and the Company to
protect Xoom.com's server and network infrastructure against damage from human
error, fire, flood, power loss, telecommunications failure, sabotage,
intentional acts of vandalism and similar events. In addition, substantially
all of the Company's server and network infrastructure is located in Northern
California, an area susceptible to earthquakes, which also could cause system
outages or failures if one should occur. Despite precautions taken by the
Company, Exodus and Frontier, the occurrence of other natural disasters or
other unanticipated problems at their respective facilities could result in
interruption in the services provided by the Company or significant damage to
Xoom.com's equipment. Despite the implementation of network security measures
by the Company, its servers are vulnerable to computer viruses, break-ins, and
similar disruptions from unauthorized tampering. The Company has experienced
attempts by experienced programmers or "hackers" to penetrate the Company's
network security, some of which have succeeded, and expects these attempts to
continue to occur from time to time. Although the Company maintains loss of
income insurance in an aggregate amount of $1.0 million, plus additional
coverage in the amount of $2.0 million for loss of income caused by
earthquakes, the occurrence of any of these events could result in
interruptions, delays or cessations in service, which could have a material
adverse effect on the Company's business, results of operations and financial
condition. In addition, the Company's reputation and the Xoom.com brand could
be materially and adversely affected.
RISK OF RELIANCE ON INTERNALLY DEVELOPED SYSTEMS
The Company uses an internally developed system for its Web site and
substantially all aspects of its transaction processing and order management
systems. The Company's inability to modify this system as necessary to
accommodate increased traffic on its Web site or increased volume through its
transaction processing and order management systems may cause unanticipated
system disruptions, slower response times, impaired quality and speed of order
fulfillment, degradation in customer service, and delays in reporting accurate
financial information. Any of these events could have a material adverse
effect on the Company's business, results of operations and financial
condition.
DEPENDENCE ON CONTINUED GROWTH OF ONLINE COMMERCE; DEPENDENCE ON DIRECT SALES
The Company's future success is substantially dependent upon continued
growth in the use of the Internet and the Web. Use of the Internet as a means
of effecting retail transactions is at an early stage of development, and
demand and market acceptance for recently introduced services and products
over the Internet is uncertain. For the year ended December 31, 1997 and the
nine months ended September 30, 1998, respectively, electronic commerce
revenue represented approximately 39% and 69% of the Company's total net
revenue. The Company cannot predict the extent to which consumers will be
willing to shift their purchasing habits from traditional retailers to online
retailers. The Internet may not prove to be a viable commercial marketplace
for a number of reasons, including lack of acceptable security technologies,
lack of access and ease of use, congestion of traffic, inconsistent quality of
service and lack of availability of cost-effective, high-speed service,
potentially inadequate development of the necessary infrastructure, excessive
governmental regulation, uncertainty regarding intellectual property
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ownership or timely development and commercialization of performance
improvements, including high speed modems. In addition, adverse publicity and
consumer concern about the security of transactions conducted on the Internet
and the privacy of users may also inhibit the growth of commerce on the
Internet. If the use of the Internet does not continue to grow or grows more
slowly than expected, the Company's business, financial condition and results
of operations may be adversely affected.
RELIANCE ON CERTAIN VENDORS
The Company's primary provider of warehousing and order fulfillment is Banta
Corporation ("Banta"). Substantially all of the Company's electronic commerce
revenues are derived from sales fulfilled through Banta. The Company has no
fulfillment operation or facility of its own and, accordingly, is dependent
upon maintaining its existing relationship with Banta or establishing a new
fulfillment relationship with one of the few other fulfillment operations. The
Company does not have a written agreement with Banta, and there can be no
assurance that the Company will maintain its relationship with Banta, or that
it will be able to find an alternative, comparable vendor capable of providing
fulfillment services on terms satisfactory to the Company should its
relationship with Banta terminate. An unanticipated termination of the
Company's relationship with Banta, particularly during the fourth quarter of
the calendar year in which typically a high percentage of sales are made,
could materially adversely affect the Company's results of operations even if
the Company was able to establish a relationship with an alternative vendor.
To date, Banta has satisfied the Company's requirements on a timely basis.
However, to the extent that Banta does not have sufficient capacity and is
unable to satisfy on a timely basis increasing requirements of the Company,
the Company would be materially adversely affected. Moreover, despite
precautions taken by the Company and Banta, the occurrence of natural
disasters or other unanticipated problems at its facilities to which it is
susceptible, such as damage from human error, fire, flood, power loss,
telecommunications failure, sabotage, intentional acts of vandalism and
similar events could result in interruption in the services provided by the
Company. In addition, the success of the Company's e-mail direct marketing
campaigns is dependent upon the ability of suppliers of the products and
services that are the subject of such campaigns to supply adequate amounts of
inventory on a timely basis. In particular, the Company relies upon Nimbus CD
Manufacturing, Inc. ("Nimbus") to procure substantially all of the CD-ROMs,
Digital Versatile Discs ("DVDs") and DVD-ROMs that contain software, clip art
and classic movies. The failure of Nimbus or such other suppliers to meet
their commitments would have a material adverse effect on the Company's
business, results of operations and financial condition.
SALES TAX COLLECTION
The Company does not currently collect sales or other similar taxes in
respect to shipments of goods into states other than California and New York.
However, one or more states or foreign countries may seek to impose sales tax
collection obligations on out-of-state or foreign companies such as the
Company which engage in online commerce. In addition, any new operation in
states outside California and New York could subject shipments into such
states to state or foreign sales taxes. A successful assertion by one or more
states or any foreign country that the Company should collect sales or other
similar taxes on the sale of merchandise could have a material adverse effect
on the Company's business, prospects, financial condition and results of
operations. See "--Government Regulation" and "--Legal Uncertainties."
MANAGEMENT OF GROWTH AND RELATIONSHIPS
The Company has experienced and may continue to experience rapid growth,
which has placed, and could continue to place, a significant strain on the
Company's managerial, financial and operational resources. The Company is
required to manage multiple relationships with various strategic partners,
technology licensors, members, advertisers and other third parties. These
requirements will be strained in the event of further growth of the Company or
in the number of third party relationships, and there can be no assurance that
the Company's systems, procedures or controls will be adequate to support the
Company's operations or that Company management will be able to manage any
growth effectively. To effectively manage its potential growth, the
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Company must continue to implement and improve its operational, financial and
management information systems and to expand, train and manage its employee
base. As of September 30, 1998, the Company's headcount had grown to
64 full-time employees from 4 as of March 31, 1997, and the Company
anticipates that the number of its employees will increase significantly in
the next 12 months. The Company has experienced difficulty from time to time
in hiring and retaining the personnel necessary to support the growth of its
business, and there can be no assurance that the Company will not experience
similar difficulty in the future.
BRIEF TENURE OF MANAGEMENT; DEPENDENCE ON KEY PERSONNEL
The Company's performance is substantially dependent on the performance of
its executive officers and other key employees, most of whom have worked
together only a short period of time. In particular, the Company's Chief
Financial Officer joined the Company in August 1998. In addition, the majority
of the Company's sales personnel have recently joined the Company, and there
can be no assurance that they will be successful in increasing the Company's
level of sales. The Company does not currently have "key person" life
insurance policies on any of its employees. The loss of the services of any of
its executive officers or other key employees could have a material adverse
effect on the business, results of operations and financial condition of the
Company. Competition for senior management, experienced media sales and
marketing personnel, qualified Web engineers and other employees is intense,
and there can be no assurance that the Company will be successful in
attracting and retaining such personnel. The failure of the Company to
successfully manage its personnel requirements would have a material adverse
effect on the Company's business, results of operations and financial
condition.
DEPENDENCE ON WEB INFRASTRUCTURE
The success of the Xoom.com site will depend in large part upon the
continued development of a Web infrastructure, such as a reliable network
backbone with the necessary speed, data capacity and security, and timely
development of complementary products such as high speed modems for providing
reliable Web access and services. Because global commerce and online exchange
of information on the Web and other similar open wide area networks are new
and evolving, it is difficult to predict with any assurance whether the Web
will support increasing use or will prove to be a viable commercial
marketplace. The Web has experienced, and is expected to continue to
experience, significant growth in the number of users and the amount of
content. To the extent that the Web continues to experience increased numbers
of users, frequency of use or increased bandwidth requirements of users, there
can be no assurance that the Web infrastructure will continue to be able to
support the demands placed on it by this continued growth or that the
performance or reliability of the Web will not be adversely affected by this
continued growth. In addition, the Web could lose its viability or
effectiveness due to delays and the development or adoption of new standards
and protocols to handle increased levels of activities or due to increased
government regulation. There can be no assurance that the infrastructure or
complementary products or services necessary to make the Web a viable
commercial marketplace will be developed, or, if they are developed, that the
Web will achieve broad acceptance. If the necessary infrastructure standards,
protocols or complementary products, services or facilities are not developed,
the Company's business, results of operations and financial condition will be
materially and adversely affected. Even if such infrastructure, standards or
protocols or complementary products, services or facilities are developed and
the Web becomes a viable commercial marketplace, there can be no assurance
that the Company will not be required to incur substantial expenditures in
order to adapt its services to changing Web technologies, which could have a
material adverse effect on the Company's business, results of operations and
financial condition.
RISKS ASSOCIATED WITH BRAND DEVELOPMENT
The Company believes that establishing and maintaining the Xoom.com brand is
critical to attracting and expanding its member base and Web traffic and
advertising and commerce relationships. The Company believes that the
importance of brand recognition will increase due to the growing number of
Internet sites and the low barriers to entry. In order to attract and retain
members, Internet users, advertisers and commerce partners, and
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to promote and maintain the Xoom.com brand in response to competitive
pressures, the Company intends to increase substantially its financial
commitment to creating and maintaining distinct brand loyalty among these
groups, including Web advertising and marketing and traditional media
advertising campaigns in print, radio, billboards and television. Promotion
and enhancement of the Xoom.com brand will also depend, in part, on the
Company's success in providing a high-quality community experience, which
success cannot be ensured. The Company has recently changed its name from
"XOOM, Inc." to "XOOM.com, Inc." There can be no assurance that such name
change will not result in confusion to current or potential customers or will
not disrupt the Company's business, either of which could have a material
adverse effect on the Company's business, results of operations and financial
condition. In addition, the Company may need to expend additional resources to
build the Xoom.com brand. If the Company does not generate a corresponding
increase in net revenue as a result of its branding efforts or otherwise fails
to promote its brand successfully, or if the Company incurs excessive expenses
in an attempt to promote and maintain its brand, the Company's business,
results of operations and financial condition, will be materially and
adversely affected. If members, visitors to the Xoom.com site, advertisers or
businesses do not perceive the Company's existing services to be of high
quality or are not aware of the Company's name change, or if the Company
alters or modifies its brand image, introduces new services or enters into new
business ventures that are not favorably received by such parties, the value
of the Company's brand could be diluted, thereby decreasing the attractiveness
of its Web site to such parties. See "--Risks Of Infringement Of Intellectual
Property."
RAPID TECHNOLOGICAL CHANGE
To remain competitive, the Company must continue to enhance and improve the
responsiveness, functionality and features of its site and develop new
features to meet customer needs. Introducing new technology into the Company's
systems involves numerous technical challenges and substantial amounts of
personnel resources, and often times takes many months to complete. There can
be no assurance that the Company will be successful at integrating such
technology into its Web site on a timely basis or without degrading the
responsiveness and speed of its Web site or that, once integrated, such
technology will function as expected. In addition, the Internet is
characterized by rapid technological change, changes in user and customer
requirements and preferences, frequent new product and service introductions
and the emergence of new industry standards and practices that could render
the Company's existing Web site, technology and systems obsolete. The
Company's success will depend, in part, on its ability to license leading
technologies useful in its business, enhance its existing services, develop
new services and technology that address the needs of its customers, and
respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis. If the Company is unable to
use new technologies effectively or adapt its Web site, proprietary technology
and transaction-processing systems to customer requirements or emerging
industry standards, it would be materially adversely affected.
SECURITY RISKS
The Company has experienced attempts by experienced programmers or "hackers"
to penetrate the Company's network security, some of which have succeeded, and
expects these attempts to continue to occur from time to time. If successful,
such actions could have a material adverse effect on the Company's business,
results of operations and financial condition. A party who is able to
penetrate the Company's network security could misappropriate proprietary
information or cause interruptions in the Company's Web site. The Company may
be required to expend significant capital and resources to protect against the
threat of such security breaches or to alleviate problems caused by such
breaches. Concerns over the security of Internet transactions and the privacy
of users may also inhibit the growth of the Internet generally, particularly
as a means of conducting commercial transactions. Security breaches or the
inadvertent transmission of computer viruses could expose the Company to a
risk of loss or litigation and possible liability. There can be no assurance
that contractual provisions attempting to limit the Company's liability in
such areas will be successful or enforceable, or that other parties will
accept such contractual provisions as part of the Company's agreements which
could have a material adverse effect on the Company's business, results of
operations and financial condition.
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The Company relies on encryption and authentication technology licensed from
third parties to provide the security and authentication necessary to effect
secure transmission of confidential information, such as customer credit card
numbers. Advances in computer capabilities, discoveries in the field of
cryptography and other discoveries, events or developments could lead to a
compromise or breach of the algorithms that the Company's licensed encryption
and authentication technology uses to protect such confidential information.
If such a compromise or breach of the Company's licensed encryption and
authentication technology occurs, it could have a material adverse effect on
the Company's business, results of operations and financial condition. The
Company may be required to expend significant capital and resources and engage
the services of third parties to protect against the threat of such security,
encryption and authentication technology breaches or to alleviate problems
caused by such breaches. Concerns over the reliability of encryption and
authentication technology may also inhibit the growth of the Internet
generally, particularly as a means of conducting commercial transactions.
PRIVACY CONCERNS
The Federal Trade Commission (the "FTC") is considering regulation regarding
the collection and use of personal identifying information obtained from
individuals, including children, when accessing Web sites, such as the
Company's. Such regulation may include a requirement that companies establish
certain procedures to, among other things: (i) give adequate notice to
consumers regarding information collection and disclosure practices, (ii)
provide consumers with the ability to have personal identifying information
deleted from a company's database, (iii) clearly identify affiliations or a
lack thereof with third parties which may collect information or sponsor
activities on a company's Web site, and (iv) obtain express parental consent
prior to collecting and using personal identifying information obtained from
children under 13 years of age. While the Company has implemented or intends
to implement programs designed to enhance the protection of the privacy of its
members, including children, there can be no assurance that such programs will
conform with any regulation adopted by the FTC. Moreover, even in the absence
of such regulation, the FTC has begun investigations into the privacy
practices of companies that collect information on the Internet. One such
investigation has resulted in a consent decree pursuant to which the Internet
company has agreed to establish programs to implement the four principles
noted above. There can be no assurance that the Company will not become
subject to such an investigation, or that the FTC's regulatory and enforcement
efforts will not adversely affect the ability to collect demographic and
personal information from members, which could have an adverse effect on its
ability to target product offerings and attract advertisers. Any such
developments would have a material adverse effect on the Company's business,
results of operations and financial condition.
In addition, at the international level, the European Union (the "EU") has
adopted a directive (the "Directive") that will impose restrictions on the
collection and use of personal data, effective October 1998. Under the
Directive, EU citizens are guaranteed certain rights, including the right of
access to their data, the right to know where the data originated, the right
to have inaccurate data rectified, the right of recourse in the event of
unlawful processing, and the right to withhold permission to use their data
for direct marketing. The Directive could, among other things, affect U.S.
companies that collect information over the Internet from individuals in EU
member countries, and may impose restrictions that are more stringent than
current Internet privacy standards in the United States. In particular, EU
countries will not be allowed to send personal information to countries that
do not maintain adequate standards of privacy. The Directive does not,
however, define what standards of privacy are adequate. As a result, there can
be no assurance that the Directive will not adversely affect the activities of
entities such as the Company that engage in data collection from users in EU
member countries.
RELIANCE ON ADVERTISING REVENUE
The Company has derived a material portion of its net revenue to date from
the sale of advertisements, including banner advertising revenue. For 1997 and
the nine months ended September 30, 1998, advertising revenue represented 7%
and 20%, respectively, of the Company's total net revenue. During the nine
months ended September 30, 1998, the Company's five largest advertising
customers accounted for approximately 28% of advertising revenue
(approximately 5% of total net revenue). The Company's strategy is to continue
to
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emphasize advertising as a method of generating net revenue. The Company's
ability to generate significant net revenue from advertising will depend on,
among other things, the adoption of the Web as an advertising medium, the
development of a large base of users of the Company's services, the
formulation of effective direct marketing campaigns, the responsiveness of
members to such campaigns, the acquisition of members possessing demographic
characteristics attractive to advertisers and the ability of the Company to
develop or acquire effective marketing and advertising delivery and
measurement systems.
There can be no assurance that current advertisers will continue to purchase
advertising space and services from the Company at current levels or at all,
or that the Company will be able to successfully attract additional
advertisers. Furthermore, with the rapid growth of available advertising space
on the Internet and the intense competition among sellers of such space, it is
difficult to project pricing models that will be adopted by the industry or
individual companies. The Company's ability to generate significant
advertising revenue will depend, in part, on the ability of the Company to
leverage additional platforms within its community for new advertising
programs without diluting the perceived value of its existing programs.
UNCERTAIN ADOPTION OF THE WEB AS AN ADVERTISING MEDIUM
The Internet as a marketing and advertising medium has not been available
for a sufficient period of time to gauge its effectiveness as compared with
traditional media. Many of the Company's suppliers and advertisers have only
limited experience with the Web as a sales and advertising medium, and
advertisers have not yet devoted a significant portion of their advertising
budgets to Web-based advertising and may not find such advertising to be
effective for promoting their products and services relative to traditional
print and broadcast media. For 1997, advertising on the Web represented less
than 0.5% of overall advertising revenue in the United States, according to
industry sources.
The adoption of Web-based advertising, particularly by those entities that
have historically relied upon traditional media for advertising, requires the
acceptance of a new way of conducting business and exchanging information.
Entities that already have invested substantial resources in other methods of
conducting business may be reluctant to adopt a new strategy that may limit or
compete with their existing efforts. There can be no assurance that the market
for Web advertising will continue to emerge or become sustainable. If the
market develops more slowly than expected, the Company's business, results of
operations and financial condition could be materially and adversely affected.
No standards have been widely accepted for the measurement of the
effectiveness of Web-based advertising, and there can be no assurance that
such standards will develop sufficiently to support the Web as an effective
advertising medium. There can be no assurance that advertisers will accept the
Company's or other third-party measurements of impressions, which could have a
material adverse effect on the Company's business, results of operations and
financial condition. In addition, there is intense competition in the sale of
advertising on the Web resulting in a wide variety of pricing models, rate
quotes and advertising services, making it difficult to project future levels
of advertising revenue and rates. It is also difficult to predict which
pricing models, if any, will achieve broad acceptance among advertisers. The
Company has traditionally based its advertising rates on providing advertisers
with a guaranteed number of impressions, and any failure of the Company's
advertising model to achieve broad market acceptance would have a material
adverse effect on the Company's business, results of operations and financial
condition.
It is possible that in the future certain Internet access providers will act
to block or limit the use of e-mail direct marketing solicitations, whether at
their own behest or at the request of users. Members may also choose not to
receive e-mail offerings from the Company or may fail to respond to such
offerings. Either of these developments would have a material adverse effect
on the Company's ability to generate electronic commerce revenue. Moreover,
"filter" software programs that limit or remove advertising from a Web user's
desktop are available; and widespread adoption or increased use of such
software by users could have a material adverse effect upon the viability of
advertising on the Web and on the Company's business, results of operations
and financial condition. There can be no assurance that the Company will be
successful in generating significant future direct marketing or advertising
revenue or other sources of net revenue, and any failure to do so would have a
material adverse effect on the Company's business, results of operations and
financial condition.
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INTENSE COMPETITION
The market for community-based direct selling channels on the Internet is
new and rapidly evolving, and competition for members, consumers, visitors and
advertisers is intense and is expected to increase significantly in the
future. Barriers to entry are relatively insubstantial. The Company believes
that the principal competitive factors for companies seeking to create
communities on the Internet are critical mass, functionality, brand
recognition, member affinity and loyalty, broad demographic focus and open
access for visitors. Other companies who are primarily focused on creating
Web-based communities on the Internet and with whom the Company competes are
Tripod, Inc., a subsidiary of Lycos, Inc. ("Tripod"), GeoCities ("GeoCities"),
WhoWhere Inc. ("WhoWhere") (through the WhoWhere and Angelfire Web sites) and
theglobe.com, Inc. ("theglobe"). The Company could also face competition in
the future from Web directories, search engines, shareware archives, content
sites, commercial online service providers ("OSPs"), sites maintained by
Internet service providers ("ISPs"), traditional media companies and other
entities that attempt to or establish communities on the Internet by
developing their own community or acquiring one of the Company's competitors.
Further, there can be no assurance that the Company's competitors and
potential competitors will not develop communities that are equal or superior
to those of the Company or that achieve greater market acceptance than the
Company's communities. The Company also competes for visitors with many
Internet content providers and ISPs, including Web directories, search
engines, shareware archives, content sites, commercial online services and
sites maintained by ISPs, as well as thousands of Internet sites operated by
individuals and government and educational institutions. These competitors
include free information, search and content sites or services, such as
America Online, Inc. ("AOL"), CNET, Inc. ("CNET"), CNN/Time Warner, Inc.
("CNN/Time Warner"), Excite, Inc. ("Excite"), Infoseek Corporation
("Infoseek"), Lycos, Inc. ("Lycos"), Netscape Communications Corporation
("Netscape"), Microsoft Corporation ("Microsoft") and Yahoo! Inc. ("Yahoo!").
The Company also competes with many companies for advertisers, including those
companies with whom the Company competes for visitors as well as traditional
forms of media such as newspapers, magazines, radio and television. The
Company believes that the principal competitive factors in attracting
advertisers include the amount of traffic on its Web site, brand recognition,
customer service, the demographics of the Company's members and viewers, the
Company's ability to offer targeted audiences and the overall cost-
effectiveness of the advertising medium offered by the Company. The Company
believes that the number of Internet companies that obtain revenue from Web-
based advertising will increase substantially in the future. Accordingly, the
Company will likely face increased competition, resulting in increased pricing
pressures on its advertising rates which could in turn have a material adverse
effect on the Company's business, results of operations and financial
condition.
The Company also expects to encounter intense competition in the online
commerce market. The Company currently or potentially competes with a variety
of other companies. These competitors include various traditional computer
retailers including CompUSA, Inc. ("CompUSA") and Micro Electronics, Inc.'s
MicroCenter ("MicroCenter"), various mail-order retailers including CDW
Computer Centers, Inc. ("CDW"), Micro Warehouse, Inc. ("MicroWarehouse"),
Insight Enterprises, Inc. ("Insight"), PC Connection, Inc. ("PC Connection")
and Creative Computers, Inc. ("Creative Computers"), various Internet-focused
retailers including Amazon.com, Inc. ("Amazon.com"), Egghead, Inc.'s
Egghead.com ("Egghead.com"), software.net Corporation ("software.net"), and
New England Circuit Sales, Inc.'s NECX Direct ("NECX Direct"), various
manufacturers that sell directly over the Internet including Dell Computer
Corporation ("Dell"), Gateway 2000, Inc. ("Gateway"), Apple Computer, Inc.
("Apple") and many software companies, a number of online service providers
including AOL and the Microsoft Network that offer computer products directly
or in partnership with other retailers, some non-computer retailers such as
Wal-Mart Stores, Inc. ("Wal-Mart") that sell a limited selection of computer
products in their stores and computer products distributors which may develop
direct channels to the consumer market. Increased competition from these and
other sources could require the Company to respond to competitive pressures by
establishing pricing, marketing and other programs or seeking out additional
strategic alliances or acquisitions which may be less favorable to the Company
than would otherwise be established or obtained, and thus could have a
material adverse effect on the business, prospects, financial condition and
results of operations of the Company.
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Many of the Company's existing and potential competitors, including Web
directories and search engines and large traditional media companies, have
longer operating histories in the Web market, greater name recognition, larger
customer bases and significantly greater financial, technical and marketing
resources than the Company. Such competitors are able to undertake more
extensive marketing campaigns for their brands and services, adopt more
aggressive advertising pricing policies and make more attractive offers to
potential employees, distribution partners, commerce companies, advertisers
and third-party content providers. There can be no assurance that Internet
content providers and ISPs, including Web directories, search engines,
shareware archives, sites that offer professional editorial content,
commercial online services and sites maintained by ISPs will not be perceived
by advertisers as having more desirable Web sites for placement of
advertisements. In addition, substantially all of the Company's current
advertising customers and strategic partners also have established
collaborative relationships with certain of the Company's competitors or
potential competitors, and other high-traffic Web sites. Accordingly, there
can be no assurance that the Company will be able to grow its membership base,
traffic levels and advertiser customer base at historical levels or retain its
current members, traffic levels or advertiser customers, or that competitors
will not experience greater growth in traffic than the Company as a result of
such relationships which could have the effect of making their Web sites more
attractive to advertisers, or that the Company's strategic partners will not
sever or elect not to renew their agreements with the Company. There can also
be no assurance that the Company will be able to compete successfully against
its current or future competitors or that competition will not have a material
adverse effect on the Company's business, results of operations and financial
condition. See "Business--Competition."
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS AND EXPANSION
For the nine months ended September 30, 1998, approximately 29% of the
Company's total net revenue was derived from sales outside the United States.
A part of the Company's strategy is to continue to grow the Xoom.com community
model in international markets. There can be no assurance that acceptance of
the Internet or the Company's community model will continue to expand
significantly in any international markets. If net revenue from international
operations is not adequate to cover the investments in such activities, the
Company's business, results of operations and financial condition could be
materially and adversely affected. The Company may experience difficulty in
managing international operations as a result of difficulty in locating an
effective foreign partner, competition, technical problems, distance and
language and cultural differences, and there can be no assurance that the
Company or its international partners will be able to successfully market and
operate the Company's community model in foreign markets. The Company also
believes that in light of substantial anticipated competition, it will be
necessary to move quickly into international markets in order to effectively
obtain market share, and there can be no assurance that the Company will be
able to do so. There are certain risks inherent in doing business on an
international level, such as unexpected changes in regulatory requirements,
trade barriers, difficulties in staffing and managing foreign operations,
fluctuations in currency exchange rates, longer payment cycles in general,
problems in collecting accounts receivable, difficulty in enforcing contracts,
political and economic instability, seasonal reductions in business activity
in certain other parts of the world and potentially adverse tax consequences.
There can be no assurance that one or more of such factors will not have a
material adverse effect on the Company's future international operations and,
consequently, on the Company's business, results of operations and financial
condition.
DEPENDENCE ON INTELLECTUAL PROPERTY RIGHTS
The Company regards its technology as proprietary and attempts to protect it
by relying on trademark, service mark, copyright and trade secret laws and
restrictions on disclosure and transferring title and other methods. The
Company currently has no patents or patents pending and does not anticipate
that patents will become a significant part of the Company's intellectual
property in the foreseeable future. The Company also generally enters into
confidentiality or license agreements with its employees and consultants, and
generally controls access to and distribution of its documentation and other
proprietary information. Despite these precautions, it may be possible for a
third party to copy or otherwise obtain and use the Company's proprietary
information without authorization or to develop similar technology
independently. The Company pursues the
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registration of its trademarks and service marks in the United States and
internationally, and has applied for registration in the United States and
certain other countries for a number of its trademarks and service marks,
including "XOOM," "XOOM.com" and the "X-in-circle" logo. Effective trademark,
service mark, copyright and trade secret protection may not be available in
every country in which the Company's services are distributed or made
available through the Internet, and policing unauthorized use of the Company's
proprietary information is difficult.
Legal standards relating to the validity, enforceability and scope of
protection of certain proprietary rights in Internet-related businesses are
uncertain and still evolving, and no assurance can be given as to the future
viability or value of any proprietary rights of the Company. There can be no
assurance that the steps taken by the Company have prevented or will prevent
misappropriation or infringement of its proprietary information. Any such
infringement or misappropriation, should it occur, might have a material
adverse effect on the Company's business, results of operations and financial
condition. In addition, litigation may be necessary in the future to enforce
the Company's intellectual property rights, to protect the Company's trade
secrets or to determine the validity and scope of the proprietary rights of
others. Such litigation might result in substantial costs and diversion of
resources and management attention and could have a material adverse effect on
the Company's business, results of operations and financial condition.
The Company currently licenses from third parties certain technologies
incorporated into the Company's Web site. As it continues to introduce new
services that incorporate new technologies, it may be required to license
additional technology from others. There can be no assurance that these third-
party technology licenses will continue to be available to the Company on
commercially reasonable terms, if at all. The inability of the Company to
obtain any of these technology licenses could result in delays or reductions
in the introduction of new services or could adversely affect the performance
of its existing services until equivalent technology is identified, licensed
and integrated.
The Company has licensed in the past, and expects that it may license in the
future, certain of its proprietary rights, such as trademarks or copyrighted
material, to third parties. While the Company attempts to ensure that the
quality of its brand is maintained by such licensees, there can be no
assurance that such licensees will not take actions that might materially
adversely affect the value of the Company's proprietary rights or reputation,
which could have a material adverse effect on the Company's business,
prospects, financial condition and results of operations. There can be no
assurance that the steps taken by the Company to protect its proprietary
rights will be adequate, or that third parties will not infringe or
misappropriate the Company's copyrights, trademarks and similar proprietary
rights.
RISKS OF INFRINGEMENT OF INTELLECTUAL PROPERTY
There can be no assurance that the Company's business activities will not or
have not infringed upon the proprietary rights of others, or that other
parties will not assert infringement claims against the Company. From time to
time, the Company has been, and expects to continue to be, subject to claims
in the ordinary course of its business including claims of alleged
infringement of the trademarks, service marks and other intellectual property
rights of third parties by the Company and the content generated by its
members. Such claims and any resultant litigation, should it occur, might
subject the Company to significant liability for damages and might result in
invalidation of the Company's proprietary rights and even if not meritorious,
could be time consuming and expensive to defend and could result in the
diversion of management time and attention, any of which might have a material
adverse effect on the Company's business, results of operations and financial
condition. In September 1998, Zoom Telephonics, Inc. ("Zoom") contacted the
Company, asserting, among other things, that the "XOOM" trademark was
confusingly similar to Zoom's own "ZOOM" registered trademark, and requesting
that the Company cease using the "XOOM" trademark and the "xoom.com" domain
name, and change its name. The Company has responded to Zoom's correspondence
by denying any confusion between trademarks, and is in preliminary discussions
with Zoom to resolve the points Zoom raised in such correspondence. Although
the Company believes that Zoom's claims are without merit, it is possible that
the
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two companies will not resolve such points. A failure to do so could result in
litigation, which could have a material adverse effect on the Company's
business, results of operations and financial condition, particularly if such
litigation forces the Company to make substantial changes to its name and
trademark usage. Any name change effected after the Offering could result in
confusion to investors, which could adversely affect the market price of the
Common Stock. In addition, in January 1998, Xoom.com became aware that
Imageline, Inc. ("Imageline"), a Virginia corporation, claimed to own the
copyright in certain images that an unrelated third party had licensed to
Xoom.com. See "--Legal Proceedings" and "Business--Legal Proceedings."
LIABILITY FOR ONLINE CONTENT
The Company believes that its success to date and its future success will
depend in part upon its ability to provide reviews and other information about
the products that it sells, along with other materials of interest to members.
Because materials may be downloaded by members and other users of the
Company's Web site and subsequently distributed to others, there is a
potential that claims will be made against the Company for defamation,
negligence, copyright or trademark infringement, personal injury or other
theories based on the nature, content, publication and distribution of such
materials. Such claims have been brought, sometimes successfully, against OSPs
in the past. The Company has received inquiries on a regular basis from third
parties regarding such matters, including the claim made by Imageline. See "--
Dependence On Intellectual Property Rights," "--Risks Of Infringement Of
Intellectual Property" and "--Legal Proceedings." In addition, the increased
attention focused upon liability issues as a result of these lawsuits and
legislative proposals could impact the overall growth of Internet use. The
Company could also be exposed to liability with respect to the offering of
third party content that may be accessible through the Company's Web site, or
through content and materials that may be posted by members on their personal
Web sites or chat rooms, or bulletin boards offered by the Company. Such
claims might include, among others, that by directly or indirectly providing
hyperlink text links to Web sites operated by third parties, the Company is
liable for copyright or trademark infringement or other wrongful actions by
such third parties through such Web sites. It is also possible that if any
third-party content information provided on the Company's Web site contains
errors, third parties could make claims against the Company for losses
incurred in reliance on such information. The Company also offers e-mail
services, which exposes the Company to potential risk, such as liabilities or
claims resulting from unsolicited e-mail (spamming), lost or misdirected
messages, illegal or fraudulent use of e-mail or interruptions or delays in e-
mail service. Even to the extent such claims do not result in liability to the
Company, the Company could incur significant costs in investigating and
defending against such claims. The imposition on the Company of potential
liability for information carried on or disseminated through its systems could
require the Company to implement measures to reduce its exposure to such
liability, which may require the expenditure of substantial resources and
limit the attractiveness of the Company's services to members and users.
Although the Company carries general liability insurance in an aggregate
amount of $2.0 million, plus umbrella coverage in an aggregate amount of $5.0
million, the Company's insurance may not cover all potential claims to which
it is exposed or may not be adequate to indemnify the Company for all costs of
defending claims or all liability that may be imposed. Any costs or imposition
of liability not covered by insurance or in excess of insurance coverage could
have a material adverse effect on the Company's business, results of
operations and financial condition. In addition, the increased attention
focused upon liability issues as a result of these lawsuits could impact the
overall growth of Internet use. See "Business--Intellectual Property and
Proprietary Rights."
LEGAL PROCEEDINGS
Xoom.com acquires rights to license and distribute software clips, including
clip art, and movies from third parties. In June 1997, Sprint Software Pty Ltd
("Sprint"), an Australian company, licensed to Xoom.com certain clip art. From
inception to September 30, 1998, the Company received less than 1.0% of its
total net revenue under the Sprint license and, since September 30, 1998, the
Company has not received any net revenue from any of the clip art under the
Sprint license. In January 1998, Xoom.com became aware that Imageline claimed
to own the copyright in certain images that Sprint had licensed to Xoom.com.
Some clip art images that Imageline
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alleged infringed Imageline's copyright were included by Xoom.com in versions
of Xoom.com's Web Clip Empire product and licensed by Xoom.com to third
parties, including other software clip publishers. Xoom.com's contracts with
such publishers require the Company to indemnify the publisher if copyrighted
material licensed from the Company infringes a copyright. Imageline claims
that the Company's infringement of Imageline's copyrights is ongoing. Xoom.com
and Imageline have engaged in discussions, but were unable to reach any
agreement regarding a resolution of this matter. On August 27, 1998 Xoom.com
filed a lawsuit in the United States District Court for the Eastern District
of Virginia against Imageline, certain parties affiliated with Imageline, and
Sprint regarding Xoom.com's and its licensees' alleged infringement on
Imageline's copyright in certain clip art that Xoom.com licensed from Sprint.
The lawsuit seeks, among other relief, disclosure of information from
Imageline concerning the alleged copyright infringement, a declaratory
judgement concerning the validity and enforceability of Imageline's copyrights
and copyright registrations, a declaratory judgement regarding damages, if
any, owed by the Company to Imageline, and indemnification from Sprint for
damages, if any, owed by Xoom.com to Imageline. On September 17, 1998,
Imageline filed an answer and counterclaim, denying the Company's allegations
and requesting injunctive relief and damages for the Company's alleged
infringements of Imageline's clip art properties. While the Company is seeking
indemnification from Sprint for damages, there can be no assurance that Sprint
will be able to fulfill the indemnity obligations under its license agreement
with the Company. There can be no assurance as to the outcome of the claims
asserted by Imageline and the related litigation. In addition, the Company may
be subject to claims by third parties seeking indemnification from the Company
in connection with the alleged infringement of the Imageline copyrights. Any
such claims or litigation could result in a decision adverse to the Company. A
decision adverse to the Company in any of these matters could have a material
adverse effect on the Company's business, results of operations and financial
condition. In addition, litigation, regardless of its merits, could result in
substantial costs to the Company and divert management's attention from the
Company's operations. In light of the Imageline claim and the resulting
litigation, the Company is evaluating its policies and procedures regarding
its licensing and distribution of software clips. There can be no assurance
that third parties will not assert infringement claims against the Company.
Any misappropriation or infringement could result in litigation which could
have a material adverse effect on the Company's business, results of
operations and financial condition. See "--Dependence On Intellectual Property
Rights," "--Risks Of Infringement Of Intellectual Property" and Note 6 of
Notes to Consolidated Financial Statements.
RISKS ASSOCIATED WITH ACQUISITIONS
Since March 1998, the Company has acquired three businesses: Paralogic
Corporation ("Paralogic"), Global Bridges Technologies, Inc. ("Global
Bridges") and Pagecount, Inc. ("Pagecount"). The Company has also entered into
an exclusive perpetual license with ArcaMax, Inc. ("ArcaMax") for Greetings
Online, a free online greeting card service and purchased certain assets of
Revolutionary Software, Inc. ("Revolutionary Software"). The Company's future
performance will in part depend on its ability to integrate these acquisitions
and leverage them into additional traffic, members or sources of revenue.
Acquisitions involve numerous risks and uncertainties, including adverse
effects on the Company's reported results of operations from acquisition-
related charges and amortization of goodwill and purchased technology, the
inability of the Company to maintain customers or goodwill of an acquired
business, difficulties in the integration of operations, personnel,
technologies, products and the information systems of the acquired companies,
diversion of management's attention from other business concerns, risks of
entering geographic and business markets in which the Company has no or
limited prior experience and potential loss of key employees of acquired
organizations. The Company is currently facing all of these challenges with
respect to its acquisitions and its ability to meet them over the long term
has not been established. As a result, there can be no assurance that the
Company will be able to integrate the acquired businesses or otherwise
successfully leverage the acquisitions into additional traffic, members or
sources of revenue. Such failure would have a material adverse effect on the
Company's business, results of operations and financial condition.
The Company's past business and technology acquisitions have been accounted
for using the purchase method of accounting. Because most Internet business
acquisitions involve the purchase of significant amounts
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of intangible assets, acquisitions of such businesses also result in goodwill
and purchased technology and significant charges for purchased in-process
research and development. For example, as a result of the acquisitions of
Paralogic and Pagecount, as well as the purchase of certain assets of
Revolutionary Software, as of September 30, 1998, the Company had incurred
charges relating to purchased in-process research and development of $790,000
for 1998 and has recorded an aggregate of $4.8 million in goodwill and
purchased technology. In addition, certain of the Company's acquisition
agreements contain provisions that allow for the issuance of additional shares
of Common Stock or cash. In connection with the acquisition of Global Bridges,
upon the completion of the Offering, the Company is required to issue Common
Stock at the Offering price with an aggregate value of $200,000, together with
$130,000 in cash. In connection with the Company's purchase of certain assets
of Revolutionary Software, upon the completion of the Offering, the Company is
required to issue Common Stock at the Offering price with an aggregate value
of $400,000, together with an additional cash consideration of $260,000. As
part of the license agreement entered into with ArcaMax, a payment for the
remaining note payable balance of approximately $135,000 will be payable
within ten days of the completion of the Offering. See "Use of Proceeds."
Generally, amounts allocable to goodwill and other intangible assets are
amortized over a two to three and one-half year period. As of September 30,
1998, net intangibles were approximately 50% of the Company's total assets. If
the Company were to incur additional charges for purchased in-process research
and development and amortization of goodwill and other intangible assets with
respect to future acquisitions, the Company's business, results of operations
and financial condition would be materially adversely affected.
As part of its business strategy, the Company may make acquisitions of
complementary businesses, products or technologies. The successful
implementation of this strategy depends on the Company's ability to identify
suitable acquisition candidates, acquire such companies on acceptable terms,
integrate their operations or technologies successfully, and retain customers
and maintain the goodwill of the acquired business. There can be no assurance
that the Company will be able to identify additional suitable acquisition
candidates, acquire any such candidates on acceptable terms, integrate their
operations or technologies successfully, or retain customers or maintain the
goodwill of the acquired business, particularly in light of the Company's own
limited operating experience. Moreover, the Company may compete for
acquisition targets with other companies with similar growth strategies. Some
of these competitors may be larger and have greater financial and other
resources than the Company. Competition for these acquisition targets likely
could also result in increased prices of acquisition targets and a diminished
pool of companies available for acquisition. If the Company chooses to use a
material amount of cash for acquisition consideration, the Company may be
required to obtain additional financing, and there can be no assurance that
such financing will be available on favorable terms, if at all. In addition,
if the Company issues equity securities as consideration for any future
acquisitions, stockholders will experience further ownership dilution and such
equity securities could have preferences, privileges or other rights superior
to those of the Common Stock. In addition, the Company would likely face the
same integration issues described above with respect to the Paralogic, Global
Bridges and Pagecount. Due to all of the foregoing, the Company's execution of
an acquisition strategy or any individual completed or future acquisition may
have a material adverse effect on the Company's business, results of
operations and financial condition.
RELIANCE ON STRATEGIC RELATIONSHIPS
Although the Company views its strategic relationships as a key factor in
its overall business strategy, there can be no assurance that its strategic
partners will view their relationships with the Company as significant to
their own business or that they will not reassess their commitment to the
Company in the future. There can be no assurance that any party to a strategic
alliance agreement with the Company will perform its obligations as agreed or
that any strategic agreement would be specifically enforceable by the Company.
The Company's arrangements with its strategic partners generally do not
establish minimum performance requirements for the Company's strategic
partners but instead rely on their voluntary efforts. In addition, most of the
Company's agreements with its strategic partners may be terminated by either
party with little notice. Therefore, there can be no assurance that these
relationships will be successful. In the event that a strategic relationship
is discontinued for any reason, the Company's business, results of operations
and financial condition may be materially adversely affected.
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YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any programs that
have time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a major system failure or
miscalculations. The Company is currently engaged in a two-phase process to
evaluate its internal status with respect to the Year 2000 issue. In the first
phase, which the Company expects to complete in the first quarter of 1999, the
Company is conducting an evaluation of its systems, including both information
technology ("IT") systems and non-IT systems such as hardware containing
embedded technology, for Year 2000 compliance. The Company has completed a
significant portion of this phase to date, and systems that have been
evaluated are either Year 2000 compliant or are expected to be made compliant
at an immaterial cost to the Company. Although the Company does not expect
that the impact of the Year 2000 issue will be material in systems still under
evaluation, there can be no assurance that the Company will not discover Year
2000 issues in the course of its evaluation process that would have a material
adverse effect on the business, results of operations or financial condition
of the Company.
Phase two of the process, which is expected to be completed during the
second quarter of 1999, will involve taking any needed corrective action to
bring systems into compliance and to develop a contingency plan in the event
any non-compliant critical systems remain by January 1, 2000. As part of this
phase, the Company will attempt to quantify the impact, if any, of the failure
to complete any necessary corrective action. Although the Company cannot
currently estimate the magnitude of such impact, if systems material to the
Company's operations have not been made Year 2000 compliant upon completion of
this phase, the Year 2000 issue could have a material adverse effect on the
Company's business, results of operations and financial condition.
To date, the costs incurred by the Company with respect to this process have
not been material. Future costs will remain difficult to estimate until the
completion of phase one; however, the Company does not currently anticipate
that such costs will be material.
Concurrently with the two-phase analysis of its internal systems, the
Company will survey third-party entities with which the Company transacts
business, including critical vendors and financial institutions, for Year 2000
compliance. The Company expects to commence this survey in the fourth quarter
of 1998 and complete this survey in the second quarter of 1999. At this time
the Company cannot estimate the effect, if any, that non-compliant systems at
these entities could have on the business, results of operations or financial
condition of the Company, and there can be no assurance that the impact, if
any, would not be material. See "Management's Discussion And Analysis Of
Financial Condition And Results Of Operations--Year 2000 Compliance."
GOVERNMENT REGULATION
The Company is not currently subject to direct regulation by any government
agency, other than regulations applicable to businesses generally, and there
are currently few laws or regulations directly applicable to access to or
commerce on the Internet. However, due to the increasing popularity and use of
the Internet, a number of legislative and regulatory proposals are under
consideration by federal, state, local and foreign governmental organizations,
and it is possible that a number of laws or regulations may be adopted with
respect to the Internet relating to such issues as user privacy, taxation,
infringement, pricing, quality of products and services and intellectual
property ownership. The adoption of any such laws or regulations may decrease
the growth in the use of the Internet, which could in turn decrease the demand
for the Company's community, increase the Company's cost of doing business, or
otherwise have a material adverse effect on the Company's business, results of
operations and financial condition. Moreover, the applicability to the
Internet of existing laws governing issues such as property ownership,
copyright, trademark, trade secret, obscenity, libel and personal privacy is
uncertain and developing. Any new legislation or regulation, or application or
interpretation of existing laws, could have a material adverse effect on the
Company's business, results of operations and financial condition. Legislation
like the recently enacted Communications Decency Act could hamper the growth
in use of the Web generally and decrease the acceptance of the Web as a
communications and commercial medium, and could, thereby, have a material
adverse effect on the Company's business, results of operations and financial
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condition. In addition, a number of proposals have been made at the federal,
state and local level that would impose additional taxes on the sale of goods
and services over the Internet and certain states have taken measures to tax
Internet-related activities. Currently, Congress is considering various
legislative proposals the enactment of which would place a moratorium of a
number of years on any new taxation of Internet commerce. There can be no
assurance that any such legislation will be adopted by Congress or that new
taxes will not be imposed upon Internet commerce after any moratorium adopted
by Congress expires or that current attempts at taxing or regulating commerce
over the Internet would not substantially impair the growth of commerce and as
a result adversely affect the Company's opportunity to derive financial
benefit from such activities. Even if a moratorium is in place with respect to
the United States, there can be no assurance that foreign countries will not
also seek to tax Internet transactions. Particularly because a substantial
portion of the Company's net revenues is derived from international sales, any
such taxes would have a material adverse effect on the Company's business,
results of operations and financial condition.
Several telecommunications carriers are seeking to have telecommunications
over the Web regulated by the Federal Communications Commission (the "FCC") in
the same manner as other telecommunications services. In addition, because the
growing popularity and use of the Web has burdened the existing
telecommunications infrastructure and many areas with high Web use have begun
to experience interruptions in phone service, local telephone carriers, such
as Pacific Bell, have petitioned the FCC to regulate ISPs and OSPs in a manner
similar to long distance telephone carriers and to impose access fees on the
ISPs and OSPs. If either of these petitions is granted, or the relief sought
therein is otherwise granted, the costs of communicating on the Web could
increase substantially, potentially slowing the growth in use of the Web,
which could in turn decrease demand for the Company's community or increase
the Company's cost of doing business.
LEGAL UNCERTAINTIES
Due to the global nature of the Web, it is also possible that, although
transmissions by the Company over the Internet originate primarily in the
State of California, the governments of other states and foreign countries
might attempt to regulate the Company's transmissions or prosecute the Company
for violations of their laws. There can be no assurance that violations of
local laws will not be alleged or charged by state or foreign governments,
that the Company might not unintentionally violate such laws or that such laws
will not be modified, or new laws enacted, in the future. Any of the foregoing
developments could have a material adverse effect on the Company's business,
results of operations and financial condition. In addition, as the Company's
products and services are available over the Internet in multiple states and
foreign countries, such jurisdictions may claim that the Company is required
to qualify to do business as a foreign corporation in each such state or
foreign country. The Company is qualified to do business only in California
and New York, and failure by the Company to qualify as a foreign corporation
in a jurisdiction where it is required to do so could subject the Company to
taxes and penalties and could result in the inability of the Company to
enforce contracts in such jurisdictions. Any such new legislation or
regulation, the application of laws and regulations from jurisdictions whose
laws do not currently apply to the Company's business, or the application of
existing laws and regulations to the Internet and other online services could
have a material adverse effect on the Company's business, results of
operations and financial condition.
NO PRIOR PUBLIC MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common Stock.
There can be no assurance that an active trading market for the Common Stock
will develop or be sustained following the closing of the Offering or that the
market price of the Common Stock will not decline below the initial public
offering price. The initial public offering price, which may bear no
relationship to the price at which the Common Stock will trade upon completion
of the Offering, will be determined by negotiations between the Company and
the representatives of the Underwriters based upon factors that may not be
indicative of future market performance. See "Underwriting" for a discussion
of the factors to be considered in determining the initial public
offering price.
24
<PAGE>
The trading price of the Company's Common Stock could be subject to wide
fluctuations in response to variations in the Company's quarterly results of
operations, the gain or loss of significant advertisers, changes in earnings
estimates by analysts, announcements of technological innovations or new
solutions by the Company or its competitors, general conditions in the
technology and Internet sectors and in Internet-related industries, other
matters discussed elsewhere in this section of the Prospectus and other events
or factors, many of which are beyond the Company's control. In addition, the
stock market in general and the technology and Internet sectors in particular
have experienced extreme price and volume fluctuations which have affected the
market price for many companies in industries similar or related to that of
the Company and which have been unrelated to the operating performance of
these companies. These market fluctuations, as well as general economic,
political and market conditions, may have a material adverse effect on the
market price of the Company's Common Stock. In the past, following periods of
volatility in the market price of a company's securities, securities class
action litigation has often been instituted against such companies. Such
litigation, if instituted, and irrespective of the outcome of such litigation,
could result in substantial costs and a diversion of management's attention
and resources and have a material adverse effect on the Company's business,
results of operations and financial condition.
CONTROL BY DIRECTORS, EXECUTIVE OFFICERS, AND PRINCIPAL STOCKHOLDERS
Upon completion of the Offering, the directors, executive officers and
principal stockholders of the Company and their respective affiliates will, in
the aggregate, beneficially own approximately 46.1% of the outstanding Common
Stock (44.5% if the Underwriters' over-allotment option is exercised in full).
As a result, these stockholders will possess significant influence over the
Company, giving them the ability, among other things, to elect a majority of
the Company's Board of Directors and approve significant corporate
transactions. Such share ownership and control may also have the effect of
delaying or preventing a change in control of the Company, impeding a merger,
consolidation, takeover or other business combination involving the Company or
discourage a potential acquirer from making a tender offer or otherwise
attempting to obtain control of the Company which could have a material
adverse effect on the market price of the Company's Common Stock.
INTRODUCTION OF EURO
Beginning in January 1999, a new currency called the "euro" is scheduled to
be introduced in certain European countries that are part of the Economic and
Monetary Union ("EMU"). During 2002, all EMU countries are expected to be
operating with the euro as their single currency. A significant amount of
uncertainty exists as to the effect the euro will have on the marketplace.
Additionally, all of the final rules and regulations have not yet been defined
and finalized by the European Commission with regard to the euro currency. The
Company is assessing the effect the euro introduction will have on its
internal systems and the sale of its products. The Company expects to take
appropriate actions based on the results of such assessment. The Company has
not yet determined the costs of addressing this issue and there can be no
assurance that this issue and its related costs will not have a material
adverse effect on the Company's business, results of operations and financial
condition. See "Management's Discussion And Analysis Of Financial Condition
And Results Of Operations--Impact Of Euro Introduction."
ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER AND BYLAWS; POSSIBLE ISSUANCE OF
PREFERRED STOCK
Following the closing of the Offering, the Company's Board of Directors will
have the authority to issue up to 5,000,000 shares of Preferred Stock without
any further vote or action by the stockholders, and to determine the price,
rights, preferences, privileges and restrictions, including voting rights, of
such shares. The rights of the holders of Common Stock would be subject to,
and may be adversely affected by, the rights of the holders of any such
Preferred Stock. The issuance of Preferred Stock may have the effect of
delaying, deferring or preventing a change in control of the Company, may
discourage bids of the Company's Common Stock at a premium over the market
price of the Common Stock, and may adversely affect the market price of, and
the voting and other rights of, the Common Stock. The Company has no current
plans to issue shares of Preferred Stock. In addition, certain provisions of
the Company's Certificate of Incorporation and Bylaws will have the
25
<PAGE>
effect of delaying, deferring or preventing a change of control of the
Company. These provisions provide, among other things, that stockholders may
not take actions by written consent and that the ability of stockholders to
call special meetings will be restricted. In addition, the Company will be
subject to the anti-takeover provisions of Section 203 of the Delaware General
Corporation Law, which will prohibit the Company from engaging in a "business
combination" with an "interested stockholder" for a period of three years
after the transaction in which the person became an interested stockholder,
unless the business combination is approved in a prescribed manner. The
Company's indemnification agreements, Certificate of Incorporation and Bylaws
provide that the Company will indemnify officers and directors against losses
that they may incur in investigations and legal proceedings resulting from
their services to the Company, which may be broad enough to include services
in connection with takeover defense measures. Such provisions may have the
effect of preventing changes in the management of the Company. See
"Description Of Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of significant amounts of Common Stock in the public market after the
Offering or the perception that such sales will occur could materially and
adversely affect the market price of the Common Stock or the future ability of
the Company to raise capital through an offering of its equity securities. Of
the 12,098,024 shares of Common Stock to be outstanding upon the closing of
the Offering (assuming no exercise of the Underwriters' over-allotment
option), the 3,000,000 shares offered hereby will be eligible for immediate
sale in the public market without restriction, unless the shares are purchased
by "affiliates" of the Company within the meaning of Rule 144 promulgated
under the Securities Act. The remaining 9,098,024 shares of Common Stock held
by existing stockholders upon the closing of the Offering (based on the number
of shares of Common Stock outstanding as of September 30, 1998) will be
"restricted securities" as that term is defined in Rule 144 under the
Securities Act. Restricted securities may be sold in the public market only if
registered or if they qualify for an exemption from registration under Rules
144, 144(k) or 701 promulgated under the Securities Act. The Company's
directors, officers, stockholders and holders of options to purchase Common
Stock have agreed that they will not sell, directly or indirectly, any Common
Stock without the prior written consent of Bear, Stearns & Co. Inc. for a
period of 180 days from the date of this Prospectus. Bear, Stearns & Co. Inc.
may however, in its sole discretion and at any time without notice, release
all or any portion of the shares subject to lock-up agreements. Subject to the
provisions of Rules 144, 144(k) and 701, 9,098,024 shares will be eligible for
sale 180 days after the date of this Prospectus upon the expiration of the
lock-up agreements.
The Company intends to file, as of the date of this Prospectus, Form S-8
registration statements under the Securities Act to register all shares of
Common Stock issuable pursuant to outstanding options and all shares of Common
Stock reserved for issuance under the Company's 1998 Plan and Stock Purchase
Plan. Such registration statements are expected to become effective
immediately upon filing, and shares covered by those registration statements
will thereupon be eligible for sale in the public markets, subject to the
lock-up agreements described above and Rule 144 limitations applicable to
affiliates. As of September 30, 1998, there were outstanding options to
purchase up to 1,901,198 shares of Common Stock which will be eligible for
sale in the public market following the Offering from time to time subject to
becoming exercisable and the expiration of the lock-up agreements, and, giving
effect to the increase in the aggregate number of shares reserved for issuance
pursuant to the 1998 Plan from 1,166,667 to 2,000,000 approved as of November
16, 1998, an additional 1,626,135 shares of Common Stock were reserved for
issuance under the 1998 Plan and the Stock Purchase Plan. See "Shares Eligible
For Future Sale."
BROAD DISCRETION IN USE OF PROCEEDS
The Company intends to use a portion of the net proceeds of the Offering to
repay a note issued in connection with the Pagecount acquisition in the
principal amount of $1.2 million and to pay the remaining balance of
approximately $135,000 due under the license agreement with ArcaMax, which
payment is due and payable within ten days of the completion of the Offering.
In addition, in connection with the acquisition of Global Bridges and the
purchase of certain assets of Revolutionary Software, the Company is required
to pay a
26
<PAGE>
cash consideration of $130,000 and $260,000, respectively, upon completion of
the Offering. The remaining net proceeds of the Offering will be used for
general corporate purposes, including working capital, capital expenditures,
potential acquisitions and promotional campaigns. As of the date of this
Prospectus, the Company cannot specify with certainty the particular uses for
the majority of the net proceeds to be received upon completion of the
Offering. Accordingly, the Company's management will have broad discretion in
the application of the net proceeds. The failure of management to apply such
funds effectively could have a material adverse effect on the Company's
business, results of operations and financial condition. See "Use Of
Proceeds."
IMMEDIATE AND SUBSTANTIAL DILUTION
Investors purchasing shares of Common Stock in the Offering will incur
immediate and substantial dilution in net tangible book value per share of the
Common Stock from the initial public offering price in the amount of $7.92 per
share (based upon an assumed initial offering price of $10.00 per share). To
the extent outstanding options or warrants to purchase Common Stock are
exercised, there will be further dilution. See "Dilution."
ABSENCE OF DIVIDENDS
The Company has never declared or paid any cash dividends on its capital
stock to date and does not anticipate paying any cash dividends on its capital
stock in the foreseeable future. See "Dividend Policy."
27
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,000,000 shares of
Common Stock offered hereby are estimated to be approximately $26,000,000
(approximately $30,185,000 if the Underwriters' over-allotment option is
exercised in full) at an assumed initial public offering price of $10.00 per
share, and after deducting the estimated underwriting discount and offering
expenses. The primary purposes of the Offering are to obtain additional
capital, create a public market for the Company's Common Stock and facilitate
future access by the Company to public equity markets.
The Company intends to use a portion of the net proceeds to repay a note
payable issued in connection with the Pagecount acquisition in the principal
amount of $1.2 million, which bears interest at a rate of seven percent (7%)
per annum compounded monthly, and which is payable in full upon the Closing of
the Offering, and to pay the remaining balance of approximately $135,000 due
under the license agreement with ArcaMax, which payment is due and payable
within ten days of the completion of the Offering. In addition, in connection
with the acquisition of Global Bridges and the purchase of certain assets of
Revolutionary Software, the Company is required to pay a cash consideration of
$130,000 and $260,000, respectively, upon completion of the Offering. The
remainder of the net proceeds shall be used for general corporate purposes,
including working capital, capital expenditures, potential acquisitions and
promotional campaigns. The amounts actually expended by the Company for such
purposes may vary significantly and will depend on a number of factors,
including the amount of the Company's future revenue and cash generated by
operations and the other factors described under "Risk Factors." Accordingly,
the Company's management will retain broad discretion in the allocation of the
net proceeds of the Offering. A portion of the net proceeds may also be used
to acquire or invest in complementary businesses, technologies or product
offerings. In the ordinary course of business, the Company evaluates potential
acquisitions of such businesses, technologies and product offerings. However,
the Company has no current agreements or commitments with respect to any such
acquisitions. Pending such uses, the net proceeds of the Offering will be
invested in short-term, interest-bearing, investment grade securities. See
"Risk Factors--Risks Associated With Potential Acquisitions" and "Broad
Discretion In Use Of Proceeds."
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock to date and does not anticipate paying any cash dividends on its capital
stock in the foreseeable future.
28
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1998 (i) on an actual basis; and (ii) on an as adjusted basis to
give effect to the assumed exercise of outstanding warrants to purchase
306,427 shares of Common Stock prior to the closing of the Offering for net
proceeds of $920,000, the issuance of 60,000 shares of Common Stock with an
aggregate fair value of $600,000 and the payment of $390,000 in cash, upon
completion of the Offering, pursuant to modifications of earn-outs in
connection with certain of the Company's acquisitions, the repayment of
approximately $1.3 million of notes payable related to an acquisition and a
license agreement and the sale of the 3,000,000 shares of Common Stock offered
hereby at an assumed initial public offering price of $10.00 per share, after
deducting the underwriting discount and estimated offering expenses and the
application of the net proceeds therefrom.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
--------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
Current portion of acquisition notes payable.............. $ 1,826 $ 537
Current portion of capital lease obligation............... 36 36
------- -------
$ 1,862 $ 573
======= =======
Acquisition notes payable, less current portion........... $ 990 $ 990
Capital lease obligations, less current portion........... 126 126
------- -------
1,116 1,116
Stockholders' equity:
Convertible preferred stock, $0.0001 par value; 1,000,000
shares authorized, actual; 5,000,000 shares authorized,
as adjusted; no shares issued and outstanding, actual
and as adjusted......................................... -- --
Common Stock, $0.0001 par value; 20,000,000 shares
authorized, actual; 40,000,000 shares authorized, as
adjusted; 8,731,597 shares issued and outstanding,
actual; 12,098,024 shares issued and outstanding, as
adjusted(1)............................................. 14,940 42,560
Deferred compensation.................................... (1,194) (1,194)
Accumulated deficit...................................... (9,964) (9,964)
------- -------
Total stockholders' equity.............................. 3,782 31,402
------- -------
Total capitalization................................... $ 4,898 $32,518
======= =======
</TABLE>
- --------
(1) Based on the number of shares outstanding as of September 30, 1998.
Excludes (i) 1,901,198 shares of Common Stock issuable upon the exercise
of options then outstanding with a weighted average exercise price of
$1.11 per share; (ii) 1,326,135 shares of Common Stock reserved for
issuance under the 1998 Plan, giving effect to the increase in the
aggregate number of shares reserved for issuance from 1,166,667 to
2,000,000 approved as of November 16, 1998; (iii) 300,000 shares of Common
Stock reserved for issuance under the Stock Purchase Plan; and
(iv) warrants to purchase 183,333 shares of Common Stock at an exercise
price of $10.00 per share. Shares issued and outstanding, as adjusted,
assumes (i) the exercise of outstanding warrants to purchase
306,427 shares of Common Stock prior to the closing of the Offering for
net proceeds of $920,000; (ii) the sale of the 3,000,000 shares of Common
Stock offered hereby, after deducting the underwriting discount and
estimated Offering expenses; and (iii) the issuance of 60,000 shares of
Common Stock with an aggregate fair value of $600,000 pursuant to
modifications of earn-outs in connection with certain of the Company's
acquisitions. See "Management--Benefit Plans" and Notes 4 and 9 of Notes
to the Company's Consolidated Financial Statements.
29
<PAGE>
DILUTION
The actual net tangible book value of the Company as of September 30, 1998
was approximately $(1.5 million) or $(0.17) per share of Common Stock. Actual
net tangible book value per share represents the amount of total actual
tangible assets less total actual liabilities, divided by the shares of Common
Stock outstanding as of September 30, 1998. After giving effect to the assumed
exercise of outstanding warrants to purchase 306,427 shares of Common Stock
prior to the closing of the Offering, the issuance and sale of the 3,000,000
shares of Common Stock offered hereby (after deducting the underwriting
discount and estimated offering expenses), the repayment of $1.3 million of
certain indebtedness associated with a certain acquisition and a license
agreement, the issuance of 60,000 shares of Common Stock with an aggregate
fair value of $600,000 and the payment of $390,000 in cash, upon completion of
the Offering, pursuant to modifications of earn-outs in connection with
certain of the Company's acquisitions, the Company's as adjusted net tangible
book value as of September 30, 1998 would have been $25.1 million, or $2.08
per share. This represents an immediate increase in as adjusted net tangible
book value of $2.25 per share to existing stockholders and an immediate
dilution of $7.92 per share to new investors. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............. $10.00
Actual net tangible book value per share as of September
30, 1998.................................................. $(0.17)
Increase per share attributable to new investors........... 2.25
------
As adjusted net tangible book value per share after the
Offering.................................................... 2.08
------
Dilution per share to new investors.......................... $ 7.92
======
</TABLE>
The following table sets forth, on a pro forma basis as of September 30,
1998, the difference between existing stockholders and the purchasers of
shares in the Offering (at an assumed initial public offering price of $10.00
per share and before deducting the underwriting discount and estimated
offering expenses) with respect to the number of shares purchased from the
Company, the total consideration paid and the average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.. 9,098,024 75.20% $ 9,396,276 23.9% $ 1.03
New investors.......... 3,000,000 24.80% 30,000,000 76.1% $10.00
---------- ----- ----------- -----
Total................ 12,098,024 100.0% $39,396,276 100.0%
========== ===========
</TABLE>
The foregoing discussion and tables assume (i) no exercise of any stock
options outstanding as of September 30, 1998; (ii) the exercise of outstanding
warrants to purchase 306,427 shares of Common Stock for gross proceeds of
$1,020,000; (iii) the sale of the 3,000,000 shares of Common Stock offered
hereby; and (iv) the issuance of 60,000 shares of Common Stock with an
aggregate fair value of $600,000 pursuant to modifications of earn-outs in
connection with certain of the Company's acquisitions. As of September 30,
1998, there were (i) options outstanding to purchase a total of 1,901,198
shares of Common Stock with a weighted average exercise price of $1.11 per
share; (ii) 1,326,135 shares of Common Stock reserved for issuance under the
1998 Plan, giving effect to the increase in the aggregate number of shares
reserved for issuance pursuant to the 1998 Plan from 1,166,667 to 2,000,000
approved as of November 16, 1998; and (iii) 300,000 shares of Common Stock
reserved for issuance under the Stock Purchase Plan. Assuming the exercise of
these outstanding options, the as adjusted net tangible book value per share
after the Offering would be $1.95, and the dilution per share to new investors
would be $8.05. See "Risk Factors--Immediate and Substantial Dilution,"
"Capitalization," "Management--Benefit Plans" and Notes 4 and 9 of Notes to
the Company's Consolidated Financial Statements.
30
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data is qualified by reference
to, and should be read in conjunction with, the Company's Consolidated
Financial Statements and the Notes thereto and "Management's Discussion And
Analysis Of Financial Condition And Results Of Operations" appearing elsewhere
in this Prospectus. The selected historical consolidated statements of
operations data presented below for the period from April 16, 1996 (the
Company's inception) through December 31, 1996, for the year ended December
31, 1997 and for the nine months ended September 30, 1998 and the selected
historical consolidated balance sheet data at December 31, 1996 and 1997 and
at September 30, 1998 are derived from consolidated financial statements of
the Company that have been audited by Ernst & Young LLP, independent auditors,
included elsewhere in this Prospectus. The selected historical consolidated
statement of operations data for the nine months ended September 30, 1997 are
derived from unaudited consolidated financial statements of the Company
included elsewhere in this Prospectus. The unaudited consolidated financial
statements include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the Company's financial
position and results of operations for this period. The selected consolidated
pro forma statement of operations data for the nine months ended September 30,
1998, are derived from selected unaudited pro forma condensed consolidated
financial statements included elsewhere in this Prospectus. The consolidated
financial data for the nine months ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998 or any other future period.
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 16, 1996 NINE MONTHS PRO FORMA
(INCEPTION) ENDED NINE MONTHS
THROUGH YEAR ENDED SEPTEMBER 30, ENDED
DECEMBER 31, DECEMBER 31, ---------------- SEPTEMBER 30,
1996 1997 1997 1998 1998
-------------- ------------ ------- ------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Net revenue:
Electronic commerce.... $ -- $ 327 $ 59 $ 3,366 $ 3,575
Advertising............ -- 60 21 953 1,004
License fees and other. -- 454 341 546 575
------ ------- ------- ------- -------
Total net revenue..... -- 841 421 4,865 5,154
Cost of net revenue:
Cost of electronic
commerce.............. -- 171 72 1,966 1,966
Cost of license fees
and other............. -- 148 136 34 80
------ ------- ------- ------- -------
Total cost of net
revenue.............. -- 319 208 2,000 2,046
------ ------- ------- ------- -------
Gross profit........... -- 522 213 2,865 3,108
Operating expenses:
Operating and
development........... 266 1,150 879 2,558 2,581
Sales and marketing.... 24 292 171 1,570 1,575
General and
administrative........ 150 721 477 2,158 2,358
Purchased in-process
research and
development(1)........ -- -- -- 790 330
Amortization of
deferred compensation. -- 248 111 1,111 1,111
Amortization of
intangible assets..... -- -- -- 1,087 2,039
Non-recurring charges.. -- 1,243 1,243 -- --
------ ------- ------- ------- -------
Total operating
expenses............. 440 3,654 2,881 9,274 9,994
------ ------- ------- ------- -------
Loss from operations... (440) (3,132) (2,668) (6,409) (6,886)
Other income (expense),
net................... -- -- -- 17 (19)
------ ------- ------- ------- -------
Net loss............... $ (440) $(3,132) $(2,668) $(6,392) $(6,905)
====== ======= ======= ======= =======
Basic and diluted net
loss per share(2)..... $(0.89) $ (0.64) $ (0.57) $ (0.89) $ (0.92)
====== ======= ======= ======= =======
Number of shares used
in per share
calculation--basic and
diluted(2)............ 497 4,874 4,688 7,172 7,483
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- SEPTEMBER 30,
1996 1997 1998
------ ------- -------------
CONSOLIDATED BALANCE
SHEET DATA: (IN THOUSANDS)
<S> <C> <C> <C>
Cash.................... $ 1 $ 6 $ 967
Working capital
(deficit).............. 156 (1,400) (3,215)
Total assets............ 705 782 10,415
Acquisition notes
payable, less current
portion................ -- -- 990
Capital lease
obligation, less
current portion........ -- -- 126
Total stockholders'
equity (deficit)....... 560 (873) 3,782
</TABLE>
(footnotes appear on the following page)
31
<PAGE>
- --------
(1) Purchased in-process research and development relates to the costs of in-
process research and development acquired by the Company in connection
with the acquisitions of Paralogic and Pagecount (pro forma only) as well
as the purchase of certain assets of Revolutionary Software. See Note 9
of Notes to the Company's Consolidated Financial Statements.
(2) See Note 1 of Notes to the Company's Consolidated Financial Statements for
an explanation of the determination of the number of shares used to
compute net loss per share and Note D of Notes to the Selected Unaudited
Pro Forma Condensed Consolidated Statements of Operation for an
explanation of the determination of the number of pro forma shares used to
compute pro forma net loss per share--basic and diluted.
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and results
of operations of the Company should be read in conjunction with, and is
qualified in its entirety by, the more detailed information including the
"Selected Consolidated Financial Data" and the Company's Consolidated
Financial Statements and the Notes thereto included elsewhere in this
Prospectus. This Prospectus contains forward-looking statements that involve
risks and uncertainties. The Company's actual results may differ materially
from the results discussed in the forward-looking statements. Factors that may
cause or contribute to such differences include those discussed in "Risk
Factors," as well as those discussed elsewhere in this Prospectus.
OVERVIEW
Xoom.com is one of the fastest growing direct marketing companies on the
Internet. The Company attracts members to its community site with a variety of
free services, including homepages, e-mail, chat rooms, clip art and software
libraries and online greeting cards. Xoom.com members can also join topical
communities where they can exchange ideas and information. Upon registration,
members agree to receive periodic offers of products and services via e-mail.
These offerings are competitively priced and continuously updated, and include
computer software, computer accessories and peripherals, consumer electronics
and clip art on CD-ROM. New product offerings during the fourth quarter of
1998 will include a DVD movie club, gift items, health-related products and a
travel club. The Company does not expect such product offerings to have a
material effect on total net revenue until after the second quarter of 1999.
Xoom.com believes that its rapidly growing base of self-qualified members
provides the Company with highly attractive and effective electronic commerce
opportunities. In addition, the Company believes that its high levels of
traffic and online reach present an attractive platform for advertising.
The Company was incorporated in April 1996 and commenced offering products
for sale on its Web site in March 1997. From inception through December 1996,
the Company had no sales and its operating activities related primarily to
developing necessary computer infrastructure, recruiting personnel, raising
capital and initial planning and developing the Xoom.com site and operations.
For the period beginning with the operation of the Xoom.com site through
December 31, 1997, the Company continued these activities and focused on
building sales momentum, establishing relationships with manufacturers,
marketing the Xoom.com brand and establishing customer service and fulfillment
operations.
The Company generates net revenue from electronic commerce, primarily
through the use of direct e-mail marketing, licensing and the sale of
advertising on its Web site. Total net revenue was $841,000, $849,000,
$1.7 million and $2.3 million for the year ended December 31, 1997 and the
quarters ended March 31, 1998, June 30, 1998 and September 30, 1998,
respectively. The increase in total net revenue was primarily due to expansion
in Xoom.com's membership base, which resulted in increases in electronic
commerce revenue, Web-based advertising revenue and, to a lesser extent, an
increase in license fees and other. Cost of net revenue increased
substantially in absolute dollars and as a percentage of total net revenue
during the same period, reflecting the Company's increased sales volume. As
the Company has grown, its operating expenses have increased, and the Company
expects that its operating expenses will continue to increase as a result of
its acquisitions and in connection with its sales and marketing efforts, its
increased funding of site development, technology and operating
infrastructure, and the increased general and administrative staff needed to
support the Company's growth.
From inception through September 30, 1998, Xoom.com has generated total net
revenue of approximately $5.7 million. Over the past twelve months, quarterly
net revenue has increased from approximately $222,000 to $2.3 million. Since
January 1998, the number of members has grown from 100,000 to approximately
4.5 million as of November 13, 1998.
As of September 30, 1998, the Company had an accumulated deficit of $10.0
million. Although the Company has experienced growth in net revenue, members,
customers and reach in recent periods, such growth rates are not sustainable,
will decrease in the future and are not indicative of future growth rates the
Company may
33
<PAGE>
experience. The Company has not achieved profitability on a quarterly or
annual basis to date, and the Company anticipates that it will incur net
losses for the foreseeable future. The extent of these losses will be
contingent, in part, on the amount and rates of growth in the Company's net
revenue from electronic commerce and advertising. The Company expects its
operating expenses to increase significantly, especially in the areas of sales
and marketing and brand promotion, and, as a result, it will need to generate
increased quarterly net revenue if profitability is to be achieved. The
Company believes that period-to-period comparisons of its operating results
are not meaningful and that the results for any period should not be relied
upon as an indication of future performance. To the extent that net revenue
does not grow at anticipated rates or that increases in its operating expenses
precede or are not subsequently followed by commensurate increases in net
revenue, or that the Company is unable to adjust operating expense levels
accordingly, the Company's business, results of operations and financial
condition will be materially and adversely affected. There can be no assurance
that the Company's operating losses will not increase in the future or that
the Company will ever achieve or sustain profitability. See "Risk Factors--
Limited Operating History; No Assurance Of Profitability; Anticipated Losses."
To date, the Company has entered into a number of business and technology
acquisitions, license arrangements and strategic alliances in order to build
its communities, provide community-specific content, generate additional
traffic, increase membership and establish additional sources of net revenue.
In March 1998, the Company acquired Paralogic, a chat service, for a purchase
price of approximately $3.0 million (consisting of 682,410 shares of Common
Stock with a fair value of $2.31 per share, $1.4 million of debt, and $61,000
of acquisition costs). Through its purchases of Global Bridges and certain
assets of Revolutionary Software in June 1998, the Company acquired Sitemail,
an HTML-based e-mail product. Global Bridges, which the Company purchased for
approximately $709,000 (consisting of 183,427 shares of Common Stock with a
fair value of $3.33 per share, $12,500 in cash, a note payable for $62,500 and
approximately $23,000 of acquisition costs), owned the exclusive selling
rights to Sitemail. Revolutionary Software, from which the Company purchased
certain assets for approximately $701,000 (consisting of 128,052 shares of
Common Stock with a fair value of $3.33 per share, $12,500 in cash and a note
payable for $262,500, along with certain earnout provisions), developed
Sitemail and had licensed it to Global Bridges. Also in June 1998, the Company
purchased an exclusive, perpetual license to use Greetings Online, an online
greeting card service, from ArcaMax for approximately $644,000 (consisting of
133,334 shares of Common Stock with a fair value of $3.33 per share, $20,000
in cash and a note payable for $180,000). Additionally, in July 1998, the
Company acquired Pagecount, a Web page counter and guestbook service, for
approximately $1.5 million (consisting of $200,000 in cash, a note payable for
$1.2 million and $60,000 of acquisition costs). In addition, certain of the
Company's acquisition agreements contain provisions that allow for the
issuance of additional shares of Common Stock or cash. Specifically, in
connection with the acquisition of Global Bridges, the Company has issued
17,304 shares of Common Stock. In addition, upon the completion of the
Offering, the Company is required to issue Common Stock at the Offering price
with an aggregate value of $200,000, together with $130,000 in cash. In
connection with the Company's purchase of certain assets of Revolutionary
Software, the Company has issued 34,608 shares of Common Stock. In addition,
upon the completion of the Offering, the Company is required to issue Common
Stock at the Offering price with an aggregate value of $400,000, together with
an additional cash consideration of $260,000. As part of the license agreement
entered into with ArcaMax, the note payable for $180,000 will be due within
ten days of the completion of the Offering. During the first nine months of
1998, the Company expensed $790,000 for purchased in-process research and
development and approximately $1.1 million for the amortization of goodwill
and purchased technology. Because most Internet business acquisitions involve
the purchase of significant amounts of intangible assets, acquisitions of such
businesses also result in goodwill and purchased technology and significant
charges for purchased in-process research and development. See "Business--
Acquisitions And Strategic Alliances."
The Company intends to continue making acquisitions to increase reach and
membership and to seek additional strategic alliances with content and
distribution partners, including alliances that create co-branded sites
through which Xoom.com markets its services. Acquisitions carry numerous risks
and uncertainties, including difficulties in the integration of operations,
personnel, technologies, products and the information systems of the acquired
companies, diversion of management's attention from other business concerns,
risks of entering geographic and business markets in which the Company has no
or limited prior experience and potential
34
<PAGE>
loss of key employees of acquired organizations. No assurance can be given as
to the ability of the Company to successfully integrate any businesses,
products, technologies or personnel that might be acquired in the future, and
the failure of the Company to do so could have a material adverse effect on
the Company's business, results of operations and financial condition. In
addition, there can be no assurance that the Company will be successful in
identifying potential acquisition candidates. See "Risk Factors--Risks
Associated With Acquisitions."
International sales comprised approximately 30% and 29% of total net revenue
for the year ended December 31, 1997, and the nine months ended September 30,
1998, respectively. This consisted of $252,000 and $1.4 million in net
revenues, respectively, during such periods. As of September 30, 1998, the
Company had approximately 2.3 million members outside of the United States.
The Company intends to enter into partnerships with companies in local markets
in order to increase its international presence and sales. There can be no
assurance, however, that acceptance of the Internet or the Company's community
model will continue to expand significantly in any international markets. If
net revenue from international operations is not adequate to cover the
investments in such activities, the Company's business, results of operations
and financial condition could be materially and adversely affected. There are
also certain risks inherent in doing business on an international level, such
as unexpected changes in regulatory requirements, trade barriers, difficulties
in staffing and managing foreign operations, fluctuations in currency exchange
rates, longer payment cycles in general, problems in collecting accounts
receivable, difficulty in enforcing contracts, political and economic
instability, seasonal reductions in business activity in certain other parts
of the world and potentially adverse tax consequences. There can be no
assurance that one or more of such factors will not have a material adverse
effect on the Company's future international operations and, consequently, on
the Company's business, results of operations and financial condition. See
"Risk Factors--Risks Associated With International Operations And Expansion."
The Company has recorded deferred stock compensation charges of $0, $551,000
and $2.0 million during the period from April 16, 1996 through December 31,
1996 (the "Inception Period"), the year ended December 31, 1997, and for the
nine months ended September 30, 1998, respectively, for the difference between
the exercise price and the deemed fair value of certain stock options granted
by the Company to its employees. Included in the deferred stock compensation
are options granted to various employees which provided for vesting upon
certain events, such as the Company's successful completion of an initial
public offering or individual and Company performance goals. In June 1998
these options were modified to vest upon the earlier of such an event or two
years from the date of grant. Accordingly, the related deferred compensation
of approximately $783,000 and amortization charges (based on cumulative
vesting to that date) of approximately $618,000 were recorded in June 1998.
Amortization of deferred stock compensation expense of $248,000 and $1.1
million was recorded in the year ended December 31, 1997, and the nine months
ended September 30, 1998, respectively. The Company expects to record
amortization expenses related to these deferred stock compensation charges of
approximately $295,000, $580,000, $225,000, $80,000 and $20,000 in the fourth
quarter ended December 31, 1998 and the years ended December 31, 1999, 2000,
2001 and 2002, respectively. There can be no assurance, however, that
additional charges will not accrue for other reasons or that the Company's
current estimates of such charges will prove accurate, either of which events
could have a material adverse effect on the Company's business, results of
operations and financial condition.
The Company will need to increase its inventory levels in the future to
support a wider base of electronic commerce products and to take advantage of
volume purchase discounts. The Company contracts with a third party
warehousing and order fulfillment company to stock inventory and ship products
directly to customers. The Company takes title to this inventory, has
responsibility for this inventory, and records inventory on its balance sheet
until the final shipment to customers or other disposition of the inventory.
There are inherent risks and costs in stocking inventory and coordinating with
a third party warehousing and order fulfillment company, including but not
limited to, product obsolescence, excess inventory, inventory shortages
resulting in unfulfilled orders, which could materially adversely affect
operating results in the future. See "Risk Factors--Risk Of Reliance On
Internally Developed Systems" and "--Reliance On Certain Vendors."
35
<PAGE>
RESULTS OF OPERATIONS
From inception through the first quarter of 1997, the Company's operations
were limited and consisted primarily of start-up activities. Accordingly, the
Company believes that year-to-year comparisons of 1996 against 1997, and
period-to-period comparisons of the nine months ended September 30, 1998
against the comparable period in 1997, are not meaningful.
The following table presents certain consolidated statement of operations
data for the periods indicated as a percentage of total net revenue. From
inception through December 31, 1996, the Company had no net revenue as
operations were limited and consisted primarily of start-up activities.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, --------------------
1997 1997 1998
------------ ----------- --------
(UNAUDITED)
<S> <C> <C> <C>
Net revenue:
Electronic commerce........................ 38.9 % 14.1 % 69.2 %
Advertising................................ 7.1 5.0 19.6
License fees and other..................... 54.0 80.9 11.2
------ ------ ------
Total net revenue........................... 100.0 100.0 100.0
Cost of net revenue(1):
Cost of electronic commerce................ 20.3 17.2 40.4
Cost of license fees and other............. 17.6 32.3 0.7
------ ------ ------
Cost of net revenue......................... 37.9 49.5 41.1
------ ------ ------
Gross profit................................ 62.1 50.5 58.9
Operating expenses:
Operating and development.................. 136.8 208.7 52.6
Sales and marketing........................ 34.7 40.6 32.3
General and administrative................. 85.7 113.4 44.4
Purchased in-process research and
development............................... -- -- 16.2
Amortization of deferred compensation...... 29.5 26.3 22.8
Amortization of intangible assets.......... -- -- 22.3
Non-recurring charges...................... 147.8 295.2 --
------ ------ ------
Total operating expenses.................... 434.5 684.2 190.6
------ ------ ------
Loss from operations........................ (372.4) (633.7) (131.7)
Other income, net........................... -- -- 0.3
------ ------ ------
Net loss.................................... (372.4)% (633.7)% (131.4)%
====== ====== ======
</TABLE>
- --------
(1) There are no material costs of advertising revenue.
Net Revenue
The Company began generating net revenue in the first quarter of 1997. The
Company's total net revenue increased from $421,000 in the nine months ended
September 30, 1997 to $4.9 million in the nine months ended
September 30, 1998, and was $841,000 for the year ended December 31, 1997. Net
revenue is composed of electronic commerce product sales (which includes
outbound shipping and handling fees) advertising revenue and licensing fees
and other. The increase in net revenue was primarily due to the expansion of
the Company's membership base, increased frequency of e-mail offerings and
broader product offerings, which resulted in an increase in product sales
through electronic commerce, an increase in web-based advertising as the
Company was able to leverage its Web site traffic, and to a lesser extent an
increase in license fees. One licensing customer accounted for 12% of total
net revenue for the year ended December 31, 1997 and no customer accounted for
more than 10% of total net revenue for the nine months ended September 30,
1998.
36
<PAGE>
Electronic Commerce. Electronic commerce revenue increased from $59,000 in
the nine months ended September 30, 1997 to $3.4 million in the nine months
ended September 30, 1998, and was $327,000 for the year ended December 31,
1997. The increase in net revenue was primarily due to the expansion of the
Company's membership base, which resulted in an increase in product sales, as
well as expansion of the breadth of products offered. The percentage of the
Company's total net revenue attributable to electronic commerce revenue
increased from 14.1% in the nine months ended September 30, 1997 to 69.2% in
the nine months September 30, 1998, and was 38.9% of total net revenue for the
year ended December 31, 1997. The Company expects electronic commerce revenue
to continue to account for a large percentage of net revenue as it expands its
product offerings and increases its direct marketing response rates through
better member demographic information and targeting of product offers.
Advertising. Advertising revenue increased from $21,000 in the nine months
ended September 30, 1997 to $953,000 in the nine months ended September 30,
1998, and was $60,000 for the year ended December 31, 1997. The increase in
advertising revenue is primarily a result of the increase in the Company's
membership, site traffic and expansion of its advertising sales force. The
percentage of the Company's total net revenue attributable to advertising
revenue increased from 5.0% in the nine months ended September 30, 1997 to
19.6% in the nine months ended September 30, 1998, and was 7.1% of total net
revenue for the year ended December 31, 1997.
License Fees and Other. License fees and other revenue increased from
$341,000 in the nine months ended September 30, 1997 to $546,000 in the nine
months ended September 30, 1998, and was $454,000 for the year ended
December 31, 1997. The increase in license fees and other revenue is primarily
a result of additional clip art and other utilities the Company was able to
license to third parties. The percentage of the Company's total net revenue
attributable to license fees decreased from 80.9% in the nine months ended
September 30, 1997 to 11.2% in the nine months ended September 30, 1998, and
was 54.0% of total net revenue for the year ended December 31, 1997. As the
Company expands its electronic commerce and advertising revenue, license fees
and other revenue will continue to represent a smaller percentage of net
revenue.
Cost of Net Revenue
Gross margins increased from 50.5% in the nine months ended September 30,
1997 to 58.9% in the nine months ended September 30, 1998, as a result of the
increase in advertising and electronic commerce revenue as a percentage of
total net revenue. Gross margins were 62.1% for the year ended December 31,
1997. There are no material costs of net revenue associated with advertising.
Electronic Commerce. Cost of electronic commerce consists primarily of the
costs of merchandise sold to customers, credit card commissions, product
fulfillment, and outbound shipping and handling costs. Cost of electronic
commerce was $171,000, $72,000 and $2.0 million for the year ended December
31, 1997, and the nine months ended September 30, 1997 and 1998, respectively.
As a percentage of electronic commerce revenue, cost of electronic commerce
was 52.3%, 122.0% and 58.4% for the year ended December 31, 1997, and the nine
months ended September 30, 1997 and 1998, respectively. Cost of electronic
commerce as a percentage of net revenue was higher in the first nine months of
1997 when compared to the full year ended December 31, 1997 and the nine
months ended September 30, 1998 due to the fact amortization of prepaid
royalties was recorded in the first and second quarters of 1997 on a product
that was discontinued late in the second quarter of 1997; at the time the
product was discontinued, the Company wrote off the remaining prepaid royalty
balance and accordingly, no amortization was recorded in the second half of
1997 or during the nine months ended September 30, 1998.
License Fees and Other. Cost of license fees and other consists primarily of
royalties on net revenue of license fees. Cost of license fees were $148,000,
$136,000 and $34,000 for the year ended December 31, 1997, and the nine months
ended September 30, 1997 and 1998, respectively. As a percentage of license
fees and other, cost of license fees and other were 32.6%, 39.9% and 6.2% for
the year ended December 31, 1997, and the nine months ended September 30, 1997
and 1998, respectively. Cost of license fees and other for the nine months
ended September 30, 1997 included $81,000 in amortization of prepaid royalties
related to a product which was subsequently discontinued in 1997.
37
<PAGE>
The Company believes that offering its customers attractive prices is an
essential component of its business strategy. The Company may in the future
increase the discounts it offers its customers and may otherwise alter its
pricing structures and policies. The Company anticipates that any increase in
discounts or price reductions will reduce gross margins below those
experienced for the year ended December 31, 1997 and the nine months ended
September 30, 1998.
Gross margins will be impacted by the mix of products sold by the Company,
and the overall mix of electronic commerce revenue, advertising revenue and
license fees. The Company typically recognizes higher gross margins on
advertising revenue and license fees and other which are expected to comprise
a lower percentage of total net revenue in the future. Therefore, the Company
expects shifts in the mix of sales will adversely impact the Company's overall
gross margin and could materially adversely impact the Company's business,
results of operations and financial condition.
Operating and Development Expenses. Operating and development expenses
consist principally of payroll and related expenses for development,
editorial, and network operations personnel and consultants, costs related to
systems infrastructure including Web site hosting, and costs of acquired
content to enhance the Company's Web site. Operating and development expenses
increased from $879,000 in the nine months ended September 30, 1997 to $2.6
million in the nine months ended September 30, 1998, and increased from
$266,000 in the Inception Period in 1996 to $1.2 million in 1997. From
inception to the quarter ended September 30, 1997 the Company incurred
approximately $300,000 in costs relating to the development of a home office
software product, apart from its Web site, which was subsequently abandoned
due to low sales volume. From June 30, 1997 the absolute dollar increases from
quarter to quarter in operating and development expenses were primarily
attributable to increases in the number of personnel and associated costs
related to enhancing the functionality and content of the Company's Web site.
Operating and development costs decreased as a percentage of total net revenue
from 208.7% in the nine months ended September 30, 1997 to 52.6% in the nine
months ended September 30, 1998, and represented 136.8% for the year ended
December 31, 1997. The Company believes operating costs will increase
significantly in the future, especially in regards to Web site hosting costs,
as its membership grows thus requiring additional bandwidth to support the
many free services offered to members. The Company believes that significant
investments in its Web site are required to remain competitive. Therefore, the
Company expects that its operating and development expenses will continue to
increase in absolute dollars for the foreseeable future.
Sales and Marketing Expenses. Sales and marketing expenses consist primarily
of payroll and related expenses for personnel engaged in marketing, selling,
licensing and order support, advertising and promotional expenditures. Sales
and marketing expenses increased from $171,000 in the nine months ended
September 30, 1997 to $1.6 million in the nine months ended September 30,
1998, and increased from $24,000 in the Inception Period in 1996 to $292,000
in 1997. The absolute dollar increases from period to period in sales and
marketing expenses were primarily attributable to increased personnel and
related expenses required to implement the Company's marketing strategy and
increased public relations, advertising and other promotional expenses. Sales
and marketing costs decreased as a percentage of total net revenue from 40.6%
in the nine months ended September 30, 1997 to 32.3% in the nine months ended
September 30, 1998, and represented 34.7% for the year ended December 31,
1997. Sales and marketing expenses as a percentage of net revenues have
decreased because of the growth in net revenue. The Company expects to
continue hiring additional personnel and to pursue a branding and marketing
campaign. Therefore, it expects marketing and sales expenses to increase
significantly in absolute dollars.
General and Administrative Expenses. General and administrative expenses
consist primarily of payroll and related costs for general corporate
functions, including finance, accounting, business development, facilities and
administration, legal, and fees for professional services and directors.
General and administrative expenses increased from $477,000 in the nine months
ended September 30, 1997 to $2.2 million in the nine months ended September
30, 1998, and increased from $150,000 in the Inception Period in 1996 to
$721,000 in 1997. The absolute dollar increases from period to period in
general and administrative expenses were primarily due to increases in the
number of general and administrative personnel, professional services,
directors fees and facility
38
<PAGE>
expenses to support the growth of the Company's operations. General and
administrative expenses decreased as a percentage of total net revenue from
113.4% in the nine months ended September 30, 1997 to 44.4% in the nine months
ended September 30, 1998, and represented 85.7% for the year ended December
31, 1997. General and administrative expenses as a percentage of net revenues
have decreased because of the growth in net revenue. The Company expects
general and administrative expenses to increase in absolute dollars in future
periods as the Company expands its staff, incurs additional costs related to
its operations, and is subject to the requirements of being a publicly traded
company.
Purchased In-Process Research and Development. For the nine months ended
September 30, 1998, the Company recognized the cost of purchased in-process
research and development of $330,000 in connection with the acquisition of
Paralogic, $330,000 in connection with the purchase of certain assets of
Revolutionary Software and $130,000 in connection with the acquisition of
Pagecount. The Company did not recognize such charges for the Inception Period
or the year ended December 31, 1997. See Note 9 of Notes to Consolidated
Financial Statements.
In connection with the Paralogic acquisition, the Company acquired
Paralogic's technology, ParaChat. ParaChat is designed to provide Web sites
with an option to offer chat technology without requiring Web site hosts to
buy the software, maintain or upgrade the software, or learn any additional
skills beyond what is necessary to construct a Web site. The chat software is
maintained on ParaChat's server and the Web site host is provided bits of
source code or "tags" that are incorporated into the Web site. The tags
interface via the Internet with the ParaChat server, and thus provide the Web
site with chat capabilities. In exchange for the free service, the Web site
host allows banner advertising on its site.
As of the time of acquisition, the ParaChat technology was not completely
functional as a commercially viable product. The nature, amount and timing of
the remaining estimated efforts necessary to develop the acquired incomplete
ParaChat technology into a commercially viable product included:
(i) Remote Database Authentication: The chat server used a very simple
flat-file database to maintain authentication information. In order to
allow users to control their own password and user information, it was
necessary to design a protocol using the Java programming language wherein
the chat server could remotely interrogate an external Oracle database
through the Internet to retrieve and modify information relating to the
user and the chat room (e.g., the topic of discussion).
(ii) Creation of New Chat Client: The chat software is comprised of two
parts: the client and the server. Although the server claimed compatibility
with Internet Standard RFC1459 (a standard message format for Internet
relay chat, allowing usage on multiple platforms), this feature was not
usable on a commercial basis, because the server functioned only with the
limited ParaChat client, which did not allow for configuration or
reconfiguration by the end-user to match the look and feel of an existing
Web site. In order to allow deployment on an existing site, it was
necessary to create an entirely new client that consisted of various
building blocks which could be composed by the end-user using HTML. These
building blocks would then use a Java-based communication protocol known as
Inter-Applet-Communication (IAC) to communicate with each other and
coordinate communication with the chat server. Since IAC is not well
defined, and differs between browser implementations, a substantial amount
of additional software development was required, particularly because no
comparable client exists in the market today.
(iii) Control Interface: The acquired ParaChat network did not allow users
to control or administer their chat room in any way (e.g., eject abusive
users, close the chat room or even specify a discussion topic). The
enhancements necessary to make these features available, and to allow them
to be maintained and administered via the central authentication database
(also still under development), were complex and required significant
additional development.
(iv) Advances in Browser Technology: In addition to the above modifications
and other maintenance modifications and bug fixes, the rapid advances in
Web browser technology implied continuous implementation of new features to
exploit new browser technologies.
39
<PAGE>
As of the date of the technology's valuation, the Company estimated that 55%
of the research and development effort had been completed at the date of
acquisition and expected the remaining research and development efforts
relating to the completion of the ParaChat technology to require approximately
six months of effort from the date of valuation through its anticipated
release date of September 1, 1998. It was estimated by Company management that
three full-time engineers would be required to complete the in-process
projects (one full time engineer for six months to work on the external
database connectivity efforts, one full time engineer for six months to work
on the client layout efforts, and one full time engineer for six months to
work on the management and control interface efforts). Accordingly, it was
determined that total estimated research and development costs-to-complete for
the ParaChat in-process project were $112,500. The Company completed the
project by the scheduled date and the actual costs of completion were not
materially different than estimated.
As of the date of valuation, the Company expected the benefit of the
acquired project to begin immediately after the estimated completion date. The
Company expected that the in-process project would be developed to
technological feasibility concurrent with the expected September 1998 release
date. The Company has demonstrated the ability to implement the on-going
research and development on time and on budget. If the in-process projects
were not successfully completed, the impact on operations would have been
lower revenue than projected. Revenue would be lower than anticipated due to
(i) a reduction in the number of new members and e-commerce customers as a
result of not offering a chat service, and (ii) not generating additional
advertising inventory as a result of not generating the planned chat
advertising impressions.
The technology that the Company acquired from Revolutionary Software was a
web-based e-mail technology known as SiteMail. This in-process Web-based e-
mail technology (similar to Microsoft Corporation's HotMail) is designed to
allow users to receive and send e-mail through the Internet using a web
browser. Since SiteMail is Web-based, it will allow for the integration of e-
mail functionality into Web sites and will be accessible by any Web-connected
device anywhere in the world. Furthermore, by integrating e-mail into a
specific site, it forces the subscriber to visit that site to access e-mail,
thereby increasing traffic. In addition, when users apply for e-mail accounts
at Web sites offering SiteMail, they are given the domain name of that Web
site or company. The personalization of the domain name in an e-mail address
has become an innovative way of promoting a company's name or web site.
As of the date of acquisition, SiteMail was in the alpha testing stage of
development and required the resolution of certain scalability technological
hurdles in order to complete the technology. In addition to the scalability
issues, the following functionality requirements also needed to be addressed
by on-going research and development efforts: (i) improving the user
interface; (ii) connecting the e-mail server with external databases; (iii)
completing spam detection and filtering functions; and (iv) completing
security enhancements for Unix Internet applications.
The Company estimated that approximately 50% of the research and development
effort had been completed at the date of acquisition and expected the
remaining research and development efforts relating to the completion of the
SiteMail technology to continue from the date of acquisition through an
anticipated release date of November 1998. The remaining development effort
was estimated to require approximately 4.5 months of engineering effort.
Company management estimated that 3.5 full-time developers would be required
to complete this project. The total cost of remaining development was
estimated to be approximately $98,000. To date, the Company does not expect
the cost to complete the in-process SiteMail project to be materially
different than what was estimated, and expects the project to be completed
within the estimated timeframe.
As of the date of valuation, the Company expected the benefit of the
acquired in-process project to begin immediately after the estimated
completion date. If the in-process project is not successfully completed, the
impact on operations would be lower revenue than projected. Revenue would be
lower than anticipated due to (i) a reduction in the number of new members and
e-commerce customers as a result of not offering an e-mail service, and (ii)
not generating additional advertising inventory as a result of not generating
planned e-mail advertising impressions.
40
<PAGE>
Pagecount, Inc.
In connection with the Pagecount acquisition, the Company acquired a web
page counter product, titled Pagecount. This product is a banner page counter
that tracks the number of visitors that view a member's site. It further
breaks down impression statistics, or page views by day, date, and time. Other
statistics include a list of locations from where the requests originated and
the host names of up to 100 visitors. The software is maintained on the
Pagecount server and tags are integrated into the web site which interface
with the Pagecount server. In exchange for the use of the Pagecount service, a
banner advertisement may be placed on each counter image.
Specifically, the nature, amount and timing of the remaining estimated
efforts necessary to develop the acquired incomplete Pagecount technology into
a commercially viable product include:
As of the date of the transaction, Pagecount was in the market research and
coding stage of development and required the completion of certain engineering
technological hurdles in order to complete the technology. Specifically,
Pagecount was not yet able to handle large volumes and was only able to
maintain statistical information for small members experiencing low levels of
traffic. In addition, Pagecount did not have an advertising delivery
capability and, historically, advertisements had to be superimposed onto the
web site by a human operator. This is a very inefficient method of placing
advertisements onto web sites and as volume increases it would be impossible
to maintain the advertising inventory. At the date of valuation, Pagecount was
in development on an advertising delivery system which would maximize the
advertising inventory being generated. Furthermore, additional development
will be required to integrate the Pagecount technology into the Company's
infrastructure in order for it to be compatible with the Company's network.
Ultimately the most significant research and development efforts related to
the remaining engineering of the Pagecount server to permit (i) advertisers in
the network access to industry-standard reports, (ii) ads to be placed into
the network using industry standard delivery software, and (iii) users to
attain enhanced reporting and possibly, credit for having displayed a large
number of banners (perhaps as a banner exchange offering).
The Company estimated that approximately 55% of the research and development
effort had been completed at the date of acquisition and expects the remaining
research and development efforts relating to the completion of the Pagecount
technology to continue from the date of acquisition through its anticipated
release date of mid-December 1998. The remaining development effort at the
date of acquisition was estimated to require approximately five months of
engineering effort. It was estimated by Company management that 2.5 full-time
developers would be required to complete this project. The total estimated
remaining development effort equates to a total cost to complete of
approximately $78,000. Additionally, to date, the Company does not expect the
cost to complete the in-process Pagecount project to be materially different
than what was estimated.
As of the date of valuation, the Company expects the benefit of the acquired
in-process project to begin immediately after the estimated completion date.
The Company expects the in-process project will be developed to technological
feasibility concurrent with the expected mid-December 1998 release date. If
the in-process projects were not successfully completed, the impact on
operations would be lower revenue than projected. Revenue would be lower than
anticipated due to (i) not obtaining new Company members and e-commerce
customers as a result of not offering a page counter service, and (ii) not
generating additional advertising inventory as a result of not generating the
planned page counter advertising impressions.
Amortization of Deferred Compensation. Deferred compensation expense
reflects the amortization of stock compensation charges resulting from stock
options and restricted stock purchase agreements. Stock compensation charges
were $248,000, $79,000, $728,000 and $304,000 for the year ended December 31,
1997, and the quarters ended March 31, 1998, June 30, 1998 and September 30,
1998, respectively. The increase in the quarter ended June 30, 1998 is
primarily due to the modification of certain options which required the
Company to accelerate the amortization of the related deferred compensation.
41
<PAGE>
Amortization of Intangible Assets. Amortization of intangible assets totaled
$1.1 million for the nine months ended September 30, 1998. This amount
represents amortization of intangible assets and goodwill resulting from the
Company's acquisitions of Paralogic, Global Bridges and Pagecount and the
purchase of certain assets of Revolutionary Software, amortized over periods
ranging from 24 to 41 months.
The Company has determined the appropriateness of two to three and one-half
year estimated useful lives related to the intangible assets based on general
and specific analysis. In general, the Internet is characterized by rapid
technological change, changes in users and customer requirements and
preferences, frequent new product and service introductions and the emergence
of new industry standards and practices.
The market for community-based direct selling channels on the Internet is
new and rapidly evolving and competition for members, consumers, visitors and
advertisers is intense. In addition, the Company attracts members to its web
site with a variety of free services, including home pages, e-mail, chat
rooms, clip art and software libraries, online greeting cards and page
counters. In order to continue attracting members using these various methods,
the free services must be constantly updated and improved.
With respect to the purchased technology associated with all business and
technology acquisitions, the Company considered the effects of obsolescence,
demand, competition, and other economic factors. Due to the rapid
technological change involved in the Internet, the Company estimated that the
intangible assets relating to the purchased technology would be replaced by
new technologies within a two to three and one-half year period.
With respect to the goodwill associated with all of the acquisitions, the
Company considered the effects of obsolescence, demand, competition, other
economic factors and expected actions of competitors and others. Based on
these considerations, the Company determined the positive effect of the
acquisitions, and therefore the life of the goodwill, to be two years. See
"Risk Factors--Rapid Technological Change," "--Intense Competition" and "--
Risks Associated With Acquisitions."
With respect to the intangible assets associated with Global Bridges,
Pagecount, Revolutionary Software, and ArcaMax, the Company considered the
competition for users of electronic mail, web page counters, online greeting
card services and the fact that the electronic mail and online greeting card
services are provided free by the Company to all members. The Company expects
to generate revenue from advertising and direct marketing to such users. In
addition, the competition for these users is intense and the Company expects
that within two years new technologies will be developed by the Company or its
competitors that will render the existing products obsolete. The obsolescence
of the Company's existing technologies, without the introduction of new
products, could result in a loss of members. As a result, the Company
determined the positive effect of the Global Bridges, Pagecount, Revolutionary
Software and ArcaMax transactions, and therefore the life of intangible
assets, to be two years. See "Risk Factors--Rapid Technological Change," "--
Intense Competition" and "--Risks Associated With Acquisitions."
Non-recurring Charges. Non-recurring charges totaled approximately $1.2
million in the year ended December 31, 1997, consisting of a $243,000 write-
off of costs associated with a discontinued product, and a $1.0 million
provision for a legal dispute for a copyright infringement claim from
Imageline relating to certain clip art images which the Company had licensed
from an unrelated third party. This litigation might subject the Company to
significant liability for damages and might result in invalidation of the
Company's proprietary rights and even if not meritorious, could be time
consuming and expensive to defend and could result in the diversion of
management time and attention, any of which might have a material adverse
impact on the Company's business, results of operations, cash flows and
financial condition. See "Risk Factors--Legal Proceedings," "Business--Legal
Proceedings" and Note 6 of Notes to Consolidated Financial Statements.
Income Taxes. There was no provision for federal or state income taxes for
any period as the Company has incurred operating losses. As of September 30,
1998, the Company had net operating loss carryforwards for federal income tax
purposes of approximately $3.5 million. There can be no assurance that the
Company will realize the benefit of the net operating loss carryforwards. The
federal net operating loss carryforwards will
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expire at various dates beginning in the fiscal year 2011 through 2012 if not
utilized. Due to the "change of ownership" provisions of the Internal Revenue
Code, the availability of the Company's net operating loss and credit
carryforwards may be subject to an annual limitation against taxable income in
future periods if a change in ownership of more than 50% of the value of the
Company's stock should occur over a three year period, which could
substantially limit the eventual tax utilization of these carryforwards. See
Note 3 of Notes to Consolidated Financial Statements.
43
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following tables present certain consolidated statements of operations
data for the Company's seven most recent quarters ended September 30, 1998 in
dollars and as a percentage of net revenue. In management's opinion, this
unaudited information has been prepared on the same basis as the audited
annual financial statements and includes all adjustments (consisting only of
normal recurring adjustments) necessary for fair presentation of the unaudited
information for the quarters presented. This information should be read in
conjunction with the consolidated financial statements, including the notes
thereto, included elsewhere herein. The results of operations for any quarter
are not necessarily indicative of results that may be expected for any
subsequent periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1997 1997 1997 1997 1998 1998 1998
-------- -------- --------- -------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenue:
Electronic commerce.... $ 9 $ 12 $ 38 $ 268 $ 677 $ 1,157 $ 1,532
Advertising............ -- 7 14 39 83 272 598
License fees and other. 20 151 170 113 89 287 170
----- ----- ------- ----- ------- ------- -------
Total net revenue...... 29 170 222 420 849 1,716 2,300
----- ----- ------- ----- ------- ------- -------
Cost of net revenue(1):
Cost of electronic
commerce.............. 4 49 19 99 278 621 1,067
Cost of license fees
and other............. 82 23 31 12 8 19 7
----- ----- ------- ----- ------- ------- -------
Total cost of net
revenue............... 86 72 50 111 286 640 1,074
----- ----- ------- ----- ------- ------- -------
Gross profit............ (57) 98 172 309 563 1,076 1,226
Operating expenses:
Operating and
development........... 397 350 132 271 576 773 1,209
Sales and marketing.... 37 83 51 121 262 455 853
General and
administrative........ 152 130 195 244 316 783 1,059
Purchased in-process
research and
development........... -- -- -- -- 330 330 130
Amortization of
deferred compensation. 5 6 100 137 79 728 304
Amortization of
intangible assets..... -- -- -- -- -- 346 741
Non-recurring charges.. -- 243 1,000 -- -- -- --
----- ----- ------- ----- ------- ------- -------
Total operating
expenses.............. 591 812 1,478 773 1,563 3,415 4,296
----- ----- ------- ----- ------- ------- -------
Loss from operations... (648) (714) (1,306) (464) (1,000) (2,339) (3,070)
Other income, net...... -- -- -- -- -- -- 17
----- ----- ------- ----- ------- ------- -------
Net loss................ $(648) $(714) $(1,306) $(464) $(1,000) $(2,339) $(3,053)
===== ===== ======= ===== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENT OF NET REVENUE THREE MONTHS ENDED
-----------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1997 1997 1997 1997 1998 1998 1998
-------- -------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenue:
Electronic commerce.... 31.0 % 7.1 % 17.1 % 63.8 % 79.7 % 67.4 % 66.6 %
Advertising............ -- 4.1 6.3 9.3 9.8 15.9 26.0
License fees and other. 69.0 88.8 76.6 26.9 10.5 16.7 7.4
-------- ------ ------ ------ ------ ------ ------
Total net revenue...... 100.0 100.0 100.0 100.0 100.0 100.0 100.0
-------- ------ ------ ------ ------ ------ ------
Cost of net revenue(1):
Cost of electronic
commerce.............. 13.8 28.9 8.6 23.5 32.8 36.2 46.4
Cost of license fees
and other............. 282.8 13.5 13.9 2.9 0.9 1.1 0.3
-------- ------ ------ ------ ------ ------ ------
Total cost of net
revenue............... 296.6 42.4 22.5 26.4 33.7 37.3 46.7
-------- ------ ------ ------ ------ ------ ------
Gross profit............ (196.6) 57.6 77.5 73.6 66.3 62.7 53.3
Operating expenses:
Operating and
development........... 1,369.0 205.9 59.5 64.6 67.8 45.0 52.6
Sales and marketing.... 127.6 48.8 23.0 28.8 30.9 26.5 37.1
General and
administrative........ 524.1 76.5 87.8 58.1 37.2 45.7 46.0
Purchased in-process
research and
development........... -- -- -- -- 38.9 19.2 5.7
Amortization of
deferred compensation. 17.2 3.5 45.0 32.6 9.3 42.4 13.2
Amortization of
intangible assets..... -- -- -- -- -- 20.2 32.2
Non-recurring charges.. -- 142.9 450.5 -- -- -- --
-------- ------ ------ ------ ------ ------ ------
Total operating
expenses.............. 2,037.9 477.6 665.8 184.1 184.1 199.0 186.8
-------- ------ ------ ------ ------ ------ ------
Loss from operations... (2,234.5) (420.0) (588.3) (110.5) (117.8) (136.3) (133.5)
Other income, net...... -- -- -- -- -- -- 0.7
-------- ------ ------ ------ ------ ------ ------
Net loss................ (2,234.5)% (420.0)% (588.3)% (110.5)% (117.8)% (136.3)% (132.8)%
======== ====== ====== ====== ====== ====== ======
</TABLE>
- --------
(1) There are no material costs of advertising revenue.
44
<PAGE>
The Company's operating expenses have increased significantly in absolute
dollar amounts in each quarter during 1996 and 1997 and in the first three
quarters of 1998 as the Company has transitioned from the development stage to
the commercialization of its services and products and expansion of its
business. The Company expects operating expenses will continue to increase in
the future as the Company continues to seek to expand its business. To the
extent that these expenses are not accompanied by an increase in net revenue,
the Company's business, results of operations and financial condition could be
materially adversely affected.
The Company expects operating results to fluctuate significantly in the
future as a result of a variety of factors, many of which are outside of the
Company's control. These factors include demand for the products the Company
sells through its Web site, consumers' acceptance of electronic commerce and,
in particular, direct e-mail marketing as a medium for the purchase of goods
and services, demand for Web-based advertising, advertisers' market acceptance
of the Web as an advertising medium, the level of traffic on the Xoom.com
site, the budgeting cycles of advertisers, the amount and timing of capital
expenditures and other costs relating to the expansion of the Company's
operations, the introduction of new or enhanced services by the Company or its
competitors, the timing and number of new hires, the availability of desirable
products and services for sale through the Company's Web site, the accuracy of
the Company's predictions regarding optimal inventory levels for products,
pricing changes for Web-based advertising as a result of competition or
otherwise, the loss of a key advertising contract or relationship by the
Company, changes in the Company's pricing policy or those of its competitors,
the mix of products, services and advertisements sold by the Company,
engineering or development fees that may be paid in connection with adding new
Web site development and publishing tools, technical difficulties with the
Xoom.com site, incurrence of costs relating to future acquisitions, general
economic conditions, and economic conditions specific to the Internet or all
or a portion of the technology market. As a strategic response to changes in
the competitive environment, the Company may from time to time make certain
pricing, service or marketing decisions or pursue business combinations that
could have a material adverse effect on the Company's business, results of
operations and financial condition. In order to accelerate the promotion of
the Xoom.com brand, the Company intends to significantly increase its
marketing budget, which could materially and adversely affect the Company's
business, results of operations and financial condition. The Company expects
to experience seasonality in its business, with user traffic on the Xoom.com
site potentially being lower during the summer and year-end vacation and
holiday periods when overall usage of the Web is lower. Additionally,
seasonality may significantly affect the Company's advertising revenue during
the first and third calendar quarters, as advertisers historically spend less
during these periods. Because Web-based commerce and advertising is an
emerging market, additional seasonal and other patterns may develop in the
future as the market matures. Any seasonality is likely to cause quarterly
fluctuations in the Company's operating results, and there can be no assurance
that such patterns will not have a material adverse effect on the Company's
business, results of operations and financial condition.
Due to the foregoing factors, the Company's quarterly net revenues and
operating results are difficult to forecast. Consequently, the Company
believes that period to period comparisons of its operating results will not
necessarily be meaningful and should not be relied upon as an indication of
future performance. It is likely that in some future quarter or quarters the
Company's operating results may fall below the expectations of securities
analysts and investors. In such event, the trading price of the Company's
Common Stock would likely be materially and adversely affected. See "Risk
Factors--Potential Fluctuations In Quarterly Results; Seasonality;
Unpredictability Of Future Net Revenue."
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily
through the private placement of Common Stock. As of September 30, 1998, the
Company had approximately $1.0 million in cash.
Net cash used in operating activities for the Inception Period, the year
ended December 31, 1997 and the nine months ended September 30, 1997 and 1998
was $635,000, $1.4 million, $1.3 million and $3.1 million, respectively. Cash
used in operating activities in each of these periods was primarily the result
of net losses.
Net cash used in investing activities for the Inception Period, the year
ended December 31, 1997 and the nine months ended September 30, 1997 and 1998
was $64,000, $393,000, $44,000 and $1.4 million, respectively. Cash
45
<PAGE>
used in investing activities in each period was primarily related to purchases
of fixed assets, except for the nine months ended September 30, 1998, in which
cash used in investing activities also included $329,000 of net cash for
business acquisitions. From time to time the Company expects to evaluate the
acquisition of products, businesses and technologies that complement the
Company's business, for which a portion of the net proceeds from the offering
may be used.
Net cash provided by financing activities of $700,000, $1.8 million, $1.3
million, and $5.6 million for the Inception Period, the year ended December
31, 1997 and the nine months ended September 30, 1997 and 1998, respectively,
was primarily attributable to net proceeds from the issuance of Common Stock
and the issuance of notes payable to stockholders.
As of September 30, 1998, the Company's principal commitments consisted of
obligations outstanding under operating leases and payments due under a
software distribution agreement. Although the Company has no material
commitments for capital expenditures, it anticipates a substantial increase in
its capital expenditures and lease commitments consistent with anticipated
growth in operations, infrastructure and personnel. Also, in the future, the
Company may require a larger merchandise inventory in order to provide better
availability to customers and achieve purchasing efficiencies.
As of September 30, 1998, the Company had a total of $2.8 million in notes
payable relating to its acquisitions, $1.8 million of which is due within one
year. This includes a non-interest bearing note payable in the amount of $1.2
million payable to the shareholders of Paralogic in minimum monthly
installments of $30,000 through September 1999 including additional payments
up to $860,000 based on performance measurements, notes payable of $55,000 and
$231,000 which bear an interest rate of 5% and are due in equal monthly
payments of $2,500 and $10,500 between July 1998 and August 2000 to the
shareholders of Global Bridges and Revolutionary Software, respectively, and a
$135,000 interest free note payable to ArcaMax, which is due in equal monthly
installments of $15,000 from July 1998 to June 1999 unless the Company
successfully executes an initial public offering or completes a sale of
substantially all of its assets, in which case the entire unpaid balance at
that time shall become due and payable. In addition, a promissory note in the
amount of $1.2 million is payable to the shareholders of Pagecount under a
recourse promissory note bearing interest at an annual rate of 7% amortized
over a 24-month schedule, with all amounts due and payable nine months after
the closing of the agreement, provided that if the Company completes an
initial public offering or a sale of substantially all of its assets prior to
such date, the entire unpaid balance at that time shall become immediately due
and payable. See Note 9 of Notes to Consolidated Financial Statements.
The Company intends to use a portion of the net proceeds to repay the note
payable issued in connection with the Pagecount acquisition, and to pay the
remaining balance due under the license agreement with ArcaMax. In addition,
in connection with the acquisition of Global Bridges and the purchase of
certain assets of Revolutionary Software, the Company is required to pay a
cash consideration of $130,000 and $260,000, respectively, upon completion of
the Offering.
In the nine months ended September 30, 1998, the Company issued warrants to
purchase a total of 306,427 shares of Common Stock at a price of $3.33 per
share. These warrants are immediately exercisable and expire on the earlier of
the successful completion of an initial public offering or the year 2003. See
Note 4 of Notes to Consolidated Financial Statements.
On October 1, 1998, the Company entered into a secured financing agreement
with a leasing company. The agreement provides for borrowings of up to a
cumulative amount of $1,000,000 through July 31, 1999. As of November 30,
1998, the Company has borrowed approximately $521,000 under this agreement.
On November 3, 1998, the Company entered into a secured loan agreement which
provides for borrowings up to $2,750,000. The Company is eligible to borrow up
to $1,250,000 and will be eligible to borrow the remaining $1,500,000 after
reaching 4.8 million members. Pursuant of the terms of the loan agreement, the
Company is required to issue the lender a warrant to purchase 183,333 shares
of Common Stock at an exercise
46
<PAGE>
price equal to the initial public offering price. As of November 30, 1998, the
Company has borrowed $1,250,000 under this agreement. The Company anticipates
taking a non-cash charge classifiable as a non-operating expense of
approximately $1.0 million during the fourth quarter of 1998 in connection
with the issuance of this warrant.
The Company's capital requirements depend on numerous factors, including
market acceptance of the Company's services, the amount of resources the
Company devotes to investments in the Xoom.com communities, the resources the
Company devotes to marketing and selling its services and its brand
promotions, the amount of inventory the Company must carry to support
electronic commerce sales, and other factors. The Company has experienced a
substantial increase in its capital expenditures since its inception
consistent with the growth in the Company's operations and staffing, and
anticipates that this will continue for the foreseeable future particularly
relating to the Company's Web site and systems infrastructure. The Company has
received a report from its independent auditors on their audit of the
Company's financial statements as of September 30, 1998, containing an
explanatory paragraph that describes the uncertainty as to the ability of the
Company to continue as a going concern due to the Company's lack of sufficient
cash to meet its projected operating needs for the next 12 months. The Company
believes, however, that the net proceeds from the Offering, together with
current cash and cash equivalents and amounts available for borrowing under
existing arrangements, will be sufficient to meet its anticipated cash needs
for working capital, capital expenditures and business expansion for at least
the next 12 months. Thereafter if cash generated from operations is
insufficient to satisfy the Company's liquidity requirements, the Company may
seek to sell additional equity or debt securities or to obtain a credit
facility. The sale of additional equity or convertible debt securities could
result in additional dilution to the Company's stockholders. There can be no
assurance that financing will be available in amounts or on terms acceptable
to the Company, if at all. See "Risk Factors--Future Capital Needs;
Uncertainty Of Additional Financing; Uncertain Ability To Continue As A Going
Concern."
YEAR 2000 COMPLIANCE
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any programs that
have time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a major system failure or
miscalculations. The Company is currently engaged in a two-phase process to
evaluate its internal status with respect to the Year 2000 issue. In the first
phase, which the Company expects to complete in the first quarter of 1999, the
Company is conducting an evaluation of its systems, including both IT systems
and non-IT systems such as hardware containing embedded technology, for Year
2000 compliance. The Company has completed a significant portion of this phase
to date, and systems that have been evaluated are either Year 2000 compliant
or are expected to be made compliant at an immaterial cost to the Company.
Although the Company does not expect that the impact of the Year 2000 issue
will be material in systems still under evaluation, there can be no assurance
that the Company will not discover Year 2000 issues in the course of its
evaluation process that would have a material adverse effect on the business,
results of operations or financial condition of the Company.
Phase two of the process, which is expected to be completed during the
second quarter of 1999, will involve taking any needed corrective action to
bring systems into compliance and to develop a contingency plan in the event
any non-compliant critical systems remain by January 1, 2000. As part of this
phase, the Company will attempt to quantify the impact, if any, of the failure
to complete any necessary corrective action. Although the Company cannot
currently estimate the magnitude of such impact, if systems material to the
Company's operations have not been made Year 2000 compliant upon completion of
this phase, the Year 2000 issue could have a material adverse effect on the
Company's business, results of operations and financial condition.
To date, the costs incurred by the Company with respect to this process have
not been material. Future costs will remain difficult to estimate until the
completion of phase one; however, the Company does not currently anticipate
that such costs will be material.
Concurrently with the two-phase analysis of its internal systems, the
Company has begun to survey third-party entities with which the Company
transacts business, including critical vendors and financial institutions, for
Year 2000 compliance. The Company expects to complete this survey in the
second quarter of 1999. At this
47
<PAGE>
time the Company cannot estimate the effect, if any, that non-compliant
systems at these entities could have on the business, results of operations or
financial condition of the Company, and there can be no assurance that the
impact, if any, would not be material. See "Risk Factors--Year 2000
Compliance."
IMPACT OF EURO INTRODUCTION
Beginning in January 1999, a new currency called the "euro" is scheduled to
be introduced in certain European countries that are part of the Economic and
Monetary Union ("EMU"). During 2002, all EMU countries are expected to be
operating with the euro as their single currency. A significant amount of
uncertainty exists as to the effect the euro will have on the marketplace.
Additionally, all of the final rules and regulations have not yet been defined
and finalized by the European Commission with regard to the euro currency. The
Company is assessing the effect the euro introduction will have on its
internal systems and the sale of its products. The Company expects to take
appropriate actions based on the results of such assessment. The Company has
not yet determined the costs of addressing this issue and there can be no
assurance that this issue and its related costs will not have a material
adverse effect on the Company's business, results of operations and financial
condition. See "Risk Factors--Introduction Of Euro."
RECENT ACCOUNTING PRONOUNCEMENTS
As of January 1, 1998, the Company adopted, SFAS 130, "Reporting
Comprehensive Income" which establishes standards for reporting and displaying
comprehensive income and its components in a full set of general-purpose
financial statements. The adoption of this standard has had no impact on the
Company's consolidated financial position, stockholders' equity, results of
operations or cash flows.
Additionally, the Financial Accounting Standards Board issued SFAS 131,
"Disclosure about Segments of an Enterprise and Related Information," which
establishes standards for the way public business enterprises report
information in annual statements and interim financial reports regarding
operating segments, products and services, geographic areas, and major
customers. SFAS 131 was issued and will be effective for 1998. The Company is
evaluating additional disclosures, if any, which may result from this
pronouncement.
48
<PAGE>
BUSINESS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in these forward-looking statements. Factors that may cause
such a difference include, but are not limited to, those discussed in "Risk
Factors."
OVERVIEW
Xoom.com is one of the fastest growing direct marketing companies on the
Internet. The Company attracts members to its community site with a variety of
free services, including homepages, e-mail, chat rooms, clip art and software
libraries and online greeting cards. Xoom.com members can also join topical
communities where they can exchange ideas and information. Upon registration,
members agree to receive periodic offers of products and services via e-mail.
These offerings are competitively priced and continuously updated, and include
computer software, computer accessories and peripherals, consumer electronics
and clip art on CD-ROM. New product offerings will include a DVD movie club,
gift items, health-related products and a travel club. Xoom.com believes that
its rapidly growing base of self-qualified members provides the Company with
highly attractive and effective electronic commerce opportunities. In
addition, the Company believes that its high levels of traffic and online
reach present an attractive platform for advertising.
Xoom.com was the second fastest growing site on the Web measured by online
reach in the first half of 1998 and the twelfth most trafficked site in
October 1998, according to Media Metrix. Xoom.com's reach increased to over
13% in September 1998 from less than 2% in January 1998, according to Media
Metrix. Xoom.com had approximately 4.5 million members as of November 13,
1998, adding an average of approximately 20,000 new members per day for the
last thirty days. The current growth rates of Xoom.com's reach and new
customers are not necessarily indicative of growth rates the Company may
experience in the future. In the first nine months of 1998, 69% of the
Company's net revenue was derived from electronic commerce and approximately
29% of net revenue was derived from non-U.S. sales. See Note 1 of Notes to
Consolidated Financial Statements. Over the past twelve months, quarterly net
revenue has increased from approximately $221,000 to $2.3 million,
representing compound quarterly sales growth of approximately 80%. See "Risk
Factors--Limited Operating History; No Assurance Of Profitability; Anticipated
Losses."
INDUSTRY BACKGROUND
Growth of the Internet
The Internet has emerged as a global medium, enabling millions of people
worldwide to share information, communicate and conduct business
electronically. IDC estimates that the number of Web users will grow from
approximately 69 million worldwide in 1997 to approximately 320 million
worldwide by the end of 2002. This growth is expected to be driven by the
large and growing number of PCs installed in homes and offices, the decreasing
cost of PCs, easier, faster and cheaper access to the Internet, improvements
in network infrastructure, the proliferation of Internet content and the
increasing familiarity with and acceptance of the Internet by businesses and
consumers. The Internet possesses a number of unique characteristics that
differentiate it from traditional media: a lack of geographic or temporal
limitations; real-time access to dynamic and interactive content; and
instantaneous communication with a single individual or with groups of
individuals. As a result of these characteristics, Web usage is expected to
continue to grow rapidly. The proliferation of users, combined with the Web's
reach and lower cost of marketing, has created a powerful direct sales and
marketing channel.
Electronic Commerce and Advertising
The growing adoption of the Web represents a significant opportunity for
businesses to conduct commerce over the Internet. According to IDC,
transactions on the Internet are expected to increase from approximately $12
billion in 1997 to approximately $426 billion in 2002, with the number of
users that are buyers of products and services rising from 26% to 40% in the
same period. One factor in this projected growth is the increasing
49
<PAGE>
variety of transactions that take place on the Web. Initially, companies
focused on facilitating Internet transactions between businesses. More
recently, however, a number of companies have targeted business-to-consumer
transactions. These companies typically use the Internet to offer standard
products and services that can be easily described with graphics and text and
that do not necessarily require a physical presence for purchase, such as
software, books, music CDs, videocassettes, home loans, airline tickets and
online banking and stock trading. The Internet allows these companies to
develop one-to-one relationships with customers worldwide without making
significant investments in traditional infrastructure such as retail outlets,
distribution networks and sales personnel.
Growth in the Web has also created an important new advertising channel.
Tools not available in traditional advertising media, such as real-time
measurement of "click-through" on advertising banners, further increase the
attractiveness of Web advertising by giving advertisers real-time feedback on
campaigns. Jupiter Communications projects that the dollar value of
advertising on the Web is expected to increase from approximately $940 million
in 1997 to approximately $7.7 billion in 2002. To date, businesses and
advertisers have typically used traditional navigational sites and
professionally-created content sites for the sale and marketing of their
products and services online. In addition, online community sites provide more
detailed demographic data and self-selected groups of consumers with an
affinity for particular products. Advertisers can thus more easily deliver
targeted messages in cost-effective manner.
The Direct Marketing Opportunity on the Internet
The same advantages that facilitate the growth of electronic commerce and
advertising make the Internet a compelling medium for direct marketing
campaigns. Direct marketing over the Internet uses e-mail to reach potential
buyers worldwide, potentially offering them a significantly broader selection
of products and services than is available locally. Internet-based direct
marketing also allows marketers to rapidly collect meaningful demographic
information and feedback from consumers, and to use this information to tailor
new messages quickly. Registration information typically collected by Web
sites, and user involvement in topical communities of interest, provide
additional demographic information. This offers businesses the chance to
increase the effectiveness of their direct marketing campaigns, which may
translate into higher sales. Further, the costs of direct marketing via e-mail
are dramatically lower than those of traditional direct marketing techniques.
As a result, Internet-based direct marketing campaigns can be profitable at
response rates that are a fraction of the rates for traditional campaigns.
The Growth of Online Communities
Traditional use of the Web has consisted largely of one-way communications
in which users "surf" and view different Web sites containing professionally-
created content on topics of general interest such as news, sports and
weather. Internet search engines and navigational sites serve a valuable
function for users seeking to browse the Internet and locate Web sites of
interest. However, these services are not primarily focused on providing a
platform for publishing and aggregating the rapidly increasing volume of
personalized content created by users or enabling such users to interact with
each other.
In particular, users who publish Web sites have had limited means of
attracting visitors to their sites or interacting with such visitors, and, as
a result, there is a growing demand for online community sites where users can
publish content and engage in community activities. According to statistics
published by Media Metrix, online community sites have recently been one of
the fastest growing sectors of the Web. Additionally, Web users are
increasingly seeking access to unique, personalized content and interaction
with others who share similar interests. Online communities provide a medium
for such access and interaction.
THE XOOM.COM SOLUTION
Xoom.com uses the unique characteristics of the Web to cost-effectively
market products and services to its rapidly growing member base. By offering
its members a variety of compelling free services and communities
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and competitively priced product offerings, the Company believes it has
created an innovative online sales channel with low customer acquisition
costs. The key elements of Xoom.com's approach are:
Cost-Effective Direct Marketing Capability
Xoom.com applies a sophisticated direct marketing approach, modeled after
traditional direct mail campaigns, to generate product sales. Unlike
traditional direct marketing campaigns, which typically use paper-based
promotional materials delivered by mail, Xoom.com's campaigns use regular e-
mails to communicate offers to members, significantly reducing the cost of
reaching the consumer. The interactive nature of the Web and the ability to
display attractive graphics to users clicking through on product offerings
enable Xoom.com to present such offerings in a more complete and dynamic
manner than allowed by paper-based delivery systems.
Rapid Formulation of Effective Direct Marketing Campaigns
Prior to introducing new product offerings to its entire membership base,
Xoom.com selects a subset of members for the purpose of test-marketing a
campaign. The Company has developed campaign-management software that uses
statistical techniques to analyze a test campaign and to predict the expected
response rate to such a campaign if it is rolled out to a larger group of
members. The Company can also analyze the effects of variations in price,
graphics and copy. Results are usually available in less than one day. On the
basis of these tests, Xoom.com selects product offers for a larger audience
and modifies them to maximize response rates, sales, profitability and member
retention. Testing also increases the accuracy of the Company's forecasts of
product demand. As a result, the Company is typically able to carry small
amounts of inventory, thus lowering overhead and the risk of write-offs.
Provision of Free Services to Attract a Growing Membership Base
The Company offers its members a variety of free services, including Web
site creation and hosting, e-mail, chat rooms, online clip art and online
greeting cards. Xoom.com provides members with 11 megabytes of disk space on
its servers to develop personal Web sites or to use as personal Web storage
space. The Company also allows members to access proprietary software in order
to quickly create a Web page, as well as ready-made multimedia tools that can
be used to develop a fully-customized, content-rich site. Members can join one
or more of over 200 communities free of charge. Members also promote their Web
sites elsewhere on the Internet, using hyperlinks on other individual sites as
well as listings on directories and search engines, resulting in millions of
new visitors to the Xoom.com site. The Company believes that the provision of
free services is critical to maintaining membership growth.
Development of Detailed Member Database
To date, the Company has gathered a significant base of information about
its members through registration information, responses to promotional
campaigns and purchasing information obtained from third parties. As more
members join Xoom.com and participate in its topical communities, and as the
Company obtains additional purchasing history data, the level of information
regarding Xoom.com's members will continue to grow. Xoom.com intends to use
this growing database to target offers, increase its range of product
offerings and encourage future transactions and involvement with the Xoom.com
site.
Attractive Advertising Platform
Xoom.com's free services and extensive community offerings create high
volumes of traffic, enabling business advertisers to cost-effectively promote
their products and services on the Xoom.com site. The Company's community
structure also provides valuable demographic information and affinity-based
member segmentation that increase advertisers' ability to target campaigns.
Further, the diversity of interest groups among members creates potential
markets for a broad range of products and services, resulting in a
correspondingly broad range of advertising customers.
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Customer Convenience
Using e-mail technology as a direct marketing tool, the Company creates
attractive electronic commerce opportunities for potential purchasers.
Xoom.com's order processing services are available 24 hours a day, seven days
a week, which facilitates on-demand ordering. Purchasers can reach the
Xoom.com site from the home or office. The Company ships products directly to
the customer's address, without the need to travel to a store, thereby
enhancing convenience, particularly for customers in international or rural
locations where traditional retail distribution cannot be supported.
STRATEGY
The Company's objective is to be a leading community-based direct selling
channel on the Internet. Key strategies to achieve this objective include:
Focus on Membership Growth
The Company plans to increase membership by: (i) maintaining a large and
diverse range of active communities focused on special interest categories;
(ii) offering a broad and expanding array of free services; and (iii)
marketing its free services through the Internet. In addition, the Company
intends to continue to seek acquisitions and strategic alliances to increase
membership.
Build Strong Brand Recognition
The Company believes that establishing and leveraging the Xoom.com brand is
critical to its ultimate success. The Company has already benefited from word-
of-mouth marketing of its brand through interactions between existing and
prospective members. The Company intends to increase brand equity through
effective marketing and promotion, improved customer service and the
completion of strategic acquisitions and alliances.
Promote Repeat Usage and Member Loyalty
The Company believes that community-based Web sites have an inherent
potential for creating and retaining a loyal membership base, particularly
when combined with free service offerings such as those provided by the
Company. As members invest time and energy in Xoom.com's services, members may
become less inclined to switch to alternate services. The Company intends to
promote repeat usage and member loyalty by maintaining and improving its range
of communities and free services, expanding the breadth and depth of its
product offerings and remaining responsive to member suggestions.
Effectively Convert Traffic and Membership Into Commerce Revenue
Xoom.com intends to leverage its community structure and direct marketing
capabilities to increase revenue. The Company has developed a number of
community categories whose members potentially have common purchasing needs
(e.g., Web cameras for groups that wish to communicate by video conference).
The Company also believes that there are opportunities for cross-selling
complementary merchandise or upselling related products into existing
communities. In addition, the Company intends to make further product offers
via e-mail and to continue providing convenient access for purchasers in order
to induce immediate purchases.
Offer New Products and Services
The Company's primary product offerings currently include computer software,
computer accessories and peripherals, consumer electronics and clip art on CD-
ROM. In the fourth quarter of 1998, the Company intends to introduce a DVD
movie club, gift items, health-related products and a travel club. Future
offerings may include educational products, books, housewares, pet supplies,
office supplies and other items that appeal to members and are profitable to
the Company.
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Increase Advertising Revenue
The Company intends to increase its advertising revenue by focusing on a
number of key strategies, including expanding its advertising customer base,
increasing advertising rates, page views and the average size and length of
advertising contracts, hiring additional direct sales representatives and
continuing to invest in improving its ad serving and targeting technology. The
Company also intends to offer special sponsorship and events-driven
promotional advertising programs to build brand awareness, generate leads and
drive traffic to an advertiser's site and to sell sponsorships of special
interest pages where topically focused content is aggregated on a permanent
area within a community.
Expand Internationally
The Company believes that the anticipated international growth of Internet
usage has the potential to generate significant additional revenue for
Xoom.com. According to IDC, the number of Web users outside of the United
States is projected to increase from approximately 30 million in 1997 to
approximately 184 million in 2002. For the nine months ended September 30,
1998, international sales comprised 29% of the Company's total net revenue and
42% of electronic commerce revenue. See Note 1 of Notes to Consolidated
Financial Statements. The Company believes that it is particularly well-
positioned to benefit from international sales growth because, unlike
traditional retailers, the Company is not encumbered with an international
distribution infrastructure that can depress margins. In addition, the Company
believes that it has a distinct advantage over catalog and store-based
retailers located in the United States because such retailers are typically
prohibited from shipping products internationally due to restrictions in their
agreements with product manufacturers. The Company intends to enter into
partnerships with local companies in order to increase its international
presence and sales.
Pursue Strategic Acquisitions and Alliances
To date, the Company has entered into a number of acquisitions, license
arrangements and strategic alliances in order to build its membership base and
services, provide community-specific content, generate additional traffic and
establish additional sources of net revenue. These include the acquisition of
a chat service, an HTML-based e-mail product, a Web page counter and guestbook
service, as well as an exclusive license arrangement with an online greeting
card service. Xoom.com has also formed alliances with Phillips Publishing for
developing a co-branded investing community, ZDNET for clip-art marketing and
USA Today for Web-based community services, among others. In addition, the
Company has entered into a letter of intent with Hanover Direct, Inc.
("Hanover Direct") for developing a jointly-owned e-commerce shopping channel.
A typical alliance provides the partner with branding flexibility, incremental
traffic, potential increases in membership and revenue and integration of
service offerings at no extra cost to the partner. The Company intends to
continue making acquisitions to increase reach and membership and to seek
additional strategic alliances with content and distribution partners,
including alliances that create co-branded sites through which Xoom.com
markets its services.
Maintain and Improve Technological Focus and Expertise
The Company believes that highly advanced functionality and performance of
its Xoom.com site are critical to its ultimate success. The Company is
committed to site reliability and accessibility, and intends to make
continuous enhancements to its technology, such as upgrading and expanding
server and networking infrastructure, increasing fault tolerance and improving
Internet connections. In addition, the Company intends to increase the
efficiency of its transaction processing and fulfillment operations and the
sophistication of its direct marketing campaign management software.
XOOM.COM PRODUCTS AND SERVICES
By offering free services, Xoom.com creates a diverse range of communities
and a critical mass of members with whom to interact. Xoom.com provides each
member with 11 megabytes of disk space on its servers and the use of powerful
Web publishing tools for the rapid creation of a personalized Web site.
Additionally, the Company offers members free e-mail, chat, online clip art
and online greeting cards, while also providing excellent customer service and
high-quality site performance. Members can participate in one or more of over
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200 communities and link to their personal Web sites, allowing them to take
advantage of the Company's services without the need to access the Xoom.com
site directly.
How Visitors Become Members
To become a member, a visitor must give a valid e-mail address as well as
permission to be re-contacted with targeted news and product offers by e-mail.
A new member can then use one or more of Xoom.com's free services, such as
building a Web page, joining a community or sending an online greeting card,
or can purchase products at a discount. Xoom.com's services are designed so
that their use attracts new members. For example, online greeting cards
contain a message that informs the recipient of the card's origins and
provides information on how the recipient can learn more about Xoom.com and
become a member. The Company also encourages members to link their Web sites
and communities to users outside of Xoom.com, thereby increasing Xoom.com's
visibility among potential members.
Converting Membership Into Commerce Revenue
Following membership registration, Xoom.com sends the new member an e-mail
with password and membership confirmation, along with an initial product
offer. Thereafter, Xoom.com sends the member an e-mail approximately once a
week, containing product offerings or informational newsletters. Each e-mail
contains directions for removal from Xoom.com's address list, should the
member wish to stop receiving offers. Product offers are made to members
worldwide using direct marketing techniques. Currently, the Company typically
makes product offers to its entire membership base. In the future, as more
members join topical communities and the Company further develops its member
database, the Company believes it will be able to effectively target consumers
having an affinity for certain products and services. Frequent directed e-mail
offers, combined with ease of ordering, provide a context for on-demand
purchases of products and services. The Company procures substantially all of
its products from Nimbus on a purchase order basis. The following chart
details Xoom.com's major product offerings for the nine months ended September
30, 1998 and prices for each category:
<TABLE>
<CAPTION>
PRODUCT CATEGORY PRICE RANGE PRODUCTS OFFERED
<S> <C> <C>
Computer Software $15-$50 Photo editing
software, Web
utilities
Computer Accessories $69-$99 Modems, computer video
and Peripherals cameras
Consumer Electronics $179-$399 Digital cameras, DVD
players
Clip Art $19-$79 CD-ROM clip art
collections
Gifts $7-$399 Beanie Babies
</TABLE>
ACQUISITIONS AND STRATEGIC ALLIANCES
The Company has entered into a number of acquisitions, license arrangements
and strategic alliances in order to increase its free service offerings,
provide community-specific content, generate additional traffic, increase
membership and establish additional sources of revenue. The Company intends to
evaluate acquisition opportunities and to seek additional strategic alliances
with content and distribution partners. The Company believes that alliances
will prove attractive to potential partners because they are designed to
provide them with branding flexibility, incremental traffic, potential
increases in membership and revenue and integration of service offerings at no
extra cost to the partner.
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Acquisitions and License Arrangements
. Paralogic Chat Network. In March 1998, the Company acquired Paralogic
and obtained a perpetual license to Paralogic's chat software. This
transaction provided Xoom.com with chat functionality and a ready-made
base of approximately 140,000 member chat rooms. Since this acquisition,
the total number of member chat rooms has increased to approximately
250,000, and chat rooms have generated over 2.5 million new Xoom.com
members.
. Sitemail. In June 1998, the Company acquired Sitemail, an HTML-based e-
mail product, through its acquisition of Global Bridges and the purchase
of certain technology from Revolutionary Software, thereby expanding the
Company's suite of member services. The Company believes that through
its ownership of the Sitemail technology and the hosting of member
mailboxes, it will gain an increased ability to e-mail customized offers
or offers with enhanced features, such as graphics, to members who use
the Sitemail service.
. Greetings Online. In June 1998, the Company entered into an exclusive,
perpetual license with ArcaMax that gave the Company the ability to
offer Greetings Online, a free online greeting card service, to members.
The Company believes that in the future the Greetings Online service
will allow it to bundle offers of gift items to users of the service.
. Pagecount. In July 1998, the Company acquired the assets of Pagecount, a
Web page counter and guestbook service, which provides Xoom.com with
promotional space on a network of approximately 250,000 Web sites. The
Company believes that this network has the potential to expand
Xoom.com's reach significantly.
Acquisitions carry numerous risks and uncertainties, including difficulties
in the integration of operations, personnel, technologies, products and the
information systems of the acquired companies, diversion of management's
attention from other business concerns, risks of entering geographic and
business markets in which the Company has no or limited prior experience and
potential loss of key employees of acquired organizations. No assurance can be
given as to the ability of the Company to successfully integrate any
businesses, products, technologies or personnel that might be acquired in the
future, and the failure of the Company to do so could have a material adverse
effect on the Company's business, results of operations and financial
condition. In addition, there can be no assurance that the Company will be
successful in identifying potential acquisition candidates. See "Risk
Factors--Risks Associated With Acquisitions."
Strategic Alliances
The Company has entered into a number of strategic alliances, including the
following:
. Hanover Direct. Xoom.com has entered into a letter of intent to form a
joint venture with Hanover Direct, a leading catalog direct marketing
company, which would create a new Internet e-commerce shopping channel.
Pursuant to the proposed joint venture, Xoom.com and Hanover Direct
would combine their respective products and those of third parties for
sale via the channel, which would operate 24 hours-a-day, seven days per
week on the Xoom.com site. New merchandise in limited quantities would
be rotated on an hourly basis around the clock, so that consumers are
motivated toward immediate purchases. Xoom.com and Hanover Direct would
share revenue under the proposed exclusive agreement for this channel.
. Phillips Publishing. Xoom.com is developing a co-branded investing
community with Phillips Publishing, the largest publisher of newsletters
in the U.S. This co-branded site is expected to begin commercial
operations during the fourth quarter of 1998. The site will feature 15
investment advisers and their newsletter content, a ticker and portfolio
service and subscription, and other merchandise offerings. Xoom.com and
Phillips will share revenue from advertising and product and service
sales in this co-branded investing community.
. ZDNet. Xoom.com has created and will host a co-branded site, with the
look and feel of the ZDNet Web site, that will market Xoom.com's clip
art to ZDNet visitors. Xoom and ZDNet will share revenue from
advertising and product sales on the co-branded site.
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. USA Today. Xoom.com has created and will host a co-branded site, with
the look and feel of the USA Today site, that will provide the USA Today
audience with the use of Xoom.com's services. The Company will have the
opportunity to sign up visitors to this site. Xoom.com and USA Today
will share revenue from advertising and product sales on the co-branded
site.
. Ulead Systems, Inc. Xoom.com has an agreement with Ulead Systems to use
its database of over 300,000 e-mail addresses and to market products to
persons on this list. The Company has licensed a number of Ulead
Systems' products for inclusion in bundled product offerings to Xoom
members, customers in Ulead Systems' e-mail database and other e-mail
lists owned or licensed by the Company. Additionally, Ulead Systems
markets Xoom.com products directly from its Web site and receives a
commission on any sales.
In addition to the above relationships, the Company also has relationships
with InfoSpace, Inc., Netopia, Inc. and Sausage Software Ltd. The Company's
strategic alliances are under agreements with a duration of one year or less.
Although the Company views its strategic relationships as a key factor in its
overall business strategy, there can be no assurance that its strategic
partners will view their relationships with the Company as significant to
their own business or that they will not reassess their commitment to the
Company in the future. There can be no assurance that any party to a strategic
alliance agreement with the Company will perform its obligations as agreed or
that any strategic agreement would be specifically enforceable by the Company.
The Company's arrangements with its strategic partners generally do not
establish minimum performance requirements for the Company's strategic
partners but instead rely on their voluntary efforts. In addition, most of the
Company's agreements with its strategic partners may be terminated by either
party with little notice. Therefore, there can be no assurance that these
relationships will be successful. In the event that a strategic relationship
is discontinued for any reason, the Company's business, results of operations
and financial condition may be materially adversely affected. In addition,
there can be no assurance that the Company will be successful in establishing
additional strategic relationships. See "Risk Factors--Reliance On Strategic
Relationships."
SALES AND MARKETING
The Company's sales and marketing strategy is designed to strengthen
awareness of the Xoom.com brand, increase online traffic, build member
loyalty, maximize repeat purchases, increase the size and frequency of
electronic commerce transactions and develop additional revenue opportunities.
Marketing the Xoom.com Site
Historically, the Company's marketing of its services has been primarily by
word-of-mouth and indirect promotions by members with links to the Xoom.com
site and through the use of its services. For example, each e-mail that a
member sends using Xoom.com's e-mail service contains a message from Xoom.com
that promotes Xoom.com's service offerings. The Company believes that such
relationship marketing will continue to generate a substantial amount of
additional traffic and new members. To augment these marketing efforts, the
Company intends to initiate a more formal, aggressive brand promotional
campaign to enhance membership growth and draw additional advertisers and
commerce partners. The Company may use a portion of the net proceeds from the
offering to launch a number of promotional campaigns, some of which may be in
traditional media, including print, radio, billboard and television and some
of which may be through the Web. All promotions will be designed to increase
traffic and brand awareness and an understanding of the Company's community
model. The Company also intends to introduce a number of other brand awareness
and membership retention programs on its own site to leverage its large and
growing member base and visitor traffic. See "Risk Factors--Reliance On
Strategic Relationships."
Product Marketing
Xoom.com applies a sophisticated direct marketing program, modeled after
traditional direct mail campaigns, to generate product sales. Regular e-mails
communicate targeted offers to members at an extremely low cost to the
Company. As Xoom.com gathers additional information about its members, it
intends to further
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target its offers and increase its range of product offerings. The Company has
developed marketing campaign-management software that uses statistical
techniques to analyze a test campaign and to predict the expected response
rate to such campaign if it is rolled out to a larger group of members.
Results are usually available in less than one day. This allows the Company to
quickly and efficiently test-market potential product offerings. On the basis
of these tests, Xoom.com selects product offers for a larger audience and
tests price to maximize response, sales or profitability. Tests also allow the
Company to structure campaigns that maximize member retention.
Advertising
The Company has a direct sales organization, located in New York and San
Francisco, that is dedicated to developing and maintaining close relationships
with top advertisers and leading advertising agencies nationwide. As of
September 30, 1998, the Company had five employees in its direct sales
organization. From time to time the Company also enters into arrangements with
a number of third-party advertising sales representatives, although, as of
September 30, 1998, the Company had no such arrangements. The Company's sales
organization is focused solely on selling advertising on all Xoom.com
properties. The Company's sales organization consults regularly with
advertisers and agencies on design and placement of their Web-based
advertising, provides advertisers with advertising measurement analysis and
focuses on providing a high level of customer service and satisfaction.
Currently, advertisers and advertising agencies enter into short-term
agreements, on average one to two months, pursuant to which they receive a
guaranteed number of impressions for a fixed fee. The Company has experienced,
and expects to continue to experience, a variable renewal rate for its
advertising contracts. Advertising on Xoom.com currently consists primarily of
banner-style advertisements that are prominently displayed at the top of pages
on a rotating basis throughout the Xoom.com site. From each banner
advertisement, viewers can hyperlink directly to the advertiser's own Web
site, thus providing the advertiser an opportunity to directly interact with
an interested customer. The Company's standard rate card cost per thousand
impressions ("CPM") for banner advertisements currently ranges from $8 to $12,
depending upon location of the advertisement and the extent to which it is
targeted for a particular audience. Discounts from standard CPM rates may be
provided for higher volume, longer-term advertising contracts.
Advertising Customers
During the first nine months of 1998, Xoom.com had approximately 90
advertisers on its Web site. For the nine months ended September 30, 1998, the
Company's five largest advertising customers, namely Goto.com, Inc., Spree.com
Corporation, The Mining Co., Musicblvd Network and USA Net, Inc. accounted for
approximately 28% of advertising revenue (approximately 5% of total net
revenue). The following is a list of the Company's top 15 advertising
customers by net revenue for the nine months ended September 30, 1998:
eBay, Inc. Media Synergy, Inc. The Mining Co.
E-Pub Inc. Musicblvd Network USA Net, Inc.
Goto.com, Inc. One & Only VisiCom, Inc.
Hotel Reservations Sportsline USA, Inc. Visual Properties
Network Spree.com Corporation L.L.C.
Maaznet Directory Yoyodyne
Services, Inc. Entertainment, Inc.
CUSTOMER SERVICE AND SUPPORT
The Company believes that the strength of its customer service and technical
support operations is critical to its success in maintaining its membership
base, increasing membership and encouraging repeat usage and purchases. The
Company has established a team of customer service and technical support
professionals who process inquiries and monitor the status of orders,
shipments and payments, operating from 7 a.m. to 6 p.m. Pacific time Monday
through Friday. Members can access customer service by e-mail and customers
can access a toll-free telephone number. The Company intends to enhance and
automate the e-mail response portions of its customer service and technical
support operations in the near future.
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WAREHOUSING AND FULFILLMENT
The Company has no fulfillment operation or warehouse facility of its own,
and currently relies solely on Banta for all warehousing and fulfillment
services. As a result of its product testing, the Company does not generally
carry large amounts of inventory of any given product. All shipments are made
from Banta's warehouse in Orem, Utah. In the event that the Company's product
sales increase substantially, particularly abroad, Banta has facilities within
and outside of the United States that can handle additional shipment and
warehousing needs. See "Risk Factors--Reliance On Certain Vendors."
The Company uses automated interfaces for accepting, sorting and processing
orders to enable it to achieve the most rapid and economical purchase and
delivery terms. Approximately 95% of orders are processed online, with the
remainder by telephone, fax or mail. Once the Company receives an order, it
sends a confirmation by e-mail to the customer. At the end of each day, the
Company sends all orders to Banta for processing. Banta then packs and ships
orders, providing confirmation to Xoom.com along with UPS shipping information
for all ground-shipped US orders. International orders are sent by
international air mail. Xoom.com forwards shipping information by e-mail to
customers, along with a link to UPS for package tracking.
TECHNOLOGY AND INFRASTRUCTURE
The Company has developed an open standard hardware and software system that
is designed for reliability. System architecture is based on a distributed
model that is highly scalable, flexible and modular, emphasizing extensive
automation and a high degree of redundancy that is designed to minimize single
points of failure. The system integrates site management, customer
interaction, inventory management, network monitoring, quality assurance,
transaction processing and fulfillment services. Currently, the system has 2.5
terabytes of unformatted disk space, supports over 25 million hits per day,
has a peak bandwidth of over 90 megabits per second and transfers 350
megabytes of data each day.
The Company uses network servers that are housed separately by application
at Exodus in Santa Clara, California and Frontier in Sunnyvale, California,
third-party and public domain server software optimized internally by the
Company and internally developed tools and utilities. Requests for files are
distributed to the appropriate servers using F5 Labs Big IP load distribution
and balancing hardware. The Company also employs in-house monitoring software
that includes automated diagnostic programs and intelligent agents, which test
and measure system response, create reports for evaluation by technical staff
and generate pager calls in the event of system failures. Additional software
monitors abuse of the site by members and potential hackers. Reporting and
tracking systems generate daily membership, order and campaign reports.
Membership and mailing engines allow for efficient deployment of member data
and targeting of e-mail campaigns.
Member-generated content is stored on a redundant array of independent
disks. Member profile information is stored on multiple disk arrays using
Oracle database software and backed up to long-term tape storage devices on a
daily basis. The Company will continue to upgrade and expand its server and
networking infrastructure in an effort to improve its fast and reliable access
to the Company's Web site and communities. Any system failure that causes an
interruption in service or a decrease in responsiveness of the Company's Web
site could result in less traffic on the Company's Web site and, if sustained
or repeated, could impair the Company's reputation and the attractiveness of
its brand.
Site connectivity to the Internet is provided via multiple DS-3 and OC-3
links on a 24 hour-a-day, seven days per week basis by Exodus and Frontier.
Exodus and Frontier also provide and manage power and environmentals for the
Company's networking and server equipment. The Company manages and monitors
its servers and network fremotely from its headquarters in San Francisco,
California. The Company strives to rapidly develop and deploy high-quality
tools and features into its system without interruption or degradation in
service. Any disruption in the Internet access provided by Exodus or Frontier,
or any interruption in the service that Exodus or Frontier receives from other
providers, or any failure of Exodus or Frontier to handle higher volumes of
Internet users to the Xoom.com site could have a material adverse effect on
the Company's business, results of operations and financial
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condition. See "Risk Factors--Risks Of Capacity Constraints; System Failures;
Technological Risks" and "--Risk Of Reliance On Internally Developed Systems."
COMPETITION
The market for community-based direct selling channels on the Internet is
new and rapidly evolving, and competition for members, consumers, visitors and
advertisers is intense and is expected to increase significantly in the
future. Barriers to entry are relatively insubstantial. The Company believes
that the principal competitive factors for companies seeking to create
communities on the Internet are critical mass, functionality, brand
recognition, member affinity and loyalty, broad demographic focus and open
access for visitors. Other companies who are primarily focused on creating
Web-based communities on the Internet and with whom the Company competes are
Tripod, GeoCities, WhoWhere (through the WhoWhere and Angelfire Web sites) and
theglobe. The Company could also face competition in the future from Web
directories, search engines, shareware archives, content sites, commercial
OSPs, sites maintained by ISPs, traditional media companies and other entities
that attempt to or establish communities on the Internet by developing their
own community or acquiring one of the Company's competitors. Further, there
can be no assurance that the Company's competitors and potential competitors
will not develop communities that are equal or superior to those of the
Company or that achieve greater market acceptance than the Company's
communities. The Company also competes for visitors with many Internet content
providers and ISPs, including Web directories, search engines, shareware
archives, content sites, commercial online services and sites maintained by
ISPs, as well as thousands of Internet sites operated by individuals and
government and educational institutions. These competitors include free
information, search and content sites or services, such as AOL, CNET, CNN/Time
Warner, Excite, Infoseek, Lycos, Netscape, Microsoft and Yahoo!. The Company
also competes with many companies for advertisers, including those companies
with whom the Company competes for visitors as well as traditional forms of
media such as newspapers, magazines, radio and television. The Company
believes that the principal competitive factors in attracting advertisers
include the amount of traffic on its Web site, brand recognition, customer
service, the demographics of the Company's members and viewers, the Company's
ability to offer targeted audiences and the overall cost-effectiveness of the
advertising medium offered by the Company. The Company believes that the
number of Internet companies that obtain revenue from Web-based advertising
will increase substantially in the future. Accordingly, the Company will
likely face increased competition, resulting in increased pricing pressures on
its advertising rates which could in turn have a material adverse effect on
the Company's business, results of operations and financial condition.
The Company also expects to encounter intense competition in the online
commerce market. The Company currently or potentially competes with a variety
of other companies. These competitors include various traditional computer
retailers including CompUSA and MicroCenter, various mail-order retailers
including CDW, Micro Warehouse, Insight, PC Connection and Creative Computers,
various Internet-focused retailers including Amazon.com, Egghead.com,
software.net, NECX Direct, various manufacturers that sell directly over the
Internet including Dell, Gateway, Apple and many software companies, a number
of online service providers including AOL and the Microsoft Network that offer
computer products directly or in partnership with other retailers, some non-
computer retailers such as Wal-Mart that sell a limited selection of computer
products in their stores and computer products distributors which may develop
direct channels to the consumer market. Increased competition from these and
other sources could require the Company to respond to competitive pressures by
establishing pricing, marketing and other programs or seeking out additional
strategic alliances or acquisitions which may be less favorable to the Company
than would otherwise be established or obtained, and thus could have a
material adverse effect on the business, prospects, financial condition and
results of operations of the Company.
Many of the Company's existing and potential competitors, including Web
directories and search engines and large traditional media companies, have
longer operating histories in the Web market, greater name recognition, larger
customer bases and significantly greater financial, technical and marketing
resources than the Company. Such competitors are able to undertake more
extensive marketing campaigns for their brands and services, adopt more
aggressive advertising pricing policies and make more attractive offers to
potential
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employees, distribution partners, commerce companies, advertisers and third-
party content providers. There can be no assurance that Internet content
providers and ISPs, including Web directories, search engines, shareware
archives, sites that offer professional editorial content, commercial online
services and sites maintained by ISPs will not be perceived by advertisers as
having more desirable Web sites for placement of advertisements. In addition,
substantially all of the Company's current advertising customers and strategic
partners also have established collaborative relationships with certain of the
Company's competitors or potential competitors, and other high-traffic Web
sites. Accordingly, there can be no assurance that the Company will be able to
grow its membership base, traffic levels and advertiser customer base at
historical levels or retain its current members, traffic levels or advertiser
customers, or that competitors will not experience greater growth in traffic
than the Company as a result of such relationships which could have the effect
of making their Web sites more attractive to advertisers, or that the
Company's strategic partners will not sever or elect not to renew their
agreements with the Company. There can also be no assurance that the Company
will be able to compete successfully against its current or future competitors
or that competition will not have a material adverse effect on the Company's
business, results of operations and financial condition. See "Risk Factors--
Competition."
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company regards its technology as proprietary and attempts to protect it
by relying on trademark, service mark, copyright and trade secret laws and
restrictions on disclosure and transferring title and other methods. The
Company currently has no patents or patents pending and does not anticipate
that patents will become a significant part of the Company's intellectual
property in the foreseeable future. The Company also generally enters into
confidentiality or license agreements with its employees and consultants, and
generally controls access to and distribution of its documentation and other
proprietary information. Despite these precautions, it may be possible for a
third party to copy or otherwise obtain and use the Company's proprietary
information without authorization or to develop similar technology
independently. The Company pursues the registration of its service marks in
the United States and internationally, and has applied for and obtained the
registration in the United States and certain other countries for a number of
its service marks, including "XOOM," "XOOM.com" and the "X-in-circle" logo.
Effective trademark, service mark, copyright and trade secret protection may
not be available in every country in which the Company's services are
distributed or made available through the Internet, and policing unauthorized
use of the Company's proprietary information is difficult. See "Risk Factors--
Dependence On Intellectual Property Rights."
Legal standards relating to the validity, enforceability and scope of
protection of certain proprietary rights in Internet-related businesses are
uncertain and still evolving, and no assurance can be given as to the future
viability or value of any proprietary rights of the Company. There can be no
assurance that the steps taken by the Company will prevent misappropriation or
infringement of its proprietary information. Any such infringement or
misappropriation, should it occur, might have a material adverse effect on the
Company's business, results of operations and financial condition. In
addition, litigation may be necessary in the future to enforce the Company's
intellectual property rights, to protect the Company's trade secrets or to
determine the validity and scope of the proprietary rights of others. Such
litigation might result in substantial costs and diversion of resources and
management attention and could have a material adverse effect on the Company's
business, results of operations and financial condition. There can be no
assurance that the Company's business activities will not infringe upon the
proprietary rights of others, or that other parties will not assert
infringement claims against the Company. From time to time, the Company has
been, and expects to continue to be, subject to claims in the ordinary course
of its business including claims of alleged infringement of the trademarks,
service marks and other intellectual property rights of third parties by the
Company and the content generated by its members. Such claims and any
resultant litigation, should it occur, might subject the Company to
significant liability for damages and might result in invalidation of the
Company's proprietary rights and even if not meritorious, could be time
consuming and expensive to defend and could result in the diversion of
management time and attention, any of which might have a material adverse
effect on the Company's business, results of operations and financial
condition. In September 1998, Zoom Telephonics, Inc. ("Zoom") contacted the
Company and asserted, among other things, that the "XOOM" trademark was
confusingly similar to Zoom's
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own "ZOOM" registered trademark, and requesting that the Company cease using
the "XOOM" trademark and the "xoom.com" domain name, and change its name. The
Company has responded to Zoom's correspondence by denying any confusion
between trademarks, and is in preliminary discussions with Zoom to resolve the
points Zoom raised in such correspondence. Although the Company believes that
Zoom's claims are without merit, it is possible that the two companies will
not resolve such points. A failure to do so could result in litigation, which
could have a material adverse effect on the Company's business, results of
operations and financial condition, particularly if such litigation forces the
Company to make substantial changes to its name and trademark usage. Any name
change effected after the Offering could result in confusion to investors,
which could adversely affect the market price of the Common Stock. In
addition, in January 1998, Xoom.com became aware that Imageline claimed to own
the copyright in certain images that an unrelated third party had licensed to
Xoom.com. See "Risk Factors--Risks of Infringement of Intellectual Property"
and "--Legal Proceedings."
The Company currently licenses from third parties certain technologies
incorporated into the Company's Web site. As it continues to introduce new
services that incorporate new technologies, it may be required to license
additional technology from others. There can be no assurance that these third-
party technology licenses will continue to be available to the Company on
commercially reasonable terms, if at all. The inability of the Company to
obtain any of these technology licenses could result in delays or reductions
in the introduction of new services or could adversely affect the performance
of its existing services until equivalent technology is identified, licensed
and integrated.
The Company has licensed in the past, and expects that it may license in the
future, certain of its proprietary rights, such as trademarks or copyrighted
material, to third parties. While the Company attempts to ensure that the
quality of its brand is maintained by such licensees, there can be no
assurance that such licensees will not take actions that might materially
adversely affect the value of the Company's proprietary rights or reputation,
which could have a material adverse effect on the Company's business,
prospects, financial condition and results of operations. There can be no
assurance that the steps taken by the Company to protect its proprietary
rights will be adequate, or that third parties will not infringe or
misappropriate the Company's copyrights, trademarks and similar proprietary
rights. See "Risk Factors--Dependence On Intellectual Property Rights."
In addition, the Company believes that its success to date and its future
success will depend in part upon its ability to provide reviews and other
information about the products that it sells. As an online publisher, the
Company may face potential liability for copyright, trademark or patent
infringement, defamation or other claims based on the nature and content of
materials that the Company publishes or distributes. Defending such claims, or
liability arising out of such claims, could have a material adverse effect on
the Company. Moreover, because of the interconnectivity currently provided on
the Company's Web site, and because the Company expects to greatly expand such
interconnectivity in the future, the Company could be exposed to liability
with respect to content that it does not control on member Web sites, in
member chat rooms and from other services available currently or in the
future. Insurance carried by the Company may not be sufficient to offset
liability arising from these types of liabilities, and any liability in excess
of such coverage could have a material adverse effect on the Company. See
"Risk Factors--Risks Of Infringement Of Intellectual Property" and "--
Liability For Online Content" and Note 6 of Notes to Consolidated Financial
Statements."
LEGAL PROCEEDINGS
Xoom.com acquires rights to license and distribute software clips, including
clip art, and movies from third parties. In June 1997, Sprint, an Australian
company, licensed to Xoom.com certain clip art. From inception to September
30, 1998, the Company received less than 1% of its total net revenue under the
Sprint license and, since September 30, 1998, the Company has not received any
net revenue under the Sprint license. In January 1998, Xoom.com became aware
that Imageline claimed to own the copyright in certain images that Sprint had
licensed to Xoom.com. Some clip art images that Imageline alleged infringed
Imageline's copyright were included by Xoom.com in versions of Xoom.com's Web
Clip Empire product and licensed by Xoom.com to third parties, including other
software clip publishers. Xoom.com's contracts with such publishers require
the
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Company to indemnify the publisher if copyrighted material licensed from the
Company infringes a copyright. Imageline claims that the Company's
infringement of Imageline's copyright is ongoing, Xoom.com and Imageline have
engaged in discussions, but were unable to reach any agreement regarding a
resolution of this matter. On August 27, 1998, Xoom.com filed a lawsuit in the
United States District Court for the Eastern District of Virginia against
Imageline, certain parties affiliated with Imageline, and Sprint regarding
Xoom.com's and its licensees' alleged infringement on Imageline's copyright in
certain clip art that Xoom.com licensed from Sprint. The lawsuit seeks, among
other relief, disclosure of information from Imageline concerning the alleged
copyright infringement, a declaratory judgement concerning the validity and
enforceability of Imageline's copyrights and copyright registrations, a
declaratory judgement regarding damages, if any, owed by Xoom.com to
Imageline, and indemnification from Sprint for damages, if any, owed by the
Company to Imageline. There is no contractual limitation on Sprint's
indemnification obligations. On September 17, 1998, Imageline filed an answer
and counterclaim, denying the Company's allegations and requesting injunctive
relief and damages for the Company's alleged infringements of Imageline's clip
art properties. While the Company is seeking indemnification from Sprint for
damages, there can be no assurance that Sprint will be able to fulfill the
indemnity obligations under its license agreement with the Company. There can
be no assurance as to the outcome of the claims asserted by Imageline and the
related litigation. In addition, the Company may be subject to claims by third
parties seeking indemnification from the Company in connection with the
alleged infringement of the Imageline copyrights. Any such claims or
litigation could result in a decision adverse to the Company. A decision
adverse to the Company in any of these matters could have a material adverse
effect on the Company's business, results of operations and financial
condition. In addition, litigation, regardless of its merits, could result in
substantial costs to the Company and divert management's attention from the
Company's operations. In light of the Imageline claim and the resulting
litigation, the Company is evaluating its policies and procedures regarding
its licensing and distribution of software clips. There can be no assurance
that third parties will not assert infringement claims against the Company.
Any misappropriation or infringement could result in litigation which could
have a material adverse effect on the Company's business, results of
operations and financial condition. See "Risk Factors--Dependence On
Intellectual Property Rights," "--Risks Of Infringement Of Intellectual
Property" and Note 6 of Notes to Consolidated Financial Statements.
EMPLOYEES
As of September 30, 1998, the Company had 64 full-time employees, including
29 in sales and marketing, 19 in operating and development and 16 in finance
and administration. The Company's future success will depend, in part, on its
ability to continue to attract, retain and motivate highly qualified technical
and management personnel, for whom competition is intense. From time to time,
the Company also employs independent contractors to support its research and
development, marketing, sales and support and administrative organizations.
The Company's employees are not covered by any collective bargaining
agreement, and the Company has never experienced a work stoppage. The Company
believes its relations with its employees are good.
FACILITIES
The Company's headquarters are currently located in a leased facility in San
Francisco, California, consisting of approximately 18,700 square feet of
office space, which is under a lease that expires September 30, 2007. The
Company's former headquarters were located in a leased facility in San
Francisco, California, consisting of approximately 6,500 square feet of office
space, which is under a lease that expires January 31, 1999. The Company has
entered into a sublease with a third party for 2,800 square feet of this
space. The Company has also leased approximately 1,000 square feet of office
space in New York through May 31, 2001 for its East Coast sales offices.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The executive officers, directors and key employees of the Company and their
respective ages as of September 30, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Chris Kitze(1)......... 39 Chairman of the Board, Secretary and Director
Laurent Massa.......... 38 Chief Executive Officer, President and Director
John Harbottle......... 44 Vice President, Finance and Chief Financial Officer
Vijay Vaidyanathan..... 33 Chief Technology Officer and Director
Scott Duffy............ 28 Vice President, Sponsorships and Online Sales Development
Russell S. Hyzen....... 33 Vice President, Business Development
Alicia Marziali........ 33 Vice President, Advertising Sales
Janine Popick.......... 31 Vice President, Direct Marketing
Bob Ellis.............. 62 Publisher and Director
James Heffernan(1)(2).. 57 Director
Jeffrey Ballowe(1)..... 43 Director
Philip Schlein(2)...... 64 Director
Robert C. Harris, Jr... 52 Director
</TABLE>
- --------
(1) Member of Audit Committee
(2) Member of Compensation Committee
Chris Kitze co-founded the Company and has served as Chairman of the Board
and Secretary since that time. Since December 1996, Mr. Kitze has been an
independent investor. From April 1996 until December 1996, Mr. Kitze also
served as the Company's President and Chief Executive Officer. In June 1995,
Mr. Kitze co-founded Point Communications Corporation ("Point
Communications"), a Web directory company, which was acquired by Lycos in
October 1995, after which Mr. Kitze served as Lycos' Vice President of
Marketing until June 1996. From June 1994 until June 1995, Mr. Kitze served as
Publisher at Softkey International (now The Learning Company). In September
1991, Mr. Kitze co-founded Aris Entertainment, a CD-ROM publishing company and
served as its President until June 1994. Mr. Kitze holds a B.S. in Chemical
Engineering from the University of Colorado.
Laurent Massa co-founded the Company and has served as its Chief Executive
Officer and President since December 1996. Mr. Massa has also served on the
Company's Board of Directors since February 1998. From September 1996 to June
1998, Mr. Massa also served as the Company's Chief Financial Officer. From May
1995 until September 1996, Mr. Massa served as Vice President of New Ventures
of Olivetti Telemedia, a telecommunications company based in Milan. Prior to
joining Olivetti, Mr. Massa joined WordStar International in March 1991 as
Director of Marketing, Europe, and became Vice President, International of
Softkey International (now The Learning Company), following Softkey's merger
with WordStar and Spinaker in February 1993. Mr. Massa holds an MBA from the
European Business School.
John Harbottle has served as the Company's Vice President, Finance and Chief
Financial Officer since August 5, 1998. From February 1996 to February 1998,
Mr. Harbottle was the Vice President of Finance and Chief Financial Officer of
Mastering Computers, Inc., an information technology training and CBT software
development and manufacturing company and then worked as an independent
consultant for Mastering Computers, Inc. from February to July 1998. From
October 1994 to February 1996, Mr. Harbottle was the Vice President of Finance
and Chief Financial Officer of Zenger-Miller, an international
management/leadership training, consulting and education company. From January
1992 to October 1994, Mr. Harbottle was the Vice President of Finance and
Chief Financial Officer of IFS, an international consumer products and direct
marketing company. Mr. Harbottle is a director of WebSoftware Corporation. Mr.
Harbottle holds a B.S. in Business Administration from the University of
California, Berkeley.
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Vijay Vaidyanathan has served as the Company's Chief Technology Officer and
as a Director since March 1998. Prior to joining the Company, Mr. Vaidyanathan
co-founded Paralogic Corporation, an internet software company, and served as
its President and Chief Executive Officer from January 1995 until its
acquisition by the Company in March 1998. Prior to founding Paralogic
Corporation Mr. Vaidyanathan served as Engineering Manager at Frontline Design
Automation, an electronic design automation company from July 1994 until
December 1994 and as Engineering Manager at Zycad Corporation, an electronic
design automation company from February 1991 until July 1994. Mr. Vaidyanathan
also serves on the board of Paralogic Software Corporation, a software
company, and Santa Clara Valley School, Inc., a non-profit school he co-
founded in 1995. Mr. Vaidyanathan holds an M.S. in Instrumentation Technology
from the Birla Institute of Technology and Science in India and an M.S. in
Computer Science from the State University of New York at Albany.
Scott Duffy has served as the Company's Vice President, Sponsorships and
Online Sales Development since August 1998. Prior to joining the Company, Mr.
Duffy served as Western Region Sales Manager for SportsLine USA, Inc. from
August 1997 to August 1998. From January 1996 to March 1997, Mr. Duffy held a
number of positions for Quote.com, Inc., an Internet financial services
company, including Business Development Manager and most recently Director of
Advertising Sales. Prior to that, Mr. Duffy served as an Account Executive for
Seven Worldwide, Inc., a worldwide imaging company that manages the production
of advertising, promotional and packaging artwork and interactive multimedia,
from 1993 to 1995.
Russell S. Hyzen has served as the Company's Vice President, Business
Development since December 1997 and as the Company's director of Business
Development from November 1996 to December 1997. Prior to joining the Company,
Mr. Hyzen served as Business Development Manager for Quote.com, an Internet
Financial Services Company, from December 1995 to October 1996. From November
1993 to December 1995, he worked as an independent consultant. In August 1991,
Mr. Hyzen founded Pacific Coast Lending, a mortgage brokerage company, and he
served as its President until November 1993. Mr. Hyzen holds a B.S. in
Business Administration from California State University, Northridge.
Alicia Marziali has served as the Company's Vice President, Advertising
Sales, since December 1997. From October 1995 to November 1997, Ms. Marziali
held a number of management positions with Lycos most recently as Director of
Sales, Eastern Region. From December 1994 until September 1995, Ms. Marziali
served as Director of Network Sales for Point Communications. Prior to joining
Point Communications, Ms. Marziali was a Regional Sales Manager for College
Bound Magazine from September 1993 until October 1994. From February 1992 to
August 1993, she was employed as a Senior Account Manager for Linnette &
Harrison, an advertising agency. From January 1990 to December 1992, she
worked as an Account Manager for Chalek & Chalek, an advertising agency. Ms.
Marziali holds a B.A. in Communications from Montclair State University.
Janine Popick has served as the Company's Vice President, Direct Marketing
since April 1998. From November 1997 until April 1998, Ms. Popick served as
Manager of Direct Marketing for FileMaker, Inc., a wholly-owned subsidiary of
Apple Computer. From January 1996 to November 1997, Ms. Popick served as
Manager of Direct Marketing of Insignia Solutions, a computer software
company. Prior to joining Insignia Solutions, Ms. Popick served as Manager of
Direct Marketing of Claris Corporation, a computer software company, from
September 1994 to January 1996. From December 1993 to August 1994, Ms Popick
served as Manager of Direct Marketing for Symantec Corporation, a software
company. She was an account executive at JDA Corp., an enterprise software
solutions company, from September 1993 to December 1993. Ms Popick holds a
B.A. in Communications and English from Hofstra University.
Bob Ellis has served as a director of the Company and as publisher since
August 1997. From July 1995 to July 1997, Mr. Ellis was President of Paris
Productions, an online publishing company. In January 1988, he founded Compact
Publishing Company ("Compact"), a publishing company and served as its Chief
Executive Officer until its acquisition by Softkey International (now The
Learning Company) in July 1994, after which he served as Vice President of
Publishing of Softkey until July 1995. Prior to founding Compact, Mr. Ellis
was a Vice President of Time-Life, Inc. and President of Time-Life Software.
Mr. Ellis holds a B.A. in Philosophy from Yale and an M.A. in History from the
University of Chicago.
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James J. Heffernan has served as a director of the Company since June 1998.
Mr. Heffernan co-founded USWeb Corporation, an internet professional services
company in December 1995 and has served as its Executive Vice President, Chief
Financial Officer, Secretary and a Director since that time. From May 1993 to
July 1994, he worked as an independent consultant and then joined Interlink
Computer Sciences, Inc. in July 1994 as Chief Financial Officer, where he
served until January 1996. From March 1992 to May 1993, Mr. Heffernan served
as Chief Financial Officer and Chief Operating Officer of Serius. Mr.
Heffernan has also served as an officer of several other technology companies,
including Software Publishing Corp., Zital Inc. and Measurex Corp. Mr.
Heffernan is a director of Savoir Technology Group, Inc and USWeb Corporation.
Mr. Heffernan has a B.S. in Business and an MBA from Santa Clara University.
Jeffrey Ballowe has served as a director of the Company since July 1998.
From 1991 to December 1997, Mr. Ballowe served in magazine publishing sales at
Ziff-Davis, including as Publisher of PC Magazine and held a number of
corporate positions in which he was responsible for establishing Ziff-Davis
European operations, managing Ziff-Davis' largest magazine group, launching
Ziff-Davis' Internet publications, creating ZDNet and launching ZDTV. At his
retirement from Ziff-Davis in December 1997, Mr. Ballowe was President of the
Ziff-Davis Interactive Media and Development Group, in charge of Ziff-Davis'
Internet publications, ZDNet, ZDTV and all development at Ziff-Davis. Prior to
working at Ziff-Davis, Mr. Ballowe worked as a marketing executive at various
technology and marketing services companies. Currently, Mr. Ballowe is
Chairman of the Board of Directors of Dejanews, serves on the boards of USWeb,
Personalogic and VerticalNet, and is an Internet Capital Group Venture
Partner. Mr. Ballowe holds a B.A. in French from Lawrence University, an M.A.
in French from the University of Wisconsin-Madison, and an MBA from the
University of Chicago.
Philip Schlein has served as a Director of the Company since July 1998.
Since April 1985, Mr. Schlein has been a general partner of U.S.
VenturePartners, a venture capital firm specializing in retail and consumer
products companies. From January 1974 to January 1985, Mr. Schlein served as
President and Chief Executive Officer of Macy's California, a division of R.
H. Macy & Co., Inc., a department store chain. Mr. Schlein also serves on the
Board of Directors of Ross Stores, Inc., ReSound Corporation, Quick Response
Services, Burnham Pacific Properties, Inc. and Bebe Stores. Mr. Schlein holds
a B.S. in Economics from the University of Pennsylvania.
Robert C. Harris, Jr. has served as a director of the Company since August
1998. Mr. Harris is a Senior Managing Director at Bear, Stearns & Co. Inc.
From 1989 to October 1997, he was a co-founder and Managing Director of
Unterberg Harris. From 1984 to 1989, he was a General Partner, Managing
Director and Director of Alex.Brown & Sons Inc. Mr. Harris is also a director
of N2K, Inc., MDSI Mobile Data Solutions, Inc. and SoftNet Systems, Inc. Mr.
Harris holds a B.S. and MBA from the University of California at Berkeley.
All Directors hold office until the next annual meeting of the stockholders
and until their successors have been duly elected and qualified. Executive
Officers are elected by and serve at the direction of the Board of Directors.
There are no family relationships among any of the Directors or Executive
Officers of the Company other than between Mr. Kitze and Ms. Marziali, who is
Mr. Kitze's sister-in-law.
BOARD COMMITTEES
The Board of Directors has established an Audit Committee and a Compensation
Committee. The Audit Committee, consisting of Chris Kitze, James J. Heffernan
and Jeffrey Ballowe, recommends the selection of independent public
accountants to the Board of Directors, reviews the scope and results of the
audit and other services provided by the Company's independent accountants,
and reviews the Company's accounting practices and its systems of internal
accounting controls.
The Compensation Committee, consisting of James J. Heffernan and Philip
Schlein, reviews and approves the salaries, bonuses and other compensation
payable to the Company's executive officers and administers and makes
recommendations concerning the Company's employee benefit plans. See "Certain
Transactions."
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DIRECTOR COMPENSATION
Except as set forth below, the Company's directors receive no cash
compensation for their services as Board members or committee members and are
not reimbursed for expenses incurred in connection with attending Board and
committee meetings. On May 15, 1998, Mr. Heffernan, an outside director,
entered into a consulting agreement with the Company pursuant to which he is
entitled to receive compensation in the form of Common Stock and options to
purchase Common Stock for his services, which services include serving as a
member of the Board of Directors. See "Certain Transactions."
On August 4, 1997, Bob Ellis, one of the Company's outside directors,
entered into a letter agreement (the "Ellis Agreement") with the Company
pursuant to which Mr. Ellis agreed to provide certain services to the Company,
including serving as a member of the Board of Directors. The Ellis Agreement
provides for compensation in the form of options to buy 222,222 shares of the
Company's Common Stock at an exercise price of $0.03 per share, which will
vest ratably over an 18 month period. The Ellis Agreement will terminate after
18 months, on February 3, 1999.
On July 28, 1998, Jeffrey Ballowe, one of the Company's outside directors,
entered into a letter agreement, which was amended as of December 2, 1998 (the
"Ballowe Agreement"), with the Company. Pursuant to the Ballowe Agreement, as
amended, Mr. Ballowe agreed to serve as a member of the Board of Directors.
The Ballowe Agreement provides for compensation in the form of options to buy
23,334 shares of the Company's Common Stock at an exercise price of $6.75 per
share, which will vest monthly over a two year period or immediately upon a
sale of the Company. Mr. Ballowe also receives a monthly fee of $10,000 as
compensation for his service as a director. Prior to the Offering, this fee is
payable in options to purchase shares of the Company's Common Stock, at an
exercise price of $6.75 per share, and following the Offering, this fee will
be payable in shares of Common Stock based upon the stock's trading price. Mr.
Ballowe will also receive compensation equal to 5% of all funds raised by him
for the Company, payable in options to purchase shares of the Company's Common
Stock prior to the Offering or, following the Offering, payable in the
Company's Common Stock. The Ballowe Agreement has a term of 18 months.
On July 28, 1998, Philip Schlein, one of the Company's outside directors,
entered into a letter agreement, which was amended as of December 2, 1998 (the
"Schlein Agreement"), with the Company. Pursuant to the Schlein Agreement, as
amended, Mr. Schlein agreed to serve as a member of the Board of Directors.
The Schlein Agreement provides for compensation in the form of options to buy
23,334 shares of the Company's Common Stock at an exercise price of $6.75 per
share, which will vest monthly over a two year period or immediately upon a
sale of the Company. Mr. Schlein also receives a monthly fee of $10,000
payable in cash or in the Company's Common Stock, at Mr. Schlein's option, as
compensation for his service as a director. The Schlein Agreement has a term
of 18 months.
On July 28, 1998, Robert Harris, one of the Company's outside directors,
entered into a letter agreement, which was amended as of December 2, 1998 (the
"Harris Agreement"), with the Company. Pursuant to the Harris Agreement, as
amended, Mr. Harris agreed to serve as a member of the Board of Directors. The
Harris Agreement provides for compensation in the form of options to buy
23,334 shares of the Company's Common Stock at an exercise price of $6.75 per
share, which will vest monthly over a two year period or immediately upon a
sale of the Company. Mr. Harris also receives a monthly fee of $10,000 payable
in cash or in the Company's Common Stock, at Mr. Harris' option, as
compensation for his service as a director. The Harris Agreement has a term of
18 months.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committee of the Company serves as a member of
the board of directors or compensation committee of any entity that has one or
more executive officers serving as a member of the Company's Board of
Directors or Compensation Committee.
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EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation
of the Company's Chief Executive Officer and each of the other most highly
compensated executive officers of the Company whose aggregate salary, bonus
and other compensation exceeded $100,000 during the fiscal year ended
December 31, 1997 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS/SARS (#)
- --------------------------- ---------- -------------------------
<S> <C> <C> <C>
Laurent Massa............................. $ 175,000 -- 83,334
President and Chief Executive Officer
Russell S. Hyzen.......................... $ 120,000 $ 3,333 53,334
Vice President, Business Development
</TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information concerning grants to
purchase shares of Common Stock to each of the Named Executive Officers during
the fiscal year ended December 31, 1997.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
PERCENT OF VALUE AT ASSUMED
TOTAL ANNUAL RATES
NUMBER OF OPTIONS OF STOCK PRICE
SECURITIES GRANTED TO APPRECIATION FOR
UNDERLYING EMPLOYEES IN EXERCISE OPTION TERM(3)
OPTIONS FISCAL YEAR PRICE PER EXPIRATION -------------------------
NAME GRANTED(1) 1997(2) SHARE DATE 0%($) 5%($) 10%($)
- ---- ---------- ------------ --------- ---------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Laurent Massa........... 83,334 13.2% $0.03 3/15/07 $36,250 $ 60,619 $ 98,007
Russell S. Hyzen........ 53,334 8.4% $0.03 11/02/07 88,800 145,652 232,874
</TABLE>
- --------
(1) Represents options granted outside the Company's stock option plans.
(2) Based on options to purchase an aggregate of 632,982 shares of Common
Stock granted during fiscal 1997.
(3) In accordance with the rules of the Securities and Exchange Commission
(the "Commission"), shown are the hypothetical gains or "option spreads"
that would exist for the respective options. These gains are based on
assumed rates of annual compounded stock price appreciation of 0%, 5% and
10% from the date the option was granted over the full option term,
assuming a fair market value of $0.47 on the date of grant for Mr.
Massa's options and $1.70 on the date of grant for Mr. Hyzen's options.
The 0%, 5% and 10% assumed rates of appreciation are mandated by the
Commission and do not represent the Company's estimate or projection of
future increases in the price of its Common Stock.
AGGREGATE OPTION EXERCISES IN FISCAL YEAR 1997 AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth certain information as of December 31, 1997
concerning exercisable and unexercisable stock options held by each of the
Named Executive Officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ACQUIRED AT FISCAL YEAR-END (#) AT FISCAL YEAR-END ($)(1)
ON VALUE ------------------------- -------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ------------ ------------ ------------------------- -------------------------
<S> <C> <C> <C> <C>
Laurent Massa........... -- -- 152,604 / 189,063 $276,976 / 343,149
Russell S. Hyzen........ -- -- 58,889 / 77,778 106,883 / 141,167
</TABLE>
- --------
(1) Based on the fair market value of the Company's Common Stock at December
31, 1997, of $1.85 per share (as determined by the Company's Board of
Directors), less the exercise price for such shares.
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EMPLOYMENT AGREEMENTS
On July 1, 1998, Laurent Massa, the Company's President and Chief Executive
Officer, entered into an employment agreement (the "Massa Agreement") with the
Company. The Massa Agreement provides for an annual salary of $216,000. Mr.
Massa is also eligible for an annual bonus of up to 33% of his base salary,
paid quarterly based on the following criteria: (i) exceeding quarterly
revenue goals: 50% of the eligible Bonus; (ii) achieving specific management
team goals: 25% of the eligible bonus and (iii) achieving personal objectives
that improve the organization: 25% of the eligible bonus. The goals will be
set and reviewed quarterly by the Compensation Committee of the Board. Should
the Company terminate Mr. Massa without Cause (as defined in the Massa
Agreement), the Company is required to provide Mr. Massa 180 days' advanced
written notice, and the Company may in its discretion terminate Mr. Massa's
employment at any time prior to the end of such notice period, provided the
Company pays Mr. Massa an amount equal to the base compensation plus benefits
Mr. Massa would have earned through the balance of the above notice period. In
the event the Company exercises it right to terminate Mr. Massa without Cause,
Mr. Massa shall be immediately entitled to exercise 100% of any stock options
granted to him by the Company that had not previously vested. If Mr. Massa is
terminated by the Company without Cause, after the beginning of trading of the
Company's stock on a public market, he may exercise his vested stock option
for a four month period from the date Mr. Massa is notified by the Company of
the intention to terminate his employment. Should the Company terminate Mr.
Massa for Cause, the Company is required to pay Mr. Massa all compensation due
on the date of termination. In the event of a Change in Control or Corporate
Transaction (as defined in the Massa Agreement) pursuant to which Mr. Massa's
employment with the Company is involuntarily terminated, with or without
cause, Mr. Massa will be entitled to payment of an amount equal to one year's
base compensation plus benefits and any and all stock options previously
granted to Mr. Massa by the Company will immediately become fully vested and
exercisable. Pursuant to the terms of the Massa Agreement, Mr. Massa may
terminate his employment with the Company at any time for any reason by
providing the Company with thirty days written advance notice. Should Mr.
Massa's employment with the Company terminate for any reason, the Massa
Agreement further provides that Mr. Massa (i) will not use any Proprietary
Information of the Company with the Company's prior written consent, (ii) will
not use any Confidential Information to compete against the Company or any of
its employees and (iii) will not, for one year following termination, solicit
any customer or employee of the Company. Mr. Massa will be eligible for an
annual review of the Massa Agreement no later than July 20, 1999. Pursuant to
a letter agreement entered into prior to the Massa Agreement, the Company
granted to Mr. Massa options to purchase up to an aggregate of 341,667 shares
of Common Stock at a per share exercise price of $0.03.
On August 4, 1998, John Harbottle, the Company's Chief Financial Officer,
entered into an employment agreement (the "Harbottle Agreement") with the
Company. The Harbottle Agreement provides for an annual salary of $144,000.
Mr. Harbottle is also eligible for a discretionary quarterly bonus of up to
$10,000. Should the Company terminate Mr. Harbottle without Cause (as defined
in the Harbottle Agreement), the Company is required to provide Mr. Harbottle
180 days' advanced written notice, and the Company may in its discretion
terminate Mr. Harbottle's employment at any time prior to the end of such
notice period, provided the Company pays Mr. Harbottle an amount equal to the
base compensation plus benefits Mr. Harbottle would have earned through the
balance of the above notice period. In the event the Company exercises it
right to terminate Mr. Harbottle without Cause, Mr. Harbottle shall be
immediately entitled to exercise 100% of any stock options granted to him by
the Company that had not previously vested. If Mr. Harbottle is terminated by
the Company without Cause after the beginning of trading of the Company's
stock on a public market, he may exercise his vested stock options for a four
month period after being notified by the Company of the intention to terminate
his employment. Should the Company terminate Mr. Harbottle for Cause, the
Company is required to pay Mr. Harbottle all compensation due on the date of
termination. In the event of a Change in Control or Corporate Transaction (as
defined in the Harbottle Agreement) pursuant to which Mr. Harbottle's
employment with the Company is involuntarily terminated, with or without
cause, Mr. Harbottle will be entitled to payment of an amount equal to 6
months base compensation plus benefits and all stock options previously
granted to Mr. Harbottle by the Company will immediately become fully vested
and exercisable. Pursuant to the terms of the Harbottle Agreement, Mr.
Harbottle may terminate his employment with the Company at any time for any
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reason by providing the Company with thirty days written advance notice.
Should Mr. Harbottle's employment with the Company terminate for any reason,
the Harbottle Agreement further provides that Mr. Harbottle (i) will not use
any Proprietary Information of the Company with the Company's prior written
consent, (ii) will not use any Confidential Information to compete against the
Company or any of its employees and (iii) will not, for one year following
termination, solicit any customer or employee of the Company. Pursuant to a
letter agreement entered into prior to the Harbottle Agreement, the Company
granted to Mr. Harbottle options to purchase up to 86,667 shares of Common
Stock at a per share exercise price of $6.75 and options to purchase up to
20,000 shares of Common Stock at a per share exercise price of $12.00.
The Company has entered into an employment agreement (the "Vaidyanathan
Agreement"), dated March 10, 1998, as amended on August 12, 1998, with Vijay
Vaidyanathan, its Chief Technical Officer. The Agreement provides that Mr.
Vaidyanathan receives a yearly salary of $120,000. Mr. Vaidyanathan is also
entitled to participate in the Company's medical, dental and vision insurance
plan and in any other employee benefit plan adopted by the Company. Should the
Company terminate Mr. Vaidyanathan without Cause (as defined in the
Vaidyanathan Agreement), the Company is required to provide Mr. Vaidyanathan
90 days' advanced written notice, and the Company may in its discretion
terminate Mr. Vaidyanathan's employment at any time prior to the end of such
notice period, provided the Company pays Mr. Vaidyanathan an amount equal to
the base compensation plus benefits Mr. Vaidyanathan would have earned through
the balance of the above notice period. In the event the Company exercises it
right to terminate Mr. Vaidyanathan without Cause, Mr. Vaidyanathan shall be
immediately entitled to exercise 100% of any stock options granted to him by
the Company that had not previously vested. If Mr. Vaidyanathan is terminated
by the Company without Cause after the beginning of trading of the Company's
stock on a public market, he may exercise his vested stock options for a four
month period after being notified by the Company of the intention to terminate
his employment. Should the Company terminate Mr. Vaidyanathan for Cause, the
Company is required to pay Mr. Vaidyanathan all compensation due on the date
of termination. In the event of a Change in Control or Corporate Transaction
(as defined in the Vaidyanathan Agreement) pursuant to which Mr.
Vaidyanathan's employment with the Company is involuntarily terminated, with
or without cause, Mr. Vaidyanathan will be entitled to payment of an amount
equal to 6 months base compensation plus benefits and all stock options
previously granted to Mr. Vaidyanathan by the Company will immediately become
fully vested and exercisable. Pursuant to the terms of the Vaidyanathan
Agreement, Mr. Vaidyanathan may terminate his employment with the Company at
any time for any reason by providing the Company with thirty days written
advance notice. Should Mr. Vaidyanathan's employment with the Company
terminate for any reason, the Vaidyanathan Agreement further provides that Mr.
Vaidyanathan (i) will not use any Proprietary Information of the Company with
the Company's prior written consent, (ii) will not use any Confidential
Information to compete against the Company or any of its employees and (iii)
will not, for one year following termination, solicit any customer or employee
of the Company. Mr. Vaidyanathan will be eligible for an annual review of the
Vaidyanathan Agreement no later than August 12, 1999. Under the Vaidyanathan
Agreement, the Company granted to Mr. Vaidyanathan options to purchase up to
93,334 shares of Common Stock at a per share exercise price of $2.31.
On July 20, 1998, Russell S. Hyzen, the Company's Vice President Business
Development, entered into an employment agreement (the "Hyzen Agreement") with
the Company. The Hyzen Agreement provides for an annual salary of $120,000 and
a discretionary bonus of up to $10,000 per quarter to be paid upon achievement
of personal and company targets to be defined. Should the Company terminate
Mr. Hyzen without Cause (as defined in the Hyzen Agreement), the Company is
required to provide Mr. Hyzen 90 days' advanced written notice, and the
Company can, in its discretion, terminate Mr. Hyzen's employment at any time
prior to the end of such notice period, provided the Company pays Mr. Hyzen an
amount equal to the base compensation Mr. Hyzen would have earned through the
balance of the above notice period plus benefits. In the event the Company
exercises it right to terminate Mr. Hyzen without Cause, Mr. Hyzen shall be
immediately entitled to exercise 100% of any stock options granted to him by
the Company that had not previously vested. If Mr. Hyzen is terminated by the
Company without Cause, after the beginning of trading of the Company's stock
on a public market, he may exercise his vested stock option for a four month
period after being informed by the Company of the intention to terminate his
employment. Should the Company terminate Mr. Hyzen for Cause, the Company
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<PAGE>
is required to pay Mr. Hyzen all compensation due on the date of termination.
In the event of a Change in Control or Corporate Transaction (as defined in
the Hyzen Agreement) pursuant to which Mr. Hyzen's employment with the Company
is involuntarily terminated for any reason, with or without cause, Mr. Hyzen
will be entitled to payment of an amount equal to six month's base
compensation plus benefits and any and all stock options previously granted to
Mr. Hyzen by the Company will immediately become fully vested and exercisable.
Pursuant to the terms of the Hyzen Agreement Mr. Hyzen may terminate his
employment with the Company at any time for any reason by providing the
Company with thirty days written advance notice. Should Mr. Hyzen's employment
with the Company terminate for any reason, the Hyzen Agreement further
provides that Mr. Hyzen (i) will not use any Proprietary Information of the
Company with the Company's prior written consent, (ii) will not use any
Confidential Information to compete against the Company or any of its
employees and (iii) will not, for one year following termination, solicit any
customer or employee of the Company. Mr. Hyzen will be eligible for an annual
review of the Hyzen Agreement no later than November 30, 1998. Pursuant to a
letter agreement entered into prior to the Hyzen Agreement, the Company
granted to Mr. Hyzen options to purchase up to 136,667 shares of Common Stock
at a per share exercise price of $0.03. In June 1998, the Company granted Mr.
Hyzen options to purchase up to an additional 13,334 shares of Common Stock at
a per share exercise price of $3.33.
BENEFIT PLANS
1998 Stock Incentive Plan
The Company's 1998 Plan was approved by the Board of Directors and by the
Company's stockholders in February 1998. The 1998 Plan provides for the grant
of options intended to qualify as "incentive stock options" under Section 422
of the Internal Revenue Code of 1986, as amended (the "Code"), nonqualified
stock options and stock appreciation rights. The 1998 Plan also provides for
the transfer or sale of Common Stock to selected individuals in connection
with the performance of services to the Company or its affiliates. A total of
2,000,000 shares of Common Stock have been reserved for issuance under the
1998 Plan. As of September 30, 1998, giving effect to an increase in the
number of shares reserved for issuance under the 1998 Plan from 1,166,667 to
2,000,000 that was approved and adopted by the Company's Board of Directors
and stockholders as of November 16, 1998, no shares of Common Stock had been
issued upon exercise of options granted under the 1998 Plan, 673,865 shares
remained reserved for future issuance upon the exercise of outstanding
options, and 1,326,135 shares remained available for future grant. The Board
of Directors or a committee designated by the Board is authorized to
administer the 1998 Plan, including the selection of individuals eligible for
grants of options, issuances of Common Stock, the terms of such grants or
issuances, possible amendments to the terms of such grants or issuances and
the interpretation of the terms of, and adoption of rules for, the 1998 Plan.
The maximum term of any stock option granted under the 1998 Plan is ten years,
except that with respect to incentive stock options granted to a person
possessing more than 10% of the combined voting power of the Company (a "10%
Stockholder"), the term of such stock options shall be for no more than five
years.
The exercise price of nonqualified stock options and incentive stock options
granted under the 1998 Plan must be at least 85% and 100%, respectively, of
the fair market value of the Common Stock on the grant date except that the
exercise price of incentive stock options granted to a 10% Stockholder must be
at least 110% of such fair market value on the grant date. The aggregate fair
market value on the date of grant of the Common Stock for which incentive
stock options are exercisable for the first time by an employee during any
calendar year may not exceed $100,000. The purchase price of shares of Common
Stock granted under the 1998 Plan must be at least 85% of the fair market
value of the Common Stock on the grant date except that the purchase price of
shares of Common Stock granted to a 10% Stockholder must be at least 100% of
such fair market value on the grant date. The individual agreements under the
1998 Plan may provide for repurchase rights for the Company under the terms
and conditions set forth in the 1998 Plan. The 1998 Plan will terminate in
2008, unless earlier terminated by the Board.
In the event of a merger in which the Company is not the surviving entity,
the sale of all or substantially all of the Company's assets or a reverse
merger resulting in a change of control of the Company, each grant which is at
the time outstanding under the Plan shall, unless the Administrator in its
discretion decides differently,
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immediately prior to the specified effective date of such transaction,
automatically become fully vested and exercisable with respect to 75% of the
unvested shares at the time represented by such grant. To the extent it has
not been previously exercised, the grant will terminate immediately prior to
the consummation of such proposed transaction, unless the grant is assumed or
an equivalent grant is substituted by the successor corporation.
1998 Employee Stock Purchase Plan
The Company's Stock Purchase Plan was approved by the Board of Directors in
August 1998 and will be submitted to the Company's stockholders for approval
prior to the Offering. The Stock Purchase Plan is intended to qualify as an
"employee stock purchase plan" under Section 423 of the Code in order to
provide employees of the Company with an opportunity to purchase Common Stock
through payroll deductions. An aggregate of 300,000 shares of the Company's
Common Stock has been reserved for issuance under the Stock Purchase Plan and
available for purchase thereunder, subject to adjustment in the event of a
stock split, stock dividend or other similar change in the Common Stock or the
capital structure of the Company. All employees of the Company (and employees
of "subsidiary corporations" and "parent corporations" of the Company (as
defined by the Code) designated by the administrator of the Stock Purchase
Plan) whose customary employment is for more than five months in any calendar
year and more than 20 hours per week are eligible to participate in the Stock
Purchase Plan. Employees hired after the consummation of the Offering are
eligible to participate in the Stock Purchase Plan, subject to a six-month
waiting period after hiring. Non-employee directors, consultants, and
employees subject to the rules or laws of a foreign jurisdiction that prohibit
or make impractical the participation of such employees in the Stock Purchase
Plan are not eligible to participate in the Stock Purchase Plan.
The Stock Purchase Plan designates Offer Periods, Purchase Periods and
Exercise Dates. Offer Periods are generally overlapping periods of 24 months.
The initial Offer Period begins on the effective date of the Stock Purchase
Plan, which is the effective date of the Company's Registration Statement
relating to the Offering, and ends on December 31, 2000. Additional Offer
Periods will commence each July 1 and January 1. Purchase Periods are
generally six month periods, with the initial Purchase Period commencing on
the effective date of the Stock Purchase Plan and ending on June 30, 1999.
Thereafter, Purchase Periods will commence each July 1 and January 1. Exercise
Dates are the last day of each Purchase Period. In the event of a merger of
the Company with or into another corporation, the sale of all or substantially
all of the assets of the Company, or certain other transactions in which the
stockholders of the Company before the transaction own less than 50% of the
total combined voting power of the Company's outstanding securities following
the transaction, the administrator of the Stock Purchase Plan may elect to
shorten the Offer Period then in progress.
On the first day of each Offer Period, a participating employee is granted a
purchase right which is a form of option to be automatically exercised on the
forthcoming Exercise Dates within the Offer Period during which deductions are
to be made from the pay of participants (in accordance with their
authorizations) and credited to their accounts under the Stock Purchase Plan.
When the purchase right is exercised, the participant's withheld salary is
used to purchase shares of Common Stock of the Company. The price per share at
which shares of Common Stock are to be purchased under the Stock Purchase Plan
during any Purchase Period is the lesser of (a) 85% of the fair market value
of the Common Stock on the date of the grant of the option (the commencement
of the Offer Period) or (b) 85% of the fair market value of the Common Stock
on the Exercise Date (the last day of a Purchase Period). The participant's
purchase right is exercised in this manner on each Exercise Date arising in
the Offer Period unless, on the first day of any Purchase Period, the fair
market value of the Common Stock is lower than the fair market value of the
Common Stock on the first day of the Offer Period. If so, the participant's
participation in the original Offer Period is terminated, and the participant
is automatically enrolled in the new Offer Period effective the same date.
Payroll deductions may range from 1% to 10% (in whole percentage increments)
of a participant's regular base pay, exclusive of bonuses, overtime, shift-
premiums, commissions, reimbursements or other expense allowances.
Participants may not make direct cash payments to their accounts. The maximum
number of shares of Common Stock which any employee may purchase under the
Stock Purchase Plan during an Purchase Period is 1,250 shares. Certain
additional limitations on the amount of Common Stock which may be purchased
during any calendar year are imposed by the Code.
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The Stock Purchase Plan will be administered by the Board of Directors or a
committee designated by the Board, which will have the authority to terminate
or amend the Stock Purchase Plan (subject to specified restrictions) and
otherwise to administer the Stock Purchase Plan and to resolve all questions
relating to the administration of the Stock Purchase Plan.
Option Grants Outside the 1998 Stock Incentive Plan
In the period between August 1996 and September 1998, options to purchase
1,227,333 shares of Common Stock were granted to the Company's directors,
officers and all of the Company's employees, as well as to a number of
consultants. The options were granted outside the 1998 Plan by the Board of
Directors pursuant to individual stock option agreements under substantially
similar terms as the options granted under the 1998 Plan.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Bylaws provide that the Company will indemnify its directors
and executive officers and may indemnify its other officers, employees and
other agents to the fullest extent permitted by the Delaware Business
Corporations Act, as amended. The Company has entered into indemnification
agreements with its directors and officers and is also empowered under its
Bylaws to purchase insurance on behalf of any person whom it is required or
permitted to indemnify. The Company has entered into indemnification
agreements with each of its directors and executive officers and intends to
obtain a policy of directors' and officers' liability insurance that insures
such persons against the cost of defense, settlement or payment of a judgment
under certain circumstances.
In addition, the Company's Certificate of Incorporation provides that the
liability of the Company's directors for monetary damages shall be eliminated
to the fullest extent permissible under the Delaware Business Corporations
Act, as so amended. This provision in the Certificate of Incorporation does
not eliminate a director's duty of care, and in appropriate circumstances
equitable remedies such as an injunction or other forms of non-monetary relief
would remain available. Each director will continue to be subject to liability
for breach of the director's duty of loyalty to the Company, for acts or
omissions not in good faith or involving intentional misconduct or knowing
violations of law, for acts or omissions that the director believes to be
contrary to the best interests of the Company or its stockholders, for any
transaction from which the director derived an improper personal benefit, for
improper transactions between the director and the Company and for improper
distributions to stockholders and loans to directors and officers. This
provision also does not affect a director's responsibilities under any other
laws, such as the federal securities laws or state or federal environmental
laws.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
There is no pending litigation or proceeding involving a director or officer
of the Company as to which indemnification is being sought, nor is the Company
aware of any pending or threatened litigation that may result in claims for
indemnification by any director or officer.
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CERTAIN TRANSACTIONS
Following the incorporation of the Company, Chris Kitze, one of the
Company's founders, purchased 333,334 shares of Common Stock for cash at a
price of $0.0003 per share, resulting in aggregate proceeds to the Company of
$100 and, pursuant to a Common Stock Purchase Agreement dated August 26, 1996,
Naveen Jain, an affiliate of the Company, purchased 333,334 shares of the
Company's Common Stock for cash at a price of $0.0003 per share, resulting in
aggregate proceeds to the Company of $100. In connection with these
transactions, the Company entered into a Stockholders' Agreement with Mr.
Kitze and Mr. Jain. This Stockholders' Agreement was terminated on February
10, 1998. Pursuant to a Common Stock Purchase Agreement dated December 31,
1996, Chris Kitze and Naveen Jain purchased an additional 2,333,334 and
1,000,000 shares, respectively, of the Company's Common Stock in exchange for
the cancellation of promissory notes in the amount of $700,000 and $300,000,
respectively. In the same agreement, Naveen Jain contributed 666,667 shares of
Common Stock to the Company. Pursuant to Common Stock Purchase Agreements
dated February 13, 1997 and November 23, 1997, Flying Disc Investments Limited
Partnership ("Flying Disc"), of which Mr. Kitze is general partner, purchased
an additional 1,333,336 and 94,445 shares of Common Stock, respectively, from
the Company for cash at $0.45 and $0.90 per share, respectively, resulting in
aggregate proceeds to the Company of approximately $685,000. An additional
129,870 shares of Common Stock were purchased by Flying Disc in February 1998
pursuant to a Common Stock Purchase Agreement for cash at a price of $2.31 per
share. Under a Common Stock and Warrant Purchase Agreement dated as of April
25, 1998, Flying Disc purchased 30,030 shares of Common Stock for cash at a
per share price of $3.33 along with a warrant to purchase an additional 6,006
shares at $3.33 per share resulting in aggregate proceeds to the Company of
approximately $100,000. Under a Common Stock and Warrant Purchase Agreement
dated as of June 18, 1998, Internet Investments, LLC ("Internet Investments")
purchased 30,030 shares of Common Stock for cash at a per share price of $3.33
along with a warrant to purchase an additional 6,006 shares at $3.33 per share
resulting in aggregate proceeds to the Company of approximately $100,000.
Mr. Jain is the managing member of Internet Investments. All of the Company's
outstanding warrants terminate, unless exercised, upon the completion of the
Offering.
Pursuant to a Stock Purchase Agreement dated February 13, 1997, Bob Ellis,
one of the Company's directors, purchased 55,556 shares of the Company's
Common Stock for cash at a price of $1.80 per share resulting in aggregate
proceeds to the Company of approximately $100,000. On August 4, 1997, due to a
revaluation of the shares purchased by Mr. Ellis, he was awarded an additional
55,556 shares of Common Stock at the new price of $0.90 per share. In
addition, on the same date, Mr. Ellis purchased an additional 222,222 shares
of Common Stock for cash at $0.90 per share resulting in aggregate proceeds to
the Company of approximately $200,000.
The Company has entered into a Consulting Agreement, dated May 15, 1998,
with James J. Heffernan, an outside director of the Company. The Consulting
Agreement will terminate on November 15, 1999. The Agreement provides for Mr.
Heffernan to receive a monthly compensation of $10,000, paid in the form of
Common Stock, and options to buy 16,667 shares of the Company's Common Stock
at an exercise price of $3.33 per share. Mr. Heffernan will be granted stock
options to buy an additional 16,667 shares of Common Stock at an exercise
price of $3.33 per share upon completion of the Offering. In addition, Mr.
Heffernan is entitled to a finder fee, payable in shares of the Company's
Common Stock, of 5% of any investment he secures on behalf of the Company
between May 15, 1998 and June 30, 1998. Under this arrangement, Mr. Heffernan
received 41,837 shares of Common Stock. See "Director Compensation."
The Company has entered into a Content License Agreement dated February 22,
1998, with Classic Media Holdings, whereby the Company was granted certain
non-exclusive perpetual, world-wide licensing rights in connection with
Classic Media Holdings' library of public domain movies. As consideration for
the license, the Company issued 43,290 shares of the Company's Common Stock to
Classic Media Holdings' principals. Mr. Kitze, the Company's Secretary and
Chairman of the Board of Directors, is a principal of Classic Media Holdings.
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The Company has entered into employment agreements, Indemnification
Agreements and certain other compensation arrangements with certain of its
directors and officers. See "Management--Employment Agreements," "Director
Compensation" and "Limitation Of Liability And Indemnification Matters."
The Company believes that all of the transactions set forth above were made
on terms no less favorable to the Company than could have been obtained from
unaffiliated third parties. The Company intends that all future transactions,
including loans, between the Company and its officers, directors, principal
stockholders and their affiliates will be approved by a majority of the Board
of Directors, including a majority of the independent and disinterested
outside directors on the Board of Directors and be on terms no less favorable
to the Company than could be obtained from unaffiliated third parties.
74
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to the Company with
respect to beneficial ownership of the Company's Common Stock as of September
30, 1998 and as adjusted to reflect the sale of the shares offered hereby, by
(i) each person known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, (ii) each of the Company's directors,
(iii) each of the Named Executive Officers, and (iv) all executive officers
and directors of the Company as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF COMMON STOCK
NUMBER OF SHARES BENEFICIALLY OWNED(1)
BENEFICIALLY OWNED ------------------------------
NAME OF BENEFICIAL OWNER PRIOR TO OFFERING(1) BEFORE OFFERING AFTER OFFERING
- ------------------------ -------------------- --------------- --------------
<S> <C> <C> <C>
Chris Kitze(2)............. 4,188,354 46.3% 34.6%
Naveen Jain(3)............. 702,703 7.8% 5.8%
Vijay Vaidyanathan(4)...... 581,967 6.4% 4.8%
Bob Ellis(5)............... 518,520 5.6% 4.2%
Laurent Massa(6)........... 243,403 2.6% 2.0%
James J. Heffernan(7)...... 162,441 1.8% 1.3%
Russell S. Hyzen(8)........ 115,001 1.3% *
John Harbottle(9).......... 12,501 * *
Jeffrey Ballowe(10)........ 7,276 * *
Philip Schlein(11)......... 5,464 * *
Robert C. Harris, Jr.(12).. 5,464 * *
All executive officers and
directors as a group
(10 persons)(13).......... 5,840,391 60.7% 46.1%
</TABLE>
- --------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that
person, shares of Common Stock subject to options held by that person
that are currently exercisable or exercisable within 60 days of September
30, 1998 and warrants to purchase shares of Common Stock that are
exercisable within 60 days of September 30, 1998 are deemed outstanding.
Percentage of beneficial ownership is based upon 9,038,024 shares of
Common Stock outstanding prior to the Offering and 12,098,024 shares of
Common Stock outstanding after the Offering, as of September 30, 1998 and
assuming no exercise of the Underwriters' over-allotment option. To the
Company's knowledge, except as set forth in the footnotes to this table
and subject to applicable community property laws, each person named in
the table has sole voting and investment power with respect to the shares
set forth opposite such person's name. Except as otherwise indicated, the
address of each of the persons in this table is as follows: c/o XOOM.com,
Inc., 300 Montgomery Street, Suite 300, San Francisco, California 94104.
(2) Includes 4,182,348 shares of Common Stock and warrants to purchase 6,006
shares of Common Stock held by Flying Disc, of which Mr. Kitze is a
general partner. Mr. Kitze may be deemed to be the beneficial owner of
the shares held by Flying Disc.
(3) Includes 30,030 shares of Common Stock and warrants to purchase 6,006
shares of Common Stock held by Internet Investments. Mr. Jain is the
managing member of Internet Investments and may be deemed to be the
beneficial owner of the shares held by Internet Investments.
(4) Includes 80,000 shares of Common Stock held by Mr. Vaidyanathan's Family
Trust (the "Vaidyanathan Trust"). Mr. Vaidyanathan may be deemed to be
the beneficial owner of the shares of Common Stock held by the
Vaidyanathan Trust.
(5) Includes 333,334 shares held by the Robert A. Ellis Revocable Trust. Also
includes options exercisable for 185,186 shares of Common Stock
exercisable within 60 days after September 30, 1998.
(6) Includes options exercisable for 243,403 shares of Common Stock
exercisable within 60 days after September 30, 1998.
75
<PAGE>
(7) Includes options exercisable for 20,834 shares of Common Stock exercisable
within 60 days after September 30, 1998. Also includes 43,334 shares of
Common Stock and warrants to purchase 8,667 shares Common Stock held by
J.J. Heffernan, LLC ("Heffernan LLC"), of which Mr. Heffernan is the
managing member, and 82,939 shares of Common Stock and warrants to
purchase 6,667 shares of Common Stock held by the Heffernan Family Trust
("Heffernan Trust"). Mr. Heffernan may be deemed to be the beneficial
owner of the shares and warrants to purchase shares of Common Stock held
by the Heffernan LLC and the Heffernan Trust.
(8) Includes options exercisable for 103,334 shares of Common Stock
exercisable within 60 days after September 30, 1998.
(9) Includes options exercisable for 12,501 shares of Common Stock exercisable
within 60 days after September 30, 1998.
(10) Includes options exercisable for 7,276 shares of Common Stock exercisable
within 60 days after September 30, 1998.
(11) Includes options exercisable for 3,889 shares of Common Stock exercisable
within 60 days after September 30, 1998.
(12) Includes options exercisable for 3,889 shares of Common Stock exercisable
within 60 days after September 30, 1998.
(13) Includes options exercisable for 580,312 shares of Common Stock
exercisable within 60 days after September 30, 1998 and warrants to
purchase 21,340 shares of Common Stock.
76
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of the Offering, the Company will be authorized to issue up
to 40,000,000 shares of Common Stock, $0.0001 par value per share, and
5,000,000 shares of Preferred Stock, $0.0001 par value per share.
The following summary of certain provisions of the Common Stock and
Preferred Stock does not purport to be complete and is subject to, and
qualified in its entirety by, the provisions of the Company's Certificate of
Incorporation, which is included as an exhibit to the Registration Statement
of which this Prospectus is a part, and by the provisions of applicable law.
COMMON STOCK
As of September 30, 1998, there were 9,038,024 shares of Common Stock
outstanding that were held of record by approximately 90 stockholders
(assuming conversion of all warrants outstanding as of September 30, 1998).
There will be 12,098,024 shares of Common Stock outstanding (assuming no
exercise of the Underwriters' over-allotment option and no exercise of
outstanding options) after giving effect to the sale of Common Stock offered
to the public by the Company hereby.
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. The Company
does not have cumulative voting rights in the election of directors, and
accordingly, holders of a majority of the shares voting are able to elect all
of the directors. Subject to preferences that may be granted to any then
outstanding Preferred Stock, holders of Common Stock are entitled to receive
ratably such dividends as may be declared by the Board of Directors out of
funds legally available therefor as well as any distributions to the
stockholders. See "Dividend Policy." In the event of a liquidation,
dissolution or winding up of the Company, holders of Common Stock are entitled
to share ratably in all assets of the Company remaining after payment of
liabilities and the liquidation preference of any then outstanding Preferred
Stock. Holders of Common Stock have no preemptive or other subscription of
conversion rights. There are no redemption or sinking fund provisions
applicable to the Common Stock.
PREFERRED STOCK
Effective upon the closing of the Offering and pursuant to the Company's
Certificate of Incorporation, the Board of Directors will have the authority,
without further action by the stockholders, to issue up to 5,000,000 shares of
Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, conversion
rights, voting rights, terms of redemption, liquidation preferences, sinking
fund terms and the number of shares constituting any series or the designation
of such series, any or all of which may be greater than the rights of Common
Stock, without any further vote or action by stockholders. The issuance of
Preferred Stock could adversely affect the voting power of holders of Common
Stock and the likelihood that such holders will receive dividend payments and
payments upon liquidation and could have the effect of delaying, deferring or
preventing a change in control of the Company. The Company has no present plan
to issue any shares of Preferred Stock after consummation of the Offering.
ANTITAKEOVER EFFECTS OF PROVISIONS OF THE COMPANY'S CHARTER AND BYLAWS
Upon completion of the Offering, the Company's Bylaws will provide that all
stockholder action must be effected at a duly called meeting of stockholders
and not by a consent in writing; the Bylaws will also provide that only the
Company's Chief Executive Officer and the President of the Company may call a
special meeting of stockholders.
These provisions will make it more difficult for the Company's existing
stockholders to replace the Board of Directors as well as for another party to
obtain control of the Company by replacing the Board of Directors. Since the
Board of Directors has the power to retain and discharge officers of the
Company, these provisions could also make it more difficult for existing
stockholders or another party to effect a change in management.
77
<PAGE>
These and other provisions may have the effect of deterring hostile
takeovers or delaying changes in control or management of the Company. These
provisions are intended to enhance the likelihood of continued stability in
the composition of the Board of Directors and in the policies furnished by the
Board of Directors and to discourage certain types of transactions that may
involve an actual or threatened change of control of the Company. These
provisions are designed to reduce the vulnerability of the Company to an
unsolicited acquisition proposal. The provisions also are intended to
discourage certain tactics that may be used in proxy fights. However, such
provisions could have the effect of discouraging others from making tender
offers for the Company's shares and, as a consequence, they also may inhibit
fluctuations in the market price of the Company's shares that could result
from actual or rumored takeover attempts. Such provisions also may have the
effect of preventing changes in the management of the Company. See "Risk
Factors--Antitakeover Effects Of Certain Charter And Bylaws; Possible Issuance
Of Preferred Stock."
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203"), which, subject to certain exceptions, prohibits a
Delaware corporation from engaging in any business combination with any
interested stockholder for a period of three years following the date that
such stockholder became an interested stockholder, unless: (i) prior to such
date, the Board of Directors of the corporation approved either the business
combination or the transaction that resulted in the stockholder becoming an
interested holder, (ii) upon consummation of the transaction that that
resulted in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding those shares owned (a) by persons
who are directors and also officers and (b) by employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or (iii) on or subsequent to such date, the business
combination is approved by the board of directors and authorized at an annual
or special meeting of the stockholders, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock that is
not owned by the interested stockholder.
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder, (ii)
any sale, transfer, pledge or other disposition of 10% or more of the assets
of the corporation involving the interested stockholder, (iii) subject to
certain exceptions, any transaction that results in the issuance or transfer
by the corporation of any stock of the corporation to the interested
stockholder, (iv) any transaction involving the corporation that has the
effect of increasing the proportionate share of the stock or any class or
series of the corporation beneficially owned by the interested stockholder or
(v) the receipt by the interested stockholder of the benefit of any loss,
advances, guarantees, pledges or other financial benefits by or through the
corporation. In general, Section 203 defines interested stockholder as an
entity or person beneficially owning 15% or more of the outstanding voting
stock of the corporation an any entity or person affiliated with or
controlling or controlled by such entity or person. See "Risk Factors--
Antitakeover Effects Of Certain Charter And Bylaws; Possible Issuance Of
Preferred Stock."
LISTING
Application has been made for quotation of the Company's Common Stock on The
Nasdaq National Market under the symbol XMCM.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is
BankBoston, N.A. Its address is c/o Boston EquiServe Trust Company, 150 Royall
Street, Canton, Massachusetts 02021, and its telephone number is (617) 575-
6127.
78
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock after the Offering
could adversely affect the market price of the Common Stock and could impair
the Company's ability to raise capital through the sale of equity securities.
Upon completion of the Offering, the Company will have outstanding 12,098,024
shares of Common Stock. Of these shares, the 3,000,000 shares offered hereby
will be freely tradable without restriction under the Securities Act, unless
they are held by "affiliates" of the Company defined under the Securities Act.
The remaining 9,098,024 outstanding shares were sold by the Company in
reliance on exemptions from the registration requirements of the Securities
Act and are "restricted securities" within the meaning of Rule 144 under the
Securities Act. The remaining 9,098,024 shares of Common Stock held by
existing stockholders upon the closing of the Offering (based on the number of
shares of Common Stock outstanding as of September 30, 1998) will be
"restricted securities" as that term is defined in Rule 144 under the
Securities Act. Restricted securities may be sold in the public market only if
registered or if they qualify for an exemption from registration under Rules
144, 144(k) or 701 promulgated under the Securities Act. The Company's
directors, officers, stockholders and holders of options to purchase Common
Stock have agreed that they will not sell, directly or indirectly, any Common
Stock without the prior written consent of Bear, Stearns & Co. Inc. for a
period of 180 days from the date of this Prospectus. Bear, Stearns & Co. Inc.
may however, in its sole discretion and at any time without notice, release
all or any portion of the shares subject to lock-up agreements. Subject to the
provisions of Rules 144, 144(k) and 701, 9,098,024 shares will be eligible for
sale 180 days after the date of this Prospectus upon the expiration of the
lock-up agreements.
The Company intends to file, as of the date of this Prospectus, Form S-8
registration statements under the Securities Act to register all shares of
Common Stock issuable pursuant to outstanding options and all shares of Common
Stock reserved for issuance under the Company's 1998 Plan and Stock Purchase
Plan. Such registration statements are expected to become effective
immediately upon filing, and shares covered by those registration statements
will thereupon be eligible for sale in the public markets, subject to the
lock-up agreements described above and Rule 144 limitations applicable to
affiliates. As of September 30, 1998, there were outstanding options to
purchase up to 1,901,198 shares of Common Stock which will be eligible for
sale in the public market following the Offering from time to time subject to
becoming exercisable and the expiration of the lock-up agreements, and, giving
effect to the increase in the aggregate number of shares reserved for issuance
pursuant to the 1998 Plan from 1,166,667 to 2,000,000 approved as of November
16, 1998, an additional 1,626,135 shares of Common Stock were reserved for
issuance under the 1998 Plan and the Stock Purchase Plan. See "Management--
Stock Plans."
Prior to the Offering, there has been no public market for the Common Stock
of the Company, and any sale of substantial amounts in the open market may
adversely affect the market price of the Common Stock offered hereby. See
"Risk Factors--Shares Eligible For Future Sale."
79
<PAGE>
UNDERWRITING
The Underwriters of the Offering named below (the "Underwriters"), for whom
Bear, Stearns & Co. Inc. and Deutsche Bank Securities Inc. are acting as
representatives, have severally agreed with the Company, subject to the terms
and conditions of the Underwriting Agreement (the form of which has been filed
as an exhibit to the Registration Statement on Form S-1 of which this
Prospectus is a part), to purchase from the Company the aggregate number of
shares of Common Stock set forth opposite their respective names below:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
Bear, Stearns & Co. Inc.....................................
Deutsche Bank Securities Inc................................
---------
Total..................................................... 3,000,000
=========
</TABLE>
The nature of the respective obligations of the Underwriters is such that
all of the shares of Common Stock must be purchased if any is purchased. Those
obligations are subject, however, to various conditions, including the
approval of certain matters by counsel. The Company has agreed to indemnify
the Underwriters against certain liabilities, including liabilities under the
Securities Act, and, where such indemnification is unavailable, to contribute
to payments that the Underwriters may be required to make in respect of such
liabilities.
The Company has been advised that the Underwriters propose to offer the
shares of Common Stock directly to the public initially at the public offering
price set forth on the cover page of this Prospectus and to certain selected
dealers at such price less a concession not to exceed $ per share, that
the Underwriters may allow, and such selected dealers may reallow, a
concession to certain other dealers not to exceed $ per share and that
after the commencement of the Offering, the public offering price and the
concessions may be changed.
The Company has granted to the Underwriters an option to purchase in the
aggregate up to 450,000 additional shares of Common Stock to be sold in the
Offering solely to cover over-allotments, if any. The option may be exercised
in whole or in part at any time within 30 days after the date of this
Prospectus. To the extent the option is exercised, the Underwriters will be
severally committed, subject to certain conditions, including the approval of
certain matters by counsel, to purchase the additional shares of Common Stock
in proportion to their respective purchase commitments as indicated in the
preceding table.
The Underwriters have reserved for sale at the initial public offering price
up to 5% of the number of shares of Common Stock offered hereby for sale to
certain directors, officers and employees of the Company, business affiliates
and related persons who have expressed an interest in purchasing shares. The
number of shares available for sale to the general public will be reduced to
the extent any reserved shares are purchased. Any reserved shares not so
purchased will be offered by the Underwriters on the same basis as the other
shares offered hereby.
The Underwriters do not expect sales of Common Stock to any accounts over
which they exercise discretionary authority to exceed 5% of the number of
shares being offered hereby.
The Company and its executive officers, directors and all of its current
stockholders have agreed that, subject to certain limited exceptions, for a
period of 180 days after the date of this Prospectus, without the prior
80
<PAGE>
written consent of Bear, Stearns & Co. Inc., they will not, directly or
indirectly, issue, sell, offer or agree to sell or otherwise dispose of any
shares of Common Stock (or securities convertible into, exchangeable for or
evidencing the right to purchase shares of Common Stock).
Prior to the Offering, there has been no public market for the Common Stock.
Consequently, the initial public offering price was determined through
negotiations among the Company and the representatives of the Underwriters.
Among the factors considered in making such determination were the Company's
financial and operating history and condition, its prospects and prospects for
the industry in which it does business in general, the management of the
Company, prevailing equity market conditions and the demand for securities
considered comparable to those of the Company.
In order to facilitate the Offering, certain persons participating in the
Offering may engage in transactions that stabilize, maintain or otherwise
affect the price of the Common Stock during and after the Offering.
Specifically, the Underwriters may over-allot or otherwise create a short
position in the Common Stock for their own account by selling more shares of
Common Stock than have been sold to them by the Company. The Underwriters may
elect to cover any such short position by purchasing shares of Common Stock in
the open market or by exercising the over-allotment option granted to the
Underwriters. In addition, the Underwriters may stabilize or maintain the
price of the Common Stock by bidding for or purchasing shares of Common Stock
in the open market and may impose penalty bids, under which selling
concessions allowed to syndicate members or other broker-dealers participating
in the Offering are reclaimed if shares of Common Stock previously distributed
in the Offering are repurchased in connection with stabilization transactions
or otherwise. The effect of these transactions may be to stabilize or maintain
the market price of the Common Stock at a level above that which might
otherwise prevail in the open market. The imposition of a penalty bid may also
affect the price of the Common Stock to the extent that it discourages resales
thereof. No representation is made as to the magnitude or effect of any such
stabilization or other transactions. Such transactions may be effected on the
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Morrison & Foerster LLP, San Francisco, California. Certain legal
matters in connection with the Offering will be passed upon for the
Underwriters by Brobeck, Phleger & Harrison LLP, San Francisco, California.
EXPERTS
The consolidated financial statements of Xoom.com, Inc. as of December 31,
1996 and 1997 and September 30, 1998 and for the period from April 16, 1996
(Inception) to December 31, 1996, for the year ended December 31, 1997 and for
the nine months ended September 30, 1998; the financial statements of
Paralogic Corporation as of December 31, 1996 and 1997 and each of the two
years in the period ended December 31, 1997; the financial statements of
Global Bridges Technology, Inc. as of December 31, 1996 and 1997 and for the
period from July 23, 1996 (inception) to December 31, 1996 and for the year
ended December 31, 1997; and the financial statements of Pagecount, Inc. as of
December 31, 1997 and for the period from January 23, 1997 (inception) to
December 31, 1997 appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
reports thereon (with respect to the consolidated financial statements of
Xoom.com, Inc., which contain an explanatory paragraph describing conditions
that raise substantial doubt about the Company's ability to continue as a
going concern described in Note 1 of the Notes to the consolidated financial
statements) appearing elsewhere herein, and are included in reliance upon such
reports given upon the authority of such firm as experts in accounting and
auditing.
81
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with Securities and Exchange Commission (the
"Commission") in Washington, D.C. a registration statement (together with all
amendments, the "Registration Statement") on Form S-1 under the Securities Act
with respect to the Common Stock offered hereby. This Prospectus, filed as
part of the Registration Statement, does not contain all of the information
set forth in the Registration Statement and the exhibits and schedules
thereto, certain portions of which have been omitted as permitted by the rules
and regulations of the Commission. For further information with respect to the
Company and the Common Stock, reference is made to the Registration Statement
and to such exhibits and schedules thereto. Statements contained in this
Prospectus as to the contents of any contract, agreement or other document are
not necessarily complete and, in each instance, reference is made to the copy
of such contract, agreement or document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. The Registration Statement and the exhibits and schedules
thereto may be inspected by anyone without charge at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the regional offices of the Commission located at 7 World
Trade Center, Suite 1300, New York, New York 10048 and 500 West Madison
Street, Suite 1400, Chicago, Illinois, 60661. Copies of all or any part of
such materials may be obtained from the Commission upon the payment of certain
fees prescribed by the Commission. Such reports and other information may also
be inspected without charge at a web site maintained by the commission. The
address of such site is http://www.sec.gov.
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by independent accountants and with
quarterly reports containing unaudited summary financial information for each
of the first three quarters of each fiscal year.
82
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
XOOM.COM, INC.
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors......................... 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
PARALOGIC CORPORATION
Report of Ernst & Young LLP, Independent Auditors......................... F-28
Balance Sheets............................................................ F-29
Statements of Operations.................................................. F-30
Statements of Shareholders' Equity (Deficit).............................. F-31
Statements of Cash Flows.................................................. F-32
Notes to Financial Statements............................................. F-33
GLOBAL BRIDGES TECHNOLOGIES, INC.
Report of Ernst & Young LLP, Independent Auditors......................... F-37
Balance Sheets............................................................ F-38
Statements of Operations.................................................. F-39
Statements of Shareholders' Equity (Deficit).............................. F-40
Statements of Cash Flows.................................................. F-41
Notes to Financial Statements............................................. F-42
PAGECOUNT, INC.
Report of Ernst & Young LLP, Independent Auditors......................... F-46
Balance Sheets............................................................ F-47
Statements of Income...................................................... F-48
Statements of Stockholders' Equity........................................ F-49
Statements of Cash Flows.................................................. F-50
Notes to Financial Statements............................................. F-51
SELECTED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
Introduction.............................................................. F-55
Selected Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the twelve months ended December 31, 1997................. F-56
Selected Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the nine months ended September 30, 1998.................. F-57
Notes to Selected Unaudited Pro Forma Condensed Consolidated Statements of
Operations............................................................... F-58
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Xoom.com, Inc.
We have audited the accompanying consolidated balance sheets of Xoom.com,
Inc. as of December 31, 1996 and 1997 and September 30, 1998, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the period from April 16, 1996 (inception) through December 31,
1996, for the year ended December 31, 1997, and for the nine months ended
September 30, 1998. 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 Xoom.com,
Inc. at December 31, 1996 and 1997 and September 30, 1998, and the
consolidated results of its operations and its cash flows for the period from
April 16, 1996 (inception) through December 31, 1996, for the year ended
December 31, 1997, and for the nine months ended September 30, 1998, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
Xoom.com, Inc. will continue as a going concern. As more fully described in
Note 1, the Company has incurred recurring operating losses and has a working
capital deficiency. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The financial statements do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification
of liabilities that may result from the outcome of this uncertainty.
Palo Alto, California
October 28, 1998
except for paragraph 3 of Note 4 and Note 11, as to which the date is
November 16, 1998
F-2
<PAGE>
XOOM.COM, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER
1996 1997 30, 1998
---------- ----------- ------------
ASSETS
<S> <C> <C> <C>
Current assets:
Cash.................................. $ 1,052 $ 5,587 $ 966,612
Accounts receivable, net of allowance
for doubtful accounts of $48,702 in
1997 and $105,171 in 1998............ -- 173,223 835,072
Stock subscription receivable from
related parties...................... 300,000 -- --
Stock subscription receivable......... -- 75,000 --
Inventories........................... -- -- 378,474
Other current assets.................. -- 906 121,682
---------- ----------- ------------
Total current assets.................... 301,052 254,716 2,301,840
Fixed assets, net....................... 61,657 413,685 1,468,339
Intangible assets, net.................. -- -- 5,282,241
Prepaid initial public offering costs... -- -- 805,325
Prepaid royalties and licenses.......... 324,000 53,556 134,068
Other assets............................ 18,544 59,713 423,426
---------- ----------- ------------
Total assets............................ $ 705,253 $ 781,670 $ 10,415,239
========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable...................... $ 136,122 $ 461,931 $ 1,514,684
Accrued compensation and related
expenses............................. 8,906 38,391 367,211
Other accrued liabilities............. -- 4,700 773,882
Note payable to stockholder........... -- 150,000 --
Acquisition notes payable............. -- -- 1,825,704
Capital lease obligations............. -- -- 35,697
Contingency accrual................... -- 1,000,000 1,000,000
---------- ----------- ------------
Total current liabilities............... 145,028 1,655,022 5,517,178
Acquisition notes payable, less current
portion................................ -- -- 990,000
Capital lease obligations, less current
portion................................ -- -- 126,302
Commitments and contingencies...........
Stockholders' equity (deficit):
Convertible preferred stock, $0.0001
par value:
Authorized shares--1,000,000
Issued and outstanding shares--none
in 1996, 1997 or 1998 -- -- --
Common stock, $0.0001 par value:
Authorized shares--20,000,000
Issued and outstanding shares--
3,333,335, 5,541,367 and 8,731,597
in 1996, 1997 and 1998, respective-
ly................................. 1,000,200 3,001,424 14,940,421
Deferred compensation................. -- (302,924) (1,194,344)
Accumulated deficit................... (439,975) (3,571,852) (9,964,318)
---------- ----------- ------------
Total stockholders' equity (deficit).... 560,225 (873,352) 3,781,759
---------- ----------- ------------
Total liabilities and stockholders'
equity (deficit)....................... $ 705,253 $ 781,670 $ 10,415,239
========== =========== ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
XOOM.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 16, 1996
(INCEPTION) YEAR ENDED NINE MONTHS ENDED
THROUGH DECEMBER SEPTEMBER 30,
DECEMBER 31, 31, ------------------------
1996 1997 1997 1998
-------------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenue:
Electronic commerce..... $ -- $ 327,080 $ 59,289 $ 3,366,048
Advertising............. -- 60,251 21,227 953,121
License fees and other.. -- 453,556 340,495 546,192
--------- ----------- ----------- -----------
Total net revenue........ -- 840,887 421,011 4,865,361
Cost of net revenue:
Cost of electronic
commerce............... -- 170,957 72,343 1,965,556
Cost of license fees and
other.................. -- 148,375 135,985 34,630
--------- ----------- ----------- -----------
Total cost of net
revenue................. -- 319,332 208,328 2,000,186
--------- ----------- ----------- -----------
Gross profit............. -- 521,555 212,683 2,865,175
Operating expenses:
Operating and
development............ 265,769 1,150,299 878,792 2,557,940
Sales and marketing..... 23,719 291,675 170,958 1,570,695
General and
administrative......... 150,487 720,534 477,342 2,157,860
Purchased in-process
research and
development............ -- -- -- 790,000
Amortization of deferred
compensation........... -- 247,924 110,712 1,110,941
Amortization of
intangible assets...... -- -- -- 1,087,029
Non-recurring charges... -- 1,243,000 1,243,000 --
--------- ----------- ----------- -----------
Total operating
expenses................ 439,975 3,653,432 2,880,804 9,274,465
--------- ----------- ----------- -----------
Loss from operations..... (439,975) (3,131,877) (2,668,121) (6,409,290)
Other income (expense):
Interest income........ -- -- -- 36,882
Interest expense....... -- -- -- (20,058)
--------- ----------- ----------- -----------
Net loss................. $(439,975) $(3,131,877) $(2,668,121) $(6,392,466)
========= =========== =========== ===========
Net loss per share--basic
and diluted............. $ (0.89) $ (0.64) $ (0.57) $ (0.89)
========= =========== =========== ===========
Number of shares used in
per share
calculation--basic and
diluted................. 496,733 4,874,319 4,687,658 7,171,676
========= =========== =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
XOOM.COM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK STOCKHOLDERS'
--------------------- DEFERRED ACCUMULATED EQUITY
SHARES AMOUNT COMPENSATION DEFICIT (DEFICIT)
--------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Issuance of common
stock to founders at
inception............. 666,668 $ 200 $ -- $ -- $ 200
Issuance of common
stock in exchange for
cancellation of notes
payable to
stockholders.......... 2,666,667 1,000,000 -- -- 1,000,000
Net loss............... -- -- -- (439,975) (439,975)
--------- ----------- ----------- ----------- -----------
Balances at December 31,
1996................... 3,333,335 1,000,200 -- (439,975) 560,225
Issuance of common
stock for cash........ 1,914,452 1,223,000 -- -- 1,223,000
Issuance of common
stock in exchange for
cancellation of notes
payable to
stockholders.......... 38,889 35,000 -- -- 35,000
Issuance of common
stock in exchange for
stock subscription
receivable............ 254,691 175,000 -- -- 175,000
Issuance of stock
options to
consultants........... -- 17,376 -- -- 17,376
Deferred compensation
related to grant of
stock options......... -- 550,848 (550,848) -- --
Amortization of
deferred
compensation.......... -- -- 247,924 -- 247,924
Net loss............... -- -- -- (3,131,877) (3,131,877)
--------- ----------- ----------- ----------- -----------
Balances at December 31,
1997................... 5,541,367 3,001,424 (302,924) (3,571,852) (873,352)
Issuance of common
stock for cash, net of
issuance costs of
$139,316.............. 1,815,537 5,532,596 -- -- 5,532,596
Issuance of common
stock in exchange for
Classic Media Holdings
license rights........ 43,292 100,000 -- -- 100,000
Issuance of common
stock in connection
with acquisitions..... 1,179,135 3,618,235 -- -- 3,618,235
Issuance of common
stock in exchange for
cancellation of notes
payable to
stockholders.......... 64,937 150,000 -- -- 150,000
Issuance of common
stock in exchange for
stock subscription
receivable............ 78,224 260,480 -- -- 260,480
Issuance of common
stock to directors and
consultants in
exchange for
services.............. 9,105 86,660 -- -- 86,660
Issuance of stock
options to
consultants........... -- 188,665 -- -- 188,665
Deferred compensation
related to grant of
stock options......... -- 2,002,361 (2,002,361) -- --
Amortization of de-
ferred compensation... -- -- 1,110,941 -- 1,110,941
Net loss............... -- -- -- (6,392,466) (6,392,466)
--------- ----------- ----------- ----------- -----------
Balances at September
30, 1998............... 8,731,597 $14,940,421 $(1,194,344) $(9,964,318) $ 3,781,759
========= =========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
XOOM.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 16, 1996
(INCEPTION) NINE MONTHS ENDED
THROUGH YEAR ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, ------------------------
1996 1997 1997 1998
-------------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH USED IN OPERATING
ACTIVITIES:
Net loss................. $(439,975) $(3,131,877) $(2,668,121) $(6,392,466)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Charge for purchased in-
process research and
development............ -- -- -- 790,000
Depreciation and
amortization........... 2,496 254,077 56,825 481,118
Amortization of
intangible assets...... -- -- -- 1,087,029
Amortization of deferred
compensation........... -- 247,924 110,712 1,110,941
Write-off of prepaid
royalties.............. -- 243,000 243,000 --
Issuance of common stock
in exchange for Classic
Media Holdings license
rights................. -- -- -- 100,000
Issuance of stock
options to
consultants............ -- 17,376 7,451 188,665
Issuance of common stock
to directors and
consultants............ -- -- -- 86,660
Changes in operating
assets and liabilities:
Accounts receivable.... -- (173,223) (126,388) (634,271)
Inventories............ -- -- -- (378,474)
Other current assets... -- (906) (23,943) (116,323)
Prepaid initial public
offering costs........ -- -- -- (805,325)
Prepaid royalties and
licenses.............. (324,000) (185,815) 46,122 (281,671)
Other assets........... (18,544) (41,169) (28,580) (363,323)
Accounts payable....... 136,122 325,809 87,913 1,047,635
Accrued compensation
and related expenses.. 8,906 29,485 15,228 288,554
Other accrued
liabilities........... -- 4,700 1,890 645,498
Contingency accrual.... -- 1,000,000 1,000,000 --
--------- ----------- ----------- -----------
Net cash used in
operating activities.... (634,995) (1,410,619) (1,277,891) (3,145,753)
Cash used in investing
activities:
Purchases of fixed
assets................. (64,153) (392,846) (44,257) (1,099,347)
Business combinations,
net of cash acquired... -- -- -- (328,644)
Cash paid in connection
with the purchase of
certain assets from
Revolutionary Software,
Inc. .................. -- -- -- (19,900)
--------- ----------- ----------- -----------
Net cash used in
investing activities.... (64,153) (392,846) (44,257) (1,447,891)
Cash provided in
financing activities:
Proceeds from issuance
of common stock........ 200 1,223,000 500,000 5,532,595
Proceeds from issuance
of notes payable to
stockholders........... 700,000 185,000 35,000 --
Proceeds from repayment
of stock subscriptions
receivable............. -- 400,000 800,000 335,480
Principal payments on
capital lease
obligations............ -- -- -- (2,679)
Repayment of acquisition
note payable........... -- -- -- (310,727)
--------- ----------- ----------- -----------
Net cash provided by
financing activities.... 700,200 1,808,000 1,335,000 5,554,669
--------- ----------- ----------- -----------
Net increase in cash..... 1,052 4,535 12,852 961,025
Cash at beginning of
period.................. -- 1,052 1,052 5,587
--------- ----------- ----------- -----------
Cash at end of period.... $ 1,052 $ 5,587 $ 13,904 $ 966,612
========= =========== =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE>
XOOM.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 16, 1996
(INCEPTION) NINE MONTHS ENDED
THROUGH YEAR ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, ----------------------
1996 1997 1997 1998
-------------- ------------ ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES:
Non-cash transactions:
Issuance of common stock in
exchange for stock
subscriptions receivable.. $ -- $175,000 $500,000 $ 260,480
========== ======== ======== ==========
Issuance of notes payable
to stockholders for stock
subscription receivable... $ 300,000 $ -- $ -- $ --
========== ======== ======== ==========
Issuance of common stock in
exchange for cancellation
of notes payable to
stockholders.............. $1,000,000 $ 35,000 $ -- $ 150,000
========== ======== ======== ==========
Deferred compensation
resulting from grant of
stock options............. $ -- $550,848 $288,075 $2,002,361
========== ======== ======== ==========
Fixed assets acquired under
capital lease
obligations............... $ -- $ -- $ -- $ 161,999
========== ======== ======== ==========
Issuance of common stock in
conjunction with business
and technology
acquisitions:
Paralogic Corporation.... $ -- $ -- $ -- $1,576,364
========== ======== ======== ==========
Global Bridges
Technologies, Inc....... $ -- $ -- $ -- $ 797,694
========== ======== ======== ==========
Revolutionary Software,
Inc..................... $ -- $ -- $ -- $ 800,178
========== ======== ======== ==========
ArcaMax, Inc............. $ -- $ -- $ -- $ 444,000
========== ======== ======== ==========
Issuance of notes payable
in conjunction with
business and technology
acquisitions:
Paralogic Corporation.... $ -- $ -- $ -- $1,400,000
========== ======== ======== ==========
Global Bridges
Technologies, Inc....... $ -- $ -- $ -- $ 62,500
========== ======== ======== ==========
Revolutionary Software,
Inc..................... $ -- $ -- $ -- $ 262,500
========== ======== ======== ==========
ArcaMax, Inc............. $ -- $ -- $ -- $ 180,000
========== ======== ======== ==========
Pagecount, Inc........... $ -- $ -- $ -- $1,200,000
========== ======== ======== ==========
Cash paid for interest..... $ -- $ -- $ -- $ 20,058
========== ======== ======== ==========
</TABLE>
See accompanying notes.
F-7
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
XOOM.com, Inc. (the "Company"), was formerly known as XOOM, Inc., Xoom
Software, Inc. and originally incorporated as Atomsoft, Inc. in the State of
Delaware on April 16, 1996.
The Company provides free community services such as Web site hosting, e-
mail, on-line chat networks and free proprietary content such as clip art and
greeting cards. The Company uses these free services and content to build a
membership base to direct market goods and services targeted to the interests
of its members. The Company derives a substantial portion of its revenue from
electronic commerce, and to a lesser extent from advertising and licensing.
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany transactions
and balances have been eliminated in consolidation.
The Company began operations on April 16, 1996 and has financed its
operations through sales of common stock and issuances of notes payable which
have subsequently been converted to common stock. The Company incurred
operating losses for the period from April 16, 1996 (inception) through
December 31, 1996, for the year ended December 31, 1997 and for the nine
months ended September 30, 1998. The Company also has a working capital
deficiency at September 30, 1998. The Company's ability to continue as a going
concern is dependent upon successful expansion of marketplace acceptance of
its product offerings, the level of revenue growth, if any, and securing
additional equity financing. From January through September 1998, the Company
issued common stock, resulting in net cash proceeds of $5,532,595. On October
1, 1998, the Company completed negotiations for a $1 million note to be
secured by up to $1 million of the Company's computer equipment, which will be
repaid over 42 months at an annual interest rate of 14.6%. The Company is also
actively pursuing additional sources of capital and/or financing including
potential strategic alliances. If the Company cannot expand marketplace
acceptance of its product offerings and increase revenue or is unable to
secure additional financing, management has the intent and the ability to
delay or reduce expenditures so as not to require additional financial
resources if such resources are not available. Should the Company be required
to delay or reduce expenditures it may not be able to fund its expansion,
promote its brand, take advantage of acquisition opportunities, develop or
enhance services or respond to competitive pressures. The conditions described
above raise substantial doubt about the Company's ability to continue as a
going concern. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification
of assets or the amounts and classification of liabilities that may result
from the outcome of this uncertainty.
Dependence on Certain Vendors
The Company currently depends on one vendor to provide warehousing and order
fulfillment. Although the Company believes that there are alternative vendors
for warehousing and order fulfillment, there can be no assurance that the
Company will maintain its relationship with this vendor as the agreement is
cancelable at any time. The loss of this relationship could have a material
adverse effect on the Company's financial condition and results of operations.
F-8
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements
and the reported results of operations during the reporting period. Actual
results could differ from those estimates.
Interim Financial Information
The interim financial information for the nine months ended September 30,
1997 is unaudited but has been prepared on the same basis as the audited
financial statements and includes all adjustments, consisting only of normal
recurring adjustments, that the Company considers necessary for a fair
presentation of its financial position at such date and its results of
operations and cash flows for those periods. Operating results for the nine
months ended September 30, 1998 are audited and are not necessarily indicative
of results that may be expected for any future periods.
Cash
The Company maintains its cash in depository accounts with one financial
institution.
Concentrations of Credit Risk and Credit Evaluations
Financial instruments which subject the Company to concentrations of credit
risk consist primarily of cash and trade accounts receivable. The Company
maintains its cash in a domestic financial institution with a high credit
standing. The Company performs periodic evaluations of the relative credit
standing of this institution. The Company conducts business with companies in
various industries throughout the United States and with individuals over the
Internet. The Company performs ongoing credit evaluations of its corporate
customers and generally does not require collateral. Sales to individuals are
principally paid for via credit cards. Reserves are maintained for potential
credit losses and such losses to date have been within management's
expectations.
For the year ended December 31, 1997, one customer, Cybernet International,
Inc., accounted for $100,000 or 12% of total net revenue. No balances were
receivable from that customer at December 31, 1997. For the nine months ended
September 30, 1998, no single customer accounted for greater than 10% of total
net revenue.
Inventories
Inventories are carried at the lower of cost (determined on the first-in
first-out basis) or market. Inventories consist of products available for
sale.
Fixed Assets
Fixed assets are stated at cost less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method over the
estimated useful lives of three years. Fixed assets under capital leases are
amortized over the shorter of the estimated useful life or the life of the
lease. Useful lives are evaluated regularly by management in order to
determine recoverability in light of current technological conditions.
F-9
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Intangible Assets, Net
Intangible assets consist of purchased technology and goodwill related to
acquisitions accounted for by the purchase method. See Note 9. Amortization of
these purchased intangibles is provided on the straight-line basis over the
respective useful lives of the assets, which ranges from two to three and one-
half years. Purchased in-process research and development without alternative
future use is expensed when acquired.
The Company identifies and records impairment losses on intangible assets
when events and circumstances indicate that such assets might be impaired. To
date, no such impairment has been recorded.
Prepaid Royalties and Licenses
Prepaid royalties represent prepayments of royalties due upon the sale or
sublicense of software technologies. Prepaid royalties are amortized as units
are sold or over estimated useful lives of approximately one year, whichever
is shorter. Licenses represent amounts paid to developers for fully paid
licenses to resell certain software. These licenses are amortized over the
estimated useful lives which are approximately one year. Amortization of
prepaid royalties and licenses, which is included in cost of electronic
commerce and cost of license fee revenue, totaled $0, $213,259 and $200,769
for the period from April 16, 1996 (inception) through December 31, 1996, for
the year ended December 31, 1997 and for the nine months ended September 30,
1998, respectively.
During the second quarter of 1997, the Company discontinued the sale of
certain products where royalty prepayments had been made and accordingly,
recorded a write-off of prepaid royalties included in non-recurring charges
totaling $243,000.
Other Assets
Other assets consist of non-current deposits relating to various ongoing
agreements entered into by the Company.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS
109"), which requires the use of the liability method in accounting for income
taxes. Under FAS 109, deferred tax assets and liabilities are measured based
on differences between the financial reporting and tax bases of assets and
liabilities using enacted tax rates and laws that are expected to be in effect
when the differences are expected to reverse.
Stock-Based Compensation
The Company accounts for stock-based awards to employees under the intrinsic
value method in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and has adopted the
disclosure-only alternative of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("FAS 123").
F-10
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Advertising Expense
All advertising costs are expensed when incurred. Advertising costs, which
are included in sales and marketing expense, were $0, $50,000 and $30,000 for
the period from April 16, 1996 (inception) through December 31, 1996, for the
year ended December 31, 1997 and for the nine months ended September 30, 1998,
respectively.
Revenue Recognition
Electronic Commerce
The Company recognizes revenue from electronic commerce sales when the
products are shipped to customers. The Company provides for potential product
returns and estimated warranty costs in the period of the sale. Such costs
have not been material to date.
Advertising
Advertising revenues are derived from the sale of banner advertisements and
sponsorships under short-term contracts. Through September 30, 1998, the
duration of the Company's advertising commitments has been principally from
one to two months. Advertising revenues on banner contracts are recognized
ratably in the period in which the advertisement is displayed, provided that
no significant Company obligations remain and collection of the resulting
receivable is probable. Company obligations typically include the guarantee of
a minimum number of "impressions" or times that an advertisement appears in
pages viewed by the users of the Company's online properties. To the extent
minimum guaranteed impressions are not met, the Company defers recognition of
the corresponding revenue until the remaining guaranteed impression levels are
achieved.
License Fees
The Company licenses software under non-cancelable license agreements to
end-users and non-cancelable sub-license agreements to resellers. License fee
revenues are recognized when a non-cancelable license agreement has been
signed, the product has been delivered, there are no uncertainties surrounding
product acceptance, the fees are fixed and determinable, collection is
considered probable and all significant contractual obligations have been
satisfied.
Export Sales
Export sales were 30% of net revenues for the year ended December 31, 1997
and 29% for the nine months ended September 30, 1998. Information regarding
the Company's export sales are as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1997 SEPTEMBER 30, 1998
----------------- ------------------
<S> <C> <C>
North America......................... $ 39,193 $ 194,971
Europe................................ 157,228 736,761
Asia/Pacific.......................... 44,293 287,806
Rest of the World..................... 11,412 210,193
-------- ----------
Total............................... $252,126 $1,429,731
======== ==========
</TABLE>
F-11
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Computation of Net Loss Per Share
The Company adopted Financial Accounting Standards Board Statement No. 128,
"Earnings Per Share," ("FAS 128") during the year ended December 31, 1997. FAS
128 replaced the calculation of primary and fully diluted net loss per share
with basic and diluted net loss per share. In accordance with FAS 128, basic
net income (loss) per share excludes dilutive common stock equivalents and is
calculated as net income (loss) divided by the weighted average number of
common shares outstanding. Diluted net income (loss) per share is computed
using the weighted average number of common shares outstanding and dilutive
common stock equivalents outstanding during the period. Common equivalent
shares from stock options and warrants (using the treasury stock method) are
excluded from the calculation of net loss per share as their effect is anti-
dilutive.
Recent Accounting Pronouncements
As of January 1, 1998 the Company adopted, Financial Accounting Standards
Board Statement No. 130, "Reporting Comprehensive Income" ("FAS 130") which
establishes standards for reporting and displaying comprehensive income and
its components in a full set of general-purpose financial statements. The
adoption of this standard has had no impact on the Company's consolidated
financial position, stockholders' equity, results of operations or cash flows.
Accordingly, the Company's comprehensive loss for the nine months ended
September 30, 1998 is equal to its reported loss.
Additionally, the Financial Accounting Standards Board issued Financial
Accounting Standards Board Statement No. 131, "Disclosure about Segments of an
Enterprise and Related Information" which establishes standards for the way
public business enterprises report information in annual statements and
interim financial reports regarding operating segments, products and services,
geographic areas, and major customers. The Company is evaluating additional
disclosures, if any, which may result from this pronouncement which is
effective for and will be reflected in the Company's December 31, 1998
financial statements.
2. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1996 1997 1998
------- -------- -------------
<S> <C> <C> <C>
Computers and equipment, including assets
under capital leases of $0, $0 and
$51,854 for 1996, 1997 and the nine
months ended September 30, 1998,
respectively............................. $64,153 $456,999 $1,676,985
Furniture and fixtures under capital
leases................................... -- -- 110,145
------- -------- ----------
Fixed assets.............................. 64,153 456,999 1,787,130
Less accumulated depreciation and
amortization, including amounts related
to assets under capital leases of $0, $0
and $4,574 for 1996, 1997 and the nine
months ended September 30, 1998,
respectively............................. (2,496) (43,314) (318,791)
------- -------- ----------
$61,657 $413,685 $1,468,339
======= ======== ==========
</TABLE>
F-12
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
3. INCOME TAXES
There has been no provision for U.S. federal or state income taxes for any
period as the Company has incurred operating losses.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets for federal and state income taxes are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1996 1997 1998
--------- ----------- -------------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.... $ 1,000 $ 537,000 $ 1,397,000
Acquired technology................. -- -- 225,000
Capitalized start up costs.......... 140,000 112,000 92,000
Prepaid royalties and licenses...... 23,000 257,000 457,000
Accrued liabilities................. -- 398,000 639,000
Other............................... 11,000 17,000 124,000
--------- ----------- -----------
Total deferred tax assets............. 175,000 1,321,000 2,934,000
Valuation allowance................... (175,000) (1,321,000) (2,934,000)
--------- ----------- -----------
Net deferred tax assets............... $ -- $ -- $ --
========= =========== ===========
</TABLE>
Realization of deferred tax assets is dependent upon future earnings, if
any, the timing and amount of which are uncertain. Accordingly, the net
deferred tax assets have been fully offset by a valuation allowance as it is
more likely than not that the deferred tax assets will not be realized.
During the period from April 16, 1996 (inception) through December 31, 1996,
the year ended December 31, 1997, and the nine months ended September 30, 1998
the valuation allowance for the deferred tax assets increased by $175,000,
$1,146,000 and $1,613,000, respectively.
As of September 30, 1998, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $3,506,000. There can be no
assurance that the Company will realize the benefit of the net operating loss
carryforwards. The federal net operating loss carryforwards will expire at
various dates beginning in the fiscal year 2011 through 2012 if not utilized.
Due to the "change of ownership" provisions of the Internal Revenue Code,
the availability of the Company's net operating loss and credit carryforwards
will be subject to an annual limitation against taxable income in future
periods if a change in ownership of more than 50% of the value of the
Company's stock should occur over a three year period, which could
substantially limit the eventual utilization of these carryforwards.
4. STOCKHOLDERS' EQUITY
In October 1998, the Company's Board of Directors authorized an increase in
the number of authorized shares of common and preferred stock from 20,000,000
to 40,000,000 and 1,000,000 to 5,000,000, respectively, each with a par value
of $.0001 per share.
F-13
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
4. STOCKHOLDERS' EQUITY (CONTINUED)
Proposed Public Offering of Common Stock
In June 1998, the Board of Directors authorized management of the Company to
file a Registration Statement with the Securities and Exchange Commission
permitting the Company to sell shares of its common stock to the public.
Stock Split
In February 1998, the Company completed a one-for-two reverse stock split of
the outstanding shares of common stock. In addition, in November 1998, the
Company completed a two-for-three reverse stock split of the outstanding
shares of common stock. All share information and per share amounts in the
accompanying consolidated financial statements has been retroactively adjusted
to reflect the effect of this stock split.
Preferred Stock
The Company is authorized to issue 1,000,000 shares of preferred stock, none
of which is issued or outstanding. The Board of Directors has the authority to
issue the preferred stock in one or more series and to fix the designations,
powers, preferences, rights, qualifications, limitations and restrictions with
respect to any series of preferred stock and to specify the number of shares
of any series of preferred stock without any further vote or action by the
stockholders.
Founders Stock
Pursuant to a common stock Purchase Agreement dated August 26, 1996 and
following the incorporation of the Company, two of the Company's founders each
purchased 333,334 shares (666,668 shares in total) of the Company's common
stock for an aggregate of $200 in cash. Pursuant to a common stock Purchase
Agreement dated December 31, 1996, the founders purchased an additional
2,333,334 and 1,000,000 shares, respectively, of the Company's common stock in
exchange for the cancellation of promissory notes that the Company owed to the
stockholders/founders in the amount of $700,000 and $300,000, respectively. In
the same agreement, one of the founders contributed 666,667 shares of his
common stock back to the Company without compensation pursuant to an agreement
between the founders.
Warrants
In connection with the issuance of common stock in the nine months ended
September 30, 1998, the Company issued warrants to purchase a total of 306,427
shares of common stock at an average price of $3.33 per share. These warrants
are immediately exercisable and expire on the earlier of the successful
completion of an initial public offering or 2003.
Stock Option Plan
The Company has reserved 1,166,667 shares of common stock under the
Company's 1998 Stock Incentive Plan (the "Plan"). The Plan provides for
incentive stock options, as defined by the Internal Revenue Code, to be
granted to employees, at an exercise price not less than 100% of the fair
value at the grant date as determined by the Board of Directors. The Plan also
provides for nonqualified stock options to be issued to non-employee officers,
directors and consultants at an exercise price of not less than 85% of the
fair value at the grant date.
F-14
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
4. STOCKHOLDERS' EQUITY (CONTINUED)
Stock Option Plan (continued)
Option vesting schedules are determined by the Board of Directors at the time
of issuance. Stock options generally vest over different periods ranging from
immediately to 25% at the end of the first year and monthly thereafter up to a
maximum of four years. Upon a change of control, as defined in the Plan, 75%
of unvested options become immediately exercisable. Certain options' vesting
can also accelerate based on the achievement of specified performance
criteria.
A summary of the option activity (including 1,227,333 options granted
outside of the Plan, all of which are outstanding as of September 30, 1998) is
as follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- ---------
<S> <C> <C>
Balance at April 16, 1996............................... -- $ --
Granted............................................... 440,000 0.03
Exercised............................................. -- --
Canceled.............................................. -- --
--------- -----
Balance at December 31, 1996............................ 440,000 0.03
Granted............................................... 632,982 0.05
Exercised............................................. -- --
Canceled.............................................. (95,000) 0.03
--------- -----
Balance at December 31, 1997............................ 977,982 0.05
Granted............................................... 1,044,716 4.94
Exercised............................................. -- --
Canceled.............................................. (121,500) 3.56
--------- -----
Balance at September 30, 1998........................... 1,901,198 $1.11
========= =====
</TABLE>
As of September 30, 1998, there are 492,802 options available for future
grant under the Plan.
The following table summarizes information about options outstanding and
exercisable at September 30, 1998:
<TABLE>
<CAPTION>
OPTIONS
OPTIONS OUTSTANDING EXERCISABLE
----------------------------------- -----------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE NUMBER AVERAGE
EXERCISE NUMBER OF CONTRACTUAL EXERCISE OF EXERCISE
PRICE SHARES LIFE (IN YEARS) PRICE SHARES PRICE
-------------- --------- --------------- --------- ------- ---------
<S> <C> <C> <C> <C> <C>
$0.03--$0.03 1,013,890 8.6 $ 0.03 582,174 $ 0.03
$0.90--$3.33 520,880 9.5 2.88 112,783 2.94
$6.00--$6.75 199,428 9.8 6.72 8,095 6.63
$10.80--$13.50
167,000 9.8 11.34 5,168 11.00
--------- -------
1,901,198 9.1 708,220
========= =======
</TABLE>
F-15
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
4. STOCKHOLDERS' EQUITY (CONTINUED)
Deferred Compensation
The Company has recorded deferred compensation charges of $0, $550,848 and
$2,002,361 during the period from April 16, 1996 (inception) through December
31, 1996, for the year ended December 31, 1997 and for the nine months ended
September 30, 1998, respectively, for the difference between the exercise
price and the deemed fair value of certain stock options granted by the
Company. These amounts are being amortized by charges to operations, using the
accelerated method, over the vesting periods of the individual stock options,
which range from three months to four years.
From December 1996 through June 1998 certain options were granted to various
employees which provided vesting only upon certain events, such as the
Company's successful completion of an initial public offering or individual
and Company performance goals. In June 1998 these options were modified to
vesting upon the earlier of an event or vesting two years from the date of
grant. As a result, the related compensation charge was determined in June
1998.
Options Issued to Consultants
The Company granted options to purchase 87,422 shares of common stock to
consultants at exercise prices ranging from $0.03 to $6.30 per share during
the period from January 1, 1997 through September 30, 1998. These options were
granted in exchange for consulting services performed. The Company valued
these options using the estimated fair value of the services performed which
amounted to $0, $20,277 and $209,630, for the period from April 16, 1996
(inception) through December 31, 1996, for the year ended December 31, 1997
and for the nine months ended September 30, 1998 respectively. These amounts
are being amortized by charges to operations over the respective consulting
periods. The amounts charged to operations were $0, $17,376 and $188,665 for
the period from April 16, 1996 (inception) through December 31, 1996, for the
year ended December 31, 1997 and for the nine months ended September 30, 1998,
respectively.
1998 Employee Stock Purchase Plan
The Company's 1998 Employee Stock Purchase Plan was adopted by the Board of
Directors in October 1998. The Company has reserved a total of 300,000 shares
of common stock for issuance under the plan. Eligible employees may designate
up to 100% of their compensation subject to certain limitations as described
in the Plan, to be deducted each pay period for the purchase of common stock
at 85% of the lesser of the fair market value of the Company's common stock on
the first day of the applicable purchasing period or the last day of the
applicable accrual period.
F-16
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
4. STOCKHOLDERS' EQUITY (CONTINUED)
Pro Forma Disclosure of the Effect of Stock-Based Compensation
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FAS 123 requires the use
of option valuation models that were not developed for use in valuing employee
stock options. Pro forma information regarding net income (loss) and net
income (loss) per share is required by FAS 123. This information is required
to be determined as if the Company has accounted for its employee stock
options under the fair value method of FAS 123. Under this method, the
estimated fair value of the options is amortized to expense over the options'
vesting period. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following weighted-
average assumptions:
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 16, 1996
(INCEPTION) NINE MONTHS
THROUGH YEAR ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1996 1997 1998
-------------- ------------ -------------
<S> <C> <C> <C>
Risk-free interest rate............ 6.5% 6.5% 5.28%
Expected life of the option........ 5 years 5 years 5 years
Expected volatility................ 0% 0% 0%
Expected dividend yield............ 0% 0% 0%
</TABLE>
Because FAS 123 is applicable only to options granted since inception, its
adjusted effect will not be fully reflected until 2000.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimates, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
The weighted-average fair value of options granted to employees during the
period from April 16, 1996 (inception) through December 31, 1996, the year
ended December 31, 1997 and for the nine months ended September 30, 1998 were
$0.02, $0.36 and $0.84, respectively.
F-17
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
4. STOCKHOLDERS' EQUITY (CONTINUED)
Pro Forma Disclosure of the Effect of Stock-Based Compensation (continued)
The effect of applying the FAS 123 fair value method to the Company's stock-
based awards results in net loss and net loss per share as follows:
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 16, 1996
(INCEPTION) NINE MONTHS
THROUGH YEAR ENDED ENDED
DECEMBER 31, DECEMBER SEPTEMBER 30,
1996 31, 1997 1998
-------------- ----------- -------------
<S> <C> <C> <C>
Net loss, as reported............. $(439,975) $(3,131,877) $(6,392,466)
Net loss, pro forma............... (441,946) (3,231,131) (6,507,034)
Net loss per share--basic and
diluted, as reported............. (0.89) (0.64) (0.89)
Net loss per share--basic and
diluted, pro forma............... (0.90) (0.66) (0.91)
</TABLE>
5. COMMITMENTS
The Company leases its facilities, furniture and fixtures and certain
computers and equipment under noncancelable leases for varying periods through
2007. The cost of assets acquired under capital leases during the nine months
ended September 30, 1998 was $161,999. Amortization expense related to these
assets of $4,574 is included in accumulated depreciation and amortization at
September 30, 1998. The Company's lease obligations are collateralized by
certain assets at September 30, 1998. The following are the minimum lease
obligations under these leases at September 30, 1998:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ----------
<S> <C> <C>
1998 (remaining three months)........................ $ 15,816 $ 109,252
1999................................................. 63,264 379,441
2000................................................. 63,264 385,253
2001................................................. 63,264 382,620
2002................................................. 17,027 387,190
2003................................................. -- 410,762
-------- ----------
Minimum lease payments................................. 222,635 $2,054,518
==========
Less amount representing interest...................... (60,636)
--------
Present value of minimum lease payments................ 161,999
Less current portion................................... (35,697)
--------
Long-term portion...................................... $126,302
========
</TABLE>
Rent expense under operating lease arrangements for the period from April
16, 1996 (inception) through December 31, 1996, the year ended December 31,
1997 and for the nine months ended September 30, 1998 totaled $5,400, $43,125
and $169,785, respectively.
In August 1998, the Company entered into a nonexclusive software
distribution agreement with a third-party software vendor. Under this
agreement the Company is required to pay monthly installments of $45,000
through January 1999.
F-18
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
6. CONTINGENCY ACCRUAL AND OTHER MATTER
In January 1998, the Company became aware that Imageline, Inc. ("Imageline")
claimed to own the copyright in certain images that a third party, Sprint
Software Pty Ltd ("Sprint") had licensed to the Company. Some clip art images
that Imageline alleged infringed Imageline's copyright were included by the
Company in versions of the Company's Web Clip Empire product and licensed by
the Company to third parties, including other software clip publishers. The
Company's contracts with such publishers require the Company to indemnify the
publisher if copyrighted material licensed from the Company infringes a
copyright. Imageline claims that the Company's infringement of Imageline's
copyrights is ongoing. The Company and Imageline have engaged in discussions,
but were unable to reach any agreement regarding a resolution of this matter.
Based on the discussions with Imageline, the Company believes the range of
liability related to this matter is from $0 up to $10,000,000; however, the
Company believes it is unlikely that the liability would exceed $1,000,000.
Accordingly, the Company reserved $1,000,000 for this potential liability, the
expense of which is included in non-recurring charges for the year ended
December 31, 1997. The Company believes that the $1,000,000 accrual represents
a reasonable estimate of the loss that could be incurred in the Imageline
dispute. If not successful in defending this claim, the resulting outcome
could have a material adverse impact on the Company's business, results of
operations, cash flows and financial condition.
On August 27, 1998, the Company filed a lawsuit in the United States
District Court for the Eastern District of Virginia against Imageline, certain
parties affiliated with Imageline, and Sprint regarding the Company's and its
licensees' alleged infringement on Imageline's copyright in certain clip art
that the Company licensed from Sprint. The lawsuit seeks, among other relief,
disclosure of information from Imageline concerning the alleged copyright
infringement, a declaratory judgment concerning the validity and
enforceability of Imageline's copyrights and copyright registrations, a
declaratory judgment regarding damages, if any, owed by the Company to
Imageline, and indemnification from Sprint for damages, if any, owed by the
Company to Imageline. There is no contractual limitation on Sprint's
indemnification. While the Company is seeking indemnification from Sprint for
damages, if any, there can be no assurance that Sprint will be able to fulfill
the indemnity obligations under its license agreements with the Company. In
addition, the Company may be subject to claims by third parties seeking
indemnification from the Company in connection with the alleged infringement
of the Imageline copyrights.
On September 17, 1998, Imageline filed an answer and counterclaim, denying
the Company's allegations and requesting injunctive relief and damages for the
Company's alleged infringements of Imageline's clip art properties.
In September 1998, Zoom Telephonics, Inc. ("Zoom") contacted the Company and
asserted, among other things, that the "XOOM" trademark was confusingly
similar to Zoom's own "ZOOM" registered trademark, and requesting that the
Company cease using the "XOOM" trademark and the "xoom.com" domain name, and
change its name. The Company has responded to Zoom's correspondence by denying
any confusion between trademarks, and is in preliminary discussions with Zoom
to resolve the points Zoom raised in such correspondence. Although the Company
believes that Zoom's claims are without merit, it is possible that the two
companies will not resolve such points. A failure to do so could result in
litigation, which could have a material adverse effect on the Company's
business, results of operations and financial condition, particularly if such
litigation forces the Company to make substantial changes to its name and
trademark usage. However, the Company does not believe that the ultimate
outcome of this matter will have a material adverse effect on its results of
operations, financial position or cash flows.
7. RELATED PARTY TRANSACTIONS
During the period from April 16, 1996 (inception) through December 31, 1996,
for the year ended December 31, 1997 and for the nine months ended September
30, 1998, the Company issued stock subscriptions
F-19
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
7. RELATED PARTY TRANSACTIONS (CONTINUED)
receivable to related parties and to investors in exchange for shares of
common stock and, in some cases, notes payable. These subscriptions receivable
are due upon demand and bear no interest. As of September 30, 1998, there were
no outstanding amounts due under subscriptions receivable.
During the period from April 16, 1996 (inception) through December 31, 1996,
for the year ended December 31, 1997 and for the nine months ended September
30, 1998, the Company issued notes payable to related parties in exchange for
cash advances and stock subscriptions receivable. All notes payable issued
through September 30, 1998 have been converted into shares of common stock.
The Company entered into a Consulting Agreement, dated May 15, 1998, with an
outside director of the Company. The Consulting Agreement will terminate on
November 15, 1999. The Agreement provides for the director to receive monthly
compensation of $10,000, paid in the form of common stock. The director also
received options to buy 16,667 shares of the Company's common stock. The
options vest at the rate of 12.5% per quarter over two years. The value of the
options on the date of issue was $100,000. This amount was charged to general
and administrative expenses during the nine months ended September 30, 1998.
The director will be granted stock options to buy an additional 16,667 shares
of common stock upon completion of the Company's initial public offering.
The Company has entered into a Content License Agreement dated February 22,
1998, with Classic Media Holdings, whereby the Company was granted certain
non-exclusive perpetual, world-wide licensing rights in connection with
Classic Media Holdings' library of public domain movies. As consideration for
the license, the Company issued 43,290 shares of the Company's common stock to
Classic Media Holdings' principals. The stock was valued using the fair value
of the asset received, which yielded a value of $100,000 that was charged to
operating and development in the nine months ended September 30, 1998. A
director of the Company is a principal of Classic Media Holdings.
8. RETIREMENT PLAN
On March 26, 1998, the Company established a 401(k) Profit Sharing Plan (the
"Plan") available to all employees who meet the Plan's eligibility
requirements. Employees may elect to contribute from 1% to 25% of their
eligible earnings to the Plan subject to certain limitations. This defined
contribution plan provides that the Company may, at its discretion, make
contributions to the Plan on a periodic basis. The Company has not made
contributions to the Plan.
9. BUSINESS COMBINATIONS AND TECHNOLOGY ACQUISITIONS
During the nine months ended September 30, 1998, the Company made the
business and technology acquisitions described in the paragraphs that follow,
each of which has been accounted for as a purchase. The consolidated financial
statements include the operating results of each business from the date of
acquisition.
The amounts allocated to purchased research and development were determined
through established valuation techniques in the high-technology Internet
industry and were expensed upon acquisition, because technological feasibility
had not been established and no future alternative uses existed. Research and
development costs to bring the products from the acquired companies to
technological feasibility are not expected to have a material impact on the
Company's future results of operations or cash flows. Amounts allocated to
goodwill and other intangible assets are amortized on a straight-line basis
over a two-year period.
F-20
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
9. BUSINESS COMBINATIONS AND TECHNOLOGY ACQUISITIONS (CONTINUED)
Paralogic Corporation
On March 10, 1998, the Company acquired 100% of the outstanding shares of
Paralogic Corporation ("Paralogic"). Paralogic provides free communication
between members via a chat Web site network (i.e., chat rooms). The purchase
consideration was $3,037,607 consisting of 682,410 shares of common stock with
a fair value of $2.31 per share, $1,400,000 of debt, and $61,243 of
acquisition costs. Contingent consideration, which the Company does consider
probable of paying, consists of an additional $860,000, included in debt
above, which will be paid if certain performance criteria are met.
The purchase consideration was allocated to the acquired assets and assumed
liabilities based on fair values as follows:
<TABLE>
<S> <C>
Accounts receivables and other current assets................... $ 8,725
Net fixed assets................................................ 50,112
Purchased in-process research and development charged to
operations in the quarter ended March 31, 1998................. 330,000
Purchased technology............................................ 160,000
Goodwill........................................................ 2,538,929
Liabilities assumed............................................. (83,214)
----------
Total purchase consideration.................................... $3,037,607
==========
</TABLE>
Purchased In-Process Research and Development. Management estimates that
$330,000 of the purchase price represents purchased in-process technology that
has not yet reached technological feasibility and has no alternative future
use. Accordingly, this amount was expensed in the three months ended March 31,
1998. The value assigned to purchased in-process technology, based on a
valuation analysis prepared by an independent third-party was determined by
identifying the research project in areas for which technological feasibility
had not been achieved and assessing the date of completion of the research and
development effort. The state of completion was determined by estimating the
costs and time incurred to date relative to those costs and time to be
incurred to develop the purchased in-process technology into commercially
viable products, estimating the resulting net cash flows only from the
percentage of research and development efforts complete at the date of
acquisition, and discounting the net cash flows back to their present value.
The discount rate included a factor that took into account the uncertainty
surrounding the successful development of the purchased in-process technology
projects.
Purchased Technology. To determine the value of purchased technology
($160,000), the expected future cash flows of the existing developed
technologies were discounted taking into account the characteristics and
applications of the product, the size of existing markets, growth rates of
existing and future markets as well as an evaluation of past and anticipated
product-life cycles.
Global Bridges Technologies, Inc.
On June 11, 1998, the Company acquired 100% of the outstanding shares of
Global Bridges Technologies, Inc. ("GBT"). GBT, owns the exclusive selling
rights to Sitemail, an HTML-based e-mail product thus expanding the Company's
suite of member services. The purchase consideration was $709,077 consisting
of 183,427 shares of common stock with a fair value of $3.33 per share,
$12,500 cash, a note payable of $62,500 with fixed payment terms and $23,267
of acquisition costs. The Company may, but is not required to, purchase the
common shares issued in connection with this acquisition at the fair market
value of the shares, if and when,
F-21
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
9. BUSINESS COMBINATIONS AND TECHNOLOGY ACQUISITIONS (CONTINUED)
Global Bridges Technologies, Inc. (continued)
the former shareholder of GBT proposes to sell such shares. This repurchase
option lapses upon the Company's successful completion of an initial public
offering.
The purchase consideration was allocated to the acquired assets and assumed
liabilities based on fair values as follows:
<TABLE>
<S> <C>
Goodwill........................................................... $766,621
Liabilities assumed................................................ (61,697)
--------
Total purchase consideration....................................... $709,077
========
</TABLE>
In July 1998, the Company amended the purchase agreement with GBT to provide
for the issuance of an additional 17,304 shares of common stock with a fair
value of $10.80 per share. Related to this amendment, the Company increased
goodwill acquired from GBT by $186,883 during July 1998. In addition, the
Company modified the terms of the earn out agreement. If the Company completes
an initial public offering or a sale of substantially all of its assets, GBT
will receive $200,000 of the Company's common stock, based on the fair market
value on the date of the initial public offering and additional cash
consideration up to $130,000. If the Company has not completed an initial
public offering or a sale of substantially all of its assets prior to GBT
achieving the performance criteria, then GBT will receive 17,304 shares of
common stock upon the achievement of the performance criteria.
Revolutionary Software, Inc.
On June 11, 1998, the Company purchased certain technology of Revolutionary
Software, Inc. ("RSI"). RSI is the developer of the Sitemail technology and
had licensed Sitemail to GBT. The purchase consideration was $701,411,
consisting of 128,052 shares of common stock with a fair value of $3.33 per
share, $12,500 cash and a note payable of $262,500 with fixed payment terms.
Initially, RSI may earn up to an additional 34,608 shares of common stock if
certain performance targets are met. In each of the twenty-four months
following June 1998, the shareholders of RSI will receive 5% of net revenues
less certain costs from electronic commerce and banner advertising from e-mail
subscribers of certain Internet service providers. The Company may, but is not
required to, purchase the common shares issued in connection with this
acquisition at the fair market value of the shares, if and when, the former
shareholder of RSI proposes to sell such shares. This repurchase right lapses
upon the Company's successful completion of an initial public offering.
The purchase consideration of the acquired assets was allocated based on
fair values as follows:
<TABLE>
<S> <C>
Purchased in-process research and development charged to operations in the
quarter ended
June 30, 1998............................................................ $330,000
Purchased technology...................................................... 371,411
--------
Total purchase consideration.............................................. $701,411
========
</TABLE>
F-22
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
9. BUSINESS COMBINATIONS AND TECHNOLOGY ACQUISITIONS (CONTINUED)
Revolutionary Software, Inc. (continued)
In July 1998, the Company amended the agreement with RSI to provide for the
issuance of an additional 34,608 shares of common stock with a fair value of
$10.80 per share. Related to this amendment, the Company increased purchased
technology acquired from RSI by $373,766 during July 1998. In addition, the
Company modified the terms of the earn out agreement. If the Company completes
an initial public offering or a sale of substantially all of its assets, RSI
will receive $400,000 of the Company's common stock, based on the fair market
value on the date of the initial public offering and additional cash
consideration of $260,000. If the Company has not completed an initial public
offering or a sale of substantially all of its assets prior to RSI achieving
the performance criteria, then RSI will receive 34,608 shares of common stock.
Purchased In-Process Research and Development. Management estimates that
$330,000 of the purchase price represents purchased in-process technology that
has not yet reached technological feasibility and has no alternative future
use. Accordingly, this amount was expensed in the three months ended June 30,
1998. The value assigned to purchased in-process technology, based on a
valuation analysis prepared by an independent third-party was determined by
identifying the on-going research projects for which technological feasibility
had not been achieved and assessing the state of completion of the research
and development effort. The state of completion was determined by estimating
the costs incurred to date relative to those costs to be incurred to develop
the purchased in-process technology into commercially viable products,
estimating the resulting net cash flows only from the percentage of research
and development efforts complete at the date of acquisition, and discounting
the net cash flows back to their present value. The discount rate included a
factor that took into account the uncertainty surrounding the successful
development of the purchased in-process technology projects.
To determine the value of purchased technology $130,000, the expected future
cash flows of the existing developed technologies were discounted taking into
account the characteristics and applications of the product, the size of
existing markets, growth rates of existing and future markets as well as an
evaluation of past and anticipated product-life cycles. The purchase
consideration above the purchased in-process research and development and
purchased technology amounts as determined by the valuation were also included
in the purchased technology.
ArcaMax, Inc.
In June, 1998, the Company purchased certain intellectual property and
licensed certain technology from ArcaMax, Inc. ("ArcaMax") for $644,000,
consisting of 133,334 shares of common stock with a fair value of $3.33 per
share, $20,000 cash and a note payable of $180,000 with fixed payment terms.
This technology acquisition gave the Company the ability to offer a free
online greeting card service to members. The Company recorded this amount as
purchased technology and is amortizing it over its estimated useful life of
two years. The Company may, but is not required to, purchase the common shares
issued in connection with this acquisition at the fair market value of the
shares, if and when, the former shareholder of ArcaMax proposes to sell such
shares. This repurchase right lapses upon the Company's successful completion
of an initial public offering.
Pagecount, Inc.
On July 24, 1998, the Company acquired substantially all of the assets of
Pagecount, Inc. ("Pagecount"). The consideration was $1,460,000 and consisted
of, $200,000 cash, a note payable of $1,200,000 with fixed payment terms and
estimated acquisition costs of $60,000. If the Company successfully executes
an initial public offering or completes a sale of substantially all of its
assets, then the entire unpaid balance of the note payable at that time shall
become immediately due and payable.
F-23
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
9. BUSINESS COMBINATIONS AND TECHNOLOGY ACQUISITIONS (CONTINUED)
Pagecount, Inc. (continued)
The purchase consideration was allocated to the acquired assets and assumed
liabilities based on fair values as follows:
<TABLE>
<S> <C>
Cash............................................................ $ 31,598
Accounts receivable and other current assets.................... 19,154
Net fixed assets................................................ 20,866
Purchased in-process research and development charged to
operations in the quarter ended September 30, 1998............. 130,000
Purchased technology............................................ 140,000
Goodwill........................................................ 1,163,970
Liabilities assumed............................................. (45,588)
----------
Total purchase consideration.................................... $1,460,000
==========
</TABLE>
Purchased In-Process Research and Development. Management estimates that
$130,000 of the purchase price represents purchased in-process technology that
has not yet reached technological feasibility and has no alternative future
use. Accordingly, this amount was expensed in the three months ended September
30, 1998. The value assigned to purchased in-process technology, based on a
valuation analysis prepared by an independent third-party was determined by
identifying the research project in areas for which technological feasibility
had not been achieved and assessing the date of completion of the research and
development effort. The state of completion was determined by estimating the
costs and time incurred to date relative to those costs and time to be
incurred to develop the purchased in-process technology into commercially
viable products, estimating the resulting net cash flows only from the
percentage of research and development efforts completed at the date of
acquisition, and discounting the net cash flows back to their present value.
The discount rate included a factor that took into account the uncertainty
surrounding the successful development of the purchased in-process technology
projects.
Purchased Technology. To determine the value of purchased technology
($140,000), the expected future cash flows of the existing developed
technologies were discounted taking into account the characteristics and
applications of the product, the size of existing markets, growth rates of
existing and future markets as well as an evaluation of past and anticipated
product-life cycles.
Purchased In-Process Research and Development and Purchased
Technology. Values assigned to purchased in-process research and development
and purchased technology were generally determined by independent appraisals
using an income approach. To determine the value of in-process research and
development, the Company considered, among other factors, the state of
completion of each project, the time and cost needed to complete each project,
expected income, and associated risks which included the inherent difficulties
and uncertainties in completing the project and thereby achieving
technological feasibility and risks related to the viability of and potential
changes to future target markets. This analysis results in amounts assigned to
in-process research and development projects that had not yet reached
technological feasibility (as defined and utilized by the Company in assessing
software capitalization) and does not have alternative future uses. To
determine the value of the purchased technology, the expected future cash
flows of each existing technology product were discounted taking into account
risks related to the characteristics and applications of each product,
existing and future markets and assessments of the life cycle stage of the
product. Based on the analysis, the existing technology that had reached
technological feasibility was capitalized.
F-24
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
9. BUSINESS COMBINATIONS AND TECHNOLOGY ACQUISITIONS (CONTINUED)
<TABLE>
<S> <C>
Purchased technology............................................ $ 1,696,578
Goodwill........................................................ 4,672,692
-----------
Intangible assets............................................... 6,369,270
Accumulated amortization........................................ (1,087,029)
-----------
Intangible assets, net.......................................... $ 5,282,241
===========
The total purchased in-process research and development that had no
alternative future use, and as such was charged to operations in the nine
month period ended September 30, 1998 is summarized below:
Paralogic Corporation........................................... $ 330,000
Revolutionary Software, Inc..................................... 330,000
Pagecount, Inc.................................................. 130,000
-----------
Total purchased in-process research and development............. $ 790,000
===========
</TABLE>
The following (unaudited) pro forma summary represents the consolidated
results of operations as if the acquisitions of Paralogic, GBT and Pagecount
had occurred at the beginning of the periods presented and are not intended to
be indicative of future results.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -----------------
<S> <C> <C>
Pro forma net revenue........................ $ 1,371,101 $ 5,154,137
Pro forma net loss........................... (5,882,729) (6,905,231)
Pro forma net loss per share--basic and
diluted..................................... (1.02) (0.92)
Number of shares used in pro forma per share
calculation--basic and diluted.............. 5,740,156 7,483,248
</TABLE>
The pro forma results are not necessarily indicative of what actually would
have occurred if the acquisitions had been in effect for the entire period
presented and are not intended to be a projection of future results.
In-process research and development charges of $0 and $460,000 were excluded
from the pro forma net loss and pro forma net loss per share figures for the
year ended December 31, 1997 and the nine months ended September 30, 1998,
respectively.
F-25
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
9. BUSINESS COMBINATIONS AND TECHNOLOGY ACQUISITIONS (CONTINUED)
Acquisition Notes Payable
Notes payable and other amounts due issued in connection with the
acquisitions described above consist of the following at September 30, 1998:
<TABLE>
<S> <C>
Note payable to the former shareholder of Global Bridges
Technologies, Inc. bearing interest of 5% annually. The note
is due in monthly installments of $2,500 through July 2000.... $ 55,000
Note payable to Pagecount, Inc. bearing interest of 7%
annually. The note is due in monthly installments of $53,727
through April 1999 and the remaining balance outstanding is
due April 30, 1999. If the company successfully executes an
initial public offering or completes a sale of substantially
all of its assets, then the entire balance at that time shall
become immediately due and payable............................ 1,153,273
Note payable to Revolutionary Software, Inc. bearing interest
of 5% annually. The note is secured by the acquired technology
and is due in monthly installments of $10,500 through July
2000.......................................................... 231,000
Note payable to ArcaMax, Inc. The note is non-interest bearing
and due in monthly installments of $15,000 through June 1999.
If the Company successfully executes an Initial Public
Offering or completes a sale of substantially all of its
assets, then the entire unpaid balance at that time shall
become immediately due and payable............................ 135,000
Note payable to former shareholder of GBT which is due upon
demand........................................................ 21,431
-----------
2,815,704
Less amounts due within one year from September 30, 1998....... (1,825,704)
-----------
Long-term acquisition notes payable............................ $ 990,000
===========
Scheduled maturities of acquisition notes payable and other amounts due are
as follows:
Year ending December 31,
1998 (remaining three months).................................. $ 358,685
1999........................................................... 2,366,019
2000........................................................... 91,000
-----------
Total.......................................................... $ 2,815,704
===========
</TABLE>
10. SECURED FINANCING ARRANGEMENT
On October 1, 1998, the Company entered into a secured financing agreement
("the Agreement") with a leasing Company. The Agreement provides for
borrowings of up to a cumulative amount of $1,000,000 through July 31, 1999.
All borrowings under the Agreement are collateralized by computer and office
equipment and bear interest at the rate of 14.58% annually. Payments are made
monthly over 42 months from the date of each borrowing in the amount of 2.87%
of the amount borrowed, plus a final payment equal to 10% of the amount
borrowed.
F-26
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
11. SUBSEQUENT EVENT
On November 3, 1998, the Company entered into a loan agreement which
provides for borrowings up to $2,750,000. The Company is eligible to borrow up
to $1,250,000 and will be eligible to borrow the remaining $1,500,000 upon
reaching 4.8 million members. The loan bears interest at 12% annually.
Principal is due on April 30, 1999 and interest is due monthly. All amounts
borrowed under this loan agreement are secured by certain fixed assets.
Pursuant to the terms of the loan agreement, if the Company is sold, at the
option of the holder, the Company is required to pay the lender $250,000 or
issue warrants to purchase 183,333 shares of the Company's common stock at a
per share price equal to the lower of the price per share paid by the
acquiring company or $12 per share. In the event the Company completes an
initial public offering, the Company is required to issue warrants to purchase
183,333 shares of its common stock at the initial public offering per share
price. If the Company completes a private equity financing with proceeds equal
to or greater than $10,000,000, the Company is required to issue warrants to
purchase 183,333 shares of its common stock at a per share price equal to 70%
of the per share price of the equity financing. The Company will record the
effect of any payment or issuance of warrants at the fair value at the time of
any such event.
On November 16, 1998 the Company's Board of Directors and stockholders
authorized an increase in the number of shares authorized under its 1998 Stock
Incentive Plan from 1,166,667 to 2,000,000.
F-27
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Paralogic Corporation
We have audited the accompanying balance sheets of Paralogic Corporation as of
December 31, 1996 and 1997, and the related statements of operations,
shareholders' equity (deficit) and cash flows for the years then ended. 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 financial position of Paralogic Corporation at
December 31, 1996 and 1997, and the results of its operations and its cash
flows for years then ended, in conformity with generally accepted accounting
principles.
Palo Alto, California
July 20, 1998
F-28
<PAGE>
PARALOGIC CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash........................................................ $29,680 $ 26,910
Accounts receivable, net of allowance for doubtful accounts
of $375 in 1996 and $11,314 in 1997........................ 10,946 24,362
Income taxes receivable..................................... -- 836
------- ---------
Total current assets......................................... 40,626 52,108
Fixed assets, net............................................ 40,429 40,086
------- ---------
Total assets................................................. $81,055 $ 92,194
======= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................................ $15,202 $ 27,719
Accrued compensation and related expenses................... 27,155 12,641
Income taxes payable........................................ 2,261 --
Deferred revenue............................................ -- 64,210
Contingency accrual......................................... -- 164,802
Deferred income taxes....................................... 2,026 --
------- ---------
Total current liabilities.................................... 46,644 269,372
------- ---------
Commitments and contingencies
Shareholders' equity (deficit):
Common stock, $1.00 par value:
Authorized shares--1,000,000;
Issued and outstanding shares--5,000 in 1996 and 5,250 in
1997...................................................... 5,000 11,000
Retained earnings (accumulated deficit)..................... 29,411 (188,178)
------- ---------
Total shareholders' equity (deficit)......................... 34,411 (177,178)
------- ---------
Total liabilities and shareholders' equity (deficit)......... $81,055 $ 92,194
======= =========
</TABLE>
See accompanying notes.
F-29
<PAGE>
PARALOGIC CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR
ENDED DECEMBER 31,
------------------
1996 1997
-------- ---------
<S> <C> <C>
Net revenue:
Services.................................................. $132,569 $ 215,917
License fees.............................................. 39,074 --
Advertising............................................... 1,379 34,028
-------- ---------
Total net revenue.......................................... 173,022 249,945
Cost of net revenue:
Cost of services.......................................... 80,019 117,963
-------- ---------
Gross profit............................................... 93,003 131,982
Costs and expenses:
Operating and development................................. 38,529 45,875
Sales and marketing....................................... 26,129 86,097
General and administrative................................ 11,591 45,757
Contingency accrual....................................... -- 164,802
-------- ---------
Total costs and expenses................................... 76,249 342,531
-------- ---------
Income (loss) before provision for income taxes............ 16,754 (210,549)
Provision for income taxes................................. 3,666 7,040
-------- ---------
Net income (loss).......................................... $ 13,088 $(217,589)
======== =========
</TABLE>
See accompanying notes.
F-30
<PAGE>
PARALOGIC CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK EARNINGS
-------------- (ACCUMULATED
SHARES AMOUNT DEFICIT) TOTAL
------ ------- ------------ ---------
<S> <C> <C> <C> <C>
Balances at December 31, 1995........... 5,000 $ 5,000 $ 16,323 $ 21,323
Net income............................. -- -- 13,088 13,088
----- ------- --------- ---------
Balances at December 31, 1996........... 5,000 5,000 29,411 34,411
Issuance of common stock in exchange
for consulting services............... 250 6,000 -- 6,000
Net loss............................... -- -- (217,589) (217,589)
----- ------- --------- ---------
Balances at December 31, 1997........... 5,250 $11,000 $(188,178) $(177,178)
===== ======= ========= =========
</TABLE>
See accompanying notes.
F-31
<PAGE>
PARALOGIC CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1997
----------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss).................................. $ 13,088 $ (217,589)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation...................................... 11,794 29,321
Common stock issued in exchange for consulting
services......................................... -- 6,000
Changes in operating assets and liabilities:
Accounts receivable.............................. 7,379 (13,416)
Accounts payable................................. 4,366 12,517
Accrued compensation and related expenses........ 10,265 (14,514)
Income tax payable/ receivable................... (238) (3,097)
Deferred revenue................................. -- 64,210
Contingency accrual.............................. -- 164,802
Deferred income taxes............................ (1,115) (2,026)
----------- ------------
Net cash provided by operating activities.......... 45,539 26,208
INVESTING ACTIVITIES:
Purchases of fixed assets.......................... (42,066) (28,978)
----------- ------------
Net cash used in investing activities.............. (42,066) (28,978)
----------- ------------
Net change in cash................................. 3,473 (2,770)
Cash at beginning of year.......................... 26,207 29,680
----------- ------------
Cash at end of year................................ $ 29,680 $ 26,910
=========== ============
SUPPLEMENTAL DISCLOSURES:
Cash paid for income taxes......................... $ 5,019 $ 10,812
=========== ============
</TABLE>
See accompanying notes.
F-32
<PAGE>
PARALOGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Paralogic Corporation (the "Company"), was incorporated in the State of
California on January 12, 1995.
The Company is a provider of chat room software and various online services.
Basis of Presentation
The Company has negative working capital and an accumulated deficit at
December 31, 1997. The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. On March 11, 1998,
the Company agreed to be acquired by Xoom.com, Inc.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported results of operations during the reporting period.
Actual results could differ from those estimates.
Cash
The Company maintains cash in depository accounts with two financial
institutions.
Concentrations of Credit Risk
The Company conducts business primarily with companies throughout the United
States. Management believes that any risk of accounting loss is mitigated by
the Company's ongoing credit evaluations of its customers. The Company
generally does not require collateral. The Company analyzes the need for
reserves for potential credit losses and records reserves when necessary.
For the year ended December 31, 1996, four customers accounted for $41,000,
$35,320, $29,625 and $28,000 or 24%, 20%, 17% and 16% of net revenue; of
these, one customer owed the Company $8,020 at December 31, 1996. There was no
single customer that accounted for more than 10% of net revenue for the year
ended December 31, 1997.
Fixed Assets
Fixed assets are recorded at cost, less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of three years.
Revenue Recognition
Service
The majority of the Company's service revenue is from fees related to
fees charged for chat network hosting and are recognized when the services
are performed.
License Fees
The Company licenses software under non-cancelable license agreements to
end-users. License fee revenue is recognized when a non-cancelable license
agreement has been signed, the product has been
F-33
<PAGE>
PARALOGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
License Fees (continued)
delivered, there are no uncertainties surrounding product acceptance, the
fees are fixed and determinable, collection is considered probable and all
significant contractual obligations have been satisfied.
Advertising
Advertising revenue are derived from the sale of banner advertisements
under short-term contracts. Advertising revenue on banner contracts are
recognized ratably in the period in which the advertisement is displayed,
provided that no significant Company obligations remain and collection of
the resulting receivable is probable. Company obligations typically include
the guarantee of a minimum number of "impressions" or times that an
advertisement appears in pages viewed by the users of the Company's online
properties. To the extent minimum guaranteed impressions are not met, the
Company defers recognition of the corresponding revenue until the remaining
guaranteed impression levels are achieved.
Advertising Expense
All advertising costs are expensed when incurred. Advertising costs which
are included in sales and marketing expense for the years ended December 31,
1996 and 1997 were $0 and $9,377, respectively.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS
109"), which requires the use of the liability method in accounting for income
taxes. Under FAS 109, deferred tax assets and liabilities are measured based
on differences between the financial reporting and tax bases of assets and
liabilities using enacted tax rates and laws that are expected to be in effect
when the differences are expected to reverse.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" ("FAS 130"), and Statement No. 131,
"Disclosure about Segments of an Enterprise and Related Information" ("FAS
131"). The Company is required to adopt these statements in fiscal year 1998.
FAS 130 establishes new standards for reporting and displaying comprehensive
income and its components. FAS 131 requires disclosure of certain information
regarding operating segments, products and services, geographic areas of
operation and major customers. Adoption of these statements is expected to
have no impact on the Company's consolidated financial position, results of
operations or cash flows.
2. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
-------- --------
<S> <C> <C>
Computer equipment....................................... $ 49,122 $ 78,100
Office equipment......................................... 5,413 5,413
-------- --------
54,535 83,513
Accumulated depreciation................................. (14,106) (43,427)
-------- --------
$ 40,429 $ 40,086
======== ========
</TABLE>
F-34
<PAGE>
PARALOGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. INCOME TAXES
Significant components of the provision (benefit) for income taxes
attributable to operations are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1996 1997
------- -------
<S> <C> <C>
Current:
Federal.................................................. $ 2,770 $ 2,242
State.................................................... 2,011 1,824
Foreign.................................................. -- 5,000
------- -------
4,781 9,066
Deferred:
Federal.................................................. (368) (2,266)
State.................................................... (747) 240
------- -------
(1,115) (2,026)
------- -------
Total provision............................................ $ 3,666 $ 7,040
======= =======
</TABLE>
A reconciliation of income taxes at the statutory federal income tax rate to
net income taxes included in the accompanying statements of operations is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1996 1997
------- --------
<S> <C> <C>
U.S. federal taxes at statutory rate..................... $ 4,774 $(72,658)
Impact of graduated U.S. statutory rate.................. (3,055) (2,098)
State taxes, net of federal benefit...................... 1,264 (12,261)
Foreign withholding taxes................................ -- 5,000
Foreign tax deduction.................................... -- (1,700)
Valuation allowance...................................... -- 89,586
Other.................................................... 683 1,171
------- --------
Total tax provision...................................... $ 3,666 $ 7,040
======= ========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial and tax
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's net deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
------- --------
<S> <C> <C>
Deferred tax assets:
Cash to accrual adjustment............................... $ 1,431 $ 97,518
Depreciation............................................. (3,457) (7,932)
------- --------
Net deferred tax assets (liabilities)..................... (2,026) 89,586
Valuation allowance....................................... -- (89,586)
------- --------
Total net deferred tax assets (liabilities)............... $(2,026) $ --
======= ========
</TABLE>
The valuation allowance increased by $89,586 in 1997.
F-35
<PAGE>
4. SHAREHOLDERS' EQUITY (DEFICIT)
The Company is authorized to issue 1,000,000 shares of common stock, with a
par value of $1.00 per share.
During 1997, the Company issued shares of common stock to consultants in
exchange for consulting services. The Company valued the common stock using
the estimated fair value of the services performed which amounted to $6,000.
This amount was amortized by charges to operations over the consulting period.
5. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company has entered into certain operating leases for office space. At
December 31, 1997, the Company had no future commitments for noncancelable
operating leases.
The Company's rental expense under operating leases for the years ended
December 31, 1996 and 1997 totaled $300 and $3,900, respectively.
Contingency Accrual
Due to the nature of its business, Paralogic Corporation is subject to
various threatened or filed legal actions. At December 31, 1997, there were
certain legal proceedings pending against the Company. These legal disputes
were settled in 1998 in connection with the business combination which is
described in Note 6. The settlement consisted of an issuance to the plaintiff
of 71,343 shares of the acquiror's common stock, valued at approximately
$164,802. This settlement amount associated with this dispute was accrued for
at December 31, 1997.
6. SUBSEQUENT EVENTS
In March 1998, the Company spun off certain components of the business into
a new company named Paralogic Software, Inc. ("PSI"). The shareholders of the
Company retained the same ownership privileges and rights in PSI as were in
effect for the Company at the time of the spin off. PSI retained the Company's
advertising and services businesses as well as the ownership of the Paralogic
chat technology. The Company retained a perpetual right to use and license the
Paralogic chat technology and all of the tangible assets and liabilities.
Effective March 11, 1998, the Company entered into merger agreement with
Xoom.com, Inc. under which the outstanding shares of common stock of the
Company were exchanged for common shares of Xoom.com, Inc. and the right to
receive certain cash distributions from Xoom.com, Inc. The financial
statements do not include any adjustments to the recorded amounts of assets
and liabilities which may result from this transaction.
7. IMPACT OF YEAR 2000 (UNAUDITED)
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Company's computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
The Company believes that it will not be required to modify or replace any
portion of its software so that its computer systems will function properly
with respect to dates in the year 2000 and thereafter.
F-36
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Global Bridges Technologies, Inc.
We have audited the accompanying balance sheets of Global Bridges
Technologies, Inc. as of December 31, 1996 and 1997, and the related
statements of operations, shareholders' equity (deficit) and cash flows for
the period from July 23, 1996 (inception) through December 31, 1996 and for
the year ended December 31, 1997. 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 audit 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 financial position of Global Bridges Technologies,
Inc. at December 31, 1996 and 1997, and the results of its operations and its
cash flows for the period from July 23, 1996 (inception) through December 31,
1996 and for the year ended December 31, 1997, in conformity with generally
accepted accounting principles.
Palo Alto, California
July 10, 1998
F-37
<PAGE>
GLOBAL BRIDGES TECHNOLOGIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- MARCH 31,
1996 1997 1998
------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash............................................ $ -- $ 1,036 $ 230
Note receivable from shareholder................ 3,404 -- --
------- -------- --------
Total current assets............................. 3,404 1,036 230
Deposits......................................... 712 712 712
------- -------- --------
Total assets..................................... $ 4,116 $ 1,748 $ 942
======= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses........... $19,466 $ 47,557 $ 46,131
Note payable to shareholder..................... -- 2,446 13,746
------- -------- --------
Total current liabilities........................ 19,466 50,003 59,877
Commitments
Shareholders' equity (deficit):
Preferred stock, no par value:
Authorized shares--10,000,000
Issued and outstanding shares--none in 1996,
1997 or 1998.................................. -- -- --
Common stock, no par value:
Authorized shares--10,000,000
Issued and outstanding shares--630,000, 500,000
and 500,000 in 1996, 1997 and 1998,
respectively.................................. 5,000 5,000 5,000
Accumulated deficit............................. (20,350) (53,255) (63,935)
------- -------- --------
Total shareholders' equity (deficit)............. (15,350) (48,255) (58,935)
------- -------- --------
Total liabilities and shareholders' equity
(deficit)....................................... $ 4,116 $ 1,748 $ 942
======= ======== ========
</TABLE>
See accompanying notes.
F-38
<PAGE>
GLOBAL BRIDGES TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
JULY 23, 1996
(INCEPTION) THREE MONTHS ENDED
THROUGH YEAR ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, ----------------------
1996 1997 1997 1998
------------- ------------ ----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net revenue................. $ 49,153 $ 27,937 $ 8,500 $ --
Cost of net revenue......... 38,885 23,718 7,302 --
-------- -------- -------- --------
Gross profit................ 10,268 4,219 1,198 --
Costs and expenses:
Operating and development.. 3,457 19,300 4,634 6,595
Sales and marketing........ 5,991 3,841 2,836 --
General and administrative. 18,716 13,983 5,826 4,085
-------- -------- -------- --------
Total costs and expenses.... 28,164 37,124 13,296 10,680
-------- -------- -------- --------
Loss before provision for
income taxes............... (17,896) (32,905) (12,098) (10,680)
Provision for income taxes.. 2,454 -- -- --
-------- -------- -------- --------
Net loss.................... $(20,350) $(32,905) $(12,098) $(10,680)
======== ======== ======== ========
</TABLE>
See accompanying notes.
F-39
<PAGE>
GLOBAL BRIDGES TECHNOLOGIES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM JULY 23, 1996 (INCEPTION) THROUGH DECEMBER 31, 1996
AND THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK
---------------- ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
-------- ------ ----------- --------
<S> <C> <C> <C> <C>
Issuance of common stock at inception
to founders........................... 630,000 $5,000 $ -- $ 5,000
Net loss............................... -- -- (20,350) (20,350)
-------- ------ -------- --------
Balances at December 31, 1996........... 630,000 5,000 (20,350) (15,350)
Repurchase of common stock in September
1997 in exchange for future royalties. (130,000) -- -- --
Net loss............................... -- -- (32,905) (32,905)
-------- ------ -------- --------
Balances at December 31, 1997........... 500,000 5,000 (53,255) (48,255)
Net loss (unaudited)................... -- -- (10,680) (10,680)
-------- ------ -------- --------
Balances at March 31, 1998 (unaudited).. 500,000 $5,000 $(63,935) $(58,935)
======== ====== ======== ========
</TABLE>
See accompanying notes.
F-40
<PAGE>
GLOBAL BRIDGES TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JULY 23, 1996
(INCEPTION) THREE MONTHS ENDED
THROUGH YEAR ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, ----------------------
1996 1997 1997 1998
------------- ------------ ----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss................... $(20,350) $(32,905) $(12,098) $(10,680)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities:
Deposits................. (712) -- -- --
Accounts payable and
accrued expenses........ 19,466 28,091 17,512 (1,426)
-------- -------- -------- --------
Net cash provided by (used
in) operating activities.. (1,596) (4,814) 5,414 (12,106)
INVESTING ACTIVITIES:
Cash advanced to
shareholder in exchange
for note receivable....... (3,404) -- -- --
Payment received from
shareholder............... -- 3,404 -- --
-------- -------- -------- --------
Net cash provided by (used
in) investing activities.. (3,404) 3,404 -- --
FINANCING ACTIVITIES:
Capital contributed by
founders.................. 5,000 -- -- --
Proceeds from note payable
to shareholder............ -- 2,446 -- 11,300
-------- -------- -------- --------
Net cash provided by
financing activities...... 5,000 2,446 -- 11,300
-------- -------- -------- --------
Net change in cash......... -- 1,036 5,414 (806)
Cash at beginning of
period.................... -- -- -- 1,036
-------- -------- -------- --------
Cash at end of period...... $ -- $ 1,036 $ 5,414 $ 230
======== ======== ======== ========
SUPPLEMENTAL DISCLOSURES:
Cash paid for income taxes. $ -- $ -- $ 2,454 $ --
======== ======== ======== ========
</TABLE>
See accompanying notes.
F-41
<PAGE>
GLOBAL BRIDGES TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM JULY 23, 1996 (INCEPTION) THROUGH DECEMBER 31, 1996
AND THE YEAR ENDED DECEMBER 31, 1997
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Global Bridges Technologies, Inc. (the "Company"), formerly known as Dream
Fabrications and Design, Inc., was incorporated in California on July 23,
1996.
The Company designs, develops and markets games, educational, and on-line
titles on behalf of publishers and developers. It also hosts and operates its
subscribers' branded web-based e-mail service using Sitemail, a web-based e-
mail solution which enables the integration of computer software for use in
the field of Internet based e-mail, advertising and commerce, and intranet
based content distribution.
Basis of Presentation
The Company began operations on July 23, 1996 and has incurred operating
losses through December 31, 1997. On June 11, 1998, the Company sold all of
its stock to Xoom.com, Inc.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements
and the reported results of operations during the reporting period. Actual
results could differ from those estimates.
Interim Financial Information
The interim financial information as of March 31, 1998 and for the three
months ended March 31, 1997 and 1998 is unaudited but has been prepared on the
same basis as the audited financial statements and includes all adjustments,
consisting only of normal recurring adjustments, that the Company considers
necessary for a fair presentation of its financial position at such date and
its results of operations and cash flows for those periods. Operating results
for the three months ended March 31, 1998 are not necessarily indicative of
results that may be expected for any future periods.
Cash
The Company maintains its cash in depository accounts with one financial
institution.
Concentrations of Credit Risk
The Company conducts business primarily with companies in various industries
throughout the United States. The Company generally does not require
collateral.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards Board Statement No. 109, "Accounting for Income
Taxes" ("FAS 109"), which requires the use of the liability method in
accounting for income taxes. Under FAS 109, deferred tax assets and
liabilities are measured using enacted rates and laws that will be in effect
when the differences are expected to reverse.
F-42
<PAGE>
GLOBAL BRIDGES TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM JULY 23, 1996 (INCEPTION) THROUGH DECEMBER 31, 1996
AND THE YEAR ENDED DECEMBER 31, 1997
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition
The Company generally recognizes revenue from consulting services as such
services are performed and when collection is determined to be probable.
Advertising Expense
All advertising costs are expensed when incurred. Advertising costs, which
are included in sales and marketing expense, for the period from July 23, 1996
(inception) through December 31, 1996 and the year ended December 31, 1997
were $205 and $397, respectively.
Recent Accounting Pronouncements
As of January 1, 1998 the Company adopted Financial Accounting Standards
Board Statement No. 130, "Reporting Comprehensive Income" ("FAS 130") which
establishes standards for reporting and displaying comprehensive income and
its components in a full set of general-purpose financial statements. The
adoption of this standard had no impact on the Company's financial position,
shareholders' equity (deficit), results of operations or cash flows.
2. NOTE RECEIVABLE FROM AND PAYABLE TO SHAREHOLDER
At December 31, 1996 the note receivable from shareholder represents cash
advances to the shareholder by the Company. The note receivable is repayable
on demand and bears no interest.
The note payable to shareholder as of December 31, 1997 represented amounts
funded to the Company by the shareholder for working capital purpose and is
repayable on demand. The note payable bears no interest.
3. INCOME TAXES
Significant components of the provision for income taxes attributable to
operations are as follows:
<TABLE>
<CAPTION>
PERIOD FROM
JULY 23, 1996
(INCEPTION)
THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
------------- ------------
<S> <C> <C>
Current:
Federal......................................... $1,656 $ --
State........................................... 798 --
------ ----
$2,454 $ --
====== ====
</TABLE>
F-43
<PAGE>
GLOBAL BRIDGES TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM JULY 23, 1996 (INCEPTION) THROUGH DECEMBER 31, 1996
AND THE YEAR ENDED DECEMBER 31, 1997
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
3. INCOME TAXES (CONTINUED)
A reconciliation of income taxes at the statutory federal income tax rate to
net income taxes included in the accompanying statements of operations is as
follows:
<TABLE>
<CAPTION>
PERIOD FROM
JULY 23, 1996
(INCEPTION)
THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
------------- ------------
<S> <C> <C>
U.S. federal taxes at statutory rate.............. $(6,085) $(11,188)
Impact of graduated U.S. statutory rate........... (1,919) 192
State taxes, net of federal benefit............... (397) (1,862)
Pre incorporation operations...................... 4,545 --
Valuation allowance............................... 6,331 12,064
Other............................................. (21) 794
------- --------
$ 2,454 $ --
======= ========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial and tax
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's net deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
------- --------
<S> <C> <C>
Deferred tax assets:
Cash to accrual adjustment............................... $ 5,667 $ 17,053
Depreciation............................................. 664 1,283
Net operating loss and tax credit carryovers............. -- 59
------- --------
Total deferred tax assets................................. 6,331 18,395
Valuation allowance....................................... (6,331) (18,395)
------- --------
Total net deferred tax assets............................. $ -- $ --
======= ========
</TABLE>
The valuation allowance increased by $6,331 and $12,064 in 1996 and 1997
respectively.
As of December 31, 1997, the Company has state net operating loss
carryforwards of approximately $1,000 that will expire in 2004. Due to the
change in ownership provisions of the Internal Revenue Code, the availability
of the Company's net operating loss carryforwards will be subject to an annual
limitation due to its acquisition by Xoom.com. This limitation could cause
these losses to expire prior to utilization by the Company.
4. STOCKHOLDERS' EQUITY
Preferred Stock
The Company is authorized to issue 10,000,000 shares of preferred stock, no
par value, none of which is issued or outstanding. The Board of Directors has
the authority to issue preferred stock in one or more series and to fix the
designations, powers, preferences, rights, qualifications, limitations and
restrictions with respect to any series of preferred stock and to specify the
number of shares of any series of preferred stock without any further vote or
action by the shareholder.
F-44
<PAGE>
GLOBAL BRIDGES TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM JULY 23, 1996 (INCEPTION) THROUGH DECEMBER 31, 1996
AND THE YEAR ENDED DECEMBER 31, 1997
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
4. STOCKHOLDERS' EQUITY (CONTINUED)
Common Stock
The Company is authorized to issue 10,000,000 shares of common stock, no par
value.
In July 1996, the Company issued 630,000 shares of its common stock in
exchange for cash of $5,000. During September 1997, the Company repurchased
130,000 shares of its common stock from a shareholder in exchange for
royalties to be paid on the future sales of certain products. No payments
under this royalty agreement have been made through December 31, 1997 and
March 31, 1998 as no sales of the products bearing royalties were made in
those periods.
5. LEASE COMMITMENTS
The Company leases its operating facilities under a noncancelable operating
lease agreement that expires in 1998.
Total rent expense for the period from July 23, 1996 (inception) through
December 31, 1996 and the year ended December 31, 1997 totaled $4,605 and
$4,642, respectively.
6. RELATED PARTY TRANSACTIONS
During the period from July 23, 1996 (inception) through December 31, 1996
the Company paid certain expenses, totaling $3,918, on behalf of another
company which shares common ownership with the Company. All owed amounts were
reimbursed to the Company as of December 31, 1996.
7. SUBSEQUENT EVENTS
In April 1998, the Company issued 500,000 shares of its common stock to a
shareholder in exchange for cancellation of a note payable due to him of
$3,929 and the assignment of a software license to the Company.
In May 1998, the operating lease agreement for the lease of the Company's
facilities was assigned by the Company to the stockholder. As a result, all
rental payments are made to the stockholder. The minimum monthly rental
payments did not change from the original lease agreement with the lessor.
Effective June 11, 1998, the Company entered into a merger agreement with
Xoom.com, Inc. under which the outstanding shares of common stock of the
Company were exchanged for common shares of Xoom.com, Inc. and the right to
receive certain cash distributions from Xoom.com, Inc. The financial
statements do not include any adjustments to the recorded amounts of assets
and liabilities which may result from this transaction.
8. IMPACT OF YEAR 2000 (UNAUDITED)
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Company's computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This situation
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
F-45
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Pagecount, Inc.
We have audited the accompanying balance sheet of Pagecount, Inc. as of
December 31, 1997, and the related statements of income, stockholders' equity
and cash flows for the period from January 23, 1997 (inception) through
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pagecount, Inc. at December
31, 1997, and the results of its operations and its cash flows for the period
from January 23, 1997 (inception) through December 31, 1997, in conformity
with generally accepted accounting principles.
Palo Alto, California
July 7, 1998,
except for Note 6, as to which the date is,
July 24, 1998
F-46
<PAGE>
PAGECOUNT, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash.................................................. $14,627 $50,145
Accounts receivable................................... 16,827 15,573
Unbilled receivables.................................. 4,931 2,133
Other current assets.................................. 725 725
------- -------
Total current assets................................... 37,110 68,576
Fixed assets, net...................................... 16,661 20,597
------- -------
Total assets........................................... $53,771 $89,173
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $ 7,237 $29,475
Accrued compensation and related expenses............. 9,037 11,709
Other accrued liabilities............................. 10,051 --
Deferred revenue...................................... -- 12,500
Income taxes payable.................................. 2,443 3,991
Deferred income taxes................................. 3,042 3,042
------- -------
Total current liabilities.............................. 31,810 60,717
------- -------
Commitment
Stockholders' equity:
Common stock, $1.00 par value:
Authorized shares--5,000
Issued and outstanding shares--115................... 650 650
Retained earnings..................................... 21,311 27,806
------- -------
Total stockholders' equity............................. 21,961 28,456
------- -------
Total liabilities and stockholders' equity............. $53,771 $89,173
======= =======
</TABLE>
See accompanying notes.
F-47
<PAGE>
PAGECOUNT, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JANUARY 23, JANUARY 23,
1997 1997
(INCEPTION) (INCEPTION) SIX MONTHS
THROUGH THROUGH ENDED JUNE
DECEMBER 31, JUNE 30, 30,
1997 1997 1998
------------ ----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Net revenue............................... $252,332 $111,200 $208,689
Cost of net revenue....................... 45,634 36,075 14,314
-------- -------- --------
Gross profit.............................. 206,698 75,125 194,375
Costs and expenses:
Sales and marketing...................... 1,519 -- 2,371
General and administrative............... 178,513 58,907 184,023
-------- -------- --------
Total costs and expenses.................. 180,032 58,907 186,394
-------- -------- --------
Income from operations.................... 26,666 16,218 7,981
Other income.............................. 130 -- 62
-------- -------- --------
Income (loss) before provision for income
taxes.................................... 26,796 16,218 8,043
Provision for income taxes................ 5,485 3,122 1,548
-------- -------- --------
Net income................................ $ 21,311 $ 13,096 $ 6,495
======== ======== ========
</TABLE>
See accompanying notes.
F-48
<PAGE>
PAGECOUNT, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ ------ -------- -------
<S> <C> <C> <C> <C>
Issuance of common stock to founders in January
1997.......................................... 115 $650 $ -- $ 650
Net income..................................... -- -- 21,311 21,311
---- ---- ------- -------
Balances at December 31, 1997................... 115 650 21,311 21,961
Net income (unaudited)......................... -- -- 6,495 6,495
---- ---- ------- -------
Balances at June 30, 1998 (unaudited)........... 115 $650 $27,806 $28,456
==== ==== ======= =======
</TABLE>
See accompanying notes.
F-49
<PAGE>
PAGECOUNT, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JANUARY 23, JANUARY 23,
1997 1997
(INCEPTION) (INCEPTION)
THROUGH THROUGH SIX MONTHS
DECEMBER 31, JUNE 30, ENDED JUNE
1997 1997 30, 1998
------------ ----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CASH PROVIDED BY OPERATING ACTIVITIES
Net income............................... $ 21,311 $ 13,096 $ 6,495
Adjustments to reconcile net income to
net cash provided by
operating activities:
Depreciation............................ 2,689 878 3,876
Changes in operating assets and
liabilities:
Accounts receivable.................... (16,827) (23,909) 1,254
Unbilled receivables................... (4,931) (2,112) 2,798
Other current assets................... (725) (725) --
Accounts payable....................... 7,237 4,119 22,238
Accrued compensation and related
expenses.............................. 9,037 8,951 2,672
Other accrued liabilities.............. 10,051 22,595 (10,051)
Deferred revenue....................... -- -- 12,500
Income taxes payable................... 2,443 3,122 1,548
Deferred income taxes.................. 3,042 -- --
-------- -------- --------
Net cash provided by operating
activities.............................. 33,327 26,015 43,330
CASH USED IN INVESTING ACTIVITIES
Purchases of computer equipment.......... (19,350) (6,535) (7,812)
CASH PROVIDED BY FINANCING ACTIVITIES
Issuance of common stock for cash........ 650 650 --
-------- -------- --------
Net increase in cash..................... 14,627 20,130 35,518
Cash at beginning of period.............. -- -- 14,627
-------- -------- --------
Cash at end of period.................... $ 14,627 $ 20,130 $ 50,145
======== ======== ========
</TABLE>
See accompanying notes.
F-50
<PAGE>
PAGECOUNT, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE PERIOD FROM JANUARY 23, 1997 (INCEPTION) THROUGH JUNE 30,
1997
AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Pagecount, Inc. (the "Company") was incorporated in the State of Maryland on
January 23, 1997.
The Company provides statistical counters which generate the number of times
a user views a customer's web site.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements
and the reported results of operations during the reporting period. Actual
results could differ from those estimates.
Interim Financial Information
The interim financial information as of June 30, 1998 and for the period
from January 23, 1997 (inception) through June 30, 1997 and the six months
ended June 30, 1998 is unaudited but has been prepared on the same basis as
the audited financial statements and include all adjustments, consisting only
of normal recurring adjustments, that the Company considers necessary for a
fair presentation of its financial position at such date and its results of
operations and cash flows for those periods. Operating results for the six
months ended June 30, 1998 are not necessarily indicative of results that may
be expected for any future periods.
Cash
The Company maintains its cash in depository accounts with one financial
institution.
Unbilled Receivables
Unbilled receivables represent amounts earned as revenue but not yet billed
to customers.
Concentrations of Credit Risk
The Company conducts business primarily with companies in various industries
throughout the United States. The Company generally does not require
collateral.
For the period from January 23, 1997 (inception) to December 31, 1997, three
customers accounted for 35%, 15%, and 11% of total revenue, and three
customers accounted for 27%, 20%, and 12% of accounts receivable at December
31, 1997.
For the six months ended June 30, 1998, two customers accounted for 42% and
12% of total revenue, and three customers accounted for 51%, 14%, and 10% of
accounts receivable at June 30, 1998.
Fixed assets
Fixed assets are stated at cost, less accumulated depreciation. Depreciation
is computed using the straight-line method over the estimated useful lives of
the assets, which is estimated to be three years.
F-51
<PAGE>
PAGECOUNT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE PERIOD FROM JANUARY 23, 1997 (INCEPTION) THROUGH JUNE 30,
1997
AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards Board Statement No. 109, "Accounting for Income
Taxes" ("FAS 109"), which requires the use of the liability method in
accounting for income taxes. Under FAS 109, deferred tax assets and
liabilities are measured based on differences between the financial reporting
and tax bases of assets and liabilities using enacted rates and laws that will
be in effect when the differences are expected to reverse.
Revenue Recognition
Advertising revenue is derived from the sale of banner advertisements under
short-term contracts. To date, the duration of the Company's advertising
commitments has been from one to seven months. Advertising revenue on banner
contracts is recognized ratably in the period in which the advertisement is
displayed, provided that no significant Company obligations remain and
collection of the resulting receivable is probable. Company obligations
typically include the guarantee of a minimum number of "impressions" or times
that an advertisement appears in pages viewed by the users of the Company's
online properties. To the extent minimum guaranteed impressions are not met,
the Company defers recognition of the corresponding revenue until the
remaining guaranteed impression levels are achieved.
Advertising Expense
All advertising costs are expensed when incurred. Advertising costs, which
are included in sales and marketing expense, for the period from January 23,
1997 (inception) through December 31, 1997 were $1,124.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" ("FAS 130"), and Statement No. 131,
"Disclosure about Segments of an Enterprise and Related Information" ("FAS
131"). The Company is required to adopt these statements in fiscal year 1998.
FAS 130 establishes new standards for reporting and displaying comprehensive
income and its components. FAS 131 requires disclosure of certain information
regarding operating segments, products and services, geographic areas of
operation and major customers. Adoption of these statements is expected to
have no impact on the Company's consolidated financial position, results of
operations or cash flows.
2. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Computer equipment.................................. $19,350 $27,162
Accumulated depreciation............................ (2,689) (6,565)
------- -------
$16,661 $20,597
======= =======
</TABLE>
F-52
<PAGE>
PAGECOUNT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE PERIOD FROM JANUARY 23, 1997 (INCEPTION) THROUGH JUNE 30,
1997
AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
3. COMMITMENTS
The Company has entered into certain operating leases for office space. The
future minimum lease payments under the Company's noncancelable operating
leases at December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998.................................................................. $4,100
</TABLE>
The Company's rental expense under operating leases for the period from
January 23, 1997 (inception) through December 31, 1997 totaled $8,725.
4. COMMON STOCK
Common stock consists of the following at December 31, 1997:
<TABLE>
<CAPTION>
SHARES SHARES ISSUED
CLASS AUTHORIZED AND OUTSTANDING
----- ---------- ---------------
<S> <C> <C>
A................................................. 500 100
B................................................. 4,500 15
----- ---
5,000 115
===== ===
</TABLE>
5. INCOME TAXES
Significant components of the provision for income taxes attributable to
operations are as follows:
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JANUARY 23, JANUARY 23,
1997 1997
(INCEPTION) (INCEPTION) SIX MONTHS
THROUGH THROUGH ENDED
DECEMBER 31, JUNE 30, JUNE 30,
1997 1997 1998
------------ ----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current:
Federal............................... $1,808 $2,311 $1,146
State................................. 635 811 402
------ ------ ------
2,443 3,122 1,548
------ ------ ------
Deferred:
Federal............................... 2,281 -- --
State................................. 761 -- --
------ ------ ------
3,042 -- --
------ ------ ------
Total provision......................... $5,485 $3,122 $1,548
====== ====== ======
</TABLE>
F-53
<PAGE>
PAGECOUNT, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE PERIOD FROM JANUARY 23, 1997 (INCEPTION) THROUGH JUNE 30,
1997
AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
5. INCOME TAXES (CONTINUED)
A reconciliation of income taxes at the statutory federal income tax rate to
net income taxes included in the accompanying statements of income is as
follows:
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JANUARY 23, JANUARY 23,
1997 1997
(INCEPTION) (INCEPTION) SIX MONTHS
THROUGH THROUGH ENDED
DECEMBER 31, JUNE 30, JUNE 30,
1997 1997 1998
------------ ----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
U.S. federal taxes at statutory rate... $ 9,111 $ 5,514 $ 2,735
Impact of graduated U.S. tax at 15%
statutory rate........................ (5,092) (3,081) (1,589)
State income taxes, net of federal
benefit............................... 1,139 689 402
Other.................................. 327 -- --
------- ------- -------
$5,485 $ 3,122 $ 1,548
======= ======= =======
</TABLE>
The principal source of the Company's deferred tax liabilities is the use of
accelerated depreciation methods for tax purposes.
6. SUBSEQUENT EVENT
Effective July 24, 1998, the Company entered into an asset sale agreement
under which it sold substantially all of its net assets to Xoom.com, Inc. The
financial statements do not include any adjustments to the recorded amounts of
assets and liabilities which may result from this transaction.
7. IMPACT OF YEAR 2000 (UNAUDITED)
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Company's computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
Based on a recent assessment, the Company has determined they will not be
required to modify or replace any portion of its software so that its computer
systems will function properly with respect to dates in the year 2000 and
thereafter.
F-54
<PAGE>
SELECTED UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION
The selected unaudited pro forma condensed consolidated financial
information of the Company gives effect to the acquisition of Paralogic
Corporation ("Paralogic"), Global Bridges Technologies, Inc. ("Global
Bridges") and Pagecount, Inc. ("Pagecount"). The historical financial
information has been derived from, and is qualified by reference to, the
financial statements of the Company, Paralogic, Global Bridges and Pagecount
and should be read in conjunction with those financial statements and the
notes thereto included elsewhere herein. The selected unaudited pro forma
condensed consolidated statements of operations for the year ended
December 31, 1997 and the nine months ended September 30, 1998, give effect to
the acquisitions as if they occurred on January 1, 1997 and January 1, 1998,
respectively. The selected unaudited pro forma condensed consolidated
statements of operations, reflect certain adjustments, including adjustments
to reflect the amortization of the intangible assets. The information should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations." The selected unaudited pro forma
condensed consolidated financial information does not purport to represent
what the consolidated results of operations or financial condition of the
Company would actually have been if the acquisitions had in fact occurred on
such date or to project the future consolidated results of operations or
financial condition of the Company.
F-55
<PAGE>
SELECTED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PAGECOUNT
FOR THE
GLOBAL PERIOD FROM
XOOM.COM PARALOGIC BRIDGES JANUARY 23, PRO FORMA
FOR THE FOR THE FOR THE 1997 PRO FORMA FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED (INCEPTION) TO BUSINESS YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, COMBINATION DECEMBER 31,
1997 1997 1997 1997 COMBINED ADJUSTMENTS 1997
------------ ------------ ------------ -------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues:
Electronic commerce.... $ 327,080 $ -- $ -- $ -- $ 327,080 $ -- $ 327,080
Advertising............ 60,251 34,028 -- 252,332 346,611 -- 346,611
License fees and
other................. 453,556 -- -- -- 453,556 -- 453,556
Services............... -- 215,917 27,937 -- 243,854 -- 243,854
----------- --------- -------- -------- ----------- ----------- -----------
Total net revenues...... 840,887 249,945 27,937 252,332 1,371,101 -- 1,371,101
Cost of net revenues:
Cost of electronic
commerce.............. 170,957 -- -- -- 170,957 -- 170,957
Cost of advertising.... -- -- -- 45,634 45,634 -- 45,634
Cost of license fees
and other............. 148,375 -- -- -- 148,375 -- 148,375
Cost of services....... -- 117,963 23,718 -- 141,681 -- 141,681
----------- --------- -------- -------- ----------- ----------- -----------
Cost of net revenue..... 319,332 117,963 23,718 45,634 506,647 -- 506,647
Gross profit............ 521,555 131,982 4,219 206,698 864,454 -- 864,454
Costs and expenses:
Operating and
development........... 1,150,299 45,875 19,300 -- 1,215,474 -- 1,215,474
Sales and marketing.... 291,675 86,097 3,841 1,519 383,132 -- 383,132
General and
administrative........ 720,534 45,757 13,983 178,513 958,787 -- 958,787
Amortization of
deferred
compensation.......... 247,924 -- -- -- 247,924 -- 247,924
Amortization of
intangible assets..... -- -- -- -- -- 2,486,345 (A) 2,486,345
Non-recurring charges... 1,243,000 164,802 -- -- 1,407,802 -- 1,407,802
----------- --------- -------- -------- ----------- ----------- -----------
Total costs and
expenses............... 3,653,432 342,531 37,124 180,032 4,213,119 2,486,345 6,699,464
Income (loss) from
operations............. (3,131,877) (210,549) (32,905) 26,666 (3,348,665) (2,486,345) 5,835,010
Interest (expense)
income................. -- -- -- 130 130 (47,849)(B) (47,719)
----------- --------- -------- -------- ----------- ----------- -----------
Income (loss) before
income taxes........... (3,131,877) (210,549) (32,905) 26,796 (3,348,535) (2,534,194) (5,882,729)
Income tax expense...... -- 7,040 -- 5,485 12,525 (12,525)(C) --
----------- --------- -------- -------- ----------- ----------- -----------
Net income (loss)....... $(3,131,877) $(217,589) $(32,905) $ 21,311 $(3,361,060) $(2,521,669) $(5,882,729)
=========== ========= ======== ======== =========== =========== ===========
Net loss per share--
basic and diluted ..... (D) $ (1.02)
===========
Number of shares used in
per share calculation--
basic and diluted...... (D) 5,740,156
===========
</TABLE>
F-56
<PAGE>
SELECTED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
GLOBAL
XOOM.COM PARALOGIC BRIDGES PAGECOUNT PRO FORMA
FOR THE NINE FOR THE TWO FOR THE FIVE FOR THE SIX PRO FORMA FOR THE NINE
MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED BUSINESS MONTHS ENDED
SEPTEMBER 30, FEBRUARY 28, MAY 31, JUNE 30, COMBINATION SEPTEMBER 30,
1998 1998 1998 1998 COMBINED ADJUSTMENTS 1998
------------- ------------ ------------ ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Revenue:
Electronic commerce.... $ 3,366,048 $ -- $ -- $208,689 $ 3,574,737 $ -- $ 3,574,737
Advertising............ 953,121 51,071 -- -- 1,004,192 -- 1,004,192
License fees and
other................. 546,192 -- -- -- 546,192 -- 546,192
Services............... -- 29,016 -- -- 29,016 -- 29,016
----------- ------- -------- -------- ----------- --------- -----------
Total net revenue....... 4,865,361 80,087 -- 208,689 5,154,137 -- 5,154,137
Cost of net revenues:
Cost of electronic
commerce.............. 1,965,556 -- -- -- 1,965,556 -- 1,965,556
Cost of advertising.... -- -- -- 14,314 14,314 -- 14,314
Cost of license fees
and other............. 34,630 -- -- -- 34,630 -- 34,630
Cost of services....... -- 31,438 -- -- 31,438 -- 31,438
----------- ------- -------- -------- ----------- --------- -----------
Cost of net revenues.... 2,000,186 31,438 -- 14,314 2,045,938 -- 2,045,938
----------- ------- -------- -------- ----------- --------- -----------
Gross profit............ 2,865,175 48,649 -- 194,375 3,108,199 -- 3,108,199
Costs and expenses:
Operating and
development........... 2,557,940 12,227 10,526 -- 2,580,693 -- 2,580,693
Sales and marketing.... 1,570,695 2,091 -- 2,371 1,575,157 -- 1,575,157
General and
administrative........ 2,157,860 12,440 4,292 184,023 2,358,615 -- 2,358,615
Purchased in-process
research and
development........... 790,000 -- -- -- 790,000 (460,000)(E) 330,000
Amortization of
deferred
compensation.......... 1,110,941 -- -- -- 1,110,941 -- 1,110,941
Amortization of
intangible assets..... 1,087,029 -- -- -- 1,087,029 951,994 (A) 2,039,023
----------- ------- -------- -------- ----------- --------- -----------
Total costs and
expenses............... 9,274,465 26,758 14,818 186,394 9,649,935 491,994 9,994,429
Income (loss) from
operations............. (6,409,290) 21,891 (14,818) 7,981 (6,541,736) (491,944) (6,886,230)
Interest (expense)
income,
net.................... 16,824 -- -- 62 16,886 (35,887)(B) (19,001)
----------- ------- -------- -------- ----------- --------- -----------
Income (loss) before
income taxes........... (6,392,466) 21,891 (14,818) 8,043 (6,524,850) (527,881) (6,905,231)
Income tax expense...... -- -- -- 1,548 1,548 (1,548)(C) --
----------- ------- -------- -------- ----------- --------- -----------
Net income (loss)....... $(6,392,466) $21,891 $(14,818) $ 6,495 $(6,526,398) $(526,333) $(6,905,231)
=========== ======= ======== ======== =========== ========= ===========
Net loss per share--
basic and diluted...... (D) $ (0.92)
===========
Number of shares used in
per share calculation--
basic and diluted...... (D) 7,483,248
===========
</TABLE>
F-57
<PAGE>
NOTES TO THE SELECTED UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
Pro forma adjustments for statements of operations for the year ended December
31, 1997 and for the nine months ended September 30, 1998 are as follows:
A. Reflects the amortization of intangible assets acquired in the
Paralogic, Global Bridges and Pagecount acquisitions in the amounts of
$2,698,928, $969,792 and $1,303,970, respectively, amortized over a two
year period.
B. Reflects interest charges of $47,849 and $35,887 for the year ended
December 31, 1997 and the nine months ended September 30, 1998,
respectively, for notes payable of $1,400,000 bearing no interest,
$62,500 bearing interest at an annual rate of 5% and $1,200,000 bearing
interest at an annual rate of 7%, related to the acquisitions of
Paralogic, Global Bridges and Pagecount, respectively.
C. Reduction of federal income taxes related to the foregoing adjustments
and operations as if the Companies were combined.
D. Basic and diluted net loss per share amounts have been adjusted to
reflect the issuance of 682,410 and 200,731 shares as part of the
Paralogic and Global Bridges acquisitions, respectively, as if the
shares had been outstanding for all periods presented.
E. Purchased in-process research and development of $460,000 has been
excluded from net loss for the nine months ended September 30, 1998 as
it represents non recurring charges of $330,000 relating to the
Paralogic acquisition and $130,000 relating to the Pagecount
acquisition.
F-58
<PAGE>
[INSIDE BACK OVER]
[DEPICTIONS OF XOOM.COM'S BACK-OFFICE OPERATIONS AND THE GEOGRAPHICAL RANGE OF
ITS CUSTOMER BASE.]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON
STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 28
Dividend Policy........................................................... 28
Capitalization............................................................ 29
Dilution.................................................................. 30
Selected Consolidated Financial Data...................................... 31
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 33
Business.................................................................. 49
Management................................................................ 63
Certain Transactions...................................................... 73
Principal Stockholders.................................................... 75
Description of Capital Stock.............................................. 77
Shares Eligible for Future Sale........................................... 79
Underwriting.............................................................. 80
Legal Matters............................................................. 81
Experts................................................................... 81
Additional Information.................................................... 82
Index to Financial Statements............................................. F-1
</TABLE>
---------------
UNTIL , (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION
TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS AND SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,000,000 SHARES
XOOM.COM, INC.
COMMON STOCK
---------------------------------
PRELIMINARY PROSPECTUS
---------------------------------
BEAR, STEARNS & CO. INC.
DEUTSCHE BANK SECURITIES
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses to be paid by the Registrant in connection with the
distribution of the securities being registered, other than underwriting
discounts and commissions, are as follows:
<TABLE>
<CAPTION>
AMOUNT*
----------
<S> <C>
Securities and Exchange Commission Filing Fee.................... $ 13,570
NASD Filing Fee.................................................. 5,100
Nasdaq National Market Listing Fee............................... 90,000
Accounting Fees and Expenses..................................... 600,000
Blue Sky Fees and Expenses....................................... 5,000
Legal Fees and Expenses.......................................... 700,000
Transfer Agent and Registrar Fees and Expenses................... 15,000
Printing Expenses................................................ 200,000
Miscellaneous Expenses........................................... 271,330
----------
Total.......................................................... $1,900,000
==========
</TABLE>
- --------
* All amounts are estimates except the SEC filing fee, the NASD filing fee
and the Nasdaq National Market listing fee.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the General Corporate Law of the State of Delaware, the
Registrant has broad powers to indemnify its directors and officers against
liabilities they may incur in such capacities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). The Registrant's
Bylaws (Exhibit 3.2 hereto) also provide for mandatory indemnification of its
directors and executive officers, and permissive indemnification of its
employees and agents, to the fullest extent permissible under Delaware law.
The Registrant's Amended and Restated Certificate of Incorporation (Exhibit
3.1 hereto) provides that the liability of its directors for monetary damages
shall be eliminated to the fullest extent permissible under Delaware law.
Pursuant to Delaware law, this includes elimination of liability for monetary
damages for breach of the directors' fiduciary duty of care to the Registrant
and its stockholders. These provisions do not eliminate the directors' duty of
care and, in appropriate circumstances, equitable remedies such as injunctive
or other forms of non-monetary relief will remain available under Delaware
law. In addition, each director will continue to be subject to liability for
breach of the director's duty of loyalty to the Registrant, for acts or
omissions not in good faith or involving intentional misconduct, for knowing
violations of law, for any transaction from which the director derived an
improper personal benefit, and for payment of dividends or approval of stock
repurchases or redemptions that are unlawful under Delaware law. The provision
also does not affect a director's responsibilities under any other laws, such
as the federal securities laws or state or federal environmental laws.
The Registrant has entered into agreements with its directors and certain of
its executive officers that require the Registrant to indemnify such persons
against expenses, judgments, fines, settlements and other amounts actually and
reasonably incurred (including expenses of a derivative action) in connection
with any proceeding, whether actual or threatened, to which any such person
may be made a party by reason of the fact that such person is or was a
director or officer of the Registrant or any of its affiliated enterprises,
provided such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
Registrant and, with respect to any criminal proceeding, had no reasonable
cause to believe his or her conduct was unlawful. The indemnification
agreements also set forth certain procedures that will apply in the event of a
claim for indemnification thereunder.
II-1
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The Registrant intends to obtain in conjunction with the effectiveness of
the Registration Statement a policy of directors' and officers' liability
insurance that insures the Company's directors and officers against the cost
of defense, settlement or payment of a judgment under certain circumstances.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Registrant
and its officers and directors for certain liabilities arising under the
Securities Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
From its incorporation to September 30, 1998, the Registrant has granted or
issued and sold the following unregistered securities:
1. An aggregate of 7,543,357 shares of the Registrant's Common Stock in the
five rounds of private equity financing described below for an aggregate
purchase price of $8,615,592:
<TABLE>
<CAPTION>
NUMBER
OF AGGREGATE
ROUND SHARES PURCHASE PRICE
----- --------- --------------
<S> <C> <C>
1. 3,555,557 $1,200,200
2. 1,555,559 800,000
3. 397,783 358,000
4. 457,627 1,006,685
5. 1,576,831 5,250,707
--------- ----------
7,543,357 $8,615,592
</TABLE>
2. Stock options to employees, directors and consultants exercisable for up
to an aggregate of 1,227,333 shares of the Registrant's Common Stock at a
nominal exercise price.
3. Stock options to employees, directors and consultants under its 1998
Stock Incentive Plan exercisable for up to an aggregate of 673,864 shares of
the Registrant's Common Stock, at exercise prices ranging from $2.31 to $13.50
per share, with a weighted average exercise price of $5.055 per share.
4. An aggregate of 1,179,135 shares in connection with its acquisition
transactions with Paralogic, Global Bridges, Revolutionary Software and
ArcaMax.
5. An aggregate of 9,105 shares of the Registrant's Common Stock issued to
directors and consultants in exchange for services rendered.
The issuances of the securities in the transactions above were deemed to be
exempt from registration under the Securities Act in reliance on Section 4(2)
of the Securities Act or Regulation D promulgated thereunder as transactions
by an issuer not involving a public offering, where the purchasers represented
their intention to acquire the securities for investment only not with a view
to distribution and received or had access to adequate information about the
Registrant, or Rule 701 promulgated thereunder as transactions pursuant to a
compensatory benefit plan or a written contract relating to compensation.
II-2
<PAGE>
Appropriate legends were affixed to the stock certificates issued in the
above transactions. Similar legends were imposed in connection with any
subsequent sales of any such securities. No Underwriters were employed in any
of the above transactions.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
The exhibits are as set forth in the Exhibit Index.
(B) FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted since they are not required or are not
applicable or the required information is shown in the financial statements or
related notes.
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The Registrant hereby undertakes that:
(1) For purposes of any liability under the Securities Act, the information
omitted from the form of prospectus filed as part of this Registration
Statement in reliance upon Rule 430A and contained in a form of prospectus
filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this Registration Statement as of
the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of San
Francisco, State of California on the 3rd day of December, 1998.
XOOM.COM, INC.
By /s/ LAURENT MASSA
___________________________________
Laurent Massa
Chief Executive Officer and
President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ LAURENT MASSA Principal Executive Officer December 3, 1998
________________________ and Director
Laurent Massa
/s/ JOHN HARBOTTLE Principal Financial and December 3, 1998
________________________ Accounting Officer
John Harbottle
/s/ CHRIS KITZE Chairman December 3, 1998
________________________
Chris Kitze
/s/ VIJAY VAIDYANATHAN* Director December 3, 1998
________________________
Vijay Vaidyanathan
/s/ BOB ELLIS* Director December 3, 1998
________________________
Bob Ellis
/s/ JAMES J. HEFFERNAN* Director December 3, 1998
________________________
James J. Heffernan
/s/ JEFFREY BALLOWE* Director December 3, 1998
________________________
Jeffrey Ballowe
/s/ PHILIP SCHLEIN* Director December 3, 1998
________________________
Philip Schlein
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ROBERT C. HARRIS, JR.* Director December 3, 1998
___________________________
Robert C. Harris, Jr.
</TABLE>
/s/ LAURENT MASSA
*By: ___________________________
Laurent Massa
Attorney-in-fact
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DOCUMENT PAGE
------- -------- ------------
<C> <S> <C>
1.1 Form of Underwriting Agreement.......................
3.1 Restated Certificate of Incorporation of the
Registrant+..........................................
3.2 Amended and Restated Bylaws of the Registrant+.......
4.1 Reference is made to Exhibits 3.1 and 3.2............
4.2 Warrant to purchase Common Stock made by the
Registrant in favor of Sand Hill Capital, LLC, dated
as of November 3, 1998+..............................
4.3 Specimen Stock Certificate of the Registrant.........
5.1 Opinion of Morrison & Foerster LLP as to the legality
of the Common Stock..................................
10.1 Form of Indemnification Agreement between the
Registrant and each of its executive officers and
directors+...........................................
10.2 Agreement of Sublease between the Registrant and
Cornerstone Internet Solutions Company d/b/a USWeb
Cornerstone dated August, 1998+......................
10.3 Assignment of Lease by Xaos Tools, Inc. and
Acceptance of Assignment and Assumption of Lease by
the Registrant, dated July 31, 1998+.................
10.4 Registrant's 1998 Stock Incentive Plan, including
forms of agreements thereunder+......................
10.5 Registrant's 1998 Employee Stock Purchase Plan,
including forms of agreements thereunder+............
10.6 Employment Agreement between the Registrant and
Russell Hyzen dated July 20, 1998+...................
10.7 Employment Agreement between the Registrant and Vijay
Vaidyanathan, dated March 10, 1998 and Addendum No. 1
thereto, dated August 12, 1998+......................
10.8 Employment Agreement between the Registrant and
Laurent Massa, dated
July 1, 1998+........................................
10.9 Employment Agreement between the Registrant and John
Harbottle dated
August 4, 1998+......................................
10.10 Agreement and Plan of Merger, among the Registrant,
XOOM Chat, Inc., Paralogic Corporation and
shareholders of Paralogic Corporation, dated March
10, 1998+............................................
10.11 Agreement and Plan of Merger, among the Registrant,
Xoom GBT Merger Corp., Global Bridges Technologies,
Inc. and Robert Kohler, dated June 11, 1998+.........
10.12 Asset Purchase Agreement, between the Registrant and
Revolutionary Software, Inc., dated June 11, 1998+...
10.13 Purchase and License Agreement between the Registrant
and ArcaMax, Inc., dated June 18, 1998+..............
10.14 Asset Purchase Agreement between the Registrant and
Pagecount, Inc., dated as of July 24, 1998+..........
10.15 First Amendment, dated July 27, 1998, to Asset
Purchase Agreement, between the Registrant and
Revolutionary Software, Inc., dated June 11, 1998+...
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DOCUMENT PAGE
------- -------- ------------
<C> <S> <C>
10.16 First Amendment, dated July 28, 1998, to Agreement and
Plan of Merger, among Registrant, Xoom GBT Merger
Corp., Global Bridges Technologies, Inc. and Robert
Kohler, dated June 11, 1998+..........................
10.17 Letter Agreement between the Registrant and Robert
Ellis, dated August 4, 1997+..........................
10.18 Consulting Agreement between the Registrant and James
Heffernan, dated May 15, 1998+........................
10.19 Letter Agreement between the Registrant and Jeffrey
Ballowe, dated July 28, 1998, as amended by letter
agreement dated December 2, 1998......................
10.20 Letter Agreement between the Registrant and Philip
Schlein, dated July 28, 1998, as amended by letter
agreement dated December 2, 1998......................
10.21 Letter Agreement between the Registrant and Robert C.
Harris, Jr., dated July 28, 1998, as amended by letter
agreement dated December 2, 1998......................
10.22 Equipment Financing Agreement between the Registrant
and Pentech Financial Services, Inc., dated October 1,
1998+.................................................
10.23 Loan Agreement between the Registrant and Sand Hill
Capital, LLC, dated as of November 3, 1998+...........
21.1 Subsidiaries of the Registrant+.......................
23.1 Consent of Morrison & Foerster LLP. Reference is made
to Exhibit 5.1........................................
23.2 Consent of Ernst & Young LLP, Independent Auditors....
24.1 Powers of Attorney+...................................
27.1 Financial Data Schedule+..............................
</TABLE>
- --------
*To be filed by amendment
+Exhibit previously filed
II-7
<PAGE>
3,000,000 Shares of Common Stock
XOOM.COM, INC.
UNDERWRITING AGREEMENT
----------------------
[Date]
BEAR, STEARNS & CO. INC.
DEUTSCHE BANK SECURITIES INC.
as Representatives of the
several Underwriters named in
Schedule I attached hereto
c/o Bear, Stearns & Co. Inc.
245 Park Avenue
New York, N.Y. 10167
Dear Sirs:
Xoom.com, Inc., a corporation organized and existing under the laws of
Delaware (the "Company"), proposes, subject to the terms and conditions stated
herein, to issue and sell to the several underwriters named in Schedule I hereto
(the "Underwriters") an aggregate of 3,000,000 shares (the "Firm Shares") of its
common stock, par value $0.0001 per share (the "Common Stock") and, for the sole
purpose of covering over-allotments in connection with the sale of the Firm
Shares, at the option of the Underwriters, up to an additional 450,000 shares
(the "Additional Shares") of Common Stock. The Firm Shares and any Additional
Shares purchased by the Underwriters are referred to herein as the "Shares".
The Shares are more fully described in the Registration Statement referred to
below.
1. Representations and Warranties of the Company. The Company
---------------------------------------------
represents and warrants to, and agrees with, the Underwriters that:
(a) The Company has filed with the Securities and Exchange Commission
(the "Commission") in accordance with the provisions of the Securities Act of
1933, as amended (the "Act"), and the rules and regulations of the Commission
thereunder (the "Regulations") a registration statement, and may have filed an
amendment or amendments thereto, on Form S-1 (No. 333-62395 for the registration
of the Shares under the Act. All of the Shares have been duly registered under
the Act pursuant to the initial registration statement, or if an abbreviated
registration statement has been, or is proposed to be, filed pursuant to Rule
462(b) of the Regulations (the "Rule 462(b) Registration Statement"), all of the
Shares have been or will be, on the date of this Agreement, duly registered
under the Act pursuant to the initial registration statement and the Rule 462(b)
Registration Statement. Such registration statement, including the prospectus,
financial statements and schedules, exhibits and all other documents filed as a
part thereof, as amended at the time of effectiveness of the registration
statement, including any information deemed to be a part thereof as of the time
of effectiveness pursuant to paragraph (b) of Rule 430A or Rule 434 of the
Regulations is herein called the "Registration Statement" and
<PAGE>
the prospectus, in the form first filed with the Commission pursuant to Rule
424(b) of the Regulations or filed as part of the Registration Statement at the
time of effectiveness if no Rule 434 or Rule 424(b) filing is required, is
herein called the "Prospectus". If the Company has filed or proposes to file a
Rule 462 Registration Statement, then any reference herein to the term
"Registration Statement" shall include such Rule 462 Registration Statement. The
term "preliminary prospectus" as used herein means a preliminary prospectus as
described in Rule 430 of the Regulations. All references in this Agreement to
(i) the Registration Statement, the Rule 462(b) Registration Statement, a
preliminary prospectus, the Prospectus or a term sheet that complies with Rule
434, or any amendments or supplements to any of the foregoing, shall include any
copy thereof filed with the Commission pursuant to its Electronic Data
Gathering, Analysis and Retrieval System ("EDGAR") and (ii) the Prospectus shall
be deemed to include the "electronic Prospectus" provided for use in connection
with the offering of the Shares as contemplated by Section 3(g) of this
Agreement.
(b) Each preliminary prospectus and the Prospectus when filed
complied in all material respects with the Act and, if filed by electronic
transmission pursuant to EDGAR (except as may be permitted by Regulation S-T
under the Act), was identical to the copy thereof delivered to the Underwriters
for use in connection with the offer and sale of the Shares. Each of the
Registration Statement, any Rule 462(b) Registration Statement and any post-
effective amendment thereto, at the time it became effective and at all
subsequent times, complied or will comply in all material respects with the
applicable provisions of the Act and the Regulations and does not or will not
contain an untrue statement of a material fact and does not or will not omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein (i) in the case of the Registration Statement, not
misleading and (ii) in the case of the Prospectus, in light of the circumstances
under which they were made, not misleading. When any related preliminary
prospectus was first filed with the Commission (whether filed as part of the
registration statement for the registration of the Shares or any amendment
thereto or pursuant to Rule 424(a) of the Regulations) and when any amendment
thereof or supplement thereto was first filed with the Commission, such
preliminary prospectus and any amendments thereof and supplements thereto
complied in all material respects with the applicable provisions of the Act and
the Regulations and did not contain an untrue statement of a material fact and
did not omit to state any material fact required to be stated therein or
necessary in order to make the statements therein in light of the circumstances
under which they were made not misleading. No representation and warranty is
made in this subsection (b), however, with respect to any information contained
in or omitted from the Registration Statement or the Prospectus or any related
preliminary prospectus or any amendment thereof or supplement thereto in
reliance upon and in conformity with information furnished in writing to the
Company by or on behalf of any Underwriter through you as herein stated
expressly for use in connection with the preparation thereof. If Rule 434 is
used, the Company will comply with the requirements of Rule 434.
(c) Ernst & Young LLP, who have certified the financial statements
and supporting schedules included in the Registration Statement, are independent
public accountants as required by the Act and the Regulations.
(d) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, except as set forth in
the Registration Statement and the Prospectus, there has been no material
adverse change or any development involving a
2
<PAGE>
prospective material adverse change in the business, prospects, properties,
operations, condition (financial or other) or results of operations of the
Company and its subsidiaries taken as a whole ("Material Adverse Change"),
whether or not arising from transactions in the ordinary course of business, and
since the date of the latest balance sheet presented in the Registration
Statement and the Prospectus, neither the Company nor any of its subsidiaries
has incurred or undertaken any liabilities or obligations, direct or contingent,
which are material to the Company and its subsidiaries taken as a whole, except
for liabilities or obligations which are reflected in the Registration Statement
and the Prospectus.
(e) This Agreement and the transactions contemplated herein have been
duly and validly authorized by the Company and this Agreement has been duly and
validly executed and delivered by the Company.
(f) The execution, delivery, and performance of this Agreement and
the consummation of the transactions contemplated hereby do not and will not (i)
conflict with or result in a breach of any of the terms and provisions of, or
constitute a default (or an event which with notice or lapse of time, or both,
would constitute a default) under, or result in the creation or imposition of
any lien, charge or encumbrance upon any property or assets of the Company or
any of its subsidiaries pursuant to, the terms of (A) any agreement or
instrument to which the Company or any of its subsidiaries is a party or by
which any of such corporations or their respective properties or assets may be
bound that is material to the Company and its subsidiaries, taken as a whole, or
(B) any governmental franchise, license, or permit heretofore issued to the
Company or any of its subsidiaries, or (ii) violate or conflict with any
provision of the certificate of incorporation or by-laws of the Company or any
of its subsidiaries or any judgment, decree, order, statute, rule or regulation
of any court or any public, governmental or regulatory agency or body having
jurisdiction over the Company or any of its subsidiaries or any of their
respective properties or assets. No consent, approval, authorization, order,
registration, filing, qualification, license or permit of or with any court or
any public, governmental or regulatory agency or body having jurisdiction over
the Company or any of its subsidiaries or any of their respective properties or
assets is required for the execution, delivery and performance of this Agreement
or the consummation of the transactions contemplated hereby, including the
issuance, sale and delivery of the Shares to be issued, sold and delivered by
the Company hereunder, except the registration under the Act of the Shares and
such consents, approvals, authorizations, orders, registrations, filings,
qualifications, licenses and permits as may be required under state securities
or Blue Sky laws in connection with the purchase and distribution of the Shares
by the Underwriters.
(g) All of the outstanding shares of Common Stock are duly and
validly authorized and issued, fully paid and nonassessable and were not issued
and are not now in violation of or subject to any preemptive rights. The Shares,
when issued, delivered and sold in accordance with this Agreement, will be duly
and validly issued and outstanding, fully paid and nonassessable, and will not
have been issued in violation of or be subject to any preemptive rights. The
Company had, at September 30, 1998, an authorized and outstanding capitalization
as set forth in the Registration Statement and the Prospectus. The Common Stock,
the Firm Shares and the Additional Shares conform to the descriptions thereof
contained in the Registration Statement and the Prospectus.
3
<PAGE>
(h) Each of the Company and its subsidiaries has been duly organized
and is validly existing as a corporation in good standing under the laws of its
jurisdiction of incorporation. Each of the Company and its subsidiaries is duly
qualified and in good standing as a foreign corporation in each jurisdiction in
which the character or location of its properties (owned, leased or licensed) or
the nature or conduct of its business makes such qualification necessary, except
for those failures to be so qualified or in good standing which will not in the
aggregate have a material adverse effect on the Company and its subsidiaries
taken as a whole (a "Material Adverse Effect"). Each of the Company and its
subsidiaries has all requisite power and authority, and all material consents,
approvals, authorizations, orders, registrations, qualifications, licenses and
permits of and from all public, regulatory or governmental agencies and bodies,
which are necessary to own, lease and operate its properties and conduct the
business of the Company and its subsidiaries, taken as a whole, as now being
conducted and as described in the Registration Statement and the Prospectus, and
no such consent, approval, authorization, order, registration, qualification,
license or permit contains a materially burdensome restriction not adequately
disclosed in the Registration Statement and the Prospectus. The Company is in
compliance with all applicable laws, orders, rules, regulations, ordinances and
directives, except where the failure to be in compliance would not have a
Material Adverse Effect.
(i) Neither the Company nor any of its subsidiaries is in violation
of any provision of its certificate of incorporation or of its by-laws or in
breach of, or in default under (nor has any event occurred that with notice,
lapse of time, or both, would constitute a breach of, or default under), except
where such breach or default would not have a Material Adverse Effect, any
provision of any agreement, instrument, franchise, license or permit to which
the Company or such subsidiary is a party or by which any of its properties or
assets may be bound or affected or any judgment, decree, order, statute, rule or
regulation of any court or any public, governmental or regulatory agency or body
having jurisdiction over the Company or such subsidiary or any of its properties
or assets.
(j) Except as described in the Registration Statement and the
Prospectus, there is no litigation, arbitration, proceeding, investigation or
claim to which the Company or any of its subsidiaries is a party or to which any
property or assets of the Company or any of its subsidiaries is subject or which
is pending or, to the knowledge of the Company, threatened or contemplated
against the Company or any of its subsidiaries which might result in any
Material Adverse Effect.
(k) The Company has not taken and will not take, directly or
indirectly, any action designed to cause or result in, or which constitutes or
which might reasonably be expected to constitute, the stabilization or
manipulation of the price of the shares of Common Stock to facilitate the sale
or resale of the Shares or a violation of Regulation M under the Securities
Exchange Act of 1934, as amended (the "Exchange Act").
(l) The financial statements, including the notes thereto, and
supporting schedules included in the Registration Statement and the Prospectus
present fairly the consolidated financial position of the Company and its
subsidiaries as of the dates indicated and the results of their operations and
cash flows for the periods specified; said financial statements have been
prepared in conformity with generally accepted accounting principles applied on
a consistent basis throughout the periods involved, except as may be expressly
stated in the related
4
<PAGE>
notes thereto; and the supporting schedules included in the Registration
Statement present fairly the information required to be stated therein. The
financial statements of each of Paralogic Corporation ("Paralogic"), Global
Bridges Technologies, Inc. ("GBT") and Pagecount, Inc. ("Pagecount") filed with
the Commission as a part of the Registration Statement and included in the
Prospectus present fairly the financial position of Paralogic, GBT and
Pagecount, respectively, as of and at the dates indicated and the results of
their operations and cash flows for the periods specified. Such financial
statements have been prepared in conformity with generally accepted accounting
principles as applied in the United States applied on a consistent basis
throughout the periods involved, except as may be expressly stated in the
related notes thereto.
(m) Except as described in the Registration Statement and the
Prospectus and except for rights that have been effectively waived in writing
(complete and accurate copies of which have been provided to the Underwriters
prior to the date of this Agreement), which waivers are in full force and
effect, no holder of securities of the Company has any rights to cause the
Company to issue to it, or register pursuant to the Act, any securities of the
Company because of the filing of the Registration Statement, in connection with
the sale of the Shares contemplated hereby or otherwise, nor does any holder of
securities of the Company have preemptive rights or other rights to purchase any
of the Shares.
(n) The Company is not, and upon consummation of the transactions
contemplated hereby and the application of the proceeds therefrom as described
in the Prospectus will not be, subject to registration as an "investment
company" under the Investment Company Act of 1940.
(o) The Common Stock of the Company, including the Shares, has been
approved for quotation on the Nasdaq National Market, subject only to official
notice of issuance.
(p) Except as described in the Registration Statement and the
Prospectus, the Company and its subsidiaries own or possess valid and
enforceable licenses or other rights to use all inventions, patents, patent
applications, trademarks, service marks, trade names, copyrights, technology,
know-how (including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures) proprietary
techniques (including processes and substances) and other intellectual property
rights necessary to conduct, the business now conducted or presently
contemplated to be conducted by the Company and its subsidiaries, taken as a
whole, as described in the Registration Statement and the Prospectus
("Intellectual Property"), subject to such exceptions as would not have a
Material Adverse Effect; other than as described in the Registration Statement
and the Prospectus: (i) there are no third parties who have any rights in the
Intellectual Property that could preclude the Company or its subsidiaries from
conducting its business as currently conducted or as presently contemplated to
be conducted as described in the Registration Statement and the Prospectus; (ii)
there are no pending or, to the Company's knowledge, threatened actions, suits,
proceedings, investigations or claims by others challenging the rights of the
Company, its subsidiaries or (if the Intellectual Property is licensed) the
licensor thereof in any Intellectual Property owned or licensed to the Company
or its subsidiaries; (iii) the Company, its subsidiaries and (if the
Intellectual Property is licensed) to the Company's knowledge the licensor
thereof has not infringed, or received any notice of infringement of or conflict
with, any rights of others with respect to the Intellectual Property; and (iv)
there is, to the knowledge of the Company, no dispute between it or any
5
<PAGE>
licensor with respect to any Intellectual Property, subject, with respect to any
of (i), (ii), (iii) or (iv), to such exceptions, individually or in the
aggregate, as would not have a Material Adverse Effect. True and correct copies
of all material licenses and other material agreements between the Company, its
subsidiaries and any third party relating to the Intellectual Property, and all
amendments and supplements thereto, have been provided to the Underwriters.
(q) The Company and its consolidated subsidiaries have timely filed
all material federal, state and foreign income and franchise tax returns
required to be filed as of the date hereof, and have paid all taxes shown as due
thereon, except to the extent such taxes are (A) currently payable without
penalty or interest or (B) being contested in good faith. All tax liabilities
are adequately provided for on the books of the Company and its consolidated
subsidiaries. There is no tax deficiency that has been asserted against the
Company or any of its consolidated subsidiaries that might have a Material
Adverse Effect.
(r) Each of the Company and its subsidiaries maintains insurance with
insurers of recognized financial responsibility of the types and in the amounts
(i) generally deemed adequate for its business and consistent with insurance
coverage maintained by similar companies in similar businesses and (ii) required
under any of the Company's or its subsidiaries' agreements, licenses or other
contracts, all of which insurance is in full force and effect; the Company has
no reason to believe that it will not be able to renew its existing insurance as
and when such coverage expires or to obtain similar insurance adequate and
customary for its business and sufficient to satisfy any requirements of its
contracts at a cost that would not have a Material Adverse Effect.
(s) Except as disclosed in the Registration Statement and the
Prospectus, (i) the Company and each of its subsidiaries has good and marketable
title to all properties (real and personal) owned by the Company or such
subsidiary, free and clear of all mortgages, pledges, liens, security interests,
claims, restrictions or encumbrances of any kind, and (ii) all properties held
under lease or license by the Company and each of its subsidiaries are held
under valid, subsisting and enforceable leases or licenses; subject, with
respect to either (i) or (ii), to such exceptions as would not have a Material
Adverse Effect.
(t) No relationship, direct or indirect, exists between or among the
Company on the one hand, and the directors, officers, stockholders, customers or
suppliers of the Company on the other hand, which is required to be described in
the Registration Statement and the Prospectus that is not so described.
2. Purchase, Sale and Delivery of the Shares.
------------------------------------------
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to sell to the Underwriters and the Underwriters,
severally and not jointly, agree to purchase from the Company, at a purchase
price per share of $_______, the number of Firm Shares set forth opposite the
respective names of the Underwriters in Schedule I hereto plus any additional
number of Shares which such Underwriter may become obligated to purchase
pursuant to the provisions of Section 9 hereof.
6
<PAGE>
(b) Payment of the purchase price for, and delivery of certificates
for, the Shares shall be made at the office of Morrison & Foerster LLP, 425
Market Street, San Francisco, California 94105, or at such other place as shall
be agreed upon by you and the Company, at 10:00 A.M. on the third or fourth
business day (as permitted under Rule 15c6-1 under the Exchange Act) (unless
postponed in accordance with the provisions of Section 9 hereof) following the
date of the effectiveness of the Registration Statement (or, if the Company has
elected to rely upon Rule 430A of the Regulations, the third or fourth business
day (as permitted under Rule 15c6-1 under the Exchange Act) after the
determination of the initial public offering price of the Shares), or such other
time not later than ten business days after such date as shall be agreed upon by
you and the Company (such time and date of payment and delivery being herein
called the "Closing Date"). Payment shall be made to the Company by wire
transfer of immediately available funds, against delivery to you for the
respective accounts of the Underwriters of certificates for the Firm Shares to
be purchased by them. Certificates for the Firm Shares shall be registered in
such name or names and in such authorized denominations as you may request in
writing at least two full business days prior to the Closing Date. The Company
will permit you to examine and package such certificates for delivery at least
one full business day prior to the Closing Date. If you so elect, delivery of
the Firm Shares purchased from the Company may be made by credit through full
fast transfer to the accounts at The Depository Trust Company designated by you.
(c) In addition, the Company hereby grants to the Underwriters the
option to purchase up to 450,000 Additional Shares at the same purchase price
per share to be paid by the Underwriters to the Company for the Firm Shares as
set forth in this Section 2, for the sole purpose of covering over-allotments in
the sale of Firm Shares by the Underwriters. This option may be exercised at any
time, in whole or in part, on or before the thirtieth day following the date of
the Prospectus, by written notice by you to the Company. Such notice shall set
forth the aggregate number of Additional Shares as to which the option is being
exercised and the date and time, as reasonably determined by you, when the
Additional Shares are to be delivered (such date and time being herein sometimes
referred to as the "Additional Closing Date"); provided, however, that the
Additional Closing Date shall not be earlier than the Closing Date or earlier
than the second full business day after the date on which the option shall have
been exercised nor later than the eighth full business day after the date on
which the option shall have been exercised (unless such time and date are
postponed in accordance with the provisions of Section 9 hereof). Certificates
for the Additional Shares shall be registered in such name or names and in such
authorized denominations as you may request in writing at least two full
business days prior to the Additional Closing Date. The Company will permit you
to examine and package such certificates for delivery at least one full business
day prior to the Additional Closing Date. If you so elect, delivery of the
Additional Shares purchased from the Company may be made by credit through full
fast transfer to the accounts at The Depository Trust Company designated by you.
The number of Additional Shares to be sold to each Underwriter shall
be the number which bears the same ratio to the aggregate number of Additional
Shares being purchased as the number of Firm Shares set forth opposite the name
of such Underwriter in Schedule I hereto (or such number increased as set forth
in Section 9 hereof) bears to the total number of Firm Shares being purchased
from the Company, subject, however, to such adjustments to eliminate any
fractional shares as you in your sole discretion shall make.
7
<PAGE>
Payment for the Additional Shares shall be made by wire transfer in
immediately available funds at the offices of Morrison & Foerster LLP, 425
Market Street, San Francisco, California 94105, or such other location as may be
mutually acceptable, upon delivery of the certificates for the Additional Shares
to you for the respective accounts of the Underwriters.
(d) The Company and the Underwriters agree that up to [_______] of
the Firm Shares to be purchased by the Underwriters (the "Directed Shares")
shall be reserved for sale by the Underwriters to eligible directors, officers,
employees, business affiliates and related persons of the Company ("eligible
purchasers") as part of the distribution of the Shares by the Underwriters,
subject to the terms of this Agreement, the applicable rules, regulations and
interpretations of the National Association of Securities Dealers, Inc. and all
other applicable laws, rules and regulations. To the extent that the Directed
Shares are not purchased by eligible purchasers of the Company, the Directed
Shares may be offered to the public as part of the public offering contemplated
hereby.
3. Offering. Upon your authorization of the release of the Firm Shares,
--------
the Underwriters propose to offer the Shares for sale to the public upon the
terms set forth in the Prospectus.
4. Covenants of the Company. The Company covenants and agrees with the
------------------------
Underwriters that:
(a) If the Registration Statement has not yet been declared effective
the Company will use its best efforts to cause the Registration Statement and
any amendments thereto to become effective as promptly as possible, and if Rule
430A is used or the filing of the Prospectus is otherwise required under Rule
424(b) or Rule 434, the Company will file the Prospectus (properly completed if
Rule 430A has been used) pursuant to Rule 424(b) or Rule 434 within the
prescribed time period and will provide evidence satisfactory to you of such
timely filing. If the Company elects to rely on Rule 434, the Company will
prepare and file a term sheet that complies with the requirements of Rule 434.
The Company will notify you immediately (and, if requested by you,
will confirm such notice in writing) (i) when the Registration Statement and any
amendments thereto become effective, (ii) of any request by the Commission for
any amendment of or supplement to the Registration Statement or the Prospectus
or for any additional information, (iii) of the mailing or the delivery to the
Commission for filing of any amendment of or supplement to the Registration
Statement or the Prospectus, (iv) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or any post-
effective amendment thereto or of the initiation, or the threatening, of any
proceedings therefor and (v) of the receipt of any comments from the Commission.
If the Commission shall propose or enter a stop order at any time, the Company
will make every reasonable effort to prevent the issuance of any such stop order
and, if issued, to obtain the lifting of such order as soon as possible. The
Company will not file any amendment to the Registration Statement or any
amendment of or supplement to the Prospectus (including the prospectus required
to be filed pursuant to Rule 424(b)or Rule 434) that differs from the prospectus
on file at the time of the effectiveness of the Registration Statement before or
after the effective date of the Registration Statement to which you shall
reasonably object in writing after being timely furnished in advance a copy
thereof.
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(b) If at any time when a prospectus relating to the Shares is
required to be delivered under the Act any event shall have occurred as a result
of which the Prospectus as then amended or supplemented would, in the judgment
of the Underwriters or the Company, include an untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, or if it shall be necessary at any
time to amend or supplement the Prospectus or Registration Statement to comply
with the Act or the Regulations, the Company will notify you promptly and
prepare and file with the Commission an appropriate amendment or supplement (in
form and substance satisfactory to you) which will correct such statement or
omission and will use its best efforts to have any amendment to the Registration
Statement declared effective as soon as possible.
(c) The Company will promptly deliver to you two conformed copies of
the Registration Statement, including exhibits and all amendments thereto, and
will maintain in the Company's files manually signed copies of such documents
for at least five years from the date of filing. The Company will promptly
deliver to each of the Underwriters such number of copies of any preliminary
prospectus, the Prospectus, the Registration Statement, and all amendments of
and supplements to such documents, if any, as you may reasonably request.
(d) The Company will endeavor in good faith, in cooperation with you,
at or prior to the time of effectiveness of the Registration Statement, to
qualify the Shares for offering and sale under the securities laws relating to
the offering or sale of the Shares of such jurisdictions as you may designate
and to maintain such qualification in effect for so long as required for the
distribution thereof; except that in no event shall the Company be obligated in
connection therewith to qualify as a foreign corporation or to execute a general
consent to service of process. The Company will promptly advise you of the
receipt by the Company of any notification with respect to suspension of the
qualification of the Shares for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose and will use every reasonable
effort to obtain the withdrawal of any order of suspension as soon as possible.
(e) The Company will make generally available (within the meaning of
Section 11(a) of the Act) to its security holders and to you as soon as
practicable, but not later than 45 days after the end of its fiscal quarter in
which the first anniversary date of the effective date of the Registration
Statement occurs, an earning statement (in form complying with the provisions of
Rule 158 of the Regulations) covering a period of at least twelve consecutive
months beginning after the effective date of the Registration Statement.
(f) The Company shall engage and maintain, at its expense, a
registrar and transfer agent for the Common Stock.
(g) The Company shall cause to be prepared and delivered, at its
expense, within one business day from the effective date of this Agreement, to
Bear, Stearns & Co. Inc. and Deutsche Bank Securities Inc. an "electronic
Prospectus" to be used by the Underwriters in connection with the offering and
sale of the Shares. As used herein, the term "electronic Prospectus" means a
form of Prospectus, and any amendment or supplement thereto, that meets each of
the following conditions: (i) it shall be encoded in an electronic format,
satisfactory to Bear, Stearns & Co. Inc., that may be transmitted electronically
by Bear, Stearns & Co. Inc. and
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the other Underwriters to offerees and purchasers of the Shares for at least
during the period when the Prospectus is required to be delivered under the Act
or the Exchange Act ("the Prospectus Delivery Period"); (ii) it shall disclose
the same information as the paper Prospectus and Prospectus filed pursuant to
EDGAR, except to the extent that graphic and image material cannot be
disseminated electronically, in which case such graphic and image material shall
be replaced in the electronic Prospectus with a fair and accurate narrative
description or tabular representation of such material, as appropriate; and
(iii) it shall be in or convertible into a paper format or an electronic format,
satisfactory to Bear, Stearns & Co. Inc., that will allow investors to store and
have continuously ready access to the Prospectus at any future time, without
charge to investors (other than any fee charged for subscription to the system
as a whole and for on-line time). Such electronic Prospectus may consist of a
Rule 434 preliminary prospectus, together with the applicable term sheet,
provided that it otherwise satisfies the format and conditions described in the
immediately preceding sentence. The Company hereby confirms that it has included
or will include in the Prospectus filed pursuant to EDGAR or otherwise with the
Commission and in the Registration Statement at the time it was declared
effective an undertaking that, upon receipt of a request by an investor or his
or her representative within the Prospectus Delivery Period, the Company shall
transmit or cause to be transmitted promptly, without charge, a paper copy of
the Prospectus.
(h) During the period of 180 days following the date of the
Prospectus, the Company will not, without the prior written consent of Bear,
Stearns & Co. Inc. (which consent may be withheld at the sole discretion of
Bear, Stearns & Co. Inc.), directly or indirectly, issue, sell, offer, contract
or grant any option to sell, pledge, transfer or otherwise dispose of or
transfer, or announce the offering of, or file any registration statement under
the Act in respect of, any shares of Common Stock, options or warrants to
acquire shares of the Common Stock or securities exchangeable or exercisable for
or convertible into shares of Common Stock (other than as contemplated by this
Agreement with respect to the Shares); provided, however, that the Company may
(i) issue shares of its Common Stock or options to purchase its Common Stock, or
Common Stock upon exercise of options, pursuant to any stock option, warrant,
stock bonus or other stock plan or arrangement described in the Prospectus, or
(ii) issue shares of Common Stock in connection with acquisitions by the
Company, but only if the holders of such shares, options, warrants or shares
issued upon exercise of such options, agree in writing not to sell, offer,
contract or grant any option to sell (including without limitation any short
sale), pledge, transfer, or establish an open "put equivalent position" within
the meaning of Rule 16a-1(h) under the Exchange Act, or otherwise dispose of any
such shares or options during such 180 day period without the prior written
consent of Bear, Stearns & Co. Inc. (which consent may be withheld at the sole
discretion of the Bear, Stearns & Co. Inc.).
(i) During a period of three years from the effective date of the
Registration Statement, the Company will furnish to you copies of (i) all
reports or other communications to its shareholders; and (ii) all reports,
financial statements and proxy or information statements filed by the Company
with the Commission or any national securities exchange.
(j) The Company will apply the proceeds from the sale of the Shares
as set forth under "Use of Proceeds" in the Prospectus.
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(k) The Company will use its best efforts to cause the Shares to be
qualified for inclusion in the Nasdaq National Market.
(l) The Company will file with the Commission in its periodic reports
pursuant to Section 13 or 15 of the Exchange Act such information as may be
required pursuant to Rule 463 of the Regulations.
(m) The Company, during the Prospectus Delivery Period, will file, on
a timely basis, with the Commission and the Nasdaq National Market all reports
and documents required to be filed under the Exchange Act.
Bear, Stearns & Co. Inc., on behalf of the several Underwriters, may,
in its sole discretion, waive in writing the performance by the Company of any
one or more of the foregoing covenants or extend the time for their performance.
5. Payment of Expenses. Whether or not the transactions contemplated in
-------------------
this Agreement are consummated or this Agreement is terminated, the Company
hereby agrees to pay all costs and expenses incident to the performance of the
obligations of the Company hereunder, including those in connection with (i)
preparing, printing, duplicating, filing and distributing the Registration
Statement, as originally filed and all amendments thereof (including all
exhibits thereto), any preliminary prospectus, the Prospectus and any amendments
or supplements thereto (including, without limitation, fees and expenses of the
Company's accountants and counsel), the underwriting documents (including this
Agreement, the Master Agreement Among Underwriters and the Master Selling
Agreement) and all other documents related to the public offering of the Shares
(including those supplied to the Underwriters in quantities as hereinabove
stated), (ii) the issuance, transfer and delivery of the Shares to the
Underwriters, including any transfer or other taxes payable thereon, (iii) the
qualification of the Shares under state or foreign securities or Blue Sky laws
or regulations, including the costs of printing and mailing a preliminary and
final "Blue Sky Survey" and the fees of counsel for the Underwriters and such
counsel's disbursements in relation thereto, (iv) quotation of the Shares on the
Nasdaq National Market, (v) filing fees of the Commission and the National
Association of Securities Dealers, Inc.; (vi) the cost of printing certificates
representing the Shares and (vii) the cost and charges of any transfer agent or
registrar.
6. Conditions of Underwriters' Obligations. The obligations of the
---------------------------------------
Underwriters to purchase and pay for the Firm Shares and the Additional Shares,
as provided herein, shall be subject to the accuracy of the representations and
warranties of the Company herein contained, as of the date hereof and as of the
Closing Date (for purposes of this Section 6 "Closing Date" shall refer to the
Closing Date for the Firm Shares and any Additional Closing Date, if different,
for the Additional Shares), to the absence from any certificates, opinions,
written statements or letters furnished to you or to Brobeck, Phleger & Harrison
LLP ("Underwriters' Counsel") pursuant to this Section 6 of any misstatement or
omission, to the performance by the Company of its obligations hereunder, and to
the following additional conditions:
(a) The Registration Statement shall have become effective not later
than 5:30 P.M., New York time, on the date of this Agreement, or at such later
time and date as shall have been consented to in writing by you; if the Company
shall have elected to rely upon Rule
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430A or Rule 434 of the Regulations, the Prospectus shall have been filed with
the Commission in a timely fashion in accordance with Section 4(a) hereof; and,
at or prior to the Closing Date no stop order suspending the effectiveness of
the Registration Statement or any post-effective amendment thereof shall have
been issued and no proceedings therefor shall have been initiated or threatened
by the Commission.
(b) At the Closing Date you shall have received the opinion of
Morrison & Foerster LLP, counsel for the Company, dated the Closing Date
addressed to the Underwriters and in form and substance satisfactory to
Underwriters' Counsel, to the effect that:
(i) Each of the Company and its subsidiaries has been duly
organized and is validly existing as a corporation in good standing under
the laws of its jurisdiction of incorporation. Each of the Company and its
subsidiaries is duly qualified and in good standing as a foreign
corporation in each jurisdiction in which the character or location of its
properties (owned, leased or licensed) or the nature or conduct of its
business makes such qualification necessary, except for those failures to
be so qualified or in good standing which will not in the aggregate have a
material adverse effect on the Company and its subsidiaries taken as a
whole. Each of the Company and its subsidiaries has all requisite corporate
authority to own, lease and license its respective properties and conduct
its business as now being conducted and as described in the Registration
Statement and the Prospectus. All of the issued and outstanding capital
stock of each subsidiary of the Company has been duly and validly issued
and is fully paid and nonassessable and was not issued in violation of
preemptive rights and, is owned directly or indirectly by the Company, free
and clear of any lien, encumbrance, claim, security interest, restriction
on transfer, shareholders' agreement, voting trust or other defect of title
whatsoever.
(ii) The Company has an authorized capital stock as set forth
in the Registration Statement and the Prospectus. All of the outstanding
shares of Common Stock are duly and validly authorized and issued, are
fully paid and nonassessable and were not issued in violation of or subject
to any preemptive rights. The Shares to be delivered on the Closing Date
have been duly and validly authorized and, when delivered by the Company in
accordance with this Agreement, will be duly and validly issued, fully paid
and nonassessable and will not have been issued in violation of or subject
to any preemptive rights. The Common Stock, the Firm Shares and the
Additional Shares conform to the descriptions thereof contained in the
Registration Statement and the Prospectus.
(iii) This Agreement has been duly and validly authorized,
executed and delivered by the Company.
(iv) There is no litigation or governmental or other action,
suit, proceeding or investigation before any court or before or by any
public, regulatory or governmental agency or body pending or to the best of
such counsel's knowledge, threatened against, or involving the properties
or business of, the Company or any of its subsidiaries, which is of a
character required to be disclosed in the Registration Statement and the
Prospectus which has not been properly disclosed therein.
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(v) To such counsel's knowledge, all agreements, instruments,
franchises, licenses or permits required to be described in the
Registration Statement and the Prospectus or required to be filed as
exhibits to the Registration Statements have been so described and so
filed.
(vi) The execution, delivery, and performance of this
Agreement and the consummation of the transactions contemplated hereby by
the Company do not and will not (A) to such counsel's knowledge result in a
material breach of any of the terms and provisions of, or constitute a
default (or an event which with notice or lapse of time, or both, would
constitute a default) under, or result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of the Company or
any of its subsidiaries pursuant to, any agreement, instrument, franchise,
license or permit known to such counsel to which the Company or any of its
subsidiaries is a party or by which any of such corporations or their
respective properties or assets may be bound or (B) violate or conflict
with any provision of the certificate of incorporation or by-laws of the
Company or any of its subsidiaries, or, to the best knowledge of such
counsel, any judgment, decree, order, statute, rule or regulation of any
court or any public, governmental or regulatory agency or body having
jurisdiction over the Company or any of its subsidiaries or any of their
respective properties or assets. No consent, approval, authorization,
order, registration, filing, qualification, license or permit of or with
any court or any public, governmental, or regulatory agency or body having
jurisdiction over the Company or any of its subsidiaries or any of their
respective properties or assets is required for the execution, delivery and
performance of this Agreement or the consummation of the transactions
contemplated hereby, except for (1) such as may be required under state
securities or Blue Sky laws in connection with the purchase and
distribution of the Shares by the Underwriters (as to which such counsel
need express no opinion) and (2) such as have been made or obtained under
the Act.
(vii) The Registration Statement and the Prospectus and any
amendments thereof or supplements thereto (other than the financial
statements and schedules and other financial data derived therefrom, as to
which no opinion need be rendered) comply as to form in all material
respects with the requirements of the Act and the Regulations.
(viii) The Registration Statement and the Rule 462(b)
Registration Statement, if any, is effective under the Act, and, to the
best knowledge of such counsel, no stop order suspending the effectiveness
of either of the Registration Statement or the Rule 462(b) Registration
Statement, if any, has been issued and no proceedings therefor have been
initiated or threatened by the Commission and all filings required by Rule
424(b) of the Regulations have been made.
In addition, such opinion shall also contain a statement that such
counsel has participated in conferences with officers and representatives of the
Company, representatives of the independent public accountants for the Company
and the Underwriters at which the contents of the Registration Statement and the
Prospectus and related matters were discussed and, no facts have come to the
attention of such counsel which would lead such counsel to believe that either
the Registration Statement at the time it became effective (including the
information deemed to
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be part of the Registration Statement at the time of effectiveness pursuant to
Rule 430A(b) or Rule 434, if applicable), or any amendment thereof made prior to
the Closing Date as of the date of such amendment, contained an untrue statement
of a material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading or that the
Prospectus as of its date (or any amendment thereof or supplement thereto made
prior to the Closing Date as of the date of such amendment or supplement) and as
of the Closing Date contained or contains an untrue statement of a material fact
or omitted or omits to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading (it being understood that such counsel need
express no belief or opinion with respect to the financial statements and
schedules and other financial data included therein).
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws other than the General Corporation Law of the
State of Delaware, the General Corporation Law of the State of California or the
federal law of the United States, to the extent such counsel deems proper and to
the extent specified in such opinion, if at all, upon an opinion or opinions (in
form and substance reasonably satisfactory to Underwriters' Counsel) of other
counsel reasonably acceptable to Underwriters' Counsel, familiar with the
applicable laws; (B) as to matters of fact, to the extent they deem proper, on
certificates of responsible officers of the Company and certificates or other
written statements of officers of departments of various jurisdictions having
custody of documents respecting the corporate existence or good standing of the
Company and its subsidiaries, provided that copies of any such statements or
certificates shall be delivered to Underwriters' Counsel. The opinion of such
counsel for the Company shall state that the opinion of any such other counsel
is in form satisfactory to such counsel and, in their opinion, you and they are
justified in relying thereon.
(c) All proceedings taken in connection with the sale of the Firm
Shares and the Additional Shares as herein contemplated shall be satisfactory in
form and substance to you and to Underwriters' Counsel, and the Underwriters
shall have received from said Underwriters' Counsel a favorable opinion, dated
as of the Closing Date with respect to the issuance and sale of the Shares, the
Registration Statement and the Prospectus and such other related matters as you
may reasonably require, and the Company shall have furnished to Underwriters'
Counsel such documents as they request for the purpose of enabling them to pass
upon such matters.
(d) At the Closing Date you shall have received a certificate of the
Chief Executive Officer and Chief Financial Officer of the Company, dated the
Closing Date to the effect that (i) the condition set forth in subsection (a) of
this Section 6 has been satisfied, (ii) as of the date hereof and as of the
Closing Date the representations and warranties of the Company set forth in
Section 1 hereof are accurate, (iii) as of the Closing Date the obligations of
the Company to be performed hereunder on or prior thereto have been duly
performed and (iv) subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, the Company and its
subsidiaries have not sustained any material loss or interference with their
respective businesses or properties from fire, flood, hurricane, accident or
other calamity, whether or not covered by insurance, or from any labor dispute
or any legal or governmental proceeding, and there has not been any Material
Adverse Change, or any development involving a Material Adverse Change, except
in each case as described in or contemplated by the Prospectus.
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(e) At the time this Agreement is executed and at the Closing Date,
you shall have received a letter, from Ernst & Young LLP, independent public
accountants for the Company, dated, respectively, as of the date of this
Agreement and as of the Closing Date addressed to the Underwriters and in form
and substance satisfactory to you, to the effect that: (i) they are independent
certified public accountants with respect to the Company within the meaning of
the Act and the Regulations and stating that the answer to Item 10 of the
Registration Statement is correct insofar as it relates to them; (ii) stating
that, in their opinion, the financial statements and schedules of the Company
included in the Registration Statement and the Prospectus and covered by their
opinion therein comply as to form in all material respects with the applicable
accounting requirements of the Act and the applicable published rules and
regulations of the Commission thereunder; (iii) on the basis of procedures
consisting of a reading of the latest available unaudited interim consolidated
financial statements of the Company, and its subsidiaries, a reading of the
minutes of meetings and consents of the shareholders and boards of directors of
the Company and its subsidiaries and the committees of such boards subsequent to
September 30, 1998, inquiries of officers and other employees of the Company and
its subsidiaries who have responsibility for financial and accounting matters of
the Company and its subsidiaries with respect to transactions and events
subsequent to September 30, 1998 and other specified procedures and inquiries to
a date not more than five days prior to the date of such letter, nothing has
come to their attention that would cause them to believe that: (A) the unaudited
consolidated financial statements and schedules of the Company presented in the
Registration Statement and the Prospectus do not comply as to form in all
material respects with the applicable accounting requirements of the Act and the
applicable published rules and regulations of the Commission thereunder or that
such unaudited consolidated financial statements are not fairly presented in
conformity with generally accepted accounting principles applied on a basis
substantially consistent with that of the audited consolidated financial
statements included in the Registration Statement and the Prospectus; (B) with
respect to the period subsequent to September 30, 1998, there were, as of the
date of the most recent available monthly consolidated financial statements of
the Company and its subsidiaries, if any, and as of a specified date not more
than five days prior to the date of such letter, any changes in the capital
stock or long-term indebtedness of the Company or any decrease in the net
current assets or stockholders' equity of the Company, in each case as compared
with the amounts shown in the most recent balance sheet presented in the
Registration Statement and the Prospectus, except for changes or decreases which
the Registration Statement and the Prospectus disclose have occurred or may
occur or which are set forth in such letter; or (C) that during the period from
September 30, 1998 to the date of the most recent available monthly consolidated
financial statements of the Company and its subsidiaries, if any, and to a
specified date not more than five days prior to the date of such letter, there
was any decrease, as compared with the corresponding period in the prior fiscal
year, in total revenues, or increases in net loss, except for changes which the
Registration Statement and the Prospectus disclose have occurred or may occur or
which are set forth in such letter; and (iv) stating that they have compared
specific dollar amounts, numbers of shares, percentages of revenues and
earnings, and other financial information pertaining to the Company and its
subsidiaries set forth in the Registration Statement and the Prospectus, which
have been specified by you prior to the date of this Agreement, to the extent
that such amounts, numbers, percentages, and information may be derived from the
general accounting and financial records of the Company and its subsidiaries or
from schedules furnished by the Company, and excluding any questions requiring
an interpretation by legal
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counsel, with the results obtained from the application of specified readings,
inquiries, and other appropriate procedures specified by you set forth in such
letter, and found them to be in agreement. In addition, such letter shall state
that the pro forma financial information included in the Registration Statement
and the Prospectus complies as to form in all material respects with the
applicable accounting requirements of the Act, including Rule 11-02 of
Regulation S-X, and that the pro forma adjustments have been properly applied to
historical amounts in the compilation of such pro forma financial information.
(f) Prior to the Closing Date the Company shall have furnished to you
such further information, certificates and documents as you may reasonably
request.
(g) You shall have received from each person who is a director,
officer or stockholder of the Company an agreement in the form of Exhibit A
hereto, and such agreement shall be in full force and effect on the Closing
Date.
(h) At the Closing Date, the Shares shall have been approved for
quotation on the Nasdaq National Market.
If any of the conditions specified in this Section 6 shall not have
been fulfilled when and as required by this Agreement, or if any of the
certificates, opinions, written statements or letters furnished to you or to
Underwriters' Counsel pursuant to this Section 6 shall not be in all material
respects reasonably satisfactory in form and substance to you and to
Underwriters' Counsel, all obligations of the Underwriters hereunder may be
cancelled by you at, or at any time prior to, the Closing Date and the
obligations of the Underwriters to purchase the Additional Shares may be
cancelled by you at, or at any time prior to, the Additional Closing Date.
Notice of such cancellation shall be given to the Company in writing, or by
telephone, telex or telegraph, confirmed in writing.
7. Indemnification.
----------------
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against
any and all losses, liabilities, claims, damages and expenses whatsoever as
incurred (including but not limited to attorneys' fees and any and all expenses
whatsoever incurred in investigating, preparing or defending against any
litigation, commenced or threatened, or any claim whatsoever, and any and all
amounts paid in settlement of any claim or litigation), joint or several, to
which they or any of them may become subject under the Act, the Exchange Act or
otherwise, insofar as such losses, liabilities, claims, damages or expenses (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of a material fact contained in the registration
statement for the registration of the Shares, as originally filed or any
amendment thereof, or any related preliminary prospectus or the Prospectus, or
in any supplement thereto or amendment thereof, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading;
provided, however, that the Company will not be liable in any such case to the
extent but only to the extent that any such loss, liability, claim, damage or
expense arises out of or is based upon any such untrue statement or alleged
untrue statement or omission or alleged omission made
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therein in reliance upon and in conformity with written information furnished to
the Company by or on behalf of any Underwriter through you expressly for use
therein. This indemnity agreement will be in addition to any liability which the
Company may otherwise have including under this Agreement.
(b) Each Underwriter severally, and not jointly, agrees to indemnify
and hold harmless the Company, each of the directors of the Company, each of the
officers of the Company who shall have signed the Registration Statement, and
each other person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act, against any losses,
liabilities, claims, damages and expenses whatsoever as incurred (including but
not limited to attorneys' fees and any and all expenses whatsoever incurred in
investigating, preparing or defending against any litigation, commenced or
threatened, or any claim whatsoever, and any and all amounts paid in settlement
of any claim or litigation), joint or several, to which they or any of them may
become subject under the Act, the Exchange Act or otherwise, insofar as such
losses, liabilities, claims, damages or expenses (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of a material fact contained in the registration statement for the registration
of the Shares, as originally filed or any amendment thereof, or any related
preliminary prospectus or the Prospectus, or in any amendment thereof or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that any such loss, liability, claim, damage or
expense arises out of or is based upon any such untrue statement or alleged
untrue statement or omission or alleged omission made therein in reliance upon
and in conformity with written information furnished to the Company by or on
behalf of any Underwriter through you expressly for use therein; provided,
however, that in no case shall any Underwriter be liable or responsible for any
amount in excess of the underwriting discount applicable to the Shares purchased
by such Underwriter hereunder. This indemnity will be in addition to any
liability which any Underwriter may otherwise have including under this
Agreement. The Company acknowledges that the statements set forth in the last
paragraph of the cover page and in the table in the first paragraph and the
third and ninth paragraphs under the caption "Underwriting" in the Prospectus
constitute the only information furnished in writing by or on behalf of any
Underwriter expressly for use in the registration statement relating to the
Shares as originally filed or in any amendment thereof, any related preliminary
prospectus or the Prospectus or in any amendment thereof or supplement thereto,
as the case may be.
(c) Promptly after receipt by an indemnified party under subsection
(a) or (b) above of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify each party against whom
indemnification is to be sought in writing of the commencement thereof (but the
failure so to notify an indemnifying party shall not relieve it from any
liability which it may have under this Section 7). In case any such action is
brought against any indemnified party, and it notifies an indemnifying party of
the commencement thereof, the indemnifying party will be entitled to participate
therein, and to the extent it may elect by written notice delivered to the
indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof with counsel satisfactory to
such indemnified party. Notwithstanding the foregoing, the indemnified party or
parties shall have the right to employ its or their own
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counsel in any such case, but the fees and expenses of such counsel shall be at
the expense of such indemnified party or parties unless (i) the employment of
such counsel shall have been authorized in writing by one of the indemnifying
parties in connection with the defense of such action, (ii) the indemnifying
parties shall not have employed counsel to have charge of the defense of such
action within a reasonable time after notice of commencement of the action, or
(iii) such indemnified party or parties shall have reasonably concluded that
there may be defenses available to it or them which are different from or
additional to those available to one or all of the indemnifying parties (in
which case the indemnifying parties shall not have the right to direct the
defense of such action on behalf of the indemnified party or parties), in any of
which events such fees and expenses shall be borne by the indemnifying parties.
Anything in this subsection to the contrary notwithstanding, an indemnifying
party shall not be liable for any settlement of any claim or action effected
without its written consent; provided, however, that such consent was not
unreasonably withheld.
8. Contribution. In order to provide for contribution in circumstances
------------
in which the indemnification provided for in Section 7 hereof is for any reason
held to be unavailable from any indemnifying party or is insufficient to hold
harmless a party indemnified thereunder, the Company and the Underwriters shall
contribute to the aggregate losses, claims, damages, liabilities and expenses of
the nature contemplated by such indemnification provision (including any
investigation, legal and other expenses incurred in connection with, and any
amount paid in settlement of, any action, suit or proceeding or any claims
asserted, but after deducting in the case of losses, claims, damages,
liabilities and expenses suffered by the Company any contribution received by
the Company from persons, other than the Underwriters, who may also be liable
for contribution, including persons who control the Company within the meaning
of Section 15 of the Act or Section 20(a) of the Exchange Act, officers of the
Company who signed the Registration Statement and directors of the Company) as
incurred to which the Company and one or more of the Underwriters may be
subject, in such proportions as is appropriate to reflect the relative benefits
received by the Company and the Underwriters from the offering of the Shares or,
if such allocation is not permitted by applicable law or indemnification is not
available as a result of the indemnifying party not having received notice as
provided in Section 7 hereof, in such proportion as is appropriate to reflect
not only the relative benefits referred to above but also the relative fault of
the Company and the Underwriters in connection with the statements or omissions
which resulted in such losses, claims, damages, liabilities or expenses, as well
as any other relevant equitable considerations. The relative benefits received
by the Company and the Underwriters shall be deemed to be in the same proportion
as (x) the total proceeds from the offering (net of underwriting discounts and
commissions but before deducting expenses) received by the Company and (y) the
underwriting discounts and commissions received by the Underwriters,
respectively, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault of the Company and of the Underwriters shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company or the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The Company
and the Underwriters agree that it would not be just and equitable if
contribution pursuant to this Section 8 were determined by pro rata allocation
(even if the Underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take account of the equitable
considerations referred to above. Notwithstanding the provisions of this Section
8, (i)
18
<PAGE>
in no case shall any Underwriter be liable or responsible for any amount in
excess of the underwriting discount applicable to the Shares purchased by such
Underwriter hereunder, and (ii) no person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. Notwithstanding the provisions of this Section 8 and the
preceding sentence, no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Shares underwritten
by it and distributed to the public were offered to the public exceeds the
amount of any damages that such Underwriter has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or alleged
omission. For purposes of this Section 8, each person, if any, who controls an
Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act shall have the same rights to contribution as such Underwriter, and
each person, if any, who controls the Company within the meaning of Section 15
of the Act or Section 20(a) of the Exchange Act, each officer of the Company who
shall have signed the Registration Statement and each director of the Company
shall have the same rights to contribution as the Company, subject in each case
to clauses (i) and (ii) of this Section 8. Any party entitled to contribution
will, promptly after receipt of notice of commencement of any action, suit or
proceeding against such party in respect of which a claim for contribution may
be made against another party or parties, notify each party or parties from whom
contribution may be sought, but the omission to so notify such party or parties
shall not relieve the party or parties from whom contribution may be sought from
any obligation it or they may have under this Section 8 or otherwise. No party
shall be liable for contribution with respect to any action or claim settled
without its consent; provided, however, that such consent was not unreasonably
withheld.
9. Default by an Underwriter.
-------------------------
(a) If any Underwriter or Underwriters shall default in its or their
obligation to purchase Firm Shares or Additional Shares hereunder, and if the
Firm Shares or Additional Shares with respect to which such default relates do
not (after giving effect to arrangements, if any, made by you pursuant to
subsection (b) below) exceed in the aggregate 10% of the number of Firm Shares
or Additional Shares, to which the default relates shall be purchased by the
non-defaulting Underwriters in proportion to the respective proportions which
the numbers of Firm Shares set forth opposite their respective names in Schedule
I hereto bear to the aggregate number of Firm Shares set forth opposite the
names of the non-defaulting Underwriters.
(b) In the event that such default relates to more than 10% of the
Firm Shares or Additional Shares, as the case may be, you may in your discretion
arrange for yourself or for another party or parties (including any non-
defaulting Underwriter or Underwriters who so agree) to purchase such Firm
Shares or Additional Shares, as the case may be, to which such default relates
on the terms contained herein. In the event that within 5 calendar days after
such a default you do not arrange for the purchase of the Firm Shares or
Additional Shares, as the case may be, to which such default relates as provided
in this Section 9, this Agreement or, in the case of a default with respect to
the Additional Shares, the obligations of the Underwriters to purchase and of
the Company to sell the Additional Shares shall thereupon terminate, without
liability on the part of the Company with respect thereto (except in each case
as provided in Section 5, 7(a) and 8 hereof) or the Underwriters, but nothing in
this Agreement shall relieve a defaulting
19
<PAGE>
Underwriter or Underwriters of its or their liability, if any, to the other
Underwriters and the Company for damages occasioned by its or their default
hereunder.
(c) In the event that the Firm Shares or Additional Shares to which
the default relates are to be purchased by the non-defaulting Underwriters, or
are to be purchased by another party or parties as aforesaid, you or the Company
shall have the right to postpone the Closing Date or Additional Closing Date, as
the case may be, for a period, not exceeding five business days, in order to
effect whatever changes may thereby be made necessary in the Registration
Statement or the Prospectus or in any other documents and arrangements, and the
Company agrees to file promptly any amendment or supplement to the Registration
Statement or the Prospectus which, in the opinion of Underwriters' Counsel, may
thereby be made necessary or advisable. The term "Underwriter" as used in this
Agreement shall include any party substituted under this Section 9 with like
effect as if it had originally been a party to this Agreement with respect to
such Firm Shares and Additional Shares.
10. Survival of Representations and Agreements. All representations and
------------------------------------------
warranties, covenants and agreements of the Underwriters and the Company
contained in this Agreement, including the agreements contained in Section 5,
the indemnity agreements contained in Section 7 and the contribution agreements
contained in Section 8, shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of any Underwriter or any
controlling person thereof or by or on behalf of the Company, any of its
officers and directors or any controlling person thereof, and shall survive
delivery of and payment for the Shares to and by the Underwriters. The
representations contained in Section 1 and the agreements contained in Sections
5, 7, 8 and 11(d) hereof shall survive the termination of this Agreement,
including termination pursuant to Section 9 or 11 hereof.
11. Effective Date of Agreement; Termination.
-----------------------------------------
(a) This Agreement shall become effective, upon the later of when (i)
you and the Company shall have received notification of the effectiveness of the
Registration Statement or (ii) the execution of this Agreement. If either the
initial public offering price or the purchase price per Share has not been
agreed upon prior to 5:00 P.M., New York time, on the fifth full business day
after the Registration Statement shall have become effective, this Agreement
shall thereupon terminate without liability to the Company or the Underwriters
except as herein expressly provided. Until this Agreement becomes effective as
aforesaid, it may be terminated by the Company by notifying you or by you
notifying the Company. Notwithstanding the foregoing, the provisions of this
Section 11 and of Sections 1, 5, 7 and 8 hereof shall at all times be in full
force and effect.
(b) You shall have the right to terminate this Agreement at any time
prior to the Closing Date or the obligations of the Underwriters to purchase the
Additional Shares at any time prior to the Additional Closing Date, as the case
may be, if (A) any domestic or international event or act or occurrence has
materially disrupted, or in your reasonable opinion will in the immediate future
materially disrupt, the market for the Company's securities or securities in
general; or (B) if trading on the New York or
20
<PAGE>
American Stock Exchanges or on Nasdaq shall have been suspended, or minimum or
maximum prices for trading shall have been fixed, or maximum ranges for prices
for securities shall have been required, on the New York or American Stock
Exchanges or on Nasdaq by the New York or American Stock Exchanges or Nasdaq or
by order of the Commission or any other governmental authority having
jurisdiction; or (C) if a banking moratorium has been declared by a state or
federal authority or if any new restriction materially adversely affecting the
distribution of the Firm Shares or the Additional Shares, as the case may be,
shall have become effective; or (D) (i) if the United States becomes engaged in
hostilities or there is an escalation of hostilities involving the United States
or there is a declaration of a national emergency or war by the United States or
(ii) if there shall have been such change in political, financial or economic
conditions if the effect of any such event in (i) or (ii) as in your judgment
makes it impracticable or inadvisable to proceed with the offering, sale and
delivery of the Firm Shares or the Additional Shares, as the case may be, on the
terms contemplated by the Prospectus.
(c) Any notice of termination pursuant to this Section 11 shall be by
telephone, telex, or telegraph, confirmed in writing by letter.
(d) If this Agreement shall be terminated pursuant to any of the
provisions hereof (otherwise than pursuant to (i) notification by you as
provided in Section 11(a) hereof or (ii) Section 9(b) or 11(b) hereof), or if
the sale of the Shares provided for herein is not consummated because any
condition to the obligations of the Underwriters set forth herein is not
satisfied or because of any refusal, inability or failure on the part of the
Company to perform any agreement herein or comply with any provision hereof, the
Company will, subject to demand by you, reimburse the Underwriters for all out-
of-pocket expenses (including the fees and expenses of their counsel), incurred
by the Underwriters in connection herewith.
12. Notices. All communications hereunder, except as may be otherwise
-------
specifically provided herein, shall be in writing and , if sent to any
Underwriter, shall be mailed, delivered, or telexed or telegraphed and confirmed
in writing, to such Underwriter c/o Bear, Stearns & Co. Inc., 245 Park Avenue,
New York, N.Y. 10167, Attention: Equity Syndicate; if sent to the Company, shall
be mailed, delivered, or telegraphed and confirmed in writing to the Company,
300 Montgomery Street, Suite 300, San Francisco, California 94104, Attention:
John Harbottle.
13. Parties. This Agreement shall insure solely to the benefit of, and
-------
shall be binding upon, the Underwriters and the Company and the controlling
persons, directors, officers, employees and agents referred to in Section 7 and
8, and their respective successors and assigns, and no other person shall have
or be construed to have any legal or equitable right, remedy or claim under or
in respect of or by virtue of this Agreement or any provision herein contained.
The term "successors and assigns" shall not include a purchaser, in its capacity
as such, of Shares from any of the Underwriters.
14. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of New York, but without regard to
principles of conflicts of law.
15. Counterparts. This Agreement may be signed in two or more
------------
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
21
<PAGE>
16. Headings. The headings of the sections of this Agreement have been
--------
inserted for convenience of reference only and shall not be deemed a part of
this Agreement.
22
<PAGE>
If the foregoing correctly sets forth the understanding between you
and the Company, please so indicate in the space provided below for that
purpose, whereupon this letter shall constitute a binding agreement among us.
Very truly yours,
XOOM.COM, INC.
By:
________________________________________
Laurent Massa
Chief Executive Officer and President
Accepted as of the date first above written
BEAR, STEARNS & CO. INC.
DEUTSCHE BANK SECURITIES INC.
By Bear, Stearns & Co. Inc.
By:
___________________________________
Authorized Signatory
On behalf of themselves and the other
Underwriters named in Schedule I hereto.
23
<PAGE>
SCHEDULE I
Name of Firm Number of Shares
- ------------ ----------------
Bear, Stearns & Co. Inc......................
Deutsche Bank Securities Inc.................
----------------
Total......................................
----------------
24
<PAGE>
EXHIBIT A
November 18, 1998
Bear, Stearns & Co., Inc.
Deutsche Bank Securities Inc.
As Representatives of the Several Underwriters
c/o Bear, Stearns & Co., Inc.
245 Park Avenue
New York, NY 10167
Re: XOOM.com, Inc. (the "Company")
------------------------------
Ladies and Gentlemen:
The undersigned is an owner of record or beneficially of certain shares of
Common Stock of the Company (Common Stock) or securities convertible into or
exchangeable or exercisable for Common Stock. The Company proposes to carry out
a public offering of Common Stock (the Offering) for which you will act as the
representatives (the Representatives) of the underwriters. The undersigned
recognizes that the Offering will be of benefit to the undersigned and will
benefit the Company by, among other things, raising additional capital for its
operations. The undersigned acknowledges that you and the other underwriters
are relying on the representations and agreements of the undersigned contained
in this letter in carrying out the Offering and in entering into underwriting
arrangements with the Company with respect to the Offering.
In consideration of the foregoing, the undersigned hereby agrees that the
undersigned will not, without the prior written consent of Bear, Stearns & Co.,
Inc. (which consent may be withheld in its sole discretion), directly or
indirectly, sell, offer, contract or grant any option to sell (including without
limitation any short sale) pledge, transfer, establish an open "put equivalent
position" within the meaning of Rule 16a-1(h) under the Securities Exchange Act
of 1934, as amended, or otherwise dispose of any shares of Common Stock, options
or warrants to acquire shares of Common Stock, or securities exchangeable or
exercisable for or convertible into shares of Common Stock currently or
hereafter owned either of record or beneficially (as defined in Rule 13d-3 under
Securities Exchange Act of 1934, as amended) by the undersigned, other than
shares purchased by the undersigned in the Offering, or publicly announce the
undersigned's intention to do any of the foregoing, for a period commencing on
November 18, 1998 and continuing to a date 180 days after the first date any of
the Common Stock to be sold in the Offering is released by you for sale to the
public. The undersigned also agrees and consents to the entry of stop transfer
instructions with the Company's transfer agent and registrar against the
transfer of shares of Common Stock or securities convertible into or
exchangeable or exercisable for Common Stock
25
<PAGE>
held by the undersigned except in compliance with the foregoing restrictions. In
the event that the Registration Statement shall not have been declared effective
on or before March 30, 1999, this Lock-Up Agreement shall be of no further force
or effect.
This agreement is irrevocable and will be binding on the undersigned and
the respective successors, heirs, personal representatives, and assigns of the
undersigned.
Dated:
_____________________________
Signature
Printed Name of Holder
26
<PAGE>
EXHIBIT 4.3
XM
COMMON STOCK COMMON STOCK
THIS CERTIFICATE IS TRANSFERABLE
IN BOSTON, MA OR NEW YORK, NY
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
CUSIP 98413F 10 1
SEE REVERSE FOR
CERTAIN DEFINITIONS
THIS CERTIFIES THAT IS THE RECORD HOLDER OF
FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, $0.0001 PAR VALUE, OF
XOOM.com, Inc.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid until countersigned and registered by
the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated:
CHIEF FINANCIAL OFFICER PRESIDENT AND CHIEF EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
BankBoston, N.A.
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
BACK
1
<PAGE>
A statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights as established, from time to time, by the Certificate of
Incorporation of the Corporation and by any certificate of designation, and the
number of shares constituting each class and series and the designations
thereof, may be obtained by the holder hereof upon request and without charge
from the Corporation at its principal office.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT - ......................... Custodian.........................
(Cust) (Minor)
under Uniform Gifts to Minors Act .........................................
(State)
UNIF TRF MIN ACT - ................. Custodian (until age ................)
(Cust)
............................ under Uniform Transfers
(Minor)
to Minors Act ..............................................
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED,
hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
2
<PAGE>
Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
Signature(s) Guaranteed
By
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN
AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE
17Ad-15.
NOTICE:
THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON
THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
3
<PAGE>
EXHIBIT 5.1
December 3, 1998
XOOM.com, Inc.
300 Montgomery Street
3rd Floor
San Francisco, CA 94104
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form S-1 of
XOOM.com, Inc., a Delaware corporation (the "Company"), filed with the
Securities and Exchange Commission (the "Registration Statement") on August 28,
1998, relating to the registration under the Securities Act of 1933, as amended,
of up to 3,450,000 shares of the Company's common stock, $.0001 par value (the
"Stock"), all of which are authorized but unissued stock to be offered and sold
by the Company (including up to 450,000 shares subject to the underwriters'
over-allotment option). The Stock is to be sold to the underwriters named in
the Registration Statement for resale to the public.
As counsel to the Company, we have examined the proceedings taken by the
Company in connection with the issuance and sale by the Company of up to
3,450,000 shares of Stock.
We are of the opinion that the shares of Stock to be offered and sold by
the Company have been duly authorized and, when issued and sold by the Company
in the manner described in the Registration Statement and in accordance with the
resolutions adopted by the Board of Directors of the Company, will be legally
issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to all references to us in the Registration
Statement, the prospectus constituting a part thereof and any amendments
thereto.
Very truly yours,
/s/ Morrison & Foerster LLP
<PAGE>
EXHIBIT 10.19
July 28, 1998
Mr. Jeff Ballowe
85 Estrada Calabasa
Santa Fe, NM 87501
FAX: 505-984-2349
Dear Jeff:
I am pleased to offer you a position as a Director on XOOM, Inc.'s Board of
Directors. The company will carry Director's and Officer's insurance upon IPO.
Your compensation would be as follows:
1. Stock options in XOOM common stock for 35,000 shares at a strike price of
$4.50. These share vest monthly over 2 years of service and would
immediately vest upon sale of the company. This represents about 1/4 of a
percent of the 14 million shares currently outstanding.
2. Ongoing consulting fee of $10,000 per month in stock options with a strike
price of $4.50 per share vesting monthly over two years - this portion of
the option payment would discontinue upon IPO and all options earned for
consulting or fund raising (see #3 below) would immediately vest. The
options will be "grossed up" to cover the $4.50 strike price and achieve the
$10,000 per month rate. After the IPO, you will receive $10,000 per month,
payable in stock and "paid out" using the closing price on the last trading
day of the month or the last day of the month (if not public) for 18 months.
We agree to cooperate to minimize your personal tax and XOOM's cheap stock
issues, within the constraints of the above.
3. A commission of 5% of money raised for XOOM, payable in stock, if after the
IPO and "grossed up" options as above at the then current strike price if
payable before the IPO.
Please indicate your acceptance of the above terms by signing below.
Sincerely yours, ACCEPTED
/s/Chris Kitze
- -------------------------------
Chris Kitze /s/ Jeff Ballowe
Chairman ---------------------------------
Jeff Ballowe
<PAGE>
[XOOM.COM LETTERHEAD]
December 2, 1998
Mr. Jeff Ballowe
85 Estrada Calabasa
Santa Fe, NM 87501
Re: Director's Agreement
Dear Jeff:
Please allow this letter to confirm our earlier discussions about revisions
to paragraph 2 of your letter agreement (the "Agreement") with XOOM.com, Inc.
(the "Company") dated July 28, 1998. As we discussed, paragraph 2 shall be
amended to read in its entirety as follows:
"2. For a period of 18 months after July 28, 1998, you will receive a fee
of $10,000 per month for your services as a director, which prior to the
completion of the Company's initial public offering ("IPO") will be payable in
stock options with a strike price of $4.50 per share vesting monthly over two
years. Upon the IPO, this portion of the option payment would discontinue and
all options earned for consulting or fund raising (see paragraph 3 below) would
immediately vest. The options will be "grossed up" to cover the $4.50 strike
price and achieve the $10,000 per month rate. After the IPO and for the
remainder of the 18 month period, your director's fee will be payable in Common
Stock, with payments based upon the closing price of the Common Stock on the
last trading day of the month or, if the Common Stock is not publicly traded,
the fair market value of the Common Stock on the last day of the month, as
determined by the Board of Directors acting in good faith."
Please indicate your acceptance of this revision by signing below.
Sincerely yours,
/s/ Chris Kitze
Chris Kitze
ACCEPTED:
/s/ Jeff Ballowe
- ---------------------------
Jeff Ballowe
<PAGE>
EXHIBIT 10.20
July 28, 1998
Mr. Phillip Schlein
2360 Steiner
San Francisco, CA 94115
FAX: 775-6232
Dear Phil,
I am pleased to offer you a position as a Director on XOOM, Inc.'s Board of
Directors. We will have Director's and Officer's insurance in place at the time
of IPO. Your compensation would be as follows:
1. Stock options in XOOM common stock for 35,000 shares at a strike price of
$4.50. These share vest monthly over 2 years of service and would
immediately vest upon sale of the company. This represents about 1/4 of a
percent of the 14 million shares currently outstanding.
2. Ongoing consulting fee of $10,000 per month, payable in stock and "paid out"
using the closing price on the last trading day of the month or the last day
of the month (if not public) for 18 months, at your option.
Please indicate your acceptance of the above terms by signing below.
Sincerely yours, ACCEPTED
/s/ Chris Kitze
- -------------------------------
Chris Kitze /s/ Philip Schlein
Chairman ---------------------------------
Phillip Schlein
<PAGE>
[XOOM.COM LETTERHEAD]
December 2, 1998
Mr. Phillip Schlein
2360 Steiner
San Francisco, CA 94115
Re: Director's Agreement
Dear Phil:
Please allow this letter to confirm our earlier discussions about revisions
to paragraph 2 of your letter agreement (the "Agreement") with XOOM.com, Inc.
(the "Company") dated July 28, 1998. As we discussed, paragraph 2 shall be
amended to read in its entirety as follows:
"2. For a period of 18 months after July 28, 1998, you will receive a fee
of $10,000 per month for your services as a director, payable in Common Stock or
in cash at your option, with payments in Common Stock based upon the closing
price of the Common Stock on the last trading day of the month or, if the Common
Stock is not publicly traded, the fair market value of the Common Stock on the
last day of the month."
Please indicate your acceptance of this revision by signing below.
Sincerely yours,
/s/ Chris Kitze
Chris Kitze
ACCEPTED:
/s/ Philip Schlein
- ---------------------------
Phillip Schlein
<PAGE>
EXHIBIT 10.21
July 28, 1998
Mr. Robert C. Harris
One Sansome
Street, 41st Floor
San Francisco, CA 94104
FAX: 772-3277
Dear Bob:
I am pleased to offer you a position as a Director on XOOM, Inc.'s Board of
Directors. We will have Director's and Officer's insurance in place at the time
of IPO. Your compensation would be as follows:
1. Stock options in XOOM common stock for 35,000 shares at a strike price of
$4.50. These share vest monthly over 2 years of service and would
immediately vest upon sale of the company. This represents about 1/4 of a
percent of the 14 million shares currently outstanding.
2. As a director, you are offered a consulting fee of $10,000 per month,
payable in stock and "paid out" using the closing price on the last trading
day of the month or the last day of the month (if not public) for 18 months,
at your option.
Please indicate your acceptance of the above terms by signing below.
Sincerely yours, ACCEPTED
/s/ Chris Kitze
- ---------------------------------
Chris Kitze /s/ Robert Harris
Chairman --------------------------------
Robert C. Harris, Jr.
<PAGE>
[XOOM.COM LETTERHEAD]
December 2, 1998
Mr. Robert C. Harris
One Sansome Street, 41st Floor
San Francisco, CA 94104
Re: Director's Agreement
Dear Bob:
Please allow this letter to confirm our earlier discussions about revisions
to paragraph 2 of your letter agreement (the "Agreement") with XOOM.com, Inc.
(the "Company") dated July 28, 1998. As we discussed, paragraph 2 shall be
amended to read in its entirety as follows:
"2. For a period of 18 months after July 28, 1998, you will receive a fee
of $10,000 per month for your services as a director, payable in Common Stock or
in cash at your option, with payments in Common Stock based upon the closing
price of the Common Stock on the last trading day of the month or, if the Common
Stock is not publicly traded, the fair market value of the Common Stock on the
last day of the month."
Please indicate your acceptance of this revision by signing below.
Sincerely yours,
/s/ Chris Kitze
Chris Kitze
ACCEPTED:
/s/ Robert C. Harris, Jr.
- -------------------------
Robert C. Harris, Jr.
<PAGE>
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Consolidated Financial Data" and "Experts" and to the use of our reports
pertaining to Xoom.com, Inc. dated October 28, 1998, except for paragraph 3 of
Note 4 and Note 11, as to which the date is November 16, 1998, pertaining to
Paralogic Corporation dated July 20, 1998, pertaining to Global Bridges
Technologies, Inc. dated July 10, 1998 and pertaining to Pagecount, Inc. dated
July 7, 1998 (except for Note 6 as to which the date is July 24, 1998)
included in Amendment No. 3 to the Registration Statement (Form S-1 No. 333-
62395) and related Prospectus of Xoom.com, Inc. for the registration of
3,000,000 shares of its Common Stock.
Ernst & Young LLP
/s/ ERNST & YOUNG LLP
Palo Alto, California
December 2, 1998
