<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 16, 1998
REGISTRATION NO. 333-62395
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
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>
<S> <C> <C>
DELAWARE 7310 88-0361536
(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>
<S> <C>
BRUCE ALAN MANN, ESQ. NORA L. GIBSON, ESQ.
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.
================================================================================
<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 OCTOBER , 1998
PRELIMINARY PROSPECTUS
SHARES
[XOOM.COM LOGO]
COMMON STOCK
All of the 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
$ and $ 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 $1,700,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
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.
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 reflects the
assumed exercise of all outstanding warrants for shares of Common Stock prior
to the closing of the Offering and assumes no exercise of the Underwriters'
over-allotment option.
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, according to Media Metrix, and the fourteenth
most trafficked site in August 1998, according to Relevant Knowledge.
Xoom.com's reach increased to over 11% in August 1998 from less than 2% in
January 1998, according to Media Metrix. Xoom.com had approximately 3.9 million
members as of October 12, 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 six months of
1998, 72% of the Company's net revenue was derived from electronic commerce and
approximately 36% 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" 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.................................. shares
Common Stock to be outstanding after the Offering (1). shares
Use of proceeds....................................... For repayment of certain
indebtedness, and for
general corporate
purposes, including
working capital, capital
expenditures and
potential acquisitions.
See "Use of Proceeds."
Proposed Nasdaq National Market symbol................ XMCM
</TABLE>
- --------
(1) Based on the number of shares outstanding as of June 30, 1998. Excludes (i)
2,457,542 shares of Common Stock issuable upon the exercise of options then
outstanding with a weighted average exercise price of $0.76 per share; (ii)
2,592,180 shares of Common Stock reserved for issuance under the Company's
1998 Stock Incentive Plan (the "1998 Plan") as of such date; and (iii)
300,000 shares of Common Stock reserved for issuance under the Company's
1998 Employee Stock Purchase Plan (the "Stock Purchase Plan"). Assumes (i)
the exercise of all outstanding warrants to purchase 459,593 shares of
Common Stock prior to the closing of the Offering at an exercise price of
$2.22 per share; (ii) 77,868 shares of Common Stock issued in July pursuant
to modifications of earn-outs in connection with certain of the Company's
acquisitions; and (iii) shares of Common Stock with an aggregate fair
value of $600,000 issuable pursuant to modifications of earn-outs in
connection with certain of the Company's acquisitions. See
"Capitalization," "Management--Benefit Plans" and Notes 4 and 8 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>
PRO FORMA
PERIOD FROM
APRIL 16 SIX MONTHS ENDED SIX MONTHS
(INCEPTION) TO YEAR ENDED JUNE 30, ENDED
DECEMBER 31, DECEMBER 31, ------------------ JUNE 30,
1996 1997 1997 1998 1998(2)
-------------- ------------ -------- -------- ----------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Net revenue:
Electronic commerce... $ -- $ 327 $ 21 $ 1,834 $ 2,043
Advertising........... -- 60 7 355 406
License fees and
other................ -- 454 172 376 404
------ ------- -------- -------- -------
Total net revenue...... -- 841 200 2,565 2,853
Gross profit........... -- 522 41 1,639 1,881
Loss from operations... (440) (3,132) (1,361) (3,721) (4,027)
Net loss............... $ (440) $(3,132) $ (1,361) $ (3,721) $(4,051)
====== ======= ======== ======== =======
Net loss per share--
basic and diluted(1).. $(0.59) $ (0.43) $ (0.20) $ (0.39) $ (0.39)
====== ======= ======== ======== =======
Number of shares used
in per share
calculation--basic and
diluted(1)............ 745 7,311 6,777 9,604 10,305
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998
----------------------------------
ACTUAL PRO FORMA(3) AS ADJUSTED(4)
------ ------------ --------------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash..................................... $4,091 $ 3,941 $
Working capital.......................... 1,826 374
Total assets............................. 9,660 10,823
Acquisition notes payable, less current
portion................................. 1,119 1,119
Total stockholders' equity............... 5,428 5,270
</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 six
months ended June 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 six months ended June 30, 1998. The pro forma condensed
consolidated statement of operations data does not include amortization of
$191,000 related to the purchase of assets of Revolutionary Software, Inc.
and ArcaMax which would have been incurred if these assets were purchased
on January 1, 1998.
(3) Pro Forma Condensed Consolidated Balance Sheet Data reflects certain
adjustments to reflect the acquisition of Pagecount, Inc. as if it occurred
on June 30, 1998. See Selected Unaudited Condensed Consolidated Balance
Sheet at June 30, 1998.
(4) Adjusted to reflect (i) the assumed exercise of all outstanding warrants
for 459,593 shares of Common Stock prior to the closing of the Offering at
an exercise price of $2.22 per share; (ii) the repayment of approximately
$1.4 million of notes payable related to acquisitions; (iii) the sale of
the shares of Common Stock offered hereby after deducting the
underwriting discount and estimated offering expenses; and (iv) the
issuance of 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 June 30, 1998, the Company had an accumulated deficit of $7.3 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 dependent, in part, on
7
<PAGE>
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. The Company may be unable to adjust
spending in a timely manner to compensate for
8
<PAGE>
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 six
months ended June 30, 1998, the Company's five largest advertising customers
accounted for approximately 44% of advertising revenue (approximately 6% 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.
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
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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 hour-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.
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
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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. 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
six months ended June 30, 1998, respectively, electronic commerce revenue
represented approximately 39% and 72% 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 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
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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 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 June 30, 1998, the Company's headcount had grown to 39 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 on August 5, 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.
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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 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
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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.
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
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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. 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. 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 six months ended June 30, 1998, advertising revenue represented 7% and
14%, respectively, of the Company's total net revenue. During the six months
ended June 30, 1998, the Company's five largest advertising customers
accounted for approximately 44% of advertising revenue (approximately 6% of
total net revenue). The Company's strategy is to continue to 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
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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.
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
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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.
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 six months ended June 30, 1998, approximately 36% 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
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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 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.
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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 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. 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.
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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, 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 June 30, 1998, the Company received approximately 1.0% of its
total net revenue under the Sprint license and, since March 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 alleged infringed Imageline's copyright were
included by Xoom.com in versions of Xoom'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. 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. 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 it
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.
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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 acquisitions have been accounted for using the purchase
method of accounting. 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. 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 July 31, 1998, the Company
had incurred charges relating to purchased in-process research and development
of approximately $1.2 million for 1998 and has recorded an aggregate of $5.9
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. Specifically, in
connection with the acquisition of Global Bridges, the Company has issued
25,956 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 51,912 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, a payment of approximately $180,000 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 year period. As of June 30, 1998, net intangibles were
approximately 38% 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
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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.
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 third
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
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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 (the "CDA") 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
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.
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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.
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 % of the outstanding Common
Stock ( % 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.
24
<PAGE>
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING
The Company currently anticipates that the net proceeds of the Offering,
together with a line of credit currently being negotiated, and available funds
will be sufficient to meet its anticipated needs for working capital and
capital expenditures 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.
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 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."
25
<PAGE>
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 shares of Common Stock to be outstanding upon the closing of the
Offering (assuming no exercise of the Underwriters' over-allotment option),
the 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 13,465,363 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 June 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 anytime 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, 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 June 30, 1998, there were outstanding options to purchase up
to 2,457,542 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 an additional
2,892,180 shares of Common Stock reserved for issuance under the Company's
1998 Plan and 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 $180,000 due under the license agreement with ArcaMax, which
payment is due and payable within ten days of the 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."
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 $ per
share (based upon an assumed initial offering price of $ 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."
26
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of
Common Stock offered hereby are estimated to be approximately $
(approximately $ if the Underwriters' over-allotment option is
exercised in full) at an assumed initial public offering price of $ 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 $180,000 due
under the license agreement with ArcaMax, which payment is due and payable
within ten days of the 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.
27
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1998 (i) on an actual basis; (ii) pro forma to reflect certain adjustments
related to the acquisition of Pagecount as if it occurred on June 30, 1998;
and (iii) on an as adjusted basis to give effect to the assumed exercise of
all outstanding warrants for shares of Common Stock prior to the closing of
the Offering, the sale of the shares of Common Stock offered hereby at
an assumed initial public offering price of $ per share, the issuance of
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 and the repayment of $1.4 million of certain indebtedness
associated with certain acquisitions, after deducting the underwriting
discount and estimated offering expenses and the application of the net
proceeds therefrom.
<TABLE>
<CAPTION>
JUNE 30, 1998
------------------------------
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE
DATA)
<S> <C> <C> <C>
Current portion of acquisition notes payable.... $ 717 $1,917 $
======= ====== ======
Acquisition notes payable, less current portion. $ 1,119 $1,119 $
------- ------ ------
Stockholders' equity:
Convertible preferred stock, $0.0001 par value;
1,000,000 shares authorized; no shares issued
and outstanding, actual pro forma and
as adjusted................................... -- -- --
Common Stock, $0.0001 par value; 20,000,000
shares authorized, actual and pro forma;
40,000,000 shares authorized, as adjusted;
13,005,770 shares issued and outstanding,
actual and pro forma; shares issued
and outstanding, as adjusted(1)............... 13,189 13,189
Deferred compensation.......................... (469) (469)
Accumulated deficit............................ (7,292) (7,450)
------- ------ ------
Total stockholders' equity.................... 5,428 5,270
------- ------ ------
Total capitalization......................... $ 6,547 $6,389
======= ====== ======
</TABLE>
- --------
(1) Based on the number of shares outstanding as of June 30, 1998. Excludes
(i) 2,457,542 shares of Common Stock issuable upon the exercise of options
then outstanding with a weighted average exercise price of $0.76 per
share; (ii) 2,592,180 shares of Common Stock reserved for issuance under
the 1998 Plan as of such date; and (iii) 300,000 shares of Common Stock
reserved for issuance under the Stock Purchase Plan. Shares issued and
outstanding, as adjusted, assumes (i) the exercise of all outstanding
warrants to purchase 459,593 shares of Common Stock prior to the closing
of the Offering at an exercise price of $2.22 per share; (ii) 77,868
shares of Common Stock issued in July pursuant to modifications of earn-
outs in connection with certain of the Company's acquisitions; and (iii)
shares of Common Stock with an aggregate fair value of $600,000
issuable pursuant to modifications of earn-outs in connection with certain
of the Company's acquisitions. See "Management--Benefit Plans" and Notes 4
and 8 of Notes to the Company's Consolidated Financial Statements.
28
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of June 30, 1998 was
approximately $160,000 or $0.01 per share of Common Stock. Pro forma net
tangible book value per share represents the amount of total pro forma
tangible assets less total pro forma liabilities, divided by the pro forma
shares of Common Stock outstanding as of June 30, 1998. After giving effect to
the assumed exercise of all outstanding warrants for shares prior to the
closing of the Offering, the issuance and sale of the shares of
Common Stock offered hereby (after deducting the underwriting discount and
estimated offering expenses), the repayment of $1.4 million of certain
indebtedness associated with certain acquisitions, the issuance of 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 pro forma net tangible book value as of June 30, 1998 would have
been $ million, or $ per share. This represents an immediate increase
in pro forma net tangible book value of $ per share to existing
stockholders and an immediate dilution of $ per share to new investors. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................. $
Pro forma net tangible book value per share as of June 30,
1998......................................................... $0.01
Increase in pro forma net tangible book value per share
attributable to new investors................................
-----
Pro forma net tangible book value per share after offering......
-----
Dilution per share to new investors............................. $
=====
</TABLE>
The following table sets forth, on a pro forma basis as of June 30, 1998,
the difference between existing stockholders and the purchasers of shares in
the Offering (at an assumed initial public offering price of $ 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.. 13,465,363 % $14,348,851 % $ 1.07
New investors.......... % % $
---------- ----- ----------- -----
Total................ 100.0% $ 100.0%
========== ===========
</TABLE>
The foregoing discussion and tables assume no exercise of any stock options
outstanding as of June 30, 1998. As of June 30, 1998, there were (i) options
outstanding to purchase a total of 2,457,542 shares of Common Stock with a
weighted average exercise price of $0.76 per share; (ii) 2,592,180 shares of
Common Stock reserved for issuance under the 1998 Plan as of such date; and
(iii) 300,000 shares of Common Stock reserved for issuance under the Stock
Purchase Plan. Assuming the exercise of these outstanding options, the pro
forma net tangible book value per share after the Offering would be $ , and
the dilution per share to new investors would be $ . The foregoing assumes
the (i) exercise of all outstanding warrants to purchase 459,593 shares of
Common Stock prior to the closing of the Offering at an exercise price of
$2.22 per share; (ii) 77,868 shares of Common Stock issued in July pursuant to
modifications of earn-outs in connection with certain of the Company's
acquisitions; and (iii) shares of Common Stock with an aggregate fair
value of $600,000 issuable pursuant to modifications of earn-outs in
connection with certain of the Company's acquisitions. See "Risk Factors--
Dilution," "Capitalization," "Management--Benefit Plans" and Notes 4 and 8 of
Notes to the Company's Consolidated Financial Statements.
29
<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 consolidated statements of operations data
presented below for the period from April 16, 1996 (the Company's inception)
through December 31, 1996 and for the year ended December 31, 1997 and the
selected consolidated balance sheet data at December 31, 1997 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 consolidated statement of operations data for the six
months ended June 30, 1997 and 1998, and the selected consolidated balance
sheet data as of June 30, 1998, are derived from unaudited consolidated
financial statements of the Company included elsewhere in this Prospectus. The
selected consolidated pro forma statement of operations data for the six
months ended June 30, 1998, are derived from selected unaudited pro forma
condensed consolidated financial statements 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 these periods. The consolidated financial data for the six
months ended June 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 PRO FORMA
(INCEPTION) SIX MONTHS ENDED SIX MONTHS
THROUGH YEAR ENDED JUNE 30, ENDED
DECEMBER 31, DECEMBER 31, ------------------ JUNE 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 $ 21 $ 1,834 $ 2,043
Advertising............ -- 60 7 355 406
License fees and other. -- 454 172 376 404
------ ------- -------- -------- -------
Total net revenue..... -- 841 200 2,565 2,853
Cost of net revenue:
Cost of electronic
commerce.............. -- 171 54 899 899
Cost of license fees
and other............. -- 148 105 27 73
------ ------- -------- -------- -------
Total cost of net
revenue.............. -- 319 159 926 972
------ ------- -------- -------- -------
Gross profit........... -- 522 41 1,639 1,881
Costs and expenses:
Operating and
development........... 266 1,150 746 1,349 1,371
Sales and marketing.... 24 292 120 718 722
General and
administrative........ 150 721 282 1,099 1,299
Purchased in-process
research and
development(1)........ -- -- -- 1,070 580
Amortization of
deferred compensation. -- 248 11 806 806
Amortization of
intangible assets..... -- -- -- 318 1,130
Non-recurring charges.. -- 1,243 243 -- --
------ ------- -------- -------- -------
Total costs and
expenses............. 440 3,654 1,402 5,360 5,908
------ ------- -------- -------- -------
Loss from operations... (440) (3,132) (1,361) (3,721) (4,027)
Other expense ......... -- -- -- -- (24)
------ ------- -------- -------- -------
Net loss............... $ (440) $(3,132) $ (1,361) $ (3,721) $(4,051)
====== ======= ======== ======== =======
Basic and diluted net
loss per share(2)..... $(0.59) $ (0.43) $ (0.20) $ (0.39) $ (0.39)
====== ======= ======== ======== =======
Number of shares used
in per share
calculation--basic and
diluted(2)............ 745 7,311 6,777 9,604 10,305
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- JUNE 30,
1996 1997 1998
------ ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash.................................................. $ 1 $ 6 $4,091
Working capital (deficit)............................. 156 (1,400) 1,826
Total assets.......................................... 705 782 9,660
Acquisition notes payable, less current portion....... -- -- 1,119
Total stockholders' equity (deficit).................. 560 (873) 5,428
</TABLE>
(footnotes appear on the following page)
30
<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 8
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.
31
<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 the
development of the necessary computer infrastructure, recruiting personnel,
raising capital and initial planning and development of 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 and $1.7
million for the year ended December 31, 1997 and the quarters ended March 31,
1998 and June 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 June 30, 1998, Xoom.com has generated total net
revenue of approximately $3.4 million. Over the past twelve months, quarterly
net revenue has increased from approximately $171,000 to $1.7 million. Since
January 1998, the number of members has grown from 100,000 to approximately
3.9 million as of October 12, 1998.
As of June 30, 1998, the Company had an accumulated deficit of $7.3 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 experience.
32
<PAGE>
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 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 1,023,613 shares of Common Stock
with a fair value of $1.54 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 275,140 shares of Common Stock with a
fair value of $2.22 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 192,077 shares of
Common Stock with a fair value of $2.22 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
200,000 shares of Common Stock with a fair value of $2.22 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
25,956 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 51,912 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 six months of
1998, the Company expensed approximately $1.1 million for purchased in-process
research and development and approximately $300,000 for the amortization of
goodwill. Because most Internet business acquisitions involve the purchase of
significant amounts of intangible assets, acquisitions of such businesses also
result in goodwill 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
33
<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 36% of total net revenue
for the year ended December 31, 1997 and the six months ended June 30, 1998,
respectively. This consisted of $252,000 and $918,000 in net revenues,
respectively, during such periods. As of July 31, 1998, the Company had
approximately 1.2 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 $462,000,
$696,000 and $365,000 during the period from April 16, 1996 through December
31, 1996 ( the "Inception Period"), the year ended December 31, 1997 and for
the six months ended June 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. Amortization of deferred stock compensation
expense of $248,000 and $806,000 was recorded in the year ended December 31,
1997, and the six months ended June 30, 1998, respectively. The Company
expects to amortize deferred stock compensation expenses of approximately $1.0
million, $160,000 and $48,000 in the years ended December 31, 1998, 1999 and
2000, respectively, and additional deferred compensation expenses in
subsequent years, relating to such stock option grants through June 30, 1998.
In addition, the Company expects to record additional deferred compensation
charges of approximately $1.0 million in the three months ended September 30,
1998. The Company expects this additional deferred compensation charge to
result in additional amortization of approximately $350,000, $400,000 and
$160,000 in the years ended December 31, 1998, 1999 and 2000, respectively,
and additional deferred compensation amortization in subsequent years,
relating to options granted subsequent to June 30, 1998. 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--Reliance On Certain
Vendors" and "--Risk Of Reliance On Internally Developed Systems."
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
34
<PAGE>
1997, and period-to-period comparisons of the six months ended June 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>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, ----------------------
1997 1997 1998
------------ ----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Net revenue:
Electronic commerce...................... 38.9 % 10.5 % 71.5 %
Advertising.............................. 7.1 3.5 13.8
License fees and other................... 54.0 86.0 14.7
------ ------ ------
Total net revenue......................... 100.0 100.0 100.0
Cost of net revenue(1):
Cost of electronic commerce.............. 20.3 27.0 35.0
Cost of license fees and other........... 17.6 52.5 1.1
------ ------ ------
Cost of net revenue....................... 37.9 79.5 36.1
------ ------ ------
Gross profit.............................. 62.1 20.5 63.9
Costs and expenses:
Operating and development................ 136.8 373.0 52.7
Sales and marketing...................... 34.7 60.0 28.0
General and administrative............... 85.7 141.0 42.8
Purchased in-process research and
development............................. -- -- 41.7
Amortization of deferred compensation.... 29.5 5.5 31.4
Amortization of intangible assets........ -- -- 12.4
Non-recurring charges.................... 147.8 121.5 --
------ ------ ------
Total costs and expenses.................. 434.5 701.0 209.0
------ ------ ------
Net loss.................................. (372.4)% (680.5)% (145.1)%
====== ====== ======
</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 $200,000 in the six months ended
June 30, 1997 to $2.6 million in the six months ended June 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 six months ended June 30, 1998.
Electronic Commerce. Electronic commerce revenue increased from $21,000 in
the six months ended June 30, 1997 to $1.8 million in the six months ended
June 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
35
<PAGE>
offered. The percentage of the Company's total net revenue attributable to
electronic commerce revenue increased from 10.5% in the six months ended June
30, 1997 to 71.5% in the six months June 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 $7,000 in the six months
ended June 30, 1997 to $355,000 in the six months ended June 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 3.5% in the six months ended June 30, 1997 to 13.8% in the six months
June 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
$172,000 in the six months ended June 30, 1997 to $376,000 in the six months
ended June 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 86.0% in the six months ended June 30, 1997 to
14.7% in the six months ended June 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 20.5% in the six months ended June 30, 1997 to
63.9% in the six months ended June 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, $54,000 and $899,000 for the year ended December 31,
1997, and the six months ended June 30, 1997 and 1998, respectively. As a
percentage of electronic commerce revenue, cost of electronic commerce was
52.3%, 257.1% and 49.0% for the year ended December 31, 1997, and the six
months ended June 30, 1997 and 1998, respectively. Cost of electronic commerce
as a percentage of net revenue was higher in the first six months of 1997 when
compared to the full year ended December 31, 1997 and the six months ended
June 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 six
months ended June 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,
$105,000 and $27,000 for the year ended December 31, 1997, and the six months
ended June 30, 1997 and 1998, respectively. As a percentage of license fees
and other, cost of license fees and other were 32.6%, 61.0% and 7.2% for the
year ended December 31, 1997, and the six months ended June 30, 1997 and 1998,
respectively. Cost of license fees and other for the six months ended June 30,
1997 included $81,000 in amortization of prepaid royalties related to a
product which was subsequently discontinued in 1997.
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 six months ended June
30, 1998.
36
<PAGE>
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 functionality of the Company's Web site. Operating and
development expenses increased from $746,000 in the six months ended June 30,
1997 to $1.3 million in the six months ended June 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 June 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 373.0% in the six months ended June 30, 1997 to 52.7% in the six months
ended June 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 $120,000 in the six months ended June
30, 1997 to $718,000 in the six months ended June 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 60.0% in the six months
ended June 30, 1997 to 28.0% in the six months ended June 30, 1998, and
represented 34.7% for the year ended December 31, 1997. 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. Sales and marketing expenses as a
percentage of net revenues have decreased because of the growth in net
revenue.
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. General and
administrative expenses increased from $282,000 in the six months ended June
30, 1997 to $1.1 million in the six months ended June 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, and facility expenses to
support the growth of the Company's operations. General and administrative
expenses decreased as a percentage of total net revenue from 141.0% in the six
months ended June 30, 1997 to 42.8% in the six months ended June 30, 1998, and
represented 85.7% for the year ended December 31, 1997. 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 six months ended June
30, 1998, the Company recognized the cost of purchased in-process research and
development of $490,000 in connection with the
37
<PAGE>
acquisition of Paralogic, and $580,000 in connection with the purchase of
certain assets of Revolutionary Software. The Company did not recognize such
charges for the Inception Period or the year ended December 31, 1997. See Note
8 of Notes to Consolidated Financial Statements.
In connection with the 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.
As of the date of the technology's valuation, the Company 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.
38
<PAGE>
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 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.
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 and $727,000 for the year ended December 31, 1997, and
the quarters ended March 31, 1998 and June 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.
Amortization of Intangible Assets. Amortization of intangible assets totaled
$318,000 for the quarter ended June 30, 1998. This amount represents
amortization of intangible assets and goodwill resulting from the Company's
acquisition of Paralogic, amortized over 24 months.
39
<PAGE>
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 December 31,
1997, the Company had net operating loss carryforwards for federal income tax
purposes of approximately $1.4 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 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.
40
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following tables present certain consolidated statements of operations
data for the Company's six most recent quarters ended June 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,
1997 1997 1997 1997 1998 1998
-------- -------- --------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net revenue:
Electronic commerce.... $ 9 $ 12 $ 38 $ 268 $ 677 $ 1,157
Advertising............ -- 7 14 39 83 272
License fees and other. 20 152 169 113 89 287
----- ----- ------- ----- ------- -------
Total net revenue..... 29 171 221 420 849 1,716
----- ----- ------- ----- ------- -------
Cost of net revenue(1):
Cost of electronic
commerce.............. 4 50 18 99 278 621
Cost of license fees
and other............. 82 23 31 12 8 19
----- ----- ------- ----- ------- -------
Total cost of net
revenue.............. 86 73 49 111 286 640
----- ----- ------- ----- ------- -------
Gross profit............ (57) 98 172 309 563 1,076
Costs and expenses:
Operating and
development........... 397 349 133 271 576 773
Sales and marketing.... 37 84 51 121 262 456
General and
administrative........ 152 130 195 244 316 783
Purchased in-process
research and
development........... -- -- -- -- 490 580
Amortization of
deferred compensation. 5 6 100 137 79 727
Amortization of
intangible assets..... -- -- -- -- -- 318
Non-recurring charges.. -- 243 1,000 -- -- --
----- ----- ------- ----- ------- -------
Total costs and
expenses............. 591 812 1,479 773 1,723 3,637
----- ----- ------- ----- ------- -------
Net loss................ $(648) $(714) $(1,307) $(464) $(1,160) $(2,561)
===== ===== ======= ===== ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENT OF NET REVENUE THREE MONTHS ENDED
------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1997 1997 1997 1997 1998 1998
-------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net revenue:
Electronic commerce.... 31.0 % 7.0 % 17.2 % 63.8 % 79.7 % 67.4 %
Advertising............ -- 4.1 6.3 9.3 9.8 15.9
License fees and other. 69.0 88.9 76.5 26.9 10.5 16.7
-------- ------ ------ ------ ------ ------
Total net revenue..... 100.0 100.0 100.0 100.0 100.0 100.0
-------- ------ ------ ------ ------ ------
Cost of net revenue(1):
Cost of electronic
commerce.............. 13.8 29.2 8.2 23.5 32.8 36.2
Cost of license fees
and other............. 282.8 13.5 14.0 2.9 0.9 1.1
-------- ------ ------ ------ ------ ------
Total cost of net
revenue.............. 296.6 42.7 22.2 26.4 33.7 37.3
-------- ------ ------ ------ ------ ------
Gross profit............ (196.6) 57.3 77.8 73.6 66.3 62.7
Costs and expenses:
Operating and
development........... 1,369.0 204.1 60.2 64.6 67.8 45.0
Sales and marketing.... 127.6 49.1 23.1 28.8 30.9 26.6
General and
administrative........ 524.1 76.0 88.2 58.1 37.2 45.6
Purchased in-process
research and
development........... -- -- -- -- 57.7 33.8
Amortization of
deferred compensation. 17.2 3.5 45.2 32.6 9.3 42.4
Amortization of
intangible assets..... -- -- -- -- -- 18.5
Non-recurring charges.. -- 142.1 452.5 -- -- --
-------- ------ ------ ------ ------ ------
Total costs and
expenses............. 2,037.9 474.8 669.2 184.1 202.9 211.9
-------- ------ ------ ------ ------ ------
Net loss................ (2,234.5)% (417.5)% (591.4)% (110.5)% (136.6)% (149.2)%
======== ====== ====== ====== ====== ======
</TABLE>
- --------
(1) There are no material costs of advertising revenue.
41
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The Company's operating expenses have increased significantly in absolute
dollar amounts in each quarter during 1996 and 1997 and in the first two
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 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 June 30, 1998, the
Company had approximately $4.1 million in cash.
Net cash used in operating activities for the Inception Period, the year
ended December 31, 1997 and the six months ended June 30, 1997 and 1998 was
$635,000, $1.4 million, $971,000 and $939,000, respectively. Cash used in
operating activities in each of these periods was primarily the result of net
losses.
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Net cash used in investing activities for the Inception Period, the year
ended December 31, 1997 and the six months ended June 30, 1997 and 1998 was
$64,000, $393,000, $25,000 and $493,000, respectively. Cash used in investing
activities in each period was primarily related to purchases of fixed assets,
except for the six months ended June 30, 1998, in which cash used in investing
activities also included $76,000 of net cash for business acquisitions.
Additionally, 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 may be used.
Net cash provided by financing activities of $700,000, $1.8 million, $1.0
million, and $5.5 million for the Inception Period, the year ended December
31, 1997 and the six months ended June 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 June 30, 1998, the Company's principal commitments consisted of
obligations outstanding under operating leases. 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 June 30, 1998, the Company had a total of $1.8 million in notes
payable relating to its acquisitions, $717,000 of which is due within one
year. This includes a non interest bearing note payable in the amount of $1.4
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 $62,500 and
$262,500 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
$180,000 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
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 immediately due and payable. See Note 8 of Notes to Consolidated
Financial Statements.
In July 1998, the Company acquired Pagecount for approximately $1.5 million
consisting of cash, a promissory note and related acquisition costs. Purchase
consideration of $200,000 was paid at closing and the balance is due 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, unless the Company completes an initial public
offering or a sale of substantially all of its assets, then the entire unpaid
balance at that time shall become immediately due and payable.
The Company intends to use a portion of the net proceeds to repay the 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 $180,000 due
under the license agreement with ArcaMax, which payment is due and payable
within ten days of the completion of the Offering.
In the six months ended June 30, 1998, the Company issued warrants to
purchase a total of 459,593 shares of Common Stock at a price of $2.22 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.
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
believes that the net
43
<PAGE>
proceeds from the Offering, together with a line of credit currently being
negotiated and with its current cash and cash equivalents, will be sufficient
to meet its anticipated cash needs for working capital and capital
expenditures and business expansion for 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."
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 third
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 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."
44
<PAGE>
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.
45
<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, according to Media Metrix, and the fourteenth
most trafficked site in August 1998, according to Relevant Knowledge.
Xoom.com's reach increased to over 11% in August 1998 from less than 2% in
January 1998, according to Media Metrix. Xoom.com had approximately 3.9
million members as of October 12, 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 six months of
1998, 72% of the Company's net revenue was derived from electronic commerce
and approximately 36% 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 $171,000 to $1.7
million, representing compound quarterly sales growth of approximately 78%.
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 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-
46
<PAGE>
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
47
<PAGE>
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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<PAGE>
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 six months ended June 30, 1998,
international sales comprised 36% of the Company's total net revenue and 50%
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. 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 six months ended June 30,
1998 and prices for each category:
PRODUCT CATEGORY PRICE RANGE PRODUCTS OFFERED
Computer Software $15-$50 Photo editing
software, Web
utilities
Computer Accessories $69-$99 Modems, computer video
and Peripherals cameras
Consumer Electronics $179 Digital cameras
Clip Art $19-$79 CD-ROM clip art
collections
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 1.6 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:
. 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.
. 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
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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.
. Entertainment Drive LLC. Xoom.com has an agreement with Entertainment
Drive LLC ("Entertainment Drive") where Entertainment Drive will create
and host a co-branded site, with the look and feel of the Xoom.com site,
that will market Entertainment Drive's online Cranky Critic Movie
Reviews, Entertainment News and Celebrity Profiles. Additionally,
Xoom.com will create and host a co-branded site, with the look and feel
of the Entertainment Drive site, that will market Xoom.com's online
streaming classic movies. These co-branded sites are expected to begin
commercial operations during the fourth quarter of 1998. Both Xoom.com
and Entertainment Drive will create links and promotions on their
respective sites to promote each other's co-branded site. This agreement
also gives Xoom.com the right to use Entertainment Drive's database of
about 300,000 e-mail addresses in order to market products to persons on
this list. Entertainment Drive will receive a commission on any sales
generated from this database.
In addition to the above relationships, the Company also has relationships
with InfoSpace, Inc., Netopia, Inc. and Sausage Software Ltd. 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."
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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 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 six months of 1998, Xoom.com had over 40 advertisers on its
Web site. For the six months ended June 30, 1998, the Company's five largest
advertising customers, namely Hotel Reservations Network, SimpleNet, Inc.,
Spree.com Corporation, USA Net, Inc. and Visual Properties L.L.C., accounted
for approximately 44% of advertising revenue (approximately 6% of total net
revenue). The following is a list of the Company's top 15 advertising
customers by net revenue for the six months ended June 30, 1998:
<TABLE>
<S> <C> <C>
3Com Corporation Hotel Reservations Network SimpleNet, Inc.
Amazon.com i-traffic, Inc. Spree.com Corporation
Cyberian Outpost, Inc. One & Only USA Net, Inc.
Datek Holdings
Corporation QSpace, Inc. VisiCom, Inc.
DLJDirect Inc. Real Networks, Inc. Visual Properties L.L.C.
</TABLE>
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
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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.
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
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for the Company's networking and server equipment. The Company manages and
monitors its servers and network remotely 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 site could have a material adverse
effect on the Company's business, results of operations and financial
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.
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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 "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
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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 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 June 30,
1998, the Company received approximately 1% of its total net revenue under the
Sprint license and,
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since March 1998, the Company has not received any net revenue under the
Sprint licnese. In January 1998, Xoom.com became aware that Imageline claimed
to own the copyright in certain images that Sprint had licensed to Xoom. 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 Company to
indemnify the publisher if copyrighted material licensed from the Company
infringes a copyright. 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. 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 it
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 June 30, 1998, the Company had 39 full-time employees, including 11 in
marketing and sales, 19 in operating and development and 9 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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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The executive officers, directors and key employees of the Company and their
respective ages as of June 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..........43 Vice President, Finance and Chief Financial Officer
Vijay Vaidyanathan......33 Chief Technology Officer and Director
Russell S. Hyzen........32 Vice President, Business Development
Alicia Marziali.........33 Vice President, Advertising Sales
Janine Popick...........30 Vice President, Direct Marketing
Bob Ellis...............62 Publisher and Director
James Heffernan(1)(2)...56 Director
Jeffrey Ballowe(1)......42 Director
Philip Schlein(2).......64 Director
Robert C. Harris, Jr....51 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 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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<PAGE>
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.
Russell S. Hyzen has served as the Company's Vice President of 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 of 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.
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
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<PAGE>
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."
DIRECTOR COMPENSATION
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."
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<PAGE>
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 333,333 shares of the
Company's Common Stock at an exercise price of $0.02 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 (the "Ballowe Agreement") with the Company
pursuant to which Mr. Ballowe agreed to provide certain services to the
Company, including serving as a member of the Board of Directors and providing
consulting services relating to business strategy and strategic alliances. The
Ballowe Agreement provides for compensation in the form of options to buy
35,000 shares of the Company's Common Stock at an exercise price of $4.50 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 consulting services to be provided to the Company, based upon
20 hours of service per month at a rate of $500 per hour. Prior to the
Offering, this fee is payable in options to purchase shares of the Company's
Common Stock, at an exercise price of $4.50 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 Bellowe Agreement has a
term of 18 months.
On July 28, 1998, Phillip Schlein, one of the Company's outside directors,
entered into a letter agreement (the "Schlein Agreement") with the Company
pursuant to which Mr. Schlein agreed to provide certain services to the
Company, including serving as a member of the Board of Directors and providing
consulting services relating to retail sales and merchandise. The Schlein
Agreement provides for compensation in the form of options to buy 35,000
shares of the Company's Common Stock at an exercise price of $4.50 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 the
Company's Common Stock as compensation for consulting services to be provided
to the Company, based upon 20 hours of service per month at a rate of $500 per
hour. 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 (the "Harris Agreement") with the Company
pursuant to which Mr. Harris agreed to provide certain services to the
Company, including serving as a member of the Board of Directors and providing
consulting services relating to business strategy and development. The Harris
Agreement provides for compensation in the form of options to buy 35,000
shares of the Company's Common Stock at an exercise price of $4.50 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 the
Company's Common Stock as compensation for consulting services to be provided
to the Company, based upon 20 hours of service per month at a rate of $500 per
hour. 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.
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").
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<PAGE>
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 -- 125,000
President and Chief Executive Officer
Russell S. Hyzen.......................... $ 120,000 $ 3,333 80,000
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........... 125,000 13.2% $0.02 3/15/07 $36,250 $ 60,619 $ 98,007
Russell S. Hyzen........ 80,000 8.4% $0.02 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 949,472 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 $0.31 on the date of grant for Mr.
Massa's options and $1.13 on the date of grant for Mr. Hyzen's options.
The 0%, 5% and 10% assumed rates of appreciation are mandated by the
Commission and do not represent the Company's estimate or projection of
future increases in the price of its Common Stock.
AGGREGATE OPTION EXERCISES IN FISCAL YEAR 1997 AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth certain information as of December 31, 1997
concerning exercisable and unexercisable stock options held by each of the
Named Executive Officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ACQUIRED AT FISCAL YEAR-END (#) AT FISCAL YEAR-END ($)(1)
ON VALUE ------------------------- -------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ------------ ------------ ------------------------- -------------------------
<S> <C> <C> <C> <C>
Laurent Massa........... -- -- 228,906 / 283,594 $276,976 / 343,149
Russell S. Hyzen........ -- -- 88,333 / 116,667 106,883 / 141,167
</TABLE>
- --------
(1) Based on the fair market value of the Company's Common Stock at December
31, 1997, of $1.23 per share (as determined by the Company's Board of
Directors), less the exercise price for such shares.
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<PAGE>
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 512,500 shares
of Common Stock at a per share exercise price of $0.02.
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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<PAGE>
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 130,000 shares of Common
Stock at a per share exercise price of $4.50 and options to purchase up to
30,000 shares of Common Stock at a per share exercise price of $8.00.
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
140,000 shares of Common Stock at a per share exercise price of $1.54.
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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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 205,000 shares of Common Stock
at a per share exercise price of $0.02. In June 1998, the Company granted Mr.
Hyzen options to purchase up to an additional 20,000 shares of Common Stock at
a per share exercise price of $2.22.
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
3,500,000 shares of Common Stock have been reserved for issuance under the
1998 Plan. As of June 30, 1998, no shares of Common Stock had been issued upon
exercise of options granted under the 1998 Plan, 907,820 shares remained
reserved for future issuance upon the exercise of outstanding options, and
2,592,180 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, immediately prior to the specified effective
date of such transaction, automatically become fully vested and
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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, plus annual increases equal to the lesser
of (i) 500,000 shares, (ii) 4% of the outstanding shares on such dates or
(iii) a lesser amount determined by the Board, 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
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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.
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 March 1998, options to purchase
1,549,722 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 may enter 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 500,000 shares of Common Stock for cash at a
price of $0.0002 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 500,000 shares of the
Company's Common Stock for cash at a price of $0.0002 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 3,500,000 and
1,500,000 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 1,000,000 shares
of Common Stock to the Company. Pursuant to Common Stock Purchase Agreements
dated February 13, 1997 and November 23, 1997, respectively, Flying Disc
Investments Limited Partnership ("Flying Disc"), of which Mr. Kitze is general
partner, purchased an aggregate 2,141,666 shares of Common Stock from the
Company for cash at $0.60 per share, resulting in aggregate proceeds to the
Company of approximately $1.2 million. An additional 194,805 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 $1.54 per share. Under a
Common Stock and Warrant Purchase Agreement dated as of April 25, 1998, Flying
Disc purchased 45,045 shares of Common Stock for cash at a per share price of
$2.22 along with a warrant to purchase an additional 9,009 shares at $2.22 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 45,045
shares of Common Stock for cash at a per share price of $2.22 along with a
warrant to purchase an additional 9,009 shares at $2.22 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 83,333 shares of the Company's
Common Stock for cash at a price of $1.20 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
83,333 shares of Common Stock at the new price of $0.60 per share. In
addition, on the same date, Mr. Ellis purchased an additional 333,333 shares
of Common Stock for cash at $0.60 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 25,000 shares of the Company's Common Stock at
an exercise price of $2.22 per share. Mr. Heffernan will be granted stock
options to buy an additional 25,000 shares of Common Stock at an exercise
price of $2.22 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 62,755 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 64,935 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 consulting 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.
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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 June 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)............. 6,282,526 46.6%
Naveen Jain(3)............. 1,054,054 7.8%
Vijay Vaidyanathan(4)...... 872,950 6.5%
Bob Ellis(5)............... 722,222 5.3%
Laurent Massa(6)........... 346,093 2.5%
James J. Heffernan(7)...... 237,890 1.8%
Russell S. Hyzen(8)........ 142,291 1.0%
John Harbottle(9).......... 15,000 *
Philip Schlein(10)......... 2,847 *
Robert C. Harris, Jr.(11).. 2,847 *
Jeffrey Ballowe(12)........ 1,612 *
All executive officers and
directors as a group
(10 persons)(13).......... 8,626,278 60.6%
</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 June 30,
1998 and warrants to purchase shares of Common Stock that are exercisable
within 60 days of June 30, 1998 are deemed outstanding. Percentage of
beneficial ownership is based upon 13,465,363 shares of Common Stock
outstanding prior to the Offering and shares of Common Stock
outstanding after the Offering, as of , 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, Inc., 300
Montgomery Street, Suite 300, San Francisco, California 94104.
(2) Includes 6,273,517 shares of Common Stock and warrants to purchase 9,009
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 45,045 shares of Common Stock and warrants to purchase 9,009
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 120,000 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 options exercisable for 222,222 shares of Common Stock
exercisable within 60 days after June 30, 1998.
(6) Includes options exercisable for 346,093 shares of Common Stock
exercisable within 60 days after June 30, 1998.
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(7) Includes options exercisable for 28,125 shares of Common Stock
exercisable within 60 days after June 30, 1998. Also includes 65,000
shares of Common Stock and warrants to purchase 13,000 shares Common
Stock held by J.J. Heffernan, LLC ("Heffernan LLC"), of which Mr.
Heffernan is the managing member, and 121,765 shares of Common Stock and
warrants to purchase 10,000 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 124,791 shares of Common Stock
exercisable within 60 days after June 30, 1998.
(9) Includes options exercisable for 15,000 shares of Common Stock
exercisable within 60 days after June 30, 1998.
(10) Includes options exercisable for 1,458 shares of Common Stock
exercisable within 60 days after June 30, 1998.
(11) Includes options exercisable for 1,458 shares of Common Stock exercisable
within 60 days after June 30, 1998.
(12) Includes options exercisable for 1,612 shares of Common Stock
exercisable within 60 days after June 30, 1998.
(13) Includes options exercisable for 740,759 shares of Common Stock
exercisable within 60 days after June 30, 1998 and warrants to purchase
32,009 shares of Common Stock.
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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 June 30, 1998, there were 13,465,363 shares of Common Stock
outstanding that were held of record by approximately 86 stockholders
(assuming conversion of all warrants outstanding as of June 30, 1998). There
will be 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.
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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.
75
<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
shares of Common Stock. Of these shares, the 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 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. of these shares will be eligible for sale in the
public market as of the Effective Date under Rule 144, subject in some cases
to certain volume restrictions and other conditions imposed thereby. An
additional shares will become eligible for sale 90 days after the
date of this Prospectus pursuant to Rule 144 and Rule 701 under the Securities
Act. Beginning 180 days after the date of this Prospectus, approximately
additional shares will become eligible for sale subject to the
provisions of Rule 144 or Rule 701 upon the expiration of agreements not to
sell such shares entered into with the Company's stockholders and option
holders. The remainder of the shares will be eligible for sale from time to
time thereafter upon expiration of their respective one-year holding period,
subject in each case to the restrictions on such sales by affiliates of the
Company. Beginning 180 days after the date of this Prospectus, approximately
additional shares subject to vested options as of the date of this
Prospectus will be available for sale subject to compliance with Rule 144 and
Rule 701 and upon the expiration of agreements not to sell such shares entered
into with the company's stockholders or option holders. The remainder of the
shares will be eligible for sale from time to time thereafter upon expiration
of their respective one year holding periods, subject in each case to the
restrictions on such sales by affiliates of the Company. Any shares subject to
lock-up agreements may be released by Bear, Stearns & Co. Inc. at any time
without notice.
As soon as practicable after the Effective Date, the Company intends to file
a registration statement on Form S-8 under the Securities Act to register
approximately shares of Common Stock reserved for issuance under the
1998 Plan and the Stock Purchase Plan, thus permitting the resale of such
shares by non-affiliates in the public market without restriction under the
Securities Act unless subject to lock-up agreements. Such registration
statement will become effective immediately upon filing. 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--Potential Effect Of Shares Eligible For Future Sale."
76
<PAGE>
UNDERWRITING
The Underwriters of the Offering named below (the "Underwriters"), for whom
Bear, Stearns & Co. Inc. is acting as representative, 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.....................................
------
Total.....................................................
======
</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 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 shares of Common Stock 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.
77
<PAGE>
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
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 for the period from April 16, 1996 (Inception) to December
31, 1996 and for the year ended December 31, 1997; 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 appearing elsewhere herein, and are included in reliance upon
such reports given upon authority of such firm as experts in accounting and
auditing.
78
<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.
79
<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-25
Balance Sheets............................................................ F-26
Statements of Operations.................................................. F-27
Statements of Shareholders' Equity (Deficit).............................. F-28
Statements of Cash Flows.................................................. F-29
Notes to Financial Statements............................................. F-30
GLOBAL BRIDGES TECHNOLOGIES, INC.
Report of Ernst & Young LLP, Independent Auditors......................... F-34
Balance Sheets............................................................ F-35
Statements of Operations.................................................. F-36
Statements of Shareholders' Equity (Deficit).............................. F-37
Statements of Cash Flows.................................................. F-38
Notes to Financial Statements............................................. F-39
PAGECOUNT, INC.
Report of Ernst & Young LLP, Independent Auditors......................... F-43
Balance Sheets............................................................ F-44
Statements of Income...................................................... F-45
Statements of Stockholders' Equity ....................................... F-46
Statements of Cash Flows.................................................. F-47
Notes to Financial Statements............................................. F-48
SELECTED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
Introduction.............................................................. F-52
Selected Unaudited Pro Forma Condensed Consolidated Balance Sheet at June
30, 1998................................................................. F-53
Notes to Selected Unaudited Pro Forma Condensed Consolidated Balance
Sheet.................................................................... F-54
Selected Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the twelve months ended December 31, 1997................. F-55
Selected Unaudited Pro Forma Condensed Consolidated Statement of
Operations for the six months ended June 30, 1998........................ F-56
Notes to Selected Unaudited Pro Forma Condensed Consolidated Statements of
Operations............................................................... F-57
</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 the related consolidated statements
of operations, stockholders' equity (deficit) and cash flows for the period
from April 16, 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 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 the consolidated results of its
operations and its cash flows for the period from April 16, 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 24, 1998
except as to the last four paragraphs of Note 8, as to which the date is,
October 13, 1998
F-2
<PAGE>
XOOM.COM, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1996 1997 1998
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash..................................... $ 1,052 $ 5,587 $ 4,091,161
Accounts receivable, net of allowance for
doubtful accounts of $48,702 in 1997 and
$146,936 in 1998........................ -- 173,223 457,202
Stock subscription receivable from
related parties......................... 300,000 -- --
Stock subscription receivable............ -- 75,000 260,480
Inventories.............................. -- -- 64,950
Other current assets..................... -- 906 65,351
---------- ----------- -----------
Total current assets...................... 301,052 254,716 4,939,144
Fixed assets, net......................... 61,657 413,685 755,101
Intangible assets, net.................... -- -- 3,752,510
Prepaid royalties and licenses............ 324,000 53,556 84,000
Other assets.............................. 18,544 59,713 129,276
---------- ----------- -----------
Total assets.............................. $ 705,253 $ 781,670 $ 9,660,031
========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable......................... $ 136,122 $ 461,931 $ 840,888
Accrued compensation and related
expenses................................ 8,906 38,391 168,855
Other accrued liabilities................ -- 4,700 386,072
Note payable to stockholder.............. -- 150,000 --
Acquisition notes payable................ -- -- 717,431
Contingency accrual...................... -- 1,000,000 1,000,000
---------- ----------- -----------
Total current liabilities................. 145,028 1,655,022 3,113,246
Acquisition notes payable, less current
portion.................................. -- -- 1,119,000
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--
5,000,000, 8,312,035 and 13,005,770 in
1996, 1997 and 1998, respectively...... 1,462,200 3,737,324 13,189,239
Deferred compensation.................... (462,000) (1,038,824) (468,749)
Accumulated deficit...................... (439,975) (3,571,852) (7,292,705)
---------- ----------- -----------
Total stockholders' equity (deficit)...... 560,225 (873,352) 5,427,785
---------- ----------- -----------
Total liabilities and stockholders' equity
(deficit)................................ $ 705,253 $ 781,670 $ 9,660,031
========== =========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE>
XOOM.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 16, 1996
(INCEPTION) SIX MONTHS ENDED
THROUGH YEAR ENDED JUNE 30,
DECEMBER 31, DECEMBER ------------------------
1996 31, 1997 1997 1998
-------------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net revenue:
Electronic commerce..... $ -- $ 327,080 $ 20,841 $ 1,834,179
Advertising............. -- 60,251 7,050 354,896
License fees and other.. -- 453,556 171,662 375,641
--------- ----------- ----------- -----------
Total net revenue........ -- 840,887 199,553 2,564,716
--------- ----------- ----------- -----------
Cost of net revenue:
Cost of electronic
commerce............... -- 170,957 53,790 898,710
Cost of license fees and
other ................. -- 148,375 105,022 27,292
--------- ----------- ----------- -----------
Total cost of net
revenue................. -- 319,332 158,812 926,002
--------- ----------- ----------- -----------
Gross profit............. -- 521,555 40,741 1,638,714
--------- ----------- ----------- -----------
Costs and expenses:
Operating and
development............ 265,769 1,150,299 746,682 1,348,519
Sales and marketing..... 23,719 291,675 119,591 717,728
General and
administrative......... 150,487 720,534 282,187 1,098,782
Purchased in-process
research and
development............ -- -- -- 1,070,000
Amortization of deferred
compensation........... -- 247,924 10,712 806,087
Amortization of
intangible assets...... -- -- -- 318,451
Non-recurring charges... -- 1,243,000 243,000 --
--------- ----------- ----------- -----------
Total costs and expenses. 439,975 3,653,432 1,402,172 5,359,567
--------- ----------- ----------- -----------
Net loss................. $(439,975) $(3,131,877) $(1,361,431) $(3,720,853)
========= =========== =========== ===========
Net loss per share--basic
and diluted............. $ (0.59) $ (0.43) $ (0.20) $ (0.39)
========= =========== =========== ===========
Number of shares used in
per share
calculation--basic and
diluted................. 745,098 7,311,471 6,776,852 9,603,621
========= =========== =========== ===========
</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............. 1,000,000 $ 200 $ -- $ -- $ 200
Issuance of common
stock in exchange for
cancellation of notes
payable to
stockholders.......... 4,000,000 1,000,000 -- -- 1,000,000
Deferred compensation
related to grant of
stock options......... -- 462,000 (462,000) -- --
Net loss............... -- -- -- (439,975) (439,975)
---------- ----------- ---------- ----------- -----------
Balances at December 31,
1996................... 5,000,000 1,462,200 (462,000) (439,975) 560,225
Issuance of common
stock for cash........ 2,871,668 1,223,000 -- -- 1,223,000
Issuance of common
stock in exchange for
cancellation of notes
payable to
stockholders.......... 58,333 35,000 -- -- 35,000
Issuance of common
stock in exchange for
stock subscription
receivable............ 382,034 175,000 -- -- 175,000
Issuance of stock
options to
consultants........... -- 17,376 -- -- 17,376
Deferred compensation
related to grant of
stock options......... -- 824,748 (824,748) -- --
Amortization of
deferred compensation. -- -- 247,924 -- 247,924
Net loss............... -- -- -- (3,131,877) (3,131,877)
---------- ----------- ---------- ----------- -----------
Balances at December 31,
1997................... 8,312,035 3,737,324 (1,038,824) (3,571,852) (873,352)
Issuance of common
stock for cash, net of
issuance costs of
$139,316 (unaudited).. 2,723,235 5,532,596 -- -- 5,532,596
Issuance of common
stock in exchange for
Classic Media Holdings
license rights
(unaudited)........... 64,935 100,000 -- -- 100,000
Issuance of common
stock in connection
with acquisitions
(unaudited)........... 1,690,830 3,057,586 -- -- 3,057,586
Issuance of common
stock in exchange for
cancellation of notes
payable to
stockholders
(unaudited)........... 97,403 150,000 -- -- 150,000
Issuance of common
stock in exchange for
stock subscription
receivable
(unaudited)........... 117,332 260,480 -- -- 260,480
Issuance of stock
options to consultants
(unaudited)........... -- 115,241 -- -- 115,241
Deferred compensation
related to grant of
stock options
(unaudited)........... -- 236,012 (236,012) -- --
Amortization of
deferred compensation
(unaudited)........... -- -- 806,087 -- 806,087
Net loss (unaudited)... -- -- -- (3,720,853) (3,720,853)
---------- ----------- ---------- ----------- -----------
Balances at June 30,
1998 (unaudited)....... 13,005,770 $13,189,239 $ (468,749) $(7,292,705) $ 5,427,785
========== =========== ========== =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
XOOM.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 16, 1996
(INCEPTION) SIX MONTHS ENDED
THROUGH YEAR ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, -----------------------
1996 1997 1997 1998
-------------- ------------ ----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH USED IN OPERATING
ACTIVITIES:
Net loss.................. $(439,975) $(3,131,877) $(1,361,431) (3,720,853)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Charge for purchased in-
process research and
development............ -- -- -- 1,070,000
Depreciation and
amortization........... 2,496 254,077 24,013 262,899
Amortization of
intangible assets...... -- -- -- 318,451
Amortization of deferred
compensation........... -- 247,924 10,712 806,087
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 3,117 115,241
Changes in operating
assets and liabilities:
Accounts receivable..... -- (173,223) (78,133) (275,555)
Inventories............. -- -- -- (64,950)
Other current assets.... -- (906) -- (60,029)
Prepaid royalties and
licenses............... (324,000) (185,815) (40,303) (168,116)
Other assets............ (18,544) (41,169) 54,865 (69,563)
Accounts payable........ 136,122 325,809 172,015 373,839
Accrued compensation and
related expenses....... 8,906 29,485 1,080 90,198
Other accrued
liabilities............ -- 4,700 559 283,276
Contingency accrual..... -- 1,000,000 -- --
--------- ----------- ----------- ----------
Net cash used in
operating activities... (634,995) (1,410,619) (970,506) (939,075)
Cash used in investing
activities:
Purchases of fixed
assets................. (64,153) (392,846) (25,322) (416,531)
Business combinations,
net of cash acquired... -- -- -- (63,916)
Cash paid in connection
with the purchase of
certain assets from
Revolutionary Software,
Inc. .................. -- -- -- (12,500)
--------- ----------- ----------- ----------
Net cash used in
investing activities... (64,153) (392,846) (25,322) (492,947)
Cash provided in
financing activities:
Proceeds from issuance
of common stock........ 200 1,223,000 700,000 5,532,596
Proceeds from issuance
of notes payable to
stockholders........... 700,000 185,000 -- --
Proceeds from repayment
of stock subscriptions
receivable............. -- 400,000 300,000 75,000
Repayment of acquisition
note payable........... -- -- -- (90,000)
--------- ----------- ----------- ----------
Net cash provided by
financing activities... 700,200 1,808,000 1,000,000 5,517,596
--------- ----------- ----------- ----------
Net increase in cash.... 1,052 4,535 4,172 4,085,574
Cash at beginning of
period................. -- 1,052 1,052 5,587
--------- ----------- ----------- ----------
Cash at end of period... $ 1,052 $ 5,587 $ 5,224 $4,091,161
========= =========== =========== ==========
</TABLE>
See accompanying notes.
F-6
<PAGE>
XOOM.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 16, 1996
(INCEPTION) SIX MONTHS ENDED
THROUGH YEAR ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, ----------------------
1996 1997 1997 1998
-------------- ------------ ----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES:
Non-cash transactions:
Issuance of common stock in
exchange for stock
subscriptions receivable.. $ -- $175,000 $100,000 $ 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........... $ 462,000 $824,748 $ -- $ 236,012
========== ======== ======== ==========
Issuance of common stock
in conjunction with
acquisitions:
Paralogic Corporation... $ -- $ -- $ -- $1,576,364
========== ======== ======== ==========
Global Bridges
Technologies, Inc. .... $ -- $ -- $ -- $ 610,811
========== ======== ======== ==========
Revolutionary Software,
Inc.................... $ -- $ -- $ -- $ 426,411
========== ======== ======== ==========
ArcaMax, Inc............ $ -- $ -- $ -- $ 444,000
========== ======== ======== ==========
Issuance of notes payable
in conjunction with
acquisitions:
Paralogic Corporation... $ -- $ -- $ -- $1,400,000
========== ======== ======== ==========
Global Bridges
Technologies, Inc. .... $ -- $ -- $ -- $ 62,500
========== ======== ======== ==========
Revolutionary Software,
Inc.................... $ -- $ -- $ -- $ 262,500
========== ======== ======== ==========
ArcaMax, Inc............ $ -- $ -- $ -- $ 180,000
========== ======== ======== ==========
</TABLE>
See accompanying notes.
F-7
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 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 and for the year ended December 31, 1997. 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
June 1998, the Company issued common stock, resulting in net proceeds of
$5,532,596. 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.
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.
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 six months
ended June 30, 1997 and 1998 is unaudited but has been prepared on the same
basis as the audited financial statements and includes all
F-8
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Interim Financial Information (continued)
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.
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.
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. Depreciation
is computed using the straight-line method over the estimated useful lives of
three years.
Intangible Assets, Net
Intangible assets consist of purchased technology and goodwill related to
acquisitions accounted for by the purchase method. See Note 8. Amortization of
these purchased intangibles is provided on the straight-line basis over the
respective useful lives of the assets, which is two years. Acquired 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
F-9
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Prepaid Royalties and Licenses (continued)
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 and $213,259
for the period from April 16, 1996 (inception) through December 31, 1996 and
for the year ended December 31, 1997, 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").
Advertising Expense
All advertising costs are expensed when incurred. Advertising costs, which
are included in sales and marketing expense, were $0 and $50,000 for the
period from April 16, 1996 (inception) through December 31, 1996 and for the
year ended December 31, 1997, 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 June 30, 1998, the duration
of the Company's advertising commitments has been principally
F-10
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Advertising (continued)
from one to two months. 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.
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% and 36% of net revenues for the year ended December
31, 1997 and the six month period ended June 30, 1998, respectively.
Information regarding the Company's export sales is as follows:
<TABLE>
<CAPTION>
YEAR ENDED FOR THE SIX MONTHS ENDED
DECEMBER 31, 1997 JUNE 30, 1998
----------------- ------------------------
(UNAUDITED)
<S> <C> <C>
North America................. $ 39,193 $215,838
Europe........................ 157,228 426,019
Asia/Pacific.................. 44,293 170,842
Rest of the World............. 11,412 105,106
-------- --------
Total....................... $252,126 $917,805
======== ========
</TABLE>
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
F-11
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Pronouncements (continued)
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 six months ended June
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, JUNE 30,
------------------ -----------
1996 1997 1998
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Computers and equipment......................... $ 64,153 $456,999 $ 957,598
Accumulated depreciation........................ (2,496) (43,314) (202,497)
-------- -------- ---------
$ 61,657 $413,685 $ 755,101
======== ======== =========
</TABLE>
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,
----------------------
1996 1997
--------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.................... $ 1,000 $ 537,000
Capitalized start up costs.......................... 140,000 112,000
Prepaid royalties and licenses...................... 23,000 257,000
Accrued liabilities................................. -- 398,000
Other............................................... 11,000 17,000
--------- -----------
Total deferred tax assets............................ 175,000 1,321,000
Valuation allowance.................................. (175,000) (1,321,000)
--------- -----------
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.
F-12
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
3. INCOME TAXES (CONTINUED)
During fiscal year 1996 and 1997 the valuation allowance of the deferred tax
assets increased by $175,000 and $1,146,000, respectively.
As of December 31, 1997, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $1,436,000. 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
The Company is authorized to issue 20,000,000 shares of common stock and
1,000,000 shares of preferred stock, each with a par value of $.0001 per
share.
Stock Split
In February, 1998, the Company completed a one-for-two 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
shareholders.
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 500,000 shares (1,000,000 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
3,500,000 and 1,500,000 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 1,000,000 shares of his
common stock back to the Company without compensation pursuant to an agreement
between the founders.
Stock Option Plan
The Company has reserved 3,500,000 shares of common stock under the
Company's Stock Option 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
F-13
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
4. STOCKHOLDERS' EQUITY (CONTINUED)
Stock Option Plan (continued)
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.
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 is as follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- ---------
<S> <C> <C>
Balance at April 16, 1996............................... -- $ --
Granted............................................... 660,000 0.02
Exercised............................................. -- --
Canceled.............................................. -- --
--------- -----
Balance at December 31, 1996............................ 660,000 0.02
Granted............................................... 949,472 0.03
Exercised............................................. -- --
Canceled.............................................. (142,500) 0.02
--------- -----
Balance at December 31, 1997............................ 1,466,972 0.03
Granted (unaudited)................................... 990,570 1.84
Exercised (unaudited)................................. -- --
Canceled (unaudited).................................. -- --
--------- -----
Balance at June 30, 1998 (unaudited).................... 2,457,542 $0.76
========= =====
</TABLE>
The following table summarizes information about options outstanding and
exercisable at June 30, 1998 (unaudited):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- ----------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER OF CONTRACTUAL EXERCISE NUMBER OF EXERCISE
PRICE SHARES LIFE (IN YEARS) PRICE SHARES PRICE
-------- --------- -------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.02 1,527,222 8.9 $0.02 827,243 $0.02
$ 0.60 17,500 8.6 0.60 17,500 0.60
$ 1.54 303,545 9.7 1.54 82,410 1.54
$ 2.22 609,275 9.9 2.22 114,317 2.22
--------- ---------
2,457,542 9.2 1,041,470
========= =========
</TABLE>
Deferred Compensation
The Company has recorded deferred compensation expense of $462,000, $824,748
and $236,012 during the period from April 16, 1996 (inception) through
December 31, 1996, the year ended December 31, 1997 and for the six months
ended June 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
F-14
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
4. STOCKHOLDERS' EQUITY (CONTINUED)
Deferred Compensation (continued)
the accelerated method, over the vesting periods of the individual stock
options, which range from three months to four years. In June 1998 certain
options were modified from vesting upon certain events to vesting upon the
earlier of an event or two years. As a result, the related compensation charge
was determined in June 1998.
Options Issued to Consultants
The Company granted options to purchase 124,709 shares of common stock to
consultants at exercise prices ranging from $.02 to $2.22 per share during the
period from January 1, 1997 through June 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 $179,511, for the period from April 16, 1996
(inception) through December 31, 1996, for the year ended December 31, 1997
and for the six month period ended June 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 $115,241 for
the period from April 16, 1996 (inception) through December 31, 1996, for the
year ended December 31, 1997 and for the six month period ended June 30, 1998,
respectively.
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)
THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
-------------- ------------
<S> <C> <C>
Risk-free interest rate.......................... 6.5% 6.5%
Expected life of the option...................... 5 years 5 years
Expected volatility.............................. 0% 0%
Expected dividend yield.......................... 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.
F-15
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
4. STOCKHOLDERS' EQUITY (CONTINUED)
Pro Forma Disclosure of the Effect of Stock-Based Compensation (continued)
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 six months ended June 30, 1998 were $0.01,
$0.24 and $0.54, respectively.
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) YEAR ENDED
THROUGH DECEMBER
DECEMBER 31, 31,
1996 1997
-------------- -----------
<S> <C> <C>
Net loss, as reported........................... $(439,975) $(3,131,877)
Net loss, pro forma............................. (441,946) (3,231,131)
Net loss per share--basic and diluted, as
reported....................................... (0.59) (0.43)
Net loss per share--basic and diluted, pro
forma.......................................... (0.59) (0.44)
</TABLE>
5. COMMITMENTS
The Company leases its facilities under operating lease arrangements. The
future minimum lease payments under the Company's non cancelable operating
leases with an initial term longer than one year at December 31, 1997 are as
follows:
<TABLE>
<S> <C>
Fiscal years ending December 31:
1998.............................................................. $44,220
1999.............................................................. 4,638
2000.............................................................. 821
-------
Total minimum lease payments........................................ $49,679
=======
</TABLE>
Total rent expense under operating lease arrangements for the period from
April 16, 1996 (inception) through December 31, 1996 and the year ended
December 31, 1997 totaled $5,400 and $43,125, respectively.
6. CONTINGENCY ACCRUAL
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. 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
F-16
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
6. CONTINGENCY ACCRUAL (CONTINUED)
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.
7. RELATED PARTY TRANSACTIONS
During the period from April 16, 1996 (inception) through December 31, 1996,
the year ended December 31, 1997 and the six months ended June 30, 1998, the
Company issued stock subscriptions 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. All amounts due under subscriptions receivable at June 30, 1998 were
repaid in July 1998.
During the period from April 16, 1996 (inception) through December 31, 1996,
the year ended December 31, 1997 and the six months ended June 30, 1998, the
Company issued notes payable to related parties in exchange for cash advances
and stock subscriptions receivable. These notes payable are due upon demand
and bear no interest. All notes payable issued through June 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 25,000 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
operating and development during the six months ended June 30, 1998. The
director will be granted stock options to buy an additional 25,000 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 64,935 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 six-month period ended June 30, 1998. A
director of the Company is a principal of Classic Media Holdings.
F-17
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
8. SUBSEQUENT EVENTS
Retirement Plan
On March, 26, 1998, the Company established a qualified 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.
Equity Financings
In the six months ended June 30, 1998, the Company received net proceeds of
$5,532,596 from the issuance of 2,723,235 shares of common stock. In
connection with the issuance of common stock in the six months ended June 30,
1998, the Company issued warrants to purchase a total of 459,593 shares of
common stock at an average price of $2.22 per share. These warrants are
immediately exercisable and expire on the earlier of the successful completion
of an initial public offering or 2003.
Business Combinations and Technology Acquisitions
During the six months ended June 30, 1998, the Company made the 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.
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 1,023,613 shares of common stock
with a fair value of $1.54 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.
F-18
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
8. SUBSEQUENT EVENTS (CONTINUED)
Paralogic Corporation (continued)
The purchase consideration was allocated to the acquired assets and assumed
liabilities based on fair values as follows:
<TABLE>
<S> <C>
Cash............................................................ $ 33,055
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................. 490,000
Purchased technology............................................ 160,000
Goodwill........................................................ 2,378,929
Liabilities assumed............................................. (83,214)
----------
Total purchase consideration.................................... $3,037,607
==========
</TABLE>
Purchased In-Process Research and Development. Management estimates that
$490,000 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. The value was determined by estimating the costs to
develop the purchased in-process technology into commercially viable products,
estimating the resulting net cash flows from such projects, 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 275,140 shares of common stock with a fair value of $2.22 per share,
$12,500 cash, a note payable of $62,500 with fixed payment terms and $23,267
of acquisition costs. The common shares issued in connection with this
acquisition are subject to repurchase by the Company at the fair market value
of the shares at the time the former shareholder of GBT proposes to sell the
common shares. This repurchase option lapses upon the Company's successful
completion of an initial public offering.
F-19
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
8. SUBSEQUENT EVENTS (CONTINUED)
The purchase consideration was allocated to the acquired assets and assumed
liabilities based on fair values as follows:
<TABLE>
<S> <C>
Other current assets............................................... $ 4,153
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 25,956 shares of common stock with a fair
value of $7.20 per share. 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 25,956 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 192,077 shares of common stock with a fair value of $2.22 per
share, $12,500 cash and a note payable of $262,500 with fixed payment terms.
Initially, RSI may earn up to an additional 51,912 shares of common stock if
certain performance targets are met. The common stock issued in connection
with this acquisition is subject to repurchase by the Company at the fair
market value of the shares at the time RSI proposes to sell the common 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.................... $580,000
Goodwill.......................................................... 121,411
--------
Total purchase consideration...................................... $701,411
========
</TABLE>
In July 1998, the Company amended the agreement with RSI to provide for the
issuance of an additional 51,912 shares of common stock with a fair value of
$7.20 per share. 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 earn $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
51,912 shares of common stock.
F-20
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
8. SUBSEQUENT EVENTS (CONTINUED)
Purchased In-Process Research and Development. Management estimates that
$580,000 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. The value was determined by estimating the costs to
develop the purchased in-process technology into commercially viable products,
estimating the resulting net cash flows from such projects, 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.
ArcaMax, Inc.
In June, 1998, the Company purchased certain intellectual property and
licensed certain technology from ArcaMax, Inc. ("ArcaMax") for $644,000,
consisting of 200,000 shares of common stock with a fair value of $2.22 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 common stock issued in connection with this acquisition is
subject to repurchase by the Company at the fair market value of the shares at
the time the former shareholder of ArcaMax proposes to sell the common 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. The Company will
account for the acquisition using the purchase method. 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.
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............. 160,000
Purchased technology............................................ 140,000
Goodwill........................................................ 1,133,970
Liabilities assumed............................................. (45,588)
----------
Total purchase consideration.................................... $1,460,000
==========
</TABLE>
F-21
<PAGE>
XOOM.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
8. SUBSEQUENT EVENTS (CONTINUED)
Pagecount, Inc. (continued)
The note payable to the shareholders of Pagecount bears interest at 7%
annually, is due in nine monthly installments of $53,727 each, with a balloon
payment due in April 1999. The entire unpaid balance of the note shall become
due and payable upon the completion of the Offering or upon the closing of a
sale of substantially all of the Company's assets.
Purchased Intangible Assets
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
development 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.
<TABLE>
<CAPTION>
JUNE 30,
1998
-----------
(UNAUDITED)
<S> <C>
Purchased technology............................................ $ 804,000
Goodwill........................................................ 3,266,961
----------
4,070,961
Accumulated amortization........................................ (318,451)
----------
Acquired intangible assets...................................... $3,752,510
==========
</TABLE>
The total purchased in-process research and development that had no
alternative future use, and as such was charged to operations in the six month
period ended June 30, 1998 is summarized below (unaudited):
<TABLE>
<S> <C>
Paralogic Corporation............................................ $ 490,000
Revolutionary Software, Inc...................................... 580,000
----------
Total purchased in-process research and development.............. $1,070,000
==========
</TABLE>
F-22
<PAGE>
XOOM.COM INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
8. SUBSEQUENT EVENTS (CONTINUED)
Purchased Intangible Assets (continued)
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>
FOR THE
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
1997 1998
------------ --------------
<S> <C> <C>
Pro forma net revenue........................... $ 1,371,101 $ 2,853,492
Pro forma net loss.............................. $(5,656,144) $(4,051,091)
Pro forma net loss per share--basic and diluted. $ (0.66) $ (0.39)
Number of shares used in pro forma per share
calculation--basic and diluted................. 8,610,224 10,304,657
</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.
Notes payable and other amounts due issued in connection with the
acquisitions described above consist of the following at June 30, 1998
(unaudited):
<TABLE>
<S> <C>
Note payable and other amounts due to the former shareholders
of Paralogic Corporation. The note is non-interest bearing
and payable in minimum monthly installments of $30,000
through September, 1999. Additional payments are required for
the $860,000 of contingent payable as the amounts are
earned....................................................... $1,310,000
Note payable to the former shareholder of Global Bridges
Technologies, Inc. bearing interest of 5% annually. The note
is due in 25 monthly payments of $2,500 through July 2000.... 62,500
Note payable to Revolutionary Software, Inc. bearing interest
of 5% annually. The note is due in 25 monthly payments of
$10,500 through July 2000.................................... 262,500
Note payable to ArcaMax, Inc. The note is non-interest bearing
and due in 12 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........................... 180,000
Note payable to former shareholder of GBT which is due upon
demand..................................................... 21,431
----------
1,836,431
Less amounts due within one year.............................. (717,431)
----------
Long-term acquisition notes payable........................... $1,119,000
==========
</TABLE>
Scheduled maturities of acquisition notes payable and other amounts due are
as follows:
<TABLE>
<S> <C>
Year ending December 31,
1998............................................................ $ 369,431
1999............................................................ 1,376,000
2000............................................................ 91,000
----------
Total........................................................... $1,836,431
==========
</TABLE>
F-23
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
8. SUBSEQUENT EVENTS (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. In
addition, the Company's Board of Directors authorized an increase in the
number of authorized shares of common stock from 20,000,000 to 40,000,000.
1998 Employee Stock Purchase Plan
The Company's 1998 Employee Stock Purchase Plan was adopted by the Board of
Directors in August 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, as defined by 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.
Contingencies
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. Any name change effected after the Offering could result in
confusion to investors, which could adversely effect the market price of the
Common Stock.
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.
Authorized Preferred Stock
On October 13, 1998, the Company amended its Certificate of Incorporation to
increase the number of authorized shares of Preferred Stock from 1,000,000 to
5,000,000.
F-24
<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-25
<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-26
<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-27
<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-28
<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-29
<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-30
<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-31
<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-32
<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 107,014 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-33
<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-34
<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-35
<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-36
<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-37
<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-38
<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-39
<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-40
<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-41
<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-42
<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-43
<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-44
<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-45
<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-46
<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-47
<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-48
<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-49
<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-50
<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-51
<PAGE>
SELECTED UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION
The selected unaudited pro forma condensed consolidated financial
information for 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 balance sheet information as of June 30, 1998, gives
effect to the Pagecount acquisition as if it had occurred on June 30, 1998. No
unaudited pro forma condensed consolidated balance sheet information is
included for the Paralogic and Global Bridges acquisitions as those balances
are included in the Company's June 30, 1998 condensed consolidated balance
sheet. The selected unaudited pro forma condensed consolidated balance sheet,
reflects certain adjustments, including allocation of the purchase price of
the Pagecount acquisition. The selected unaudited pro forma condensed
consolidated statements of operations for the year ended December 31, 1997 and
the six months ended June 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-52
<PAGE>
SELECTED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
BALANCE SHEET
AT JUNE 30, 1998
<TABLE>
<CAPTION>
PRO FORMA
BUSINESS
XOOM.COM PAGECOUNT COMBINATION PRO FORMA
JUNE 30, 1998 JUNE 30, 1998 ADJUSTMENTS COMBINED
------------- ------------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash................... $ 4,091,161 $50,145 $ (200,000)(1) $ 3,941,306
Accounts receivable,
net................... 457,202 17,706 -- 474,908
Stock subscription
receivable............ 260,480 -- -- 260,480
Inventories............ 64,950 -- -- 64,950
Other current assets... 65,351 725 -- 66,076
----------- ------- ---------- -----------
Total current assets.... 4,939,144 68,576 (200,000) 4,807,720
Fixed assets, net....... 755,101 20,597 -- 775,698
Intangible assets, net.. 3,752,510 -- 1,273,970 (2) 5,026,480
Other assets............ 213,276 -- -- 213,276
----------- ------- ---------- -----------
Total assets............ $ 9,660,031 $89,173 $1,073,970 $10,823,174
=========== ======= ========== ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....... $ 840,888 $29,475 $ 60,000 (3) $ 930,363
Accrued compensation
and related expenses.. 168,855 11,709 -- 180,564
Other accrued
liabilities........... 386,072 -- -- 386,072
Deferred revenue....... -- 12,500 -- 12,500
Acquisition notes
payable............... 717,431 -- 1,200,000 (1) 1,917,431
Income taxes payable... -- 3,991 -- 3,991
Deferred income taxes.. -- 3,042 -- 3,042
Contingency accrual.... 1,000,000 -- -- 1,000,000
----------- ------- ---------- -----------
Total current
liabilities............ 3,113,246 60,717 1,260,000 4,433,963
Acquisition notes
payable, less current
portion................ 1,119,000 -- -- 1,119,000
Stockholders' equity:
Common stock........... 13,189,239 650 (650)(4) 13,189,239
Deferred compensation.. (468,749) -- -- (468,749)
Accumulated deficit.... (7,292,705) 27,806 (185,380)(4)(5) (7,450,279)
----------- ------- ---------- -----------
Total stockholders'
equity................. 5,427,785 28,456 (186,030) 5,270,211
----------- ------- ---------- -----------
Total liabilities and
stockholders' equity... $ 9,660,031 $89,173 $1,073,970 $10,823,174
=========== ======= ========== ===========
</TABLE>
F-53
<PAGE>
NOTES TO THE SELECTED UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET
Pro forma balance sheet adjustments for June 30, 1998 are as follows:
1. Cash paid of $200,000 and notes payable of $1,200,000 issued to
complete the acquisition of Pagecount.
2. Recognition of the excess purchase costs of $1,273,970 over the fair
value of net assets acquired.
3. Merger and acquisitions costs of $60,000
4. The elimination of the historical stockholders' equity accounts of
Pagecount.
5. Recognition of purchased in-process research and development of
$160,000.
F-54
<PAGE>
SELECTED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PAGECOUNT
FOR THE
PERIOD FROM
GLOBAL JANUARY 23,
XOOM.COM PARALOGIC BRIDGES 1997 PRO FORMA
FOR THE FOR THE FOR THE (INCEPTION) PRO FORMA FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED 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..... -- -- -- -- -- 2,259,760 (A) 2,259,760
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 2,259,760 6,472,879
Income (loss) from
operations............. (3,131,877) (210,549) (32,905) 26,666 (3,348,665) (2,259,760) (5,608,425)
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) (2,307,609) (5,656,144)
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) $(2,295,084) $(5,656,144)
=========== ========= ======== ======== =========== =========== ===========
Net loss per share--
basic and diluted...... (D) $ (0.66)
===========
Number of shares used in
per share calculation--
basic and diluted...... (D) 8,610,224
===========
</TABLE>
F-55
<PAGE>
SELECTED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
GLOBAL
XOOM.COM PARALOGIC BRIDGES PAGECOUNT PRO FORMA
FOR THE SIX FOR THE TWO FOR THE FIVE FOR THE SIX PRO FORMA FOR THE SIX
MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED BUSINESS MONTHS ENDED
JUNE 30, FEBRUARY 28, MAY 31, JUNE 30, COMBINATION JUNE 30,
1998 1998 1998 1998 COMBINED ADJUSTMENTS 1998
------------ ------------ ------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Revenue:
Electronic commerce.... $ 1,834,179 $ -- $ -- $208,689 $ 2,042,868 $ -- $ 2,042,868
Advertising............ 354,896 51,071 -- -- 405,967 -- 405,967
License fees and other. 375,641 -- -- -- 375,641 -- 375,641
Services............... -- 29,016 -- -- 29,016 -- 29,016
----------- ------- -------- -------- ----------- --------- -----------
Total net revenue....... 2,564,716 80,087 -- 208,689 2,853,492 -- 2,853,492
Cost of net revenues:
Cost of electronic
commerce.............. 898,710 -- -- -- 898,710 -- 898,710
Cost of advertising.... -- -- -- 14,314 14,314 -- 14,314
Cost of license fees
and other............. 27,292 -- -- -- 27,292 -- 27,292
Cost of services....... -- 31,438 -- -- 31,438 -- 31,438
----------- ------- -------- -------- ----------- --------- -----------
Cost of net revenues... 926,002 31,438 -- 14,314 971,754 -- 971,754
Gross profit............ 1,638,714 48,649 -- 194,375 1,881,738 -- 1,881,738
Costs and expenses:
Operating and
development........... 1,348,519 12,227 10,526 -- 1,371,272 -- 1,371,272
Sales and marketing.... 717,728 2,091 -- 2,371 722,190 -- 722,190
General and
administrative........ 1,098,782 12,440 4,292 184,023 1,299,537 -- 1,299,537
Purchased in-process
research and
development........... 1,070,000 -- -- -- 1,070,000 (490,000)(E) 580,000
Amortization of
deferred compensation. 806,087 -- -- -- 806,087 -- 806,087
Amortization of
intangible assets..... 318,451 -- -- -- 318,451 811,429 (A) 1,129,880
----------- ------- -------- -------- ----------- --------- -----------
Total costs and
expenses............... 5,359,567 26,758 14,818 186,394 5,587,537 321,429 5,908,966
Income (loss) from
operations............. (3,720,853) 21,891 (14,818) 7,981 (3,705,799) (321,429) (4,027,228)
Interest (expense)
income................. -- -- -- 62 62 (23,925)(B) (23,863)
----------- ------- -------- -------- ----------- --------- -----------
Income (loss) before
income taxes........... (3,720,853) 21,891 (14,818) 8,043 (3,705,737) (345,354) (4,051,091)
Income tax expense...... -- -- -- 1,548 1,548 (1,548)(C) --
----------- ------- -------- -------- ----------- --------- -----------
Net Income (loss)....... $(3,720,853) $21,891 $(14,818) $ 6,495 $(3,707,285) $(343,806) $(4,051,091)
=========== ======= ======== ======== =========== ========= ===========
Net loss per share--
basic and diluted...... (D) $ (0.39)
===========
Number of shares used in
per share calculation--
basic and diluted...... (D) 10,304,657
===========
</TABLE>
F-56
<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 six months ended June 30, 1998 are as
follows:
A. Reflects the amortization of intangible assets acquired in the
Paralogic, Global Bridges and Pagecount in the amounts of acquisitions
of $2,538,929, $766,621 and $1,273,970 respectively, amortized over a
two year period.
B. Reflects interest charges of $47,849 and $23,925 for the year ended
December 31, 1997 and the six months ended June 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 1,023,613 and 275,140 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 $490,000 has been
excluded from net loss for the six months ended June 30, 1998 as it
represents non recurring charges relating to the Paralogic
acquisition.
F-57
<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........................................................... 27
Dividend Policy........................................................... 27
Capitalization............................................................ 28
Dilution.................................................................. 29
Selected Consolidated Financial Data...................................... 30
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 32
Business.................................................................. 46
Management................................................................ 60
Certain Transactions...................................................... 70
Principal Stockholders.................................................... 72
Description of Capital Stock.............................................. 74
Shares Eligible for Future Sale........................................... 76
Underwriting.............................................................. 77
Legal Matters............................................................. 78
Experts................................................................... 78
Additional Information.................................................... 79
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.
================================================================================
================================================================================
SHARES
[XOOM.COM, INC. LOGO APPEARS HERE]
COMMON STOCK
---------------
PROSPECTUS
---------------
BEAR, STEARNS & CO. INC.
, 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..................................... 500,000
Blue Sky Fees and Expenses....................................... 5,000
Legal Fees and Expenses.......................................... 600,000
Transfer Agent and Registrar Fees and Expenses................... 15,000
Printing Expenses................................................ 200,000
Miscellaneous Expenses........................................... 271,330
----------
Total.......................................................... $1,700,000
==========
</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 June 30, 1998, the Registrant has granted or
issued and sold the following unregistered securities:
1. An aggregate of 11,314,940 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. 5,333,334 $1,200,200
2. 2,333,333 800,000
3. 596,665 358,000
4. 686,425 1,006,685
5. 2,365,183 5,250,707
---------- ----------
11,314,940 $8,615,592
</TABLE>
2. Stock options to employees, directors and consultants exercisable for up
to an aggregate of 1,549,722 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 907,820 shares of
the Registrant's Common Stock, at exercise prices ranging from $1.54 to $2.22
per share, with a weighted average exercise price of $1.99 per share.
4. An aggregate of 1,690,830 shares in connection with its acquisition
transactions with Paralogic, Global Bridges, Revolutionary Software and
ArcaMax.
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 16th day of October, 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 October 16, 1998
- ----------------------- and Director
Laurent Massa
/s/ John Harbottle Principal Financial and October 16, 1998
- ----------------------- Accounting Officer
John Harbottle
/s/ Chris Kitze Chairman October 16, 1998
- -----------------------
Chris Kitze
/s/ Vijay Vaidyanathan* Director October 16, 1998
- -----------------------
Vijay Vaidyanathan
/s/ Bob Ellis* Director October 16, 1998
- -----------------------
Bob Ellis
/s/ James J. Heffernan* Director October 16, 1998
- -----------------------
James J. Heffernan
/s/ Jeffrey Ballowe* Director October 16, 1998
- -----------------------
Jeffrey Ballowe
/s/ Philip Schlein* Director October 16, 1998
- -----------------------
Philip Schlein
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Robert C. Harris, Jr.* Director October 16, 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.............
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.....
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...........................
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DOCUMENT PAGE
------- -------- ------------
<C> <S> <C>
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...........................
10.20 Letter Agreement between the Registrant and Philip
Schlein, dated July 28, 1998...........................
10.21 Letter Agreement between the Registrant and Robert C.
Harris, Jr., dated July 28, 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>
EXHIBIT 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
XOOM, INC.
XOOM, Inc., a corporation organized and existing under and by virtue
of the General Corporation Law of the State of Delaware (the "Corporation"),
DOES HEREBY CERTIFY:
1. That the name of the Corporation is XOOM, Inc. The Corporation
was originally incorporated under the name Atomsoft, Inc.; and the original
Certificate of Incorporation of the Corporation was filed with the Secretary of
State of the State of Delaware on April 16, 1996.
2. That pursuant to a unanimous written consent of the Board of
Directors of the Corporation dated October 7, 1998, resolutions were duly
adopted setting forth the proposed amendment and restatement of the Certificate
of Incorporation of the Corporation and declaring said amendment and restatement
to be advisable. The resolution setting forth the proposed amendment and
restatement is as follows:
RESOLVED, that the Certificate of Incorporation of the
Corporation be, and it hereby is, amended and restated in its entirety
to read as set forth attached hereto.
3. That thereafter, the directors and the stockholders of the
Corporation took action by executing a written consent in lieu of a meeting in
accordance with Section 108(c) and Section 228(a), respectively, of the General
Corporation Law of the State of Delaware.
4. That said amendment and restatement was duly adopted in accordance
with the provisions of Sections 242 and 245 of the General Corporation Law of
the State of Delaware.
IN WITNESS WHEREOF, the Corporation has caused this Restated
Certificate of Incorporation to be signed by its duly authorized officer, this
8th day of October, 1998.
XOOM, INC.
By:/s/ Laurent Massa
-----------------
Laurent Massa
President and Chief Executive Officer
1
<PAGE>
RESTATED CERTIFICATE OF INCORPORATION
OF
XOOM, INC.
ARTICLE ONE
The name of the Corporation is XOOM.com, Inc.
ARTICLE TWO
The address of the registered office of the Corporation in the State of
Delaware is 1209 Orange Street, Wilmington, Delaware 19801, County of New
Castle. The name of the Corporation's registered agent at such address is The
Corporation Trust Company.
ARTICLE THREE
The nature of the business or purposes to be conducted or promoted is to
engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of the State of Delaware.
ARTICLE FOUR
The total number of shares of all classes of stock that the Corporation is
authorized to issue is Forty-Five Million (45,000,000) shares, consisting of
Forty Million (40,000,000) shares of Common Stock, par value ($.0001) per share,
and Five Million (5,000,000) shares of Preferred Stock, par value ($.0001) per
share.
Any of the shares of Preferred Stock may be issued from time to time in one
or more series. Subject to the limitations and restrictions set forth in this
Article Four, the Board of Directors, by resolution or resolutions, is
authorized to create or provide for any such series, and to fix the
designations, preferences and relative, participating, optional or other special
rights, and qualifications, limitations or restrictions thereof, including,
without limitation, the authority to fix or alter the dividend rights, dividend
rates, conversion rights, exchange rights, voting rights, rights and terms of
redemption (including sinking and purchase fund provisions), the redemption
price or prices, the dissolution preferences and the rights in respect to any
distribution of assets of any wholly unissued series of Preferred Stock and the
number of shares constituting any such series, and the designation thereof, or
any of them and to increase or decrease the number of shares of any series so
created, subsequent to the issue of that series but not below the number of
shares of such series then outstanding. In case the number of shares of any
series shall be so decreased, the shares constituting such decrease shall resume
the status which they had prior to the adoption of the resolution originally
fixing the number of shares of such series.
1
<PAGE>
There shall be no limitation or restriction on any variation between any of
the different series of Preferred Stock as to the designations, preferences and
relative, participating, optional or other special rights, and the
qualifications, limitations or restrictions thereof; and the several series of
Preferred Stock may, except as otherwise expressly provided herein, vary in any
and all respects as fixed and determined by the resolution or resolutions of the
Board of Directors, providing for the issuance of the various series; provided,
however, that all shares of any one series of Preferred Stock shall have the
same designation, preferences and relative, participating, optional or other
special rights and qualifications, limitations and restrictions.
Except as otherwise required by law, or as otherwise fixed by resolution or
resolutions of the Board of Directors with respect to one or more series of
Preferred Stock, the entire voting power and all voting rights shall be vested
exclusively in the Common Stock, and each stockholder of the Corporation who at
the time possesses voting power for any purpose shall be entitled to one vote
for each share of such stock standing in his name on the books of the
Corporation.
ARTICLE FIVE
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors of the Corporation is expressly authorized to make, alter
or repeal the Bylaws of the Corporation.
ARTICLE SIX
Elections of directors need not be by written ballot unless the Bylaws of
the Corporation shall so provide.
ARTICLE SEVEN
The Corporation shall indemnify, to the fullest extent permitted by Section
145 of the General Corporation Law of Delaware, as amended from time to time,
all officers and directors of the Corporation whom it may indemnify pursuant
thereto. The personal liability of a director of the Corporation to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director shall be limited to the fullest extent permitted by the
General Corporation Law of the State of Delaware, as it now exists or may
hereafter be amended. The Corporation may indemnify, to the fullest extent
permitted by Section 145 of the General Corporation Law of Delaware, as amended
from time to time, any or all employees or agents of the Corporation whom it may
indemnify pursuant thereto. Any repeal or modification of this Article by the
stockholders of the Corporation shall not adversely affect any right or
protection of an officer or director of the Corporation existing at the time of
such repeal or modification.
ARTICLE EIGHT
Whenever a compromise or arrangement is proposed between this Corporation
and its creditors or any class of them and/or between this Corporation and its
stockholders or any class
2
<PAGE>
of them, any court of equitable jurisdiction within the State of Delaware may,
on the application in a summary way of this Corporation or of any creditor or
stockholder thereof, or on the application of any receiver or receivers
appointed for this Corporation under the provisions of Section 291 of Title 8 of
the Delaware Code or on the application of trustees in dissolution or of any
receiver or receivers appointed for this Corporation under the provisions of
Section 279 of Title 8 of the Delaware Code order a meeting of the creditors or
class of creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, to be summoned in such manner as the said court
directs. If a majority in number representing three-fourths in value of the
creditors or class of creditors, and/or of the stockholders or class of
stockholders of this Corporation, as the case may be, agree to any compromise or
arrangement and to any reorganization of this Corporation as a consequence of
such compromise or arrangement, the said compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which the said application
has been made, be binding on all the creditors or class of creditors, and/or on
all the stockholders or class of stockholders, of this Corporation, as the case
may be, and also on this Corporation.
ARTICLE NINE
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed herein and by the laws of the State of Delaware, and all
rights conferred upon stockholders herein are granted subject to this right.
3
<PAGE>
EXHIBIT 3.2
XOOM.COM, INC.
BYLAWS
(AS AMENDED AND RESTATED ON OCTOBER 7, 1998)
ARTICLE I
Offices and Agent
-----------------
1. Principal Office. The principal office of the Corporation may be
----------------
located within or without the State of Delaware, as designated by the board of
directors. The Corporation may have other offices and places of business at
such places within or without the State of Delaware as shall be determined by
the directors or as may be required by the business of the Corporation.
2. Registered Office and Agent. The Corporation shall have and
---------------------------
maintain at all times (a) a registered office in the State of Delaware, which
office shall be located at 1209 Orange Street, Wilmington, County of New Castle,
Delaware 19801, and (b) a registered agent located at such address whose name is
The Corporation Trust Company, until changed from time to time as provided by
the General Corporation Law of the State of Delaware ("Delaware Corporation
Law").
ARTICLE II
Stockholders' Meetings
----------------------
1. Annual Meetings. The annual meeting of stockholders for the
---------------
election of directors and for the transaction of such other business as may
properly be brought before the meeting shall be held on such date and at such
time as determined by resolution of the board of directors. If this date falls
upon a legal holiday, then such meeting shall be held on the next succeeding
business day at the same hour. If no annual meeting is held in accordance with
the foregoing provisions, the board of directors shall cause the meeting to be
held as soon thereafter as convenient.
2. Special Meetings. Special meetings of the stockholders of the
----------------
Corporation may be called for any purpose at any time by the Chairman of the
Board of Directors, Chief Executive Officer or President, and shall be called by
the Secretary if directed by the board of directors. Special meetings of the
stockholders of the Corporation may not be called by any other person or
persons. No business may be transacted at any special meeting except that
referred to in the notice thereof. Any amendment, change or repeal of this
Section 2 of Article II, or any other amendment to these Bylaws that will have
the effect of permitting circumvention of or modifying this Section 2 of Article
II, shall require the favorable vote, at a stockholders' meeting, of the holders
of at least sixty-six and two-thirds percent (66 2/3%) of the then-outstanding
shares of stock of the Corporation entitled to vote.
3. Place of Meetings. All meetings of stockholders of the Corporation
-----------------
shall be held within or without the State of Delaware as may be designated by
the board of directors or the President, or, if not designated, at the principal
office of the Corporation.
1
<PAGE>
4. Notice of Meetings.
------------------
(a) Except as otherwise provided in these Bylaws or Delaware
Corporation Law, written notice of any meeting of stockholders, stating the
place, date and hour of the meeting and, in the case of a special meeting, the
purpose for which the meeting is called, shall be delivered either personally or
by mail to each stockholder of record entitled to vote at such meeting not less
than ten (10) nor more than sixty (60) days before the date of the meeting by or
at the direction of the board of directors, the President or the Secretary. If
mailed, such notice shall be deemed to be delivered as to any stockholder of
record when deposited in the United States mail addressed to the stockholder at
his address as it appears on the stock transfer books of the Corporation, with
postage prepaid.
(b) When a meeting is adjourned to another time or place, notice
need not be given of the adjourned meeting if the time and place thereof are
announced at the meeting at which the adjournment is taken. At the adjourned
meeting the Corporation may transact any business which might have been
transacted at the original meeting. If the adjournment is for more than thirty
(30) days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
5. Waiver of Notice. Any stockholder, either before or after any
----------------
stockholders' meeting, may waive in writing notice of the meeting, and his
waiver shall be deemed the equivalent of giving notice. Attendance at a meeting
by a stockholder shall constitute a waiver of notice, except when the
stockholder attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened.
6. Fixing of Record Date. For the purpose of determining the
---------------------
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the board of directors of the Corporation may fix in
advance a record date, which shall be not more than sixty (60) days nor less
than ten (10) days prior to the date of such meeting, nor more than sixty (60)
days prior to any other action. If no record date is fixed, the record date for
determining the stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the day next preceding the day
on which notice is given, or, if notice is waived, at the close of business on
the day next preceding the day on which the meeting is held. The record date
for determining stockholders for any purpose shall be at the close of business
on the day on which the board of directors adopts the resolution relating
thereto. A determination of stockholders of record entitled to notice of or
vote at a meeting of stockholders shall apply to any adjournment of the meeting,
provided, however, that the board of directors may fix a new record date for the
- -------- -------
adjourned meeting.
2
<PAGE>
7. Stockholders List. The officer who has charge of the stock ledger
-----------------
of the Corporation shall prepare and make, at least ten (10) days before every
meeting of stockholders, a complete list of the stockholders entitled to vote at
the meeting arranged in alphabetical order and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten (10) days prior to the meeting at a place within the city where the meeting
is to be held. The list shall also be produced and kept at the time and place
of the meeting during the whole time thereof and may be inspected by any
stockholder who is present.
8. Proxies.
-------
(a) A stockholder entitled to vote at a meeting of stockholders may
authorize another person or persons to act for him by proxy, which proxy shall
be filed with the Secretary at or before the meeting at which it is used. No
proxy shall be voted or acted upon after three (3) years from its date, unless
the proxy provides for a longer period.
(b) Without limiting the manner in which a stockholder may authorize
another person or persons to act for him as proxy pursuant to subsection (a) of
this Section, the following shall constitute a valid means by which a
stockholder may grant such authority:
(1) A stockholder may execute a writing authorizing another
person or persons to act for him as proxy. Execution may be accomplished by the
stockholder or his authorized officer, director, employee or agent signing such
writing or causing his signature to be affixed to such writing by any reasonable
means including, but not limited to, by facsimile signature.
(2) A stockholder may authorize another person or persons to act
for him as proxy by transmitting or authorizing the transmission of a telegram,
cablegram or other means of electronic transmission to the person who will be
the holder of the proxy or to a proxy solicitation firm, proxy support service
organization or like agent duly authorized by the person who will be the holder
of the proxy to receive such transmission, provided, that any such telegram,
--------
cablegram or other means of electronic transmission must either set forth or be
submitted with information from which it can be determined that the telegram,
cablegram or other electronic transmission was authorized by the stockholder.
Such authorization can be established by the signature of the stockholder on the
proxy, either in writing or by a signature stamp or facsimile signature, or by a
number or symbol from which the identity of the stockholder can be determined,
or by any other procedure deemed appropriate by the inspectors or other persons
making the determination as to due authorization. If it is determined that such
telegrams, cablegrams or other electronic transmissions are valid, the
inspectors or, if there are no inspectors, such other persons making that
determination shall specify the information upon which they relied.
(c) Any copy, facsimile telecommunication or other reliable
reproduction of the writing or transmission created pursuant to subsection (c)
of this section may be substituted or used in lieu of the original writing or
transmission for any and all purposes for
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which the original writing or transmission could be used, provided, that such
--------
copy, facsimile telecommunication or other reproduction shall be a complete
reproduction of the entire original writing or transmission.
9. Voting. Each stockholder shall have one vote for each share of
------
stock entitled to vote held of record by such stockholder and a proportionate
vote for each fractional share so held, unless otherwise provided in the
Certificate of Incorporation.
Persons holding stock in a fiduciary capacity shall be entitled to
vote the shares so held. Persons whose stock is pledged shall be entitled to
vote, unless in the transfer by the pledgor on the books of the Corporation he
has expressly empowered the pledgee to vote thereon, in which case only the
pledgee, or his proxy, may represent such stock and vote thereon.
If shares having voting power stand of record in the names of two or
more persons, whether fiduciaries, members of a partnership, joint tenants,
tenants in common, tenants by the entirety, or otherwise, or if two or more
persons have the same fiduciary relationship respecting the same shares, unless
the Secretary is given written notice to the contrary and is furnished with a
copy of the instrument or order appointing them or creating the relationship
wherein it is so provided, their acts with respect to voting shall have the
following effect: (i) if only one votes, his act binds all; (ii) if more than
one vote, the act of the majority so voting binds all; and (iii) if more than
one vote, but the vote is evenly split on any particular matter, each fraction
may vote the securities in question proportionately, or any person voting the
shares or a beneficiary, if any, may apply to the Court of Chancery or any court
of competent jurisdiction in the State of Delaware to appoint an additional
person to act with the persons so voting the shares. The shares shall then be
voted as determined by a majority of such persons and the person appointed by
the court. If a tenancy is held in unequal interests, a majority or even-split
for the purpose of this sub-section shall be a majority or even-split in
interest.
10. Quorum and Required Vote. Except as otherwise provided by law,
------------------------
the Certificate of Incorporation or these Bylaws, the holders of a majority of
the shares entitled to vote at the meeting, present in person or by proxy, shall
constitute a quorum for the transaction of business. If a quorum is present, the
affirmative vote of a majority of the shares present or represented by proxy at
the meeting and entitled to vote on the subject matter shall be the act of the
stockholders, and, if there are two or more classes of stock entitled to vote as
separate classes, then, in the case of each such class, the affirmative vote of
a majority of the shares of that class present or represented by proxy at the
meeting shall be the vote of such class unless a different vote is required by
an express provision of law, the Certificate of Incorporation or these Bylaws.
11. Voting Procedures and Inspections of Elections.
----------------------------------------------
(a) The Corporation shall, in advance of any meeting of
stockholders, appoint one or more inspectors to act at the meeting and make a
written report thereof. The Corporation may designate one or more persons as
alternate inspectors to replace any inspector who fails to act. If no inspector
or alternate is able to act at a meeting of stockholders, the person presiding
at the meeting shall appoint one or more inspectors to act at the meeting. Each
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inspector, before entering upon the discharge of his duties, shall take and sign
an oath faithfully to execute the duties of inspector with strict impartiality
and according to the best of his ability.
(b) The inspectors shall (i) ascertain the number of shares
outstanding and the voting power of each, (ii) determine the shares represented
at a meeting and the validity of proxies and ballots, (iii) count all votes and
ballots, (iv) determine and retain for a reasonable period a record of the
disposition of any challenges made to any determination by the inspectors, and
(v) certify their determination of the number of shares represented at the
meeting and their count of all votes and ballots. The inspectors may appoint or
retain other persons or entities to assist the inspectors in the performance of
the duties of the inspectors.
(c) The date and time of the opening and the closing of the
polls for each matter upon which the stockholders will vote at a meeting shall
be announced at the meeting. No ballot, proxies or votes, nor any revocations
thereof or changes thereto, shall be accepted by the inspectors after the
closing of the polls unless the Court of Chancery upon application by a
stockholder shall determine otherwise.
(d) In determining the validity and counting of proxies and
ballots, the inspectors shall be limited to an examination of the proxies, any
envelopes submitted with those proxies, any information provided in accordance
with Section 212(c)(2) of the Delaware Corporation Law, the ballots and the
regular books and records of the corporation, except that the inspectors may
consider other reliable information for the limited purpose of reconciling
proxies and ballots submitted by or on behalf of banks, brokers, their nominees
or similar persons which represent more votes than the holder of a proxy is
authorized by the record owner to cast or more votes than the stockholder holds
of record. If the inspectors consider other reliable information for the limited
purpose permitted herein, the inspectors at the time they make their
certification pursuant to sub-section (b)(v) above shall specify the precise
information considered by them, including the person or persons from whom they
obtained the information, when the information was obtained, the means by which
the information was obtained and the basis for the inspectors' belief that such
information is accurate and reliable.
12. Stockholder Proposals at Annual Meetings.
----------------------------------------
(a) At an annual meeting of the stockholders, only such
business shall be conducted as shall have been properly brought before the
meeting. To be properly brought before an annual meeting, business must be
specified in the notice of meeting (or any supplement thereto) given by or at
the direction of the Board of Directors, otherwise properly brought before the
meeting by or at the direction of the Board of Directors or otherwise properly
brought before the meeting by a stockholder. In addition to any other applicable
requirements, for business to be properly brought before an annual meeting by a
stockholder, the stockholder must have given timely notice thereof in writing to
the Secretary of the corporation. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
corporation, not less than 45 days nor more than 75 days prior to the date on
which the corporation first mailed its proxy materials for the previous year's
annual meeting of shareholders (or the date on which the corporation mails its
proxy materials for the current year if
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during the prior year the corporation did not hold an annual meeting or if the
date of the annual meeting was changed more than 30 days from the prior year). A
stockholder's notice to the Secretary shall set forth as to each matter the
stockholder proposes to bring before the annual meeting (i) a brief description
of the business desired to be brought before the annual meeting and the reasons
for conducting such business at the annual meeting, (ii) the name and record
address of the stockholder proposing such business, (iii) the class and number
of shares of the corporation which are beneficially owned by the stockholder,
and (iv) any material interest of the stockholder in such business.
(b) Notwithstanding anything in these Bylaws to the contrary,
no business shall be conducted at the annual meeting except in accordance with
the procedures set forth in this Section 12 of Article II; provided, that
--------
nothing in this Section 12 of Article II shall be deemed to preclude discussion
by any stockholder of any business properly brought before the annual meeting in
accordance with said procedure.
(c) The presiding officer of an annual meeting shall, if the
facts warrant, determine and declare to the meeting that business was not
properly brought before the meeting in accordance with the provisions of this
Section 12 of Article II, and any such business not properly brought before the
meeting shall not be transacted.
13. Nominations of Persons for Election to the Board of Directors.
-------------------------------------------------------------
(a) In addition to any other applicable requirements, only
persons who are nominated in accordance with the following procedures shall be
eligible for election as directors. Nominations of persons for election to the
board of directors may be made at a meeting of stockholders by or at the
direction of the board of directors, by any nominating committee or person
appointed by the board of directors or by any stockholder of the Corporation
entitled to vote for the election of directors at the meeting who complies with
the notice procedures set forth in this Section 13 of Article II.
(b) Such nominations, other than those made by or at the
direction of the board of directors, shall be made pursuant to timely notice in
writing to the Secretary. To be timely, a stockholder's notice must be delivered
to or mailed and received at the principal executive offices of the corporation,
not less than 45 days nor more than 75 days prior to the date on which the
corporation first mailed its proxy materials for the previous year's annual
meeting of shareholders (or the date on which the corporation mails its proxy
materials for the current year if during the prior year the corporation did not
hold an annual meeting or if the date of the annual meeting was changed more
than 30 days from the prior year). Such stockholder's notice shall set forth (i)
as to each person whom the stockholder proposes to nominate for election or re-
election as a director, (A) the name, age, business address and residence
address of the person, (B) the principal occupation or employment of the person,
(C) the class and number of shares of the Corporation which are beneficially
owned by the person, and (D) any other information relating to the person that
is required to be disclosed in solicitations for proxies for election of
directors pursuant to Rule 14a under the Securities Exchange Act of 1934; and
(ii) as to the stockholder giving the notice, (A) the name and record address of
the stockholder, and (B) the
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class and number of shares of the Corporation which are beneficially owned by
the stockholder. The Corporation may require any proposed nominee to furnish
such other information as may reasonably be required by the Corporation to
determine the eligibility of such proposed nominee to serve as a director of the
Corporation. No person shall be eligible for election as a director of the
Corporation unless nominated in accordance with the procedures set forth herein.
These provisions shall not apply to nomination of persons, if any, entitled to
be separately elected by holders of preferred stock.
(c) The presiding officer of the meeting shall, if the facts
warrant, determine and declare to the meeting that a nomination was not made in
accordance with the foregoing procedure, and the defective nomination shall be
disregarded.
14. Conduct of Meetings. The board of directors may adopt by
-------------------
resolution such rules and regulations for the conduct of meetings of
stockholders as it shall deem appropriate. Except to the extent inconsistent
with such rules and regulations as adopted by the board of directors, the
presiding officer of any meeting of stockholders shall have the right and
authority to prescribe such rules, regulations and procedures and to do all such
acts as, in the judgment of such presiding officer, are appropriate for the
proper conduct of the meeting. Such rules, regulations and procedures, whether
adopted by the board of directors or prescribed by the presiding officer of the
meeting, may include, without limitation, the following: (i) the establishment
of an agenda or order of business for the meeting; (ii) rules and procedures for
maintaining order at the meeting and the safety of those present; (iii)
limitations on attendance at or participation in the meeting to stockholders of
record, their duly authorized and constituted proxies or such other persons as
the presiding officer of the meeting shall determine; (iv) restrictions on entry
to the meeting after the time fixed for the commencement thereof; and (v)
limitations on the time allotted to questions and/or comments by participants.
Unless and to the extent determined by the board of directors or the presiding
officer of the meeting, meetings of stockholders shall not be required to be
held in accordance with the rules of parliamentary procedure.
15. Adjournment. In case a quorum shall not be present at any
-----------
meeting, the presiding officer of the meeting or a majority in interest of the
stockholders entitled to vote thereat present in person or by proxy shall have
power to adjourn the meeting from time to time, without notice other than
announcement at the meeting, until the requisite amount of stock entitled to
vote shall be represented. At any such adjourned meeting at which the requisite
amount of stock entitled to vote shall be represented, any business may be
transacted which might have been transacted at the meeting as originally
noticed, but only those stockholders entitled to vote at the meeting as
originally noticed shall be entitled to vote at any adjournment or adjournments
thereof. In addition, the board of directors may adjourn a meeting of the
stockholders if the board of directors determines that adjournment is necessary
or appropriate in order to enable the stockholders (i) to consider fully
information that the board of directors determines has not been made
sufficiently or timely available to stockholders or (ii) to otherwise
effectively exercise their voting rights.
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16. Action by Stockholders Without Meeting. Any action required by
--------------------------------------
the provisions of Delaware Corporation Law to be taken by the stockholders of
the Corporation may be taken without a meeting, by a consent or consents in
writing, and the Board of Directors shall determine the procedures for obtaining
such written consent or consents from the stockholders of the Corporation in
accordance with the provisions of the Delaware Corporation Law.
ARTICLE III
Board of Directors
------------------
1. Number, Qualifications and Term of Office.
-----------------------------------------
(a) The Board of Directors shall be constituted as follows:
(1) Except as otherwise provided in the Certificate of
Incorporation or the Delaware Corporation Law, the business and affairs of the
Corporation shall be managed by or under the direction of a board of directors
consisting of one or more members.
(2) Directors need not be stockholders of the Corporation.
(3) The number of directors of the Corporation shall not be
less than five (5) nor more than nine (9) until changed by amendment of the
Certificate of Incorporation or by a Bylaw amending this Section 1 of Article
III duly adopted by the vote or written consent of holders of a majority of the
outstanding shares or by the board of directors. The exact number of directors
shall be fixed from time to time, within the limits specified in the Certificate
of Incorporation or in this Section 1 of Article III, by a Bylaw or amendment
thereof duly adopted by the vote of a majority of the shares entitled to vote
represented at a duly held meeting at which a quorum is present or by the board
of directors. Subject to the foregoing provisions for changing the number of
directors, the number of directors of the Corporation has been fixed at eight
(8).
(4) Except as provided in Section 2 of Article III of these
Bylaws, the directors shall be elected by a plurality vote of the shares
represented in person or by proxy at the stockholders annual meeting in each
year and entitled to vote on the election of directors. Elected directors shall
hold office until the next annual meeting for the years in which their terms
expire and until their successors shall be duly elected and qualified. If, for
any cause, the board of directors shall not have been elected at an annual
meeting, they may be elected as soon thereafter as convenient at a special
meeting of the stockholders called for that purpose in the manner provided in
these Bylaws.
2. Vacancies. Except as otherwise provided by the Certificate of
---------
Incorporation or any amendments thereto, vacancies and newly created
directorships resulting from any increase in the number of authorized directors
may be filled by a majority of the directors then in office, although less than
a quorum, or by a sole remaining director, and each director so elected shall
hold office for the unexpired portion of the term of the director whose place
shall be vacant, and until his successor shall have been duly elected and
qualified. A vacancy in the board of directors shall be deemed to exist under
this Section 2 of Article III in
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the case of the death, removal or resignation of any director, or if the
stockholders fail at any meeting of stockholders at which directors are to be
elected to elect the number of directors then constituting the whole board.
3. Resignation. Any director may resign by delivering his written
-----------
resignation to the Corporation at its principal office, addressed to the
President or Secretary. Such resignation shall be effective upon receipt unless
it is specified to be effective at some other time or upon the happening of some
other event. When one or more directors shall resign from the board, effective
at a future date, a majority of the directors then in office, including those
who have so resigned, shall have power to fill such vacancy or vacancies, the
vote thereon to take effect when such resignation or resignations shall become
effective, and each director so chosen shall hold office for the unexpired
portion of the term of the director whose place shall be vacated and until his
successor shall have been duly elected and qualified.
4. Compensation. Directors may be paid such compensation for their
------------
services and such reimbursements for expenses of attendance at meetings as the
board of directors may from time to time determine. No such payment shall
preclude any director from serving the Corporation in any other capacity and
receiving compensation therefor.
ARTICLE IV
Meetings of the Board
---------------------
1. Place of Meetings. The regular or special meetings of the board
-----------------
of directors or any committee designated by the board shall be held at the
principal office of the Corporation or at any other place within or without the
State of Delaware that a majority of the board of directors or any such
committee, as the case may be, may designate from time to time by resolution.
2. Regular Meetings. The board of directors shall meet each year
----------------
immediately after and at the same place as the annual meeting of the
stockholders for the purpose of electing officers and transacting such other
business as may come before the meeting. The board of directors or any
committee designated by the board may provide, by resolution, for the holding of
additional regular meetings within or without the State of Delaware without
notice of the time and place of such meeting other than such resolution;
provided, that any director who is absent when such resolution is made shall be
- --------
given notice of said resolution.
3. Special Meetings. Special meetings of the board of directors or
----------------
any committee designated by the board may be held at any time and place, within
or without the State of Delaware, designated in a call by the chairman of the
board, if any, by the President or by a majority of the members of the board of
directors or any such committee, as the case may be.
4. Notice of Special Meetings. Except as otherwise provided by
--------------------------
these Bylaws or the laws of the State of Delaware, written notice of each
special meeting of the board of directors or any committee thereof setting forth
the time and place of the meeting shall be given to each director by the
Secretary or by the officer or director calling the meeting not less
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than two (2) days prior to the time fixed for the meeting. Notice of special
meetings may be either given in person, by telephone, or by sending a copy of
the notice through the United States mail or by telegram, telex or telecopy,
charges prepaid, to the address of each director appearing on the books of the
Corporation. If mailed, such notice shall be deemed to be delivered when
deposited in the United States mail so addressed, with postage prepaid thereon.
If notice be given by telegram, telex or telecopy, such notice shall be deemed
to be delivered when the telegram, telex or telecopy is delivered to the
telegraph, telex or telecopy operator. Neither the business to be transacted at,
nor the purpose of, any regular or special meeting of the board of directors
need be specified in the notice or waiver of notice of such meeting.
5. Waiver of Notice. A director may waive, in writing, notice of
----------------
any special meeting of the board of directors or any committee thereof, either
before, at, or after the meeting, and his waiver shall be deemed the equivalent
of giving notice. By attending or participating in a regular or special meeting,
a director waives any required notice of such meeting unless the director, at
the beginning of the meeting, objects to the holding of the meeting or the
transaction of business at the meeting.
6. Quorum and Action at Meeting. At meetings of the board of
----------------------------
directors or any committee designated by the board, a majority of the total
number of directors, or a majority of the members of any such committee, as the
case may be, shall constitute a quorum for the transaction of business. In the
event one or more of the directors shall be disqualified to vote at any meeting,
then the required quorum shall be reduced by one for each such director so
disqualified; provided, that in no case shall less than one-third (1/3) of the
--------
number so fixed constitute a quorum. If a quorum is present, the act of the
majority of directors in attendance shall be the act of the board of directors
or any committee thereof, as the case may be, unless the act of a greater number
is required by these Bylaws, the Certificate of Incorporation or the Delaware
Corporation Law. If a quorum shall not be present at any meeting of the board of
directors, the directors present thereat may adjourn that meeting from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present.
7. Presumption of Assent. A director who is present at a meeting
---------------------
of the board of directors or a committee thereof when action is taken is deemed
to have assented to the action taken unless: (i) he objects at the beginning of
such meeting to the holding of the meeting or the transacting of business at the
meeting; (ii) he contemporaneously requests that his dissent from the action
taken be entered in the minutes of such meeting; or (iii) he gives written
notice of his dissent to the presiding officer of such meeting before its
adjournment or to the Secretary of the Corporation immediately after adjournment
of such meeting. The right of dissent as to a specific action taken at a meeting
of the board or a committee thereof is not available to a director who votes in
favor of such action.
8. Committees. The board of directors may, by a resolution passed
----------
by a majority of the whole board of directors, designate one or more committees,
each committee to consist of one or more of the directors of the Corporation.
The board may designate one or more directors as alternate members of any
committee, who may replace any absent or disqualified member at any meeting of
the committee. In the absence or disqualification of a member of a
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committee, the member or members of the committee present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the board of directors to act at the
meeting in the place of the absent or disqualified member. Any such committee,
to the extent provided in the resolution of the board of directors and subject
to the provisions of Delaware Corporation Law, shall have and may exercise all
the powers and authority of the board of directors in the management of the
business and affairs of the Corporation, and may authorize the seal of the
Corporation to be affixed to all such papers which may require it. Each such
committee shall keep minutes and make such reports as the board of directors may
from time to time request. Except as the board of directors may otherwise
determine, any committee may make rules for the conduct of its business, but,
unless otherwise provided by the directors or in such rules, its business shall
be conducted as nearly as possible in the same manner as is provided in these
Bylaws for the board of directors.
9. Informal Action by Directors. Except as otherwise provided in the
----------------------------
Certificate of Incorporation, any action required or permitted by Delaware
Corporation Law to be taken at any meeting of the board of directors or any
committee thereof may be taken without a meeting if all members of the board or
committee, as the case may be, consent to the action in writing and the written
consents are filed with the minutes of proceedings of the board or committee.
10. Telephonic Meetings. Directors or any members of any committee may
-------------------
participate in a meeting of the board or committee by means of a conference
telephone or similar communications equipment by which all persons participating
in the meeting can hear each other at the same time. Such participation shall
constitute presence in person at the meeting.
ARTICLE V
Officers and Agents
-------------------
1. Enumeration, Election and Term. The officers of the Corporation
------------------------------
shall consist of a president, a secretary, a treasurer and such other officers
with such other titles as may be deemed necessary or desirable by the board of
directors, including a chief executive officer, chief financial officer, one or
more vice presidents, a controller, assistant treasurers and assistant
secretaries and a chairman of the board. Any number of offices may be held by
the same person, and no officer need be a stockholder or a resident of the State
of Delaware. Except as otherwise provided by law, the Certificate of
Incorporation or these Bylaws, each officer shall hold office until his
successor is elected and qualified or until his earlier death, resignation or
removal. The officers of the Corporation shall be elected annually by the board
of directors at the first meeting of the board held after each annual meeting of
the stockholders.
2. General Duties. All officers and agents of the Corporation, as
--------------
between themselves and the Corporation, shall have such authority and shall
perform such duties in the management of the Corporation as may be provided in
these Bylaws or as may be determined by resolution of the board of directors not
inconsistent with these Bylaws. In all cases where the duties of any officer,
agent or employee are not prescribed by these Bylaws or by the board of
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directors, such officer, agent or employee shall follow the orders and
instructions of the President.
3. Vacancies. The board of directors may fill any vacancy occurring in
---------
any office for any reason and may, in its discretion, leave any vacancy unfilled
for such period as it may determine, other than a vacancy in the office of
president or secretary. The officer so selected shall hold office until his
successor is elected and qualified or until his earlier death, resignation or
removal.
4. Compensation. The board of directors from time to time shall fix
------------
the compensation of the officers of the Corporation. The compensation of other
agents and employees of the Corporation may be fixed by the board of directors,
by any committee designated by the board or by an officer to whom that function
has been delegated by the board.
5. Resignation and Removal. Any officer may resign by delivering his
-----------------------
written resignation to the Corporation at its principal office, addressed to the
President or Secretary. Such resignation shall be effective upon receipt,
unless it is specified to be effective at some other time or upon the happening
of some other event. Any officer or agent of the Corporation may be removed,
with or without cause, by a vote of the majority of the members of the board of
directors whenever in its judgment the best interests of the Corporation may be
served thereby, but such removal shall be without prejudice to the contract
rights, if any, of the person so removed. Election or appointment of an officer
or an agent shall not of itself create contract rights.
6. Chairman of the Board. The Chairman of the Board, if any, shall
---------------------
preside as chairman at meetings of the stockholders and the board of directors.
He shall, in addition, have such other duties as the board may prescribe that he
perform. At the request of the President, the Chairman of the Board may, in the
case of the President's absence or inability to act, temporarily act in his
place. In the case of death of the President or in the case of his absence or
inability to act without having designated the Chairman of the Board to act
temporarily in his place, the Chairman of the Board shall perform the duties of
the President, unless the board of directors, by resolution, provides otherwise.
If the Chairman of the Board shall be unable to act in place of the President,
the Vice Presidents may exercise such powers and perform such duties as provided
below.
7. Chief Executive Officer. The Chief Executive Officer, if any, shall
-----------------------
see that all orders and resolutions of the board of directors are carried into
effect and shall oversee the strategic planning and policy development of the
Corporation. The Chief Executive Officer shall have the authority to execute
bonds, mortgages and other contracts requiring a seal, under the seal of the
Corporation, except where required by law to be otherwise signed and executed
and except where the signing and execution thereof shall be expressly delegated
by the board of directors to some other officer or agent of the Corporation.
The Chief Executive Officer shall perform other duties commonly incident to this
office and shall perform such other duties and have such other powers as the
board of directors may from time to time prescribe.
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8. President. The President shall have general supervision of the
---------
business of the Corporation. In the event the position of chairman of the board
shall not be occupied or the chairman shall be absent or otherwise unable to
act, the President shall preside at meetings of the stockholders and directors
and shall discharge the duties of the presiding officer. The President shall
have the authority to execute bonds, mortgages and other contracts requiring a
seal under the seal of the Corporation, except where required by law to be
otherwise signed and executed and except where the signing and execution thereof
shall be expressly delegated by the board of directors to some other officer or
agent of the Corporation. At each annual meeting of the stockholders, the
President shall give a report of the business of the Corporation for the
preceding fiscal year and shall perform whatever other duties the board of
directors may from time to time prescribe.
9. Chief Financial Officer. The chief financial officer, or if none
-----------------------
the treasurer, shall have custody of corporate funds and securities and shall
keep full and accurate accounts of receipts and disbursements and shall deposit
all corporate monies and other valuable effects in the name and to the credit of
the Corporation in the depository or depositories of the Corporation, and shall
render an account of his or her transactions as chief financial officer and of
the financial condition of the Corporation to the President and/or the board of
directors upon request. Such power given to the treasurer to deposit and
disburse funds shall not, however, preclude any other officer or employee of the
Corporation from also depositing and disbursing funds when authorized to do so
by the board of directors. The chief financial officer shall, if required by
the board of directors, give the Corporation a bond in such amount and with such
surety or sureties as may be ordered by the board of directors for the faithful
performance of the duties of his office. The chief financial officer shall have
such other powers and perform such other duties as may be from time to time
prescribed by the board of directors or the President. In the absence of the
chief financial officer or his inability to act, the treasurer (or, in his
absence, the assistant treasurers or controller, if any) shall act with the same
authority and shall be subject to the same restrictions as are applicable to the
chief financial officer.
10. Vice Presidents. Each Vice President shall have such powers and
---------------
perform such duties as the board of directors may from time to time prescribe or
as the President may from time to time delegate to him. At the request of the
President, in the case of the President's absence or inability to act, any Vice
President may temporarily act in his place. In the case of the death of the
President, or in the case of his absence or inability to act without having
designated a Vice President or Vice Presidents to act temporarily in his place,
the board of directors, by resolution, may designate a Vice President or Vice
Presidents to perform the duties of the President. If no such designation shall
be made, the chief executive officer, if any, shall exercise such powers and
perform such duties, as provided above, but, if the Corporation has no chief
executive officer, or if the chief executive officer is unable to act in place
of the President, all of the Vice Presidents may exercise such powers and
perform such duties.
11. Secretary. The Secretary shall keep or cause to be kept in books
---------
provided for that purpose, the minutes of the meetings of the stockholders,
executive committee, if any, and any other committees, and of the board of
directors; shall see that all notices are duly given in accordance with the
provisions of these Bylaws and as required by law; shall be custodian of
13
<PAGE>
the records and of the seal of the Corporation and see that the seal is affixed
to all documents, the execution of which on behalf of the Corporation under its
seal is duly authorized and in accordance with the provisions of these Bylaws;
and, in general, shall perform all duties incident to the office of Secretary
and such other duties as may, from time to time, be assigned to him by the board
of directors or by the President. In the absence of the Secretary or his
inability to act, the assistant secretaries, if any, shall act with the same
powers and shall be subject to the same restrictions as are applicable to the
Secretary.
12. Delegation of Duties. Whenever an officer is absent, or whenever, for
--------------------
any reason, the board of directors may deem it desirable, the board may delegate
the powers and duties of an officer to any other officer or officers or to any
director or directors.
ARTICLE VI
Indemnification of Officers, Directors and Others
-------------------------------------------------
1. Indemnification.
(a) Each person who was or is a party or is threatened to be made a
party to or is involved (as a party, witness or otherwise), in any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (hereinafter a "Proceeding"), by reason of the
fact that he, or a person of whom he is the legal representative, is or was a
director or officer of the Corporation or is or was serving at the request of
the Corporation as a director or officer of another corporation or of a
partnership, joint venture, trust, or other enterprise, including service with
respect to employee benefit plans, whether the basis of the Proceeding is
alleged action in an official capacity as a director or officer or in any other
capacity while serving as a director or officer, shall be indemnified and held
harmless by the Corporation to the fullest extent authorized by the Delaware
Corporation Law, as the same exists or may hereafter be amended or interpreted
(but, in the case of any such amendment or interpretation, only to the extent
that such amendment or interpretation permits the Corporation to provide broader
indemnification rights than were permitted prior thereto) against all expenses,
liability and loss (including attorneys' fees, judgments, fines, ERISA excise
taxes or penalties, and amounts paid or to be paid in settlement, and any
interest, assessments or other charges imposed thereon, and any federal, state,
local or foreign taxes imposed on any person indemnified hereby as a result of
the actual or deemed receipt of any payments under this Article VI) reasonably
incurred or suffered by such person in connection with investigating, defending,
being a witness in, or participating in (including on appeal), or preparing for
any of the foregoing in, any Proceeding (hereinafter "Losses"); provided,
--------
however, that except as to actions to enforce indemnification rights pursuant to
- -------
Section 3 of Article VI, the Corporation shall indemnify any officer or director
seeking indemnification in connection with a Proceeding (or part thereof)
initiated by such person only if the Proceeding (or part thereof) was authorized
by the Board of Directors of the Corporation. The right to indemnification
conferred in this Article VI shall be a contract right.
(b) Each person who was or is a party or is threatened to be made a
party to or is involved (as a party, witness or otherwise), in any threatened,
pending or completed
14
<PAGE>
Proceeding, by reason of the fact that he, or a person of whom he is the legal
representative, is or was an employee or agent (other than an officer or
director) of the Corporation or is or was serving at the request of the
Corporation as an employee or agent (other than an officer or director) of
another corporation or of a partnership, joint venture, trust, or other
enterprise, including service with respect to employee benefit plans, whether
the basis of the Proceeding is alleged action in an official capacity as an
employee or agent or in any other capacity while serving as an employee or
agent, may be indemnified and held harmless by the Corporation to the fullest
extent authorized by the Delaware Corporation Law, as the same exists or may
hereafter be amended or interpreted (but, in the case of any such amendment or
interpretation, only to the extent that such amendment or interpretation permits
the Corporation to provide broader indemnification rights than were permitted
prior thereto) against all Losses.
2. Authority to Advance Expenses. Expenses incurred by an officer or
-----------------------------
director (acting in his capacity as such) in defending a Proceeding shall be
paid by the Corporation in advance of the final disposition of such Proceeding,
provided, that if required by the Delaware Corporation Law, as amended, such
- --------
expenses shall be advanced only upon delivery to the Corporation of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
the Corporation as authorized in this Article VI or otherwise. Expenses incurred
by employees or other agents of the Corporation (or by the directors or officers
not acting in their capacity as such, including service with respect to employee
benefit plans) may be advanced upon such terms and conditions as the Board of
Directors deems appropriate. Any obligation to reimburse the Corporation for
expense advances shall be unsecured and no interest shall be charged thereon.
3. Right of Claimant to Bring Suit. If a claim under Section 1 or 2 of
-------------------------------
Article VI is not paid in full by the Corporation within 30 days after a written
claim has been received by the Corporation, the claimant may at any time
thereafter bring suit against the Corporation to recover the unpaid amount of
the claim and, if successful in whole or in part, the claimant shall be entitled
to be paid also the expense (including attorneys' fees) of prosecuting such
claim. It shall be a defense to any such action (other than an action brought
to enforce a claim for expenses incurred in defending a Proceeding in advance of
its final disposition where the required undertaking has been tendered to the
corporation) that the claimant has not met the standards of conduct that make it
permissible under the Delaware Corporation Law for the Corporation to indemnify
the claimant for the amount claimed. The burden of proving such a defense shall
be on the Corporation. Neither the failure of the Corporation (including its
Board of Directors, independent legal counsel or stockholders) to have made a
determination prior to the commencement of such action that indemnification of
the claimant is proper under the circumstances because he has met the applicable
standard of conduct set forth in the Delaware Corporation Law, nor an actual
determination by the Corporation (including its Board of Directors, independent
legal counsel or stockholders) that the claimant had not met such applicable
standard of conduct, shall be a defense to the action or create a presumption
that claimant has not met the applicable standard of conduct.
15
<PAGE>
4. Provisions Nonexclusive. The rights conferred on any person by this
-----------------------
Article VI shall not be exclusive of any other rights that such person may have
or hereafter acquire under any statute, provision of the Certificate of
Incorporation, as may be amended from time to time, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in an
official capacity and as to action in another capacity while holding such
office. To the extent that any provision of the Certificate of Incorporation,
agreement or vote of the stockholders or disinterested directors is inconsistent
with these bylaws, the provision, agreement or vote shall take precedence.
5. Authority to Insure. The corporation may purchase and maintain
-------------------
insurance to protect itself and any director, officer, employee or other agent
(collectively, "Agents") against any Losses, whether or not the Corporation
would have the power to indemnify the Agent against such Losses under applicable
law or the provisions of these Bylaws.
6. Survival of Rights. The rights provided by this Article VI shall
------------------
continue as to a person who has ceased to be an Agent and shall inure to the
benefit of the heirs, executors, and administrators of such a person.
7. Settlement of Claims. The Corporation shall not be liable to
--------------------
indemnify any Agent under this Article VI (a) for any amounts paid in settlement
of any action or claim effected without the Corporation's written consent, which
consent shall not be unreasonably withheld; or (b) for any judicial award if the
Corporation was not given a reasonable and timely opportunity, at its expense,
to participate in the defense of such action.
8. Effect of Amendment. Any amendment, repeal or modification of this
-------------------
Article VI shall not adversely affect any right or protection of any Agent
existing at the time of such amendment, repeal or modification.
9. Subrogation. In the event of payment under this Article VI, the
-----------
Corporation shall be subrogated to the extent of such payment to all of the
rights of recovery of the Agent, who shall execute all papers required and shall
do everything that may be necessary to secure such rights, including the
execution of such documents necessary to enable the Corporation effectively to
bring suit to enforce such rights.
10. No Duplication of Payments. The Corporation shall not be liable
--------------------------
under this Article VI to make any payment in connection with any claim made
against the Agent to the extent the Agent has otherwise actually received
payment (under any insurance policy, agreement, vote or otherwise) of the
amounts otherwise indemnifiable hereunder.
ARTICLE VII
Capital Stock
-------------
1. Certificates of Stock. The shares of the Corporation shall be
---------------------
represented by certificates, provided that the board of directors of the
Corporation may, by resolution, provide that some or all of any or all classes
or series of its stock shall be uncertificated shares. Any such resolution
shall not apply to shares represented by a certificate until such certificate is
16
<PAGE>
surrendered to the Corporation. Notwithstanding the adoption of such a
resolution by the board of directors, every holder of stock represented by
certificates and upon request every holder of uncertificated shares shall be
entitled to have a certificate signed by, or in the name of the Corporation by,
the Chairman or Vice Chairman of the board of directors, or the President or
Vice President, and by the Treasurer or an assistant treasurer, or the Secretary
or an assistant secretary, representing the number of shares registered in
certificate form. Any or all the signatures on the certificate may be a
facsimile. In case any officer, transfer agent, or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the Corporation with the same effect as if he were
such officer, transfer agent or registrar at the date of issue.
2. Issuance of Stock. Unless otherwise voted by the stockholders and
-----------------
subject to the provisions of the Certificate of Incorporation, the whole or any
part of any unissued balance of the authorized capital stock of the Corporation
or the whole or any part of any unissued balance of the authorized capital stock
of the Corporation held in its treasury may be issued, sold, transferred or
otherwise disposed of by resolution of the board of directors in such manner,
for such consideration and on such terms as the board of directors may
determine. Consideration for such shares of capital stock shall be expressed in
dollars, and shall not be less than the par value or stated value therefor, as
the case may be. The par value for shares, if any, shall be stated in the
Certificate of Incorporation, and the stated value for shares, if any, shall be
fixed from time to time by the board of directors.
3. Lost Certificates. The board of directors may direct a new
-----------------
certificate to be issued in place of any previously issued certificate alleged
to have been destroyed or lost if the owner makes an affidavit or affirmation of
that fact and produces such evidence of loss or destruction as the board may
require. The board, in its discretion, may as a condition precedent to the
issuance of a new certificate require the owner to indemnify the Corporation
(including providing the Corporation with a bond) against any claim that may be
made against the Corporation relating to the allegedly destroyed or lost
certificate.
4. Transfer of Shares. Subject to applicable law, shares of stock of
------------------
the Corporation may be transferred on its books upon the surrender to the
Corporation or its transfer agent of the certificates representing such shares,
if any, duly endorsed or accompanied by a written assignment or power of
attorney duly executed and with such proof of authority or authenticity of
signature as the Corporation or its transfer agent may reasonably require. In
that event, the surrendered certificates shall be cancelled, new certificates
issued to the persons entitled to them, if any, and the transaction recorded on
the books of the Corporation.
5. Registered Stockholders. The Corporation shall be entitled to
-----------------------
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares, and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of the other person, whether or not
it shall have
17
<PAGE>
express or other notice thereof, except as otherwise provided by the laws of the
State of Delaware.
6. Stock Ledger. An appropriate stock journal and ledger shall be kept
------------
by the Secretary or such registrars or transfer agents as the directors by
resolution may appoint in which all transactions in the shares of stock of the
Corporation shall be recorded.
7. Restriction on Transfer of Shares. Notice of any restriction on the
---------------------------------
transfer of the stock of the Corporation shall be placed on each certificate of
stock issued or, in the case of uncertificated shares, contained in the notice
sent to the registered owner of such shares in accordance with the provisions of
the Delaware Corporation Law.
ARTICLE VIII
Fiscal Year
-----------
The fiscal year of the Corporation shall be determined by the board of
directors and set forth in the minutes of the meetings of the directors. Said
fiscal year may be changed from time to time by the board of directors in its
discretion.
ARTICLE IX
Dividends
---------
Dividends upon the capital stock of the Corporation, subject to the
provisions of the Certificate of Incorporation, if any, may be declared by the
board of directors at any regular or special meeting, pursuant to law. Dividends
may be paid in cash, in property or in shares of the capital stock, subject to
the provisions of the Certificate of Incorporation. Before payment of any
dividend, there may be set aside out of any funds of the Corporation available
for dividends such sum or sums as the directors from time to time, in their
absolute discretion, think proper as a reserve or reserves to meet
contingencies, or for equalizing dividends, or for repairing or maintaining any
property of the Corporation, or for such other purpose as the directors shall
think in the best interests of the Corporation, and the directors may modify or
abolish any such reserve in the manner in which it was created.
ARTICLE X
Amendments
----------
These Bylaws may be repealed, altered or amended or new Bylaws adopted at
any meeting of the stockholders, either annual or special, by the affirmative
vote of a majority of the stock entitled to vote at such meeting, unless a
larger vote is required by these Bylaws or the Certificate of Incorporation. The
board of directors shall also have the authority to repeal, alter or amend these
Bylaws or adopt new Bylaws (including, without limitation, the amendment of any
Bylaws setting forth the number of directors who shall constitute the whole
board of directors) by unanimous written consent or at any annual, regular or
special meeting by the affirmative vote of a majority of the whole number of
directors, subject to the power of the stockholders to change or repeal such
Bylaws; provided, that the board of directors shall not make or alter any Bylaws
--------
fixing the qualifications, classifications, or term of office of directors.
18
<PAGE>
ARTICLE XI
Miscellaneous
-------------
1. Gender. Whenever required by the context, the singular shall include
------
the plural, the plural the singular, and one gender shall include all genders.
2. Invalid Provision. The invalidity or unenforceability of any
-----------------
particular provision of these Bylaws shall not affect the other provisions
herein, and these Bylaws shall be construed in all respects as if such invalid
or unenforceable provision were omitted.
3. Governing Law. These Bylaws shall be governed by and construed in
-------------
accordance with the laws of the State of Delaware.
19
<PAGE>
I, Chris Kitze, as Chairman of the Board and Secretary of the
Corporation, do hereby certify that the foregoing Bylaws were adopted by the
Board of Directors of XOOM.com, Inc. effective as of October 7, 1998.
/s/ Chris Kitze
------------------------------------------------
Chris Kitze, Chairman of the Board and Secretary
20
<PAGE>
EXHIBIT 10.5
XOOM.COM, INC.
1998 EMPLOYEE STOCK PURCHASE PLAN
---------------------------------
The following constitute the provisions of the 1998 Employee Stock
Purchase Plan of XOOM.com, Inc.
1. Purpose. The purpose of the Plan is to provide employees of the
-------
Company and its Designated Parents or Subsidiaries with an opportunity to
purchase Common Stock of the Company through accumulated payroll deductions. It
is the intention of the Company to have the Plan qualify as an "Employee Stock
Purchase Plan" under Section 423 of the Code. The provisions of the Plan,
accordingly, shall be construed so as to extend and limit participation in a
manner consistent with the requirements of that section of the Code.
2. Definitions. As used herein, the following definitions shall
-----------
apply:
(a) "Applicable Laws" means the legal requirements relating to the
---------------
administration of employee stock purchase plans, if any, under applicable
provisions of federal securities laws, state corporate and securities laws, the
Code, the rules of any applicable stock exchange or national market system, and
the rules of any foreign jurisdiction applicable to participation in the Plan by
residents therein.
(b) "Board" means the Board of Directors of the Company.
-----
(c) "Change in Control" means a change in ownership or control of the
-----------------
Company effected through the direct or indirect acquisition by any person or
related group of persons (other than an acquisition from or by the Company or by
a Company-sponsored employee benefit plan or by a person that directly or
indirectly controls, is controlled by, or is under common control with, the
Company) of beneficial ownership (within the meaning of Rule 13d-3 of the
Exchange Act) of securities possessing more than fifty percent (50%) of the
total combined voting power of the Company's outstanding securities.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
----
(e) "Common Stock" means the common stock of the Company.
------------
(f) "Company" means XOOM.com, Inc., a Delaware corporation.
-------
(g) "Compensation" means an Employee's base salary from the Company or
------------
one or more Designated Parents or Subsidiaries, including such amounts of base
salary as are deferred by the Employee (i) under a qualified cash or deferred
arrangement described in Section 401(k) of the Code, or (ii) to a plan qualified
under Section 125 of the Code. Compensation does not include overtime, bonuses,
annual awards, other incentive payments, reimbursements or other expense
allowances, fringe benefits (cash or noncash), moving expenses, deferred
compensation, contributions (other than contributions described in the first
sentence) made on
1
<PAGE>
the Employee's behalf by the Company or one or more Designated Parents or
Subsidiaries under any employee benefit or welfare plan now or hereafter
established, and any other payments not specifically referenced in the first
sentence.
(h) "Corporate Transaction" means any of the following transactions:
---------------------
(1) a merger or consolidation in which the Company is not the
surviving entity, except for a transaction the principal purpose of
which is to change the state in which the Company is incorporated;
(2) the sale, transfer or other disposition of all or
substantially all of the assets of the Company (including the capital
stock of the Company's subsidiary corporations) in connection with
complete liquidation or dissolution of the Company;
(3) any reverse merger in which the Company is the surviving
entity but in which securities possessing more than fifty percent
(50%) of the total combined voting power of the Company's outstanding
securities are transferred to a person or persons different from those
who held such securities immediately prior to such merger; or
(4) an acquisition by any person or related group of persons
(other than the Company or by a Company-sponsored employee benefit
plan) of beneficial ownership (within the meaning of Rule 13d-3 of the
Exchange Act) of securities possessing more than fifty percent (50%)
of the total combined voting power of the Company's outstanding
securities (whether or not in a transaction also constituting a Change
in Control), but excluding any such transaction that the Plan
Administrator determines shall not be a Corporate Transaction
(i) "Designated Parents or Subsidiaries" means the Parents or
----------------------------------
Subsidiaries which have been designated by the Plan Administrator from time to
time as eligible to participate in the Plan.
(j) "Effective Date" means the effective date of the Registration
--------------
Statement relating to the Company's initial public offering of its Common Stock.
However, should any Designated Parent or Subsidiary become a participating
company in the Plan after such date, then such entity shall designate a separate
Effective Date with respect to its employee-participants.
(k) "Employee" means any individual, including an officer or director,
--------
who is an employee of the Company or a Designated Parent or Subsidiary for
purposes of Section 423 of the Code. For purposes of the Plan, the employment
relationship shall be treated as continuing intact while the individual is on
sick leave or other leave of absence approved by the individual's employer.
Where the period of leave exceeds ninety (90) days and the individual's right to
reemployment is not guaranteed either by statute or by contract, the employment
relationship will be deemed to have terminated on the ninety-first (91st) day of
such leave, for purposes of determining eligibility to participate in the Plan.
2
<PAGE>
(l) "Enrollment Date" means the first day of each Offer Period.
---------------
(m) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(n) "Exercise Date" means the last day of each Purchase Period.
-------------
(o) "Fair Market Value" means, as of any date, the value of Common
Stock determined as follows:
(1) Where there exists a public market for the Common Stock, the
Fair Market Value shall be (A) the closing price for a share of Common
Stock for the last market trading day prior to the time of the
determination (or, if no closing price was reported on that date, on
the last trading date on which a closing price was reported) on the
stock exchange determined by the Plan Administrator to be the primary
market for the Common Stock or the Nasdaq National Market, whichever
is applicable or (B) if the Common Stock is not traded on any such
exchange or national market system, the average of the closing bid and
asked prices of a share of Common Stock on the Nasdaq Small Cap Market
for the day prior to the time of the determination (or, if no such
prices were reported on that date, on the last date on which such
prices were reported), in each case, as reported in The Wall Street
Journal or such other source as the Plan Administrator deems reliable;
(2) In the absence of an established market of the type described
in (1), above, for the Common Stock, and subject to (3), below, the
Fair Market Value thereof shall be determined by the Plan
Administrator in good faith; or
(3) On the initial Effective Date of the Plan, the Fair Market
Value shall be the price at which the Board, or if applicable, the
Pricing Committee of the Board, and the underwriters agree to offer
the Common Stock to the public in the initial public offering of the
Common Stock, net of discounts and underwriting commissions.
(p) "Offer Period" means an Offer Period established pursuant to
------------
Section 4 hereof.
(q) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(r) "Participant" means an Employee of the Company or Designated
-----------
Parent or Subsidiary who is actively participating in the Plan.
(s) "Plan" means this Employee Stock Purchase Plan.
----
3
<PAGE>
(t) "Plan Administrator" means either the Board or a committee of the
------------------
Board that is responsible for the administration of the Plan as is designated
from time to time by resolution of the Board.
(u) "Purchase Period" means a period of approximately six months,
---------------
commencing on January 1 and July 1 of each year and terminating on the next
following June 30 or December 31, respectively; provided, however, that the
first Purchase Period shall commence on the Effective Date and shall end on June
30, 1999.
(v) "Purchase Price" shall mean an amount equal to 85% of the Fair
--------------
Market Value of a share of Common Stock on the Enrollment Date or on the
Exercise Date, whichever is lower.
(w) "Reserves" means the sum of the number of shares of Common Stock
--------
covered by each option under the Plan which have not yet been exercised and the
number of shares of Common Stock which have been authorized for issuance under
the Plan but not yet placed under option.
(x) "Subsidiary" means a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
3. Eligibility.
-----------
(a) General. Any individual who is an Employee on a given Enrollment
-------
Date shall be eligible to participate in the Plan for the Offer Period
commencing with such Enrollment Date.
(b) Limitations on Grant and Accrual. Any provisions of the Plan to
--------------------------------
the contrary notwithstanding, no Employee shall be granted an option under the
Plan (i) if, immediately after the grant, such Employee (taking into account
stock owned by any other person whose stock would be attributed to such Employee
pursuant to Section 424(d) of the Code) would own stock and/or hold outstanding
options to purchase stock possessing five percent (5%) or more of the total
combined voting power or value of all classes of stock of the Company or of any
Parent or Subsidiary, or (ii) which permits his/her rights to purchase stock
under all employee stock purchase plans of the Company and its Parents or
Subsidiaries to accrue at a rate which exceeds Twenty-Five Thousand Dollars
($25,000) worth of stock (determined at the Fair Market Value of the shares at
the time such option is granted) for each calendar year in which such option is
outstanding at any time. The determination of the accrual of the right to
purchase stock shall be made in accordance with Section 423(b)(8) of the Code
and the regulations thereunder.
(c) Other Limits on Eligibility. Notwithstanding Subsection (a),
---------------------------
above, the following Employees shall not be eligible to participate in the Plan
for any relevant Offer Period: (i) Employees whose customary employment is
twenty (20) hours or less per week; (ii) Employees whose customary employment is
for not more than five (5) months in any calendar year; (iii) Employees who are
subject to rules or laws of a foreign jurisdiction that
4
<PAGE>
prohibit or make impractical the participation of such Employees in the Plan,
and (iv) Employees who commence such employment after the initial Effective Date
of the Plan and who have been so employed by the Company for less than six (6)
months.
4. Offer Periods.
-------------
(a) The Plan shall be implemented through overlapping or consecutive
Offer Periods until such time as (i) the maximum number of shares of Common
Stock available for issuance under the Plan shall have been purchased or (ii)
the Plan shall have been sooner terminated in accordance with Section 19 hereof.
The maximum duration of an Offer Period shall be twenty-seven (27) months.
Initially, the Plan shall be implemented through overlapping Offer Periods of
twenty-four (24) months' duration commencing each January 1 and July 1 following
the Effective Date (except that the initial Offer Period shall commence on the
Effective Date and shall end on December 31, 2000). The Plan Administrator
shall have the authority to change the length of any Offer Period and the length
of Purchase Periods within any such Offer Period subsequent to the initial Offer
Period by announcement at least thirty (30) days prior to the commencement of
the Offer Period and to determine whether subsequent Offer Periods shall be
consecutive or overlapping.
(b) A Participant shall be granted a separate option for each Offer
Period in which he/she participates. The option shall be granted on the
Enrollment Date and shall be automatically exercised in successive installments
on the Exercise Dates ending within the Offer Period.
(c) An Employee may participate in only one Offer Period at a time.
Accordingly, except as provided in Section 4(d), an Employee who wishes to join
a new Offer Period must withdraw from the current Offer Period in which he/she
is participating and must also enroll in the new Offer Period prior to the
Enrollment Date for that Offer Period.
(d) If on the first day of any Purchase Period in an Offer Period in
which a Participant is participating, the Fair Market Value of the Common Stock
is less than the Fair Market Value of the Common Stock on the Enrollment Date of
the Offer Period (after taking into account any adjustment during the Offer
Period pursuant to Section 18(a)), the Offer Period shall be terminated
automatically and the Participant shall be enrolled automatically in the new
Offer Period which has its first Purchase Period commencing on that date,
provided the Participant is eligible to participate in the Plan on that date and
has not elected to terminate participation in the Plan.
(e) Except as specifically provided herein, the acquisition of Common
Stock through participation in the Plan for any Offer Period shall neither limit
nor require the acquisition of Common Stock by a Participant in any subsequent
Offer Period.
5. Participation.
-------------
(a) An eligible Employee may become a Participant in the Plan by
completing a subscription agreement authorizing payroll deductions in the form
of Exhibit A to this Plan and filing it with the designated payroll office of
the Company at least ten (10) business days prior to
5
<PAGE>
the Enrollment Date for the Offer Period in which such participation will
commence, unless a later time for filing the subscription agreement is set by
the Plan Administrator for all eligible Employees with respect to a given Offer
Period.
(b) Payroll deductions for a Participant shall commence with the first
partial or full payroll period beginning on the Enrollment Date and shall end on
the last complete payroll period during the Offer Period, unless sooner
terminated by the Participant as provided in Section 10.
6. Payroll Deductions.
------------------
(a) At the time a Participant files his/her subscription agreement,
he/she shall elect to have payroll deductions made during the Offer Period in
amounts between one percent (1%) and not exceeding ten percent (10%) of the
Compensation which he/she receives during the Offer Period.
(b) All payroll deductions made for a Participant shall be credited to
his/her account under the Plan and will be withheld in whole percentages only.
A Participant may not make any additional payments into such account.
(c) A Participant may discontinue his/her participation in the Plan as
provided in Section 10, or may decrease the rate of his/her payroll deductions
during the Offer Period by completing and filing with the Company a change of
status notice in the form of Exhibit B to this Plan authorizing a decrease in
the payroll deduction rate. The decrease in rate shall be effective with the
first full payroll period commencing ten (10) business days after the Company's
receipt of the change of status notice unless the Company elects to process a
given change in participation more quickly. A Participant may increase or
decrease the rate of his/her payroll deductions for a future Offer Period by
filing with the Company a change of status notice authorizing an increase or
decrease in the payroll deduction rate within ten (10) business days (unless the
Company elects to process a given change in participation more quickly) before
the commencement of the upcoming Offer Period. A Participant may not increase
the rate of his/her payroll deductions for an existing Offer Period. A
Participant's subscription agreement shall remain in effect for successive Offer
Periods unless terminated as provided in Section 10. The Plan Administrator
shall be authorized to limit the number of payroll deduction rate changes during
any Offer Period.
(d) Notwithstanding the foregoing, to the extent necessary to comply
with Section 423(b)(8) of the Code and Section 3(b) herein, a Participant's
payroll deductions may be decreased to 0% at such time during any Purchase
Period which is scheduled to end during the current calendar year (the "Current
Purchase Period") that the aggregate of all payroll deductions which were
previously used to purchase stock under the Plan in a prior Purchase Period
which ended during that calendar year plus all payroll deductions accumulated
with respect to the Current Purchase Period equal $21,250. Payroll deductions
shall recommence at the rate provided in such Participant's subscription
agreement at the beginning of the first Purchase Period which is scheduled to
end in the following calendar year, unless terminated by the Participant as
provided in Section 10.
6
<PAGE>
7. Grant of Option. On the Enrollment Date, each Participant in
---------------
such Offer Period shall be granted an option to purchase on each Exercise Date
of such Offer Period (at the applicable Purchase Price) up to a number of shares
of the Common Stock determined by dividing such Participant's payroll deductions
accumulated prior to such Exercise Date and retained in the Participant's
account as of the Exercise Date by the applicable Purchase Price; provided (i)
that such purchase shall be subject to the limitations set forth in Sections
3(b) and 12 hereof, and (ii) the maximum number of shares of Common Stock a
Participant shall be permitted to purchase in any Purchase Period shall be one
thousand two hundred fifty (1,250) shares, subject to adjustment as provided in
Section 18 hereof. Exercise of the option shall occur as provided in Section 8,
unless the Participant has withdrawn pursuant to Section 10, and the option, to
the extent not exercised, shall expire on the last day of the Offer Period.
8. Exercise of Option. Unless a Participant withdraws from the Plan
------------------
as provided in Section 10, below, his/her option for the purchase of shares will
be exercised automatically on each Exercise Date, and the maximum number of full
shares subject to the option shall be purchased for such Participant at the
applicable Purchase Price with the accumulated payroll deductions in his/her
account. No fractional shares will be purchased; any payroll deductions
accumulated in a Participant's account which are not sufficient to purchase a
full share shall be carried over to the next Purchase Period or Offer Period,
whichever applies, or returned to the Participant, if the Participant withdraws
from the Plan. Notwithstanding the foregoing, any amount remaining in a
Participant's account following the purchase of shares on the Exercise Date due
to the application of Section 423(b)(8) of the Code or Section 7, above, shall
be returned to the Participant and shall not be carried over to the next Offer
Period. During a Participant's lifetime, a Participant's option to purchase
shares hereunder is exercisable only by him/her.
9. Delivery. Upon receipt of a request from a Participant after
--------
each Exercise Date on which a purchase of shares occurs, the Company shall
arrange the delivery to such Participant, as promptly as practicable, of a
certificate representing the shares purchased upon exercise of his/her option.
10. Withdrawal; Termination of Employment.
-------------------------------------
(a) A Participant may withdraw all but not less than all the payroll
deductions credited to his/her account and not yet used to exercise his/her
option under the Plan at any time by submitting a change of status notice to the
Company in the form of Exhibit B to this Plan. All of the Participant's payroll
deductions credited to his/her account will be paid to such Participant as
promptly as practicable after receipt of notice of withdrawal, such
Participant's option for the Offer Period will be automatically terminated, and
no further payroll deductions for the purchase of shares will be made during the
Offer Period. If a Participant withdraws from an Offer Period, payroll
deductions will not resume at the beginning of the succeeding Offer Period
unless the Participant delivers to the Company a new subscription agreement.
(b) Upon a Participant's ceasing to be an Employee for any reason or
upon termination of a Participant's employment relationship (as described in
Section 2(j)), the payroll
7
<PAGE>
deductions credited to such Participant's account during the Offer Period but
not yet used to exercise the option will be returned to such Participant or, in
the case of his/her death, to the person or persons entitled thereto under
Section 14, and such Participant's option will be automatically terminated.
11. Interest. No interest shall accrue on the payroll deductions
--------
credited to a Participant's account under the Plan.
12. Stock.
-----
(a) The maximum number of shares of Common Stock which shall be made
available for sale under the Plan shall be three hundred thousand (300,000)
shares, subject to adjustment upon changes in capitalization of the Company as
provided in Section 18. If on a given Exercise Date the number of shares with
respect to which options are to be exercised exceeds the number of shares then
available under the Plan, the Plan Administrator shall make a pro rata
allocation of the shares remaining available for purchase in as uniform a manner
as shall be practicable and as it shall determine to be equitable.
(b) A Participant will have no interest or voting right in shares
covered by his/her option until such shares are actually purchased on the
Participant's behalf in accordance with the applicable provisions of the Plan.
No adjustment shall be made for dividends, distributions or other rights for
which the record date is prior to the date of such purchase.
(c) Shares to be delivered to a Participant under the Plan will be
registered in the name of the Participant or in the name of the Participant and
his/her spouse.
13. Administration. The Plan shall be administered by the Plan
--------------
Administrator which shall have full and exclusive discretionary authority to
construe, interpret and apply the terms of the Plan, to determine eligibility
and to adjudicate all disputed claims filed under the Plan. Every finding,
decision and determination made by the Plan Administrator shall, to the full
extent permitted by Applicable Law, be final and binding upon all persons.
14. Designation of Beneficiary.
--------------------------
(a) Each Participant will file a written designation of a beneficiary
who is to receive any shares and cash, if any, from the Participant's account
under the Plan in the event of such Participant's death. If a Participant is
married and the designated beneficiary is not the spouse, spousal consent shall
be required for such designation to be effective.
(b) Such designation of beneficiary may be changed by the Participant
(and his/her spouse, if any) at any time by written notice. In the event of the
death of a Participant and in the absence of a beneficiary validly designated
under the Plan who is living (or in existence) at the time of such Participant's
death, the Company shall deliver such shares and/or cash to the executor or
administrator of the estate of the Participant, or if no such executor or
administrator has been appointed (to the knowledge of the Plan Administrator),
the Plan Administrator, in its discretion, may deliver such shares and/or cash
to the spouse or to any one or more dependents or
8
<PAGE>
relatives of the Participant, or if no spouse, dependent or relative is known to
the Plan Administrator, then to such other person as the Plan Administrator may
designate.
15. Transferability. Neither payroll deductions credited to a
---------------
Participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 14 hereof) by the Participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Plan Administrator may treat such act as an election to
withdraw funds from an Offer Period in accordance with Section 10.
16. Use of Funds. All payroll deductions received or held by the
------------
Company under the Plan may be used by the Company for any corporate purpose, and
the Company shall not be obligated to segregate such payroll deductions.
17. Reports. Individual accounts will be maintained for each
-------
Participant in the Plan. Statements of account will be given to Participants at
least annually, which statements will set forth the amounts of payroll
deductions, the Purchase Price, the number of shares purchased and the remaining
cash balance, if any.
18. Adjustments Upon Changes in Capitalization; Corporate
-----------------------------------------------------
Transactions.
- ------------
(a) Adjustments Upon Changes in Capitalization. Subject to any
------------------------------------------
required action by the stockholders of the Company, the Reserves, the Purchase
Price, as well as any other terms that the Plan Administrator determines require
adjustment shall be proportionately adjusted for (i) any increase or decrease in
the number of issued shares of Common Stock resulting from a stock split,
reverse stock split, stock dividend, combination or reclassification of the
Common Stock, (ii) any other increase or decrease in the number of issued shares
of Common Stock effected without receipt of consideration by the Company, or
(iii) as the Plan Administrator may determine in its discretion, any other
transaction with respect to Common Stock to which Section 424(a) of the Code
applies; provided, however that conversion of any convertible securities of the
Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Plan Administrator and its
determination shall be final, binding and conclusive. Except as the Plan
Administrator determines, no issuance by the Company of shares of stock of any
class, or securities convertible into shares of stock of any class, shall
affect, and no adjustment by reason hereof shall be made with respect to, the
Reserves and the Purchase Price.
(b) Corporate Transactions. In the event of a proposed Corporate
----------------------
Transaction, each option under the Plan shall be assumed by such successor
corporation or a parent or subsidiary of such successor corporation, unless the
Plan Administrator determines, in the exercise of its sole discretion and in
lieu of such assumption, to shorten the Offer Period then in progress by setting
a new Exercise Date (the "New Exercise Date"). If the Plan Administrator
shortens the Offer Period then in progress in lieu of assumption in the event of
a Corporate Transaction, the Plan Administrator shall notify each Participant in
writing, at least ten (10) days prior to the New Exercise Date, that the
Exercise Date for his/her option has been changed to the
9
<PAGE>
New Exercise Date and that his/her option will be exercised automatically on the
New Exercise Date, unless prior to such date he/she has withdrawn from the Offer
Period as provided in Section 10. For purposes of this Subsection, an option
granted under the Plan shall be deemed to be assumed if, in connection with the
Corporate Transaction, the option is replaced with a comparable option with
respect to shares of capital stock of the successor corporation or Parent
thereof. The determination of option comparability shall be made by the Plan
Administrator prior to the Corporate Transaction and its determination shall be
final, binding and conclusive on all persons.
19. Amendment or Termination.
------------------------
(a) The Plan Administrator may at any time and for any reason
terminate or amend the Plan. Except as provided in Section 18, no such
termination can affect options previously granted, provided that an Offer Period
may be terminated by the Plan Administrator on any Exercise Date if the Plan
Administrator determines that the termination of the Offer Period is in the best
interests of the Company and its stockholders. Except as provided in Section
18, no amendment may make any change in any option theretofore granted which
adversely affects the rights of any Participant. To the extent necessary to
comply with Section 423 of the Code (or any successor rule or provision or any
other Applicable Law), the Company shall obtain stockholder approval in such a
manner and to such a degree as required.
(b) Without stockholder consent and without regard to whether any
Participant rights may be considered to have been "adversely affected," the Plan
Administrator shall be entitled to limit the frequency and/or number of
reductions in the amount withheld during Offer Periods, establish the exchange
ratio applicable to amounts withheld in a currency other than U.S. dollars,
establish additional terms, conditions, rules or procedures to accommodate the
rules or laws of applicable foreign jurisdictions, permit payroll withholding in
excess of the amount designated by a Participant in order to adjust for delays
or mistakes in the Company's processing of properly completed withholding
elections, establish reasonable waiting and adjustment periods and/or accounting
and crediting procedures to ensure that amounts applied toward the purchase of
Common Stock for each Participant properly correspond with amounts withheld from
the Participant's Compensation, and establish such other limitations or
procedures as the Plan Administrator determines in its sole discretion advisable
and which are consistent with the Plan.
20. Notices. All notices or other communications by a Participant to
-------
the Company under or in connection with the Plan shall be deemed to have been
duly given when received in the form specified by the Plan Administrator at the
location, or by the person, designated by the Plan Administrator for the receipt
thereof.
21. Conditions Upon Issuance of Shares. Shares shall not be issued
----------------------------------
with respect to an option unless the exercise of such option and the issuance
and delivery of such shares pursuant thereto shall comply with all Applicable
Laws and shall be further subject to the approval of counsel for the Company
with respect to such compliance. As a condition to the exercise of an option,
the Company may require the Participant to represent and warrant at the
10
<PAGE>
time of any such exercise that the shares are being purchased only for
investment and without any present intention to sell or distribute such shares
if, in the opinion of counsel for the Company, such a representation is required
by any of the aforementioned Applicable Laws. In addition, no options shall be
exercised or shares issued hereunder before the Plan shall have been approved by
stockholders of the Company as provided in Section 23.
22. Term of Plan. The Plan shall become effective upon the earlier
------------
to occur of its adoption by the Board or its approval by the stockholders of the
Company. It shall continue in effect for a term of ten (10) years unless sooner
terminated under Section 19.
23. Stockholder Approval. Continuance of the Plan shall be subject
--------------------
to approval by the stockholders of the Company within twelve (12) months before
or after the date the Plan is adopted. Such stockholder approval shall be
obtained in the degree and manner required under Applicable Laws.
24. No Employment Rights. The Plan does not, directly or indirectly,
--------------------
create any right for the benefit of any employee or class of employees to
purchase any shares under the Plan, or create in any employee or class of
employees any right with respect to continuation of employment by the Company or
a Designated Parent or Subsidiary, and it shall not be deemed to interfere in
any way with such employer's right to terminate, or otherwise modify, an
employee's employment at any time.
25. No Effect on Retirement and Other Benefit Plans. Except as
-----------------------------------------------
specifically provided in a retirement or other benefit plan of the Company or a
Designated Parent or Subsidiary, participation in the Plan shall not be deemed
compensation for purposes of computing benefits or contributions under any
retirement plan of the Company or a Designated Parent or Subsidiary, and shall
not affect any benefits under any other benefit plan of any kind or any benefit
plan subsequently instituted under which the availability or amount of benefits
is related to level of compensation. The Plan is not a "Retirement-Plan" or
"Welfare Plan" under the Employee Retirement Income Security Act of 1974, as
amended.
26. Effect of Plan. The provisions of the Plan shall, in accordance
--------------
with its terms, be binding upon, and inure to the benefit of, all successors of
each Participant, including, without limitation, such Participant's estate and
the executors, administrators or trustees thereof, heirs and legatees, and any
receiver, trustee in bankruptcy or representative of creditors of such
Participant.
27. Governing Law. The Plan is to be construed in accordance with
-------------
and governed by the internal laws of the State of California (as permitted by
Section 1646.5 of the California Civil Code, or any similar successor provision)
without giving effect to any choice of law rule that would cause the application
of the laws of any jurisdiction other than the internal laws of the State of
California to the rights and duties of the parties, except to the extent the
internal laws of the State of California are superseded by the laws of the
United States. Should any provision of the Plan be determined by a court of law
to be illegal or unenforceable, the other provisions shall nevertheless remain
effective and shall remain enforceable.
11
<PAGE>
EXHIBIT A
XOOM.com, Inc. 1998 Employee Stock Purchase Plan
SUBSCRIPTION AGREEMENT
Effective with the Offer Period beginning on:
[_] ESPP Effective Date [_] January 1, 1999 or [_] July 1, 1999
1. PERSONAL INFORMATION *MODIFY DATA REQUESTED AS APPROPRIATE**
<TABLE>
<S> <C> <C>
Legal Name (Please Print)____________________________________________ __________ ____________________________
(Last) (First) (MI) Location Department
Street Address_______________________________________________________ __________________________________________________
Daytime Telephone
City, State/Country, Zip_____________________________________________ _________________________________________________
E-Mail Address
Social Security No. __ __ __ - __ __ - __ __ __ Employee I.D. No.___ ________________________________________________
Manager Mgr. Location
</TABLE>
2. ELIGIBILITY Any Employee whose customary employment is more than 20 hours
per week and more than 5 months per calendar year, and who does not hold
(directly or indirectly) five percent (5%) or more of the combined voting
power of the Company, a parent or a subsidiary, whether in stock or options
to acquire stock is eligible to participate in the XOOM.com, Inc. 1998
Employee Stock Purchase Plan (the "ESPP"); provided, however, that
Employees who are subject to the rules or laws of a foreign jurisdiction
that prohibit or make impractical the participation of such Employees in
the ESPP are not eligible to participate.
3. DEFINITIONS Each capitalized term in this Subscription Agreement shall have
the meaning set forth in the ESPP.
4. SUBSCRIPTION I hereby elect to participate in the ESPP and subscribe to
purchase shares of the Company's Common Stock in accordance with this
Subscription Agreement and the ESPP. I have received a complete copy of the
ESPP and a prospectus describing the ESPP and understand that my
participation in the ESPP is in all respects subject to the terms of the
ESPP. The effectiveness of this Subscription Agreement is dependent on my
eligibility to participate in the ESPP.
5. Payroll Deduction Authorization I hereby authorize payroll deductions from
my Compensation during the Offer Period in the percentage specified below
(payroll reductions may not exceed 10% of Compensation nor $21,250 per
calendar year):
6. ESPP ACCOUNTS AND PURCHASE PRICE I understand that all payroll deductions
will be credited to my account under the ESPP. No additional payments may
be made to my account. No interest will be credited on funds held in the
account at any time including any refund of the account caused by
withdrawal from the ESPP. All payroll deductions shall be accumulated for
the purchase of Company Common Stock at the applicable Purchase Price
determined in accordance with the ESPP.
7. WITHDRAWAL AND CHANGES IN PAYROLL DEDUCTION I understand that I may
discontinue my participation in the ESPP at any time prior to an Exercise
Date as provided in Section 10 of the ESPP, but if I do not withdraw from
the ESPP, any accumulated payroll deductions will be applied automatically
to purchase Company Common Stock. I may decrease the rate of my payroll
deductions in whole percentage increments to not less than one percent (1%)
on one occasion during any Purchase Period by completing and timely filing
a Change of Status Notice. I MAY NOT INCREASE THE RATE OF MY PAYROLL
DEDUCTIONS DURING ANY ONGOING OFFER PERIOD IN WHICH I AM A PARTICIPANT. I
may increase or decrease the rate of payroll deductions for future Offer
Periods by timely filing a Change of Status Notice.
8. PERPETUAL SUBSCRIPTION I understand that this Subscription Agreement shall
remain in effect for successive Offer Periods until I withdraw from
participation in the ESPP, or termination of the ESPP.
9. TAXES I have reviewed the ESPP prospectus discussion of the federal tax
consequences of participation in the ESPP and consulted with tax
consultants as I deemed advisable prior to my participation in the ESPP. I
hereby agree to notify the Company in writing within thirty (30) days of
any disposition (transfer or sale) of any shares purchased under the ESPP
if such disposition occurs within two (2) years of the Enrollment Date (the
first day of the Offer Period during
* Less than
** Greater than
A-1
<PAGE>
which the shares were purchased) or within one (1) year of the Exercise
Date (the date I purchased such shares), and I will make adequate provision
to the Company for foreign, federal, state or other tax withholding
obligations, if any, which arise upon the disposition of the shares. In
addition, the Company may withhold from my Compensation any amount
necessary to meet applicable tax withholding obligations incident to my
participation in the ESPP, including any withholding necessary to make
available to the Company any tax deductions or benefits contingent on such
withholding.
10. DESIGNATION OF BENEFICIARY In the event of my death, I hereby designate the
following person or trust as my beneficiary to receive all payments and
shares due to me under the ESPP: [_] I am single [_] I am married
<TABLE>
<S> <C>
Beneficiary (please print)_____________________________________________________ Relationship to Beneficiary (if any)
(Last) (First) (MI)
Street Address_________________________________________________________________ ____________________________________
City, State/Country, Zip_______________________________________________________
</TABLE>
11. TERMINATION OF ESPP I understand that the Company has the right,
exercisable in its sole discretion, to amend or terminate the ESPP at any
time, and a termination may be effective as early as an Exercise Date
(after purchase of shares on such date) within each outstanding Offer
Period.
<TABLE>
<S> <C>
Date: ________________ Employee Signature:_______________________________________________________
_______________________________________________________
spouse's signature (if beneficiary is other than spouse)
</TABLE>
A-2
<PAGE>
EXHIBIT B
XOOM.com, Inc. 1998 Employee Stock Purchase Plan
CHANGE OF STATUS NOTICE
___________________________________
Participant Name (Please Print)
___________________________________
Social Security Number
================================================================================
[_] WITHDRAWAL FROM ESPP
I hereby withdraw from the XOOM.com, Inc. 1998 Employee Stock Purchase Plan
(the "ESPP") and agree that my option under the applicable Offer Period
will be automatically terminated and all accumulated payroll deductions
credited to my account will be refunded to me. No further payroll
deductions will be made for the purchase of shares in the applicable Offer
Period and I shall be eligible to participate in a future Offer Period only
by timely delivery to the Company of a new Subscription Agreement.
================================================================================
[_] DECREASE IN PAYROLL DEDUCTION
I hereby elect to decrease my rate of payroll deduction under the ESPP as
follows (select one):
[_] CURRENT PURCHASE PERIOD
Decrease in payroll deduction will be effective for the first full
payroll period commencing no fewer than ten (10) business days
following the Company's receipt of this notice, unless this change is
processed more quickly.
[_] NEXT OFFER PERIOD
Decrease in payroll deduction will be effective for the next Offer
Period in which I am enrolled commencing no fewer than ten (10)
business days following the Company's receipt of this notice.
================================================================================
[_] INCREASE IN PAYROLL DEDUCTION
I hereby elect to increase my rate of payroll deduction under the ESPP
effective for the next Offer Period in which I am enrolled commencing no
fewer than ten (10) business days following the Company's receipt of this
notice.
B-1
<PAGE>
================================================================================
[_] CHANGE OF BENEFICIARY [_] I am single [_] I am married
This change of beneficiary shall terminate my previous beneficiary
designation under the ESPP. In the event of my death, I hereby designate
the following person or trust as my beneficiary to receive all payments and
shares due to me under the ESPP:
<TABLE>
<S> <C>
Beneficiary (please print) ____________________________________________________ Relationship to Beneficiary (if any)
(Last) (First) (MI)
Street Address ________________________________________________________________ ______________________________________
City, State/Country, Zip_______________________________________________________
</TABLE>
================================================================================
<TABLE>
<S> <C>
Date: __________________________________________ Employee Signature:_______________________________________________________
_______________________________________________________
spouse's signature (if beneficiary is other than spouse)
</TABLE>
B-2
<PAGE>
EXHIBIT 10.14
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (this "Agreement") is made and entered into
---------
as of July 24, 1998 by and between XOOM, INC., a Delaware corporation (the
"Purchaser") and PAGECOUNT, INC., a Maryland corporation (the "Seller").
--------- ------
RECITALS:
1. The Seller owns and operates an online facility for counting and
monitoring Internet Web traffic on individual Web pages, offered free of charge
to users with home pages on the Web (the "Pagecount Service");
-----------------
2. The Seller desires to sell, and the Purchaser desires to buy, on the
terms and conditions set forth in this Agreement, the Pagecount Service,
together with certain of the Seller's assets as set forth herein; and
3. The Seller desires to assign, and the Purchaser is willing to assume,
on the terms and conditions set forth in this Agreement, certain of the
liabilities of the Seller as set forth herein; and
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements hereinafter contained, the parties hereto agree as follows:
ARTICLE 1
PURCHASE AND SALE OF ASSETS
1.1 Transferred Assets.
------------------
Subject to and upon the terms and conditions of this Agreement, the Seller
agrees to sell, assign, transfer, convey and deliver to the Purchaser free and
clear of all liabilities and encumbrances except as hereinafter set forth, and
the Purchaser agrees to purchase from the Seller on the Closing Date (as defined
in Article 3) the hardware, software, scripts, data files and other electronic
data, source code, code user base, the domain www.pagecount.com and the other
-----------------
domain names listed on Schedule 1.1 hereto, and any other personal and
intellectual property necessary to create, maintain and operate (or actually
used by Seller to create, maintain and operate) the Pagecount Service (all of
which are sometimes collectively referred to as the "Transferred Assets"),
------------------
including, without limitation, the assets and property of Seller reflected on
its balance sheet as of June 30, 1998 (the "Interim Balance Sheet") (except as
---------------------
excluded on Schedule 1.2(d), and all assets and property thereafter acquired by
Seller necessary to create, maintain and operate (or actually used by Seller to
create, maintain and operate) the Pagecount Service before the Closing Date and
not disposed of in the ordinary course of business consistent with prior
practice, including without limitation, the following:
<PAGE>
(a) All tangible personal property and assets (except as hereinafter
expressly provided otherwise), including, but not limited to, the accounts
receivable and other assets set forth on Schedule 1.1(a) hereto;
---------------
(b) All registered and common law trademarks and service marks, tradenames,
copyrights, logos, slogans, and permissions for the use of copyrighted materials
owned by others owned by the Seller (and all licenses with respect thereto),
which are listed on Schedule 1.1(b) hereto;
---------------
(c) All of Seller's claims and rights against third parties, if any,
relating to the Transferred Assets;
(d) All contracts of Seller relevant to operation of the Pagecount Service,
which are listed on Schedule 1.1(d) hereto;
---------------
(e) All trade secrets, know-how, procedures and marketing know-how to the
extent documented or implicitly part of or required to operate the Pagecount
System as it exists as of the Closing;
(f) All accounts receivable, prepayments, deferred expenses, notes
receivable, rights to advances and deposits;
(g) Seller's goodwill;
(h) All of the insurance policies set forth in Schedule 1.1(h) hereto to
---------------
the extent such policies relate to liabilities assumed by the Purchaser pursuant
to this Agreement; and
(i) All other tangible and intangible assets necessary to create, maintain
and operate (or actually used by Seller to create, maintain and operate) the
Pagecount Service.
1.2 Retained Assets.
----------------
Notwithstanding anything to the contrary herein, the Seller shall retain
and not sell, assign, transfer, convey or deliver to the Purchaser any of the
following (hereinafter referred to as the "Retained Assets"):
---------------
(a) The Seller's corporate books and records containing the minutes of
meetings of directors and stockholders;
(b) All federal, state, county and local income, excise, franchise,
property and other tax returns, reports and declarations of the Seller;
(c) All tax refunds due and owing to the Seller in respect of all periods
up to the Closing Date;
(d) All assets listed on Schedule 1.2(d) hereto;
---------------
<PAGE>
1.3 Title.
------
Title to the Transferred Assets shall pass to the Purchaser at the Closing
and the Transferred Assets shall be deemed delivered to the Purchaser at their
respective locations, but Seller shall retain physical possession of the
Transferred Assets and operate such assets for The Purchaser's account pursuant
to a Management Agreement in the form of Exhibit A hereto (the "Management
--------- ----------
Agreement"), to be entered into as of the Closing.
- ---------
ARTICLE 2
PURCHASE PRICE
2.1 Purchase Price/Payment Terms.
-----------------------------
The purchase price to be paid by The Purchaser to Seller for the
Transferred Assets shall consist of (i) $1.4 million in cash as set forth below,
and (ii) the assumption of certain liabilities as provided in Section 2.2.
(a) At the Closing, the Purchaser shall deliver to the Seller's account by
wire transfer in immediately available funds Two Hundred Thousand Dollars
($200,000.00).
(b) The balance of the purchase price of $1.2 million shall be payable by
Purchaser under a recourse promissory note substantially in the form of Exhibit
-------
B hereto (the "Note"), with interest, in arrears, payable at the annual rate of
- - ----
7% and a default rate of 12%. Payments on the Note shall be amortized on a 24-
month schedule, but all amounts still outstanding under the Note shall be due
and payable (except as set forth in Section 2.2) nine months after the Closing
(the "Maturity Date"). The Note shall be subject to prepayment at any time,
-------------
without penalty, at the Purchaser's sole discretion. The Note shall be secured
by the Purchaser's entire interest in the Transferred Assets and any additional
hardware contributed by the Purchaser and located at Pagecount's headquarters
and at other places where Pagecount currently has operations used in operating
the Pagecount Service. Monthly installments on the Note, each in the amount of
$53,727, shall be due and payable beginning from the thirtieth day after the
Closing and continuing on the same day of each month thereafter up to and
including the Maturity Date, on which date all outstanding interest and
principal shall be due and payable; provided, however, that the Note shall
automatically accelerate and become payable in full (except as set forth in
Section 2.2) upon the first to occur of the Purchaser's receipt of the proceeds
of an initial public offering (an "IPO"), the closing of a Corporate
---
Transaction, Change of Control, or Financing (as defined in Section 2.1(c)).
(c) For purposes hereof:
(i) "Change in Control" shall mean a change in ownership or
-----------------
control of the Purchaser effected through the direct or indirect acquisition or
transfer of securities possessing more than fifty percent (50%) of the total
combined voting power of the Purchaser's outstanding securities.
<PAGE>
(ii) "Corporate Transaction" shall mean any of the following
---------------------
transactions to which the Purchaser is a party: (A) the sale, transfer or other
disposition of all or substantially all of the assets of the Purchaser, (B) a
merger with or into another entity where the Purchaser is not the survivor
(other than a merger solely for the purpose of changing the state of
incorporation or effecting a recapitalization of the Purchaser); or (C) a
consolidation or other reorganization, in which shareholders of the Purchaser
prior to such event own less than fifty percent (50%) of the outstanding voting
securities of the survivor.
(iii) "Financing" shall mean the Purchaser's issuance(s) of its
---------
securities, (debt or equity) or borrowing(s) the aggregate proceeds of which
equal or exceed $3,000,000.
(iv) "IPO" shall mean a best efforts or firm commitment underwritten
---
initial public offering of the securities of Purchaser or Purchaser's
affiliates, the proceeds of which equal or exceed $3 million.
2.2 Holdback.
---------
Upon the first to occur of (i) an IPO, (ii) prepayment in full of the Note
(subject to this Section 2.2), (iii) closing of a Corporate Transaction or
Change of Control, or (iv) on the Maturity Date, the final $200,000 of principal
(after payment of any accrued interest) payable under the Note shall constitute
a holdback amount (the "Holdback") which will be paid into an escrow account
--------
under the control of a third party institution and governed by an Escrow
Agreement in substantially the form of Exhibit C hereto (the "Escrow
--------- ------
Agreement"), upon which the Note shall be deemed paid in full. The Holdback
shall be released to Pagecount, net of indemnified losses, if any, payable to
the Purchaser under this Agreement or the Management Agreement in satisfaction
of a good faith claim by Purchaser, at the rate of $50,000 per month during each
of the four months after the date on which payment of the balance of the Note is
due and payable, less any offsets to which the Purchaser is entitled under this
Agreement or the Management Agreement.
2.3 Limited Assumption of Liabilities.
----------------------------------
At the Closing, the Purchaser shall assume only the following obligations
and liabilities of the Seller and no others (the "Assumed Liabilities"):
-------------------
(a) The liabilities of the Seller reflected on Schedule 2.3(a) hereto that
---------------
are outstanding on the Closing Date;
(b) The obligations and liabilities of the Seller under the contracts and
agreements listed on Schedule 1.1(d).
---------------
2.4 Liabilities Not Assumed.
------------------------
(a) Notwithstanding the foregoing, the Purchaser shall not assume any
obligation or liability resulting from or arising out of any breach of any
representation, warranty or agreement of the Seller contained in this Agreement.
<PAGE>
(b) The Purchaser undertakes no liability of the Seller not expressly
assumed including, without limitation, liability with respect to environmental
claims and suits; liability for the payment of the Seller's outstanding loans
and credit lines except as provided in this Agreement; any liability for making
payments of any kind (including, as a result of the transactions contemplated
hereby, for the employment or termination of employment by the Seller of
employees, or as a result of union contracts, if any, grievances, or other labor
claims, or otherwise) to employees of the Seller; liability for pensions or
other benefits to employees of the Seller; liability for making payments of any
kind as a result of the termination of any agency; liability for making payments
of any kind pursuant to any agreements, arrangements or understandings with
employees or other persons out of the proceeds from the sale of the Transferred
Assets; liability for any Taxes (as defined below); liability for any fees or
expenses incurred by the Seller in connection with the transactions contemplated
by the Agreement, and any obligations, charges or liabilities of the Seller, the
existence of which constitute a breach of any representation, warranty or
agreement of the Seller contained in this Agreement.
(c) For purposes hereof, "Taxes" shall mean all taxes, however,
denominated, including any interest, penalties or other additions to tax that
may become payable in respect thereof, imposed by any federal, territorial,
state, local or foreign government or any agency or political subdivision of any
such government, which taxes shall include, without limiting the generality of
the foregoing, all income or profits taxes (including, but not limited to,
federal income taxes and state income taxes), payroll and employee withholding
taxes, unemployment insurance, social security taxes, sales and use taxes, ad
valorem taxes, excise taxes, franchise taxes, gross receipts taxes, business
license taxes, occupation taxes, real and personal property taxes, stamp taxes,
environmental taxes, transfer taxes, workers' compensation, Pension Benefit
Guaranty Corporation premiums and other governmental charges, and other
obligations of the same or of a similar nature to any of the foregoing, which
the Seller is required to pay, withhold or collect.
2.5 Taxes.
-----
The Seller shall pay all Taxes and any taxes on the Purchaser resulting
from the transfer of the Transferred Assets or the transactions contemplated
hereby except any liability being (for so long as being) contested in good
faith.
2.6 Apportioned Obligations.
------------------------
The Seller shall be responsible for and shall pay any Taxes arising or
resulting from or in connection with the ownership of Transferred Assets on or
prior to the Closing Date (as defined below) (including, without limitation,
Taxes arising or resulting from the sale of the Transferred Assets pursuant to
this Agreement). The Purchaser shall be responsible for and shall pay all
sales, use and transfer tax relating to the sale and transfer of the Transferred
Assets and all Taxes arising or resulting from or in connection with the
ownership of the Transferred Assets after the Closing Date.
<PAGE>
2.7 Tax Clearance Certificates.
---------------------------
The Seller shall, at its sole cost and expense, deliver to the Purchaser on
or before the Closing Date (as defined below) clearance certificates issued by
the Maryland Department of Assessment and Taxation.
ARTICLE 3
CLOSING
The closing of the purchase and sale of the Transferred Assets hereunder
shall be held at the offices of Morrison & Foerster LLP, 425 Market Street, San
Francisco, California 94105 at 10:00 a.m., local time, on July 28, 1998 (the
"Closing Date") or at such other time and place as shall be mutually agreed upon
- -------------
by the Purchaser and the Seller. Provided such party is not in default of any
of its obligations pursuant to this Agreement, either party upon notice to the
other party given in the manner provided for herein may extend the closing for a
period or for periods up to and including August 20, 1998. The time and place
of closing is herein referred to as the "Closing" and the date of the Closing is
-------
herein referred to as the "Closing Date."
-------------
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF THE SELLER
The Seller hereby makes the following representations and warranties to the
Purchaser, as of the date hereof and as of the Closing, subject only to the
disclosure items on the Seller's disclosure schedule attached hereto and
incorporated hereby ("Seller's Disclosure Schedule"), the section numbers of
----------------------------
which correspond to the section numbers below:
4.1 Organization; Books and Records.
--------------------------------
The Seller is a corporation duly organized, validly existing and in good
standing under the laws of the State of Maryland, with full corporate power and
authority to consummate the transactions contemplated by this Agreement. Copies
of the Articles of Incorporation and Bylaws, corporate minute books, stock
certificate books and stock transfer books of the Seller have heretofore been
delivered to the Purchaser and are, in all material respects true, correct and
complete as of the date hereof.
4.2 Intentionally Omitted.
----------------------
4.3 Non-Contravention.
------------------
To Seller's knowledge, except as set forth in Seller's Disclosure Schedule,
the execution, delivery and performance of this Agreement by Sellers and the
consummation of the transactions contemplated do not and will not, with or
without the giving of notice or the lapse of time, or both, violate, conflict
with, result in the breach of or accelerate the performance required by any of
the terms, conditions or provisions of the charter documents or by-laws or other
governing
<PAGE>
documents of the Seller or any covenant, agreement or understanding to which the
Seller is a party or any order, ruling, decree, judgment, arbitration award,
law, rule, regulation or stipulation to which the Seller is subject or
constitute a default thereunder or result in the creation of any lien, charge or
encumbrance upon any of the properties or assets of the Seller.
4.4 Regulatory Approvals.
---------------------
Except as set forth in Seller's Disclosure Schedule, to the Seller's
knowledge, the Seller is not required to file, seek or obtain any governmental
notice, filing, authorization, approval, order or consent, or any bond in
satisfaction of any governmental regulation, in connection with the execution,
delivery and performance of this Agreement by Sellers or in order to prevent
termination of any material right, privilege, license or agreement of the
Seller.
4.5 Capitalization of the Seller.
-----------------------------
The Seller's authorized capital stock consists of 500 shares of Series A
Common Stock, no par value, of which 100 shares are issued and outstanding (the
"Series A Common Stock") and 4,500 shares of Series B Common Stock, no par
---------------------
value, of which 15 shares are issued and outstanding (the "Series B Common
---------------
Stock"). The Series A Common Stock and the Series B Common Stock are referred
to as the "Capital Stock." All the issued and outstanding shares of Capital
--------------
Stock are duly authorized, validly issued, fully paid and nonassessable, and the
issued and outstanding shares of Capital Stock are held of record by the
respective shareholders and in the amounts as set forth in Schedule 4.5 hereto.
Except as set forth in Seller's Disclosure Schedule, there are no outstanding
options, warrants or other rights to purchase, obtain or acquire, or any
outstanding securities or obligations convertible into or exchangeable for, or
any voting agreements with respect to, any shares of capital stock of the Seller
or any other securities of the Seller and the Seller is not obligated, now or in
the future, contingently or otherwise, to issue, purchase or redeem capital
stock of the Seller or any other securities of the Seller to or from any person.
4.6 Subsidiaries and Equity Interests; Transactions with Affiliates.
----------------------------------------------------------------
(a) Except as set forth in Seller's Disclosure Schedule, the Seller owns no
capital stock of or other equity interest in, has no obligation to form or
participate in, any corporation, partnership or other person, and is not a
member of or participant in any partnership, joint venture or similar person.
4.7 Financial Statements.
---------------------
The Seller has heretofore furnished to the Purchaser unaudited financial
statements for the Seller consisting of (a) balance sheets at June 30, 1998 and
for year ended December 31, 1997 and (b) statements of income, retained earnings
and cash flows for the period ended June 30, 1998 and for fiscal year ended
December 31, 1997 (the foregoing financial statements, reports and notes thereto
are hereinafter collectively referred to as the "Financial Statements"). The
--------------------
Financial Statements present fairly the financial position of the Seller at the
dates thereof and the results of operations and cash flows of the Seller for the
period then ended. Except as and to the extent reflected or reserved against in
the unaudited Interim Balance Sheet or otherwise set forth on Seller's
Disclosure Schedule attached hereto, the Seller had no material
<PAGE>
liability or obligation (whether absolute or contingent, or accrued or
unaccrued) required to be disclosed in the Financial Statements, or in the notes
thereto.
4.8 Absence of Certain Changes or Events.
-------------------------------------
Except as set forth in Seller's Disclosure Schedule, since the date of the
Interim Balance Sheet, June 30, 1998, there has not been, with respect to the
Seller or its businesses or properties:
(a) any material adverse change in the business or financial condition of
the Seller ("Material Adverse Change");
(b) any material obligations or liabilities incurred, except trade and
other obligations or liabilities in usual amounts and on terms consistent with
past practices incurred by the Seller in the ordinary course of business;
(c) any indebtedness for borrowed money incurred by the Seller, except
indebtedness under existing facilities incurred in the ordinary course of
business;
(d) any destruction, damage by fire, accident or other casualty or act of
God of or to any of the material properties or assets of the Seller, whether or
not covered by insurance; or
(e) any action that, if taken after the date hereof, would constitute a
breach of any of the covenants set forth in Article 6.
4.9 Assets Other than Real Property Interests.
------------------------------------------
(a) The Seller has good and valid title to the Transferred Assets free and
clear of all mortgages, liens, security interests, pledges, encumbrances,
charges, agreements, claims, restrictions and defects of title of any kind
except (i) as are set forth in Seller's Disclosure Schedule, (ii) mechanics,
carriers', workmen's, repairmen's or other like liens arising or incurred in the
ordinary course of business and liens for Taxes which are not due and payable or
being contested in good faith by appropriate proceedings, (iii) other
imperfections of title or encumbrances, if any, which mortgages, liens, security
interests and encumbrances do not, individually or in the aggregate, materially
impair the continued use and operation of the assets to which they relate in the
business of the Seller as presently conducted.
(b) All the tangible personal property of the Seller has been maintained in
all material respects in accordance with the past practice of the Seller and
generally accepted industry practice. Each item of tangible personal property
of the Seller is in all material respects in good operating condition and
repair, ordinary wear and tear excepted. All leased personal property of the
Seller is in all material respects in the condition required of such property by
the terms of the lease applicable thereto during the term of the lease and upon
the expiration thereof.
4.10 Real Property Owned and Leased.
-------------------------------
Seller's Disclosure Schedule contains a complete and accurate list and full
description of all real property owned or leased by the Seller (the "Real
----
Property"). The Seller has good and valid title to the leasehold estates in all
- --------
real property and interests in real property leased by it, in
<PAGE>
each case, free and clear of all mortgages, liens, security interests, pledges,
leases, subleases, encumbrances, charges, assignments, easements, claims or
other restrictions and defects of title.
4.11 Trademarks, etc.
----------------
(a) Schedule 1.1(b) sets forth a complete and accurate listing of all
material United States and foreign trademarks, trade names, service marks and
copyrights necessary to create, maintain and operate (or actually used by Seller
to create, maintain and operate) the Pagecount System (collectively, the
"Intellectual Property") owned, licensed, used or held for use in the conduct
---------------------
of the businesses of the Seller, whether registered or unregistered, and any
applications or registrations therefor. Except as set forth in Seller's
Disclosure Schedule, the Seller solely owns and has the exclusive right to use,
free and clear of any payments or encumbrances which in the aggregate are
material to the conduct of the business of the Seller, all such Intellectual
Property. Except as set forth in Seller's Disclosure Schedule, there is no
material claim or demand of any person pertaining to, or any proceedings which
are pending or, to the knowledge of the Seller, threatened, which challenge the
exclusive rights of the Seller in respect of any Intellectual Property whether
registered or unregistered. Except as set forth in Seller's Disclosure Schedule,
no material Intellectual Property to the knowledge of the Seller is subject to
any agreement restricting the use thereof or any outstanding order, ruling,
decree, judgment or stipulation by or with any court, arbitrator or
administrative agency, and, to the knowledge of the Seller, none of the
Intellectual Property infringes the intellectual property rights of others or,
to the actual knowledge of the Seller, is being infringed by others or is used
by others (whether or not such use constitutes infringement) except as would not
have a Material Adverse Effect on Seller's business or assets. There are no
material agreements or material licenses between the Seller and any other person
or entity which may have been terminated or expired prior to the date hereof and
under which the Seller has granted rights or licenses in the Intellectual
Property to such other persons or entities or granted an option to acquire such
rights or licenses, which rights or licenses or the option to acquire the same
survived such termination or expiration. Except as set forth in Seller's
Disclosure Schedule, to the knowledge of Seller, no person or entity has any
licenses under any of the Intellectual Property.
(b) To the knowledge of Seller, the Seller owns and has the unlimited right
to use, execute, reproduce, display, perform, modify, enhance, distribute,
prepare derivative works of or sublicense any of the Business Know-how (as
defined below) po ssessed by Seller or its affiliates relating to goods and
services presently provided by or presently proposed to be provided by the
Seller. The Seller has not granted any licenses or otherwise disclosed nor has
it agreed to disclose any of its Business Know-how except as set forth in
Seller's Disclosure Schedule. As used in this section "Business Know-how" shall
-----------------
mean all trade secrets and confidential business and technical information,
including ideas, skills, methods, experience, research and development, know-
how, artwork, compositions, technical data, designs, drawings, engineering
notebooks, software, source code and specifications necessary to create,
maintain and operate (or actually used by Seller to create, maintain and
operate) the Pagecount Service.
4.12 Insurance.
----------
Schedule 1.1(h) sets forth a complete and accurate list of all casualty,
directors and officers liability, general liability (including product
liability) and all other types of insurance
<PAGE>
maintained by the Seller, together with the carriers and liability limits for
each such policy. Each policy is duly in force, and no notice has been received
by the Seller from any insurance carrier purporting to cancel or reduce coverage
under any such policy. The Seller is current in all premiums or other payments
due thereunder. Seller's Disclosure Schedule identifies which insurance policies
are "occurrence" or "claims made."
---------- -------------
4.13 Commitments.
------------
(a) Except as set forth in Seller's Disclosure Schedule and except as would
not have a Material Adverse Effect on Seller's assets or operations, with
respect to commitments that relate to the Pagecount System, Seller is not a
party to and bound by any:
(i) employment agreement or employment contract;
(ii) employee collective bargaining agreement or other contract with
any labor union;
(iii) covenant of the Seller not to compete or other covenant of the
Seller restricting the development, marketing or distribution of the products
and services of the Seller;
(iv) material agreement, contract or other arrangement with (A)
Seller or any affiliate of Seller or (B) any current or former officer,
director, employee or independent contractor of the Seller (other than
employment agreements covered by clause (i) above);
(v) lease, sublease or similar agreement with any person under
which the Seller is a lessor or sublessor of, or makes available for use to any
person (other than the Seller), (A) any Real Property or (B) any portion of any
premises otherwise occupied by the Seller;
(vi) lease or similar agreement with any other person under which
(A) the Seller is lessee of, or holds or uses, any machinery, equipment, vehicle
or other tangible personal property owned by any person or (B) the Seller is a
lessor or sublessor of, or makes available for use by any person, any tangible
personal property owned or leased by the Seller, in any such case which has an
aggregate future liability or receivable, as the case may be, in excess of
$10,000;
(vii) service, consulting, management or other similar type of
agreement or contract, in either such case which has an aggregate future
liability in excess of $5,000;
(viii) continuing agreement or contract for the distribution of any
products or services manufactured by the Seller;
(ix) agreement, contract or arrangement for the placement of
advertising or other promotional activities which has an aggregate future
liability in excess of $10,000 and which cannot be terminated upon 30 days'
notice;
(x) except as set forth in Seller's Disclosure Schedule, any
material license, option or other agreement relating in whole or in part to the
Intellectual Property described in Section 4.11 and the corresponding section of
Seller's Disclosure Schedule (including any license or other agreement under
which the Seller is licensee or licensor of any such Intellectual
<PAGE>
Property) or to trade secrets, confidential information or proprietary rights
and processes of the Seller or any other person;
(xi) agreement, contract or other instrument under which the Seller
has borrowed any money from, or issued any note, bond, debenture or other
evidence of indebtedness to, any person or any other note, bond, debenture or
other evidence of indebtedness issued to any person;
(xii) agreement, contract or other instrument under which the Seller
has, directly or indirectly, made any advance, loan, extension of credit or
capital contribution to, or other investment in, any person;
(xiii) mortgage, pledge, security agreement, deed of trust or other
instrument granting a lien or other encumbrance upon any Real Property, which
lien or other encumbrance is not set forth in the section of Seller's Disclosure
Schedule corresponding to Section 4.10;
(xiv) agreement, contract or instrument providing for indemnification
of any person with respect to liabilities relating to any current or former
business of the Seller, or any predecessor person; or
(xv) other agreement, contract, lease, license, commitment or
instrument to which the Seller is a party or by or to which it or any of its
assets or business is bound or subject which has an aggregate future liability
to any person in excess of $5,000.
(b) To the Seller's knowledge, except as set forth in Seller's Disclosure
Schedule, all agreements, contracts, leases, licenses, commitments or
instruments of the Seller listed in the Schedules hereto (collectively, the
"Contracts") are valid and binding, in full force and effect and are enforceable
- ----------
by the Seller in accordance with their respective terms, except as would not,
either individually or in the aggregate, result in a Material Adverse Change.
Except as set forth in Seller's Disclosure Schedule, the Seller has performed
all material obligations required to be performed by it to date under the
Contracts and it is not (with or without the lapse of time or the giving of
notice, or both) in breach or default in any material respect thereunder. The
Seller has provided to the Purchaser a true and correct copy of each of the
Contracts.
4.14 Legal Proceedings.
------------------
Except as set forth in Seller's Disclosure Schedule, the Seller is not
engaged in or a party to, or, to the knowledge of the Seller, threatened with,
any suit, investigation, legal action or other proceeding before any court,
administrative agency, arbitration panel or other similar authority which (a)
involves (individually, or in the aggregate for cases arising out of the same or
substantially similar facts or circumstances) the possibility of liability of
the Seller (whether or not covered by insurance), (b) seeks injunctive relief or
(c) relates to the transactions contemplated by this Agreement, and the Seller
knows of no basis for any such suit, investigation, legal action or proceeding.
There are no outstanding orders, rulings, decrees, judgments or stipulations by
or with any court, administrative agency, arbitration panel or other similar
authority which are applicable to the properties, assets, operations or business
of the Seller or which challenge or otherwise relate to the transactions
contemplated by this Agreement.
<PAGE>
Except as set forth in Seller's Disclosure Schedule, there is no lawsuit or
claim by the Seller pending, or which the Seller intends to initiate, against
any other person.
4.15 Taxes.
------
Except as set forth in Seller's Disclosure Schedule, all Returns (as
defined below), required to be filed by or with respect to the Seller and any
predecessor corporations in respect of Taxes have been filed with the
appropriate tax authorities and each such Return is materially true, accurate
and complete. The Seller has delivered to the Purchaser correct and complete
copies of all material Returns of the Seller that have been filed by Seller.
Except as and to the extent reflected or reserved against in the Balance Sheet
or as described in the notes thereto, as of the date hereof, the Seller had no
liability for Taxes. All Taxes for periods after the date of the Balance Sheet
that should be reserved on the books of the Seller and the Seller's past
practice have been so reserved, and all estimated tax payments required to be
made have been made. The Seller has withheld and paid over all Taxes required
to have been withheld and paid over, and complied with all information reporting
and backup withholding requirements, including maintenance of required records
with respect thereto, in connection with amounts paid or owing to any employee,
creditor, independent contractor, or other third party. Except as set forth in
Seller's Disclosure Schedule, there have been no audits or examinations by any
taxing authority relating to Taxes of the Seller during the past six years, no
taxing authority has given notice that it will commence any such audit or
examination and no taxing authority is asserting (either orally or in writing,
formally or informally) or, to the knowledge of the Seller, threatening to
assert any deficiency or claim relating to Taxes of the Seller, and no liens for
Taxes have been filed and are currently outstanding with respect to any of the
assets or properties of the Seller. There is no agreement or waiver currently
in effect extending the period for assessment or collection of any Taxes. The
Seller is not, nor has it ever been, a party to a tax sharing, tax indemnity or
tax allocation agreement, and the Seller has not assumed the tax liability of
any other person under contract. The Seller is not, nor has it ever been, a
member of an affiliated group filing a consolidated federal income tax Return.
As used herein, "Return" or "Returns" shall mean all returns, declarations of
------ -------
estimated tax payments, reports, estimates, information returns and statements,
including any related or supporting information with respect to any of the
foregoing, filed or to be filed with the United States or any state,
governmental authority or subdivision or agency thereof in connection with the
determination, assessment, collection or administration of any Taxes.
4.16 Compliance with Laws.
---------------------
Except as set forth in Seller's Disclosure Schedule to the knowledge of the
Seller, (a) the Seller has complied, and is now in compliance, with all federal,
state, local and foreign laws, ordinances and regulations (including, without
limitation, those relating to employment and employment practices, and
occupational safety and health) applicable to the Seller, except where
noncompliance would not have a material adverse effect; and .(b) no claims or
complaints from any governmental authorities or other parties have been asserted
or received by the Seller which are still pending or outstanding and, to the
knowledge of the Seller, none is threatened, that the Seller is in material
violation of any applicable building, zoning, occupational safety and health, or
similar law, or of any applicable fair employment, equal opportunity or similar
law, ordinance or regulation. To the knowledge of the Seller, Seller's
Disclosure Schedule sets forth all
<PAGE>
governmental permits, licenses and authorizations necessary or desirable for the
operation or occupancy of the properties and the conduct of the business of the
Seller as presently conducted. All such licenses, permits and authorizations
which are held in the name of any employee, officer, director, stockholder,
agent or otherwise on behalf of the Seller shall be deemed included under this
warranty.
4.17 Environment.
------------
Except as set forth in Seller's Disclosure Schedule, (a) no Hazardous
Material (as defined below) is located on, at, in, under or about any real
property, including any buildings, structures, fixtures, improvements,
interests, privileges, easements and appurtenances related thereto, owned,
leased or operated by the Seller ("Premises") in a manner which violates any
--------
Environmental Requirement (as defined below), or for which clean-up or
corrective action of any kind could be required or is otherwise authorized under
any Environmental Requirement; (b) no risk to human health or the environment
exists as a result of any Hazardous Material previously or currently located on,
at, in, under or about the Premises; (c) no releasing, emitting, discharging,
leaching, dumping, disposing of any Hazardous Material from the Premises onto or
into any other property or from any other property onto or into the Premises has
occurred or is occurring in violation of any Environmental Requirement, or for
which clean-up or corrective action of any kind could be required or is
otherwise authorized under any Environmental Requirement, or which could pose a
risk to human health or the environment; (d) no notice of violation, lien,
complaint, suit, order or other notice with respect to the environmental
condition of the Premises or regarding the disposal or release of Hazardous
Materials from the Premises onto any other property is outstanding, threatened
or otherwise anticipated, nor has any such notice been issued which has not been
fully satisfied and complied with in a timely manner so as to bring the Premises
into full compliance with every Environmental Requirement; (e) the Seller does
not currently own or operate, nor in the past has owned or operated, any
property that is on the "National Priorities List" or the CERCLA list of the
------------------------
U.S. Environmental Protection Agency ("EPA"), or any similar state list, or is
---
the subject of any federal, state or local investigation evaluating whether any
remedial action is needed to respond to a release of any Hazardous Material into
the environment; (f) the Seller or any of its predecessors has filed or
otherwise provided any notice under any federal, state or local law indicating
past or present treatment, storage or disposal of a Hazardous Material into the
environment; (g) the Seller has no contingent liability in connection with the
generation, treatment, storage, disposal or any release of any Hazardous
Material into the environment; (h) none of the operations of the Seller involves
or has ever involved the treatment, storage or disposal of a Hazardous Material;
(i) neither the Seller, nor any lessee, prior owner or other person, has
disposed of or arranged for the disposal of any Hazardous Material on any
premises which are currently or have in the past been owned, leased or operated
by the Seller; (j) the Seller has not disposed of, or arranged for the disposal
of, any Hazardous Material on any premises not owned by the Seller that is on
EPA's National Priorities List or the CERCLA list or any similar state list, or
which is or reasonably could be the subject of any clean-up action by a federal
or state agency, or by a third party who could seek reimbursement of clean-up
expenses from the Seller under federal or state law; (k) no underground storage
tanks or surface impoundments are on any Premises; (l) no information exists
indicating that any person (including past or present employees) may have his
health impaired as a result of exposure to any Hazardous Materials located on,
at, in, under or about the Premises; and (m) the Seller and all third parties,
with respect to any conduct of such parties that
<PAGE>
might result in liability to the Seller, are currently and have at all times in
the past been in full compliance with all applicable Environmental Requirements.
For the purpose hereof, the following terms shall have the following meanings:
i) The term "Hazardous Materials" means any
-------------------
material, substance or constituent, including any PCBs, pollutants, solid
wastes, explosive or regulated radioactive materials or substances, hazardous
or toxic materials, substances, wastes or chemicals, petroleum (including
crude oil or any fraction thereof) or petroleum distillates, asbestos or
asbestos containing materials, materials listed in 49 C.F.R. Section 172.101
and materials defined as hazardous substances pursuant to Section 101(14) of
the Comprehensive Environmental Response, Compensation and Liability Act of
1980 (42 U.S.C. (S)(S) 9601 et seq.), as amended ("CERCLA"), that, whether by
------
its nature or its use, is subject to regulation under, or forms the basis for
liability under, any Environmental Requirement.
ii) The term "Environmental Requirement" means
-------------------------
current or future obligations, duties or requirements arising out of or
related to any laws, ordinances, statutes, codes, rules, regulations, orders,
judicial decisions, judgments, decrees, governmental restrictions,
directives, policies, guidelines, permits or licenses addressing
environmental, health or safety issues or requirements of or by any federal,
state or local government agency, including but not limited to, CERCLA, the
Hazardous Materials Transportation Act (49 U.S.C. (S)(S) 1801 et seq.), the
Resource Conservation and Recovery Act (42 U.S.C. (S)(S) 6901 et seq.), the
Toxic Substances Control Act (15 U.S.C. S(S) 2601 et she.) the Clean Air Act
(42 U.S.C. (S)(S) 7401 et seq.), the Federal Water Pollution Control Act (32
U.S.C. (S)(S) 1251 et seq.) and the Safe Drinking Water Act (32 U.S.C. (S)(S)
300f et seq.), in each care as may be amended from time to time, any
regulation pursuant to any of the above laws, and including, but not limited
to, any obligations, duties or requirements arising out of or related to
Hazardous Materials under common law or foreign law.
4.18 Employee Benefit Plans: Termination and Severance Agreements
------------------------------------------------------------
The Seller has no pension, retirement, savings, profit sharing, deferred
compensation, medical, dental or health plan, or life insurance plan, bonus,
incentive and special compensation or other plan or other employee benefit plan
or program.
4.19 Employee and Labor Matters.
---------------------------
(a) The Seller is not a party to any collective bargaining agreement or
other contract with or commitment to any labor union or association representing
any employee of the Seller, nor does any labor union or collective bargaining
agent represent any employees of the Seller. Except as set forth in Seller's
Disclosure Schedule, there are no pending, or, to the knowledge of the Seller,
threatened, charges against the Seller, or any current or former employee,
officer or director of the Seller before the Equal Employment Opportunity
Commission or any state or local agency responsible for the prevention of
unlawful employment practices.
<PAGE>
(b) All employees working in the United States hired by the Seller on or
after November 7, 1986 are authorized for employment by the Seller in the United
States in accordance with the Immigration and Naturalization Act, as amended,
and regulations promulgated under that statute. No allegations of immigration-
related unfair employment practices have been made with the Equal Employment
Opportunity Commission or the Special Counsel for Immigration-Related Unfair
Employment Practices. The Seller has completed and retained in accordance with
the Immigration and Naturalization Service regulations a Form I-9 for all
employees working in the United States hired on or after November 7, 1986,
except those employees whose employment terminated on or before June 1, 1987.
None of the employees currently employed by the Seller is authorized for
employment in the United States pursuant to a nonimmigrant visa which authorizes
the employee to be employed by the Seller.
(c) Seller's Disclosure Schedule sets forth a complete list of all the
Seller's officers, directors and employees together with the monthly salary of
each.
4.20 Capital Expenditures.
---------------------
Except as disclosed on Seller's Disclosure Schedule and approved by
Purchaser, the aggregate contractual commitments of the Seller for new capital
expenditures since the date of the Balance Sheet shall not exceed $2,500 on the
Closing Date.
4.21 Customer Accounts Receivable; Inventories.
------------------------------------------
To the knowledge of the Seller, all accounts receivable of the Seller,
whether reflected on the Balance Sheet or subsequently created, have arisen from
bona fide transactions in the ordinary course of business and are good and
collectible upon the terms agreed upon at delivery of the services and at the
aggregate recorded amounts thereof, net of any applicable reserves or allowances
for doubtful accounts which are reflected on the Balance Sheet or accrued after
the date of the Balance Sheet in the ordinary course of business consistent with
past practice. During the two year period prior to the date hereof, the Seller
has not sold, pledged or otherwise disposed of any of its accounts receivable in
connection with any receivable-type financing or factoring-type financing or
similar transaction.
4.22 No Material Misstatement or Omission.
-------------------------------------
No representation or warranty of the Seller in this Asset Purchase
Agreement nor any information contained in any schedule, certificate or other
writing delivered pursuant to this Agreement or at the Closing, contains or will
contain any untrue statement of a material fact or omits or will omit to state a
material fact necessary to make the statements contained herein or therein not
misleading.
4.23 No Undisclosed Material Liabilities.
------------------------------------
To the knowledge of Seller, there are no liabilities of the Seller of any
kind whatsoever, whether accrued, contingent, absolute, determined, determinable
or otherwise, and there is no existing condition, situation or set of
circumstances, other than:
(a) liabilities provided for in the Balance Sheet or disclosed in the notes
thereto;
<PAGE>
(b) liabilities disclosed on Seller's Disclosure Schedule; and
(c) other undisclosed liabilities which, individually or in the aggregate,
would not result in a Material Adverse Change.
4.24 Authorization.
--------------
The execution and delivery by the Seller of this Agreement and the Related
Agreements (as defined in Section 7.8, and the consummation of the transactions
contemplated hereby and thereby, will, on the Closing Date, have been, duly and
validly authorized by all necessary corporate action on the Seller's part, and
this Agreement and the Related Agreements and all other such instruments and
agreements delivered or to be delivered by the Seller in connection herewith
will be, on the closing Date, the valid and binding obligations of the Seller,
enforceable against it in accordance with their respective terms.
4.25 Title to Assets.
----------------
Except as set forth in Seller's Disclosure Schedule, Seller has good and
marketable title to all the Transferred Assets. All these assets are free and
clear of restrictions on or conditions to transfer or assignment, and free and
clear of mortgages, liens, pledges, charges, encumbrances, equities, claims,
covenants, conditions, or restrictions, except for (i) the disclosures contained
in Seller's Disclosure Schedule; and (ii) possible minor matters that, in the
aggregate, are not substantial in amount and do not materially detract from or
interfere with the present or intended use of any of these assets or materially
impair business operations. The Seller is not in default or in arrears in any
material respect under any lease.
4.26 Condition of Assets.
--------------------
The Transferred Assets have been properly maintained and are in good
operating condition and there exists no outstanding notice of any violation of
any statute or regulation relating to the Transferred Assets. Except with
respect to the Retained Assets, the Transferred Assets include all assets and
properties and all rights reasonably necessary to permit the Purchaser to carry
on the Seller's business as presently conducted by the Seller.
4.27 Broker's Fees
-------------
Seller shall indemnify Buyer and hold it harmless from any liability or
expense arising from any claim for brokerage commissions, finder's fees or other
similar compensation based on any agreement, arrangement or understanding made
by or on behalf of Seller.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
The Purchaser hereby makes the following representations and warranties to
the Seller, as of the date hereof and as of the Closing, subject only to the
Purchaser's disclosure items on the
<PAGE>
disclosure schedule attached hereto and incorporated hereby (the "Purchaser's
----------------
Disclosure Schedule"), the section numbers of which correspond to the section
- -------------------
numbers below:
5.1 Corporate Organization.
-----------------------
The Purchaser is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware, with full corporate power and
authority to consummate the transactions contemplated hereby.
5.2 Authorization.
--------------
The execution and delivery by the Purchaser of this Agreement and the
Related Agreements provided for herein, and the performance of its obligations
hereunder and thereunder, have been duly and validly authorized by all necessary
corporate action on the part of the Purchaser and this Agreement, and the
Related Agreements are or will be the valid and binding obligations of the
Purchaser enforceable against it in accordance with their respective terms.
5.3 Brokers.
--------
No agent, broker, person or firm acting on behalf of the Purchaser or under
its authority is or will be entitled to a financial advisory fee, brokerage
commission, finder's fee or like payment in connection with any of the
transactions contemplated hereby.
5.4 Litigation.
-----------
There are no suits, actions, or administrative, arbitration or other
proceedings or governmental investigations pending or, to the knowledge of the
Purchaser, threatened against the Purchaser with respect to any of the
transactions contemplated hereby.
5.5 Conflicts With Other Agreements.
--------------------------------
The execution and delivery by the Purchaser of this Agreement and each of
the Related Agreements and the performance by the Purchaser of its respective
obligations hereunder or thereunder will not, or with the giving of notice or
the lapse of time or both, would not:
(a) conflict with or result in a breach of or constitute a default under
any provision of the Certificate of Incorporation or By-laws of the Purchaser or
any contract, indenture, lease, sublease, loan agreement, restriction, lien,
encumbrance or other obligation or liability to which the Purchaser is a party
or by which it is affected or bound; or
(b) violate any order, writ, injunction, decree, law, statute, rule or
regulation applicable to the Purchaser.
5.6 Consents.
---------
No consent, approval or agreement of any person, party, court, government
or entity is required to be obtained by the Purchaser in connection with the
execution and delivery of this
<PAGE>
Agreement or the Related Agreements, or the consummation of the transactions
contemplated hereby and thereby.
ARTICLE 6
THE SELLER'S AND THE PURCHASER'S OBLIGATIONS PRIOR TO THE CLOSING
The Seller covenants and agrees with the Purchaser and the Purchaser
covenants and agrees with the Seller, as follows:
6.1 Conduct of Business.
--------------------
From the date hereof until the Closing Date, except as the Purchaser may
otherwise consent in writing, the Seller shall conduct the Seller's business
only in the ordinary and usual course, and use all reasonable efforts to
preserve intact the Seller's business organization and good will, including,
without limitation, the following:
(a) using all reasonable efforts to retain the services of its management
and employees;
(b) using all reasonable efforts to maintain its relationships with its
suppliers and others having business relationships with it;
(c) paying when due all taxes, assessments, fees or charges applicable to
it except if being diligently contested in good faith by appropriate
proceedings;
(d) not purchasing, selling or disposing of any of the Transferred Assets
other than in the ordinary course of business or mortgaging, pledging,
subjecting of a lien or security interest or otherwise encumbering any of the
Transferred Assets;
(e) not incurring any indebtedness or liability, contingent or otherwise,
other than in the ordinary course of business consistent with past practice;
(f) except as may be required under any employment or other agreements
currently in effect, not changing the compensation payable or to become payable
to any of its officers, employees or agents or entering into any new employment
contract with respect to the Seller's business unless it is terminable at will
and without penalty;
(g) not modifying or terminating any Contract listed on the Schedules
hereto or entering into any other contract or agreement or modifying or
terminating any such contract or agreement, other than in the ordinary course of
business; and
(h) maintaining at all times the insurance listed on Schedule 1.1(h)
---------------
hereto, or equivalent insurance with substitute insurers reasonably satisfactory
to the Purchaser.
<PAGE>
6.2 Breach of Representations and Warranties.
-----------------------------------------
From the date hereof until the Closing Date or the termination of this
Agreement pursuant to Article 11, promptly upon either party becoming aware of
the occurrence of, or the impending or threatened occurrence of, any event which
would cause or constitute a breach, or would have caused or constituted a breach
had such event occurred or been known to such party prior to the date hereof, of
any of the representations and warranties of such party contained in this
Agreement or in any schedule attached hereto, such party shall give the other
party notice thereof in reasonable detail and such party shall use its best
efforts to prevent or promptly remedy the same; subject to the limitations of
Section 10.3.
6.3 Exclusive Dealing.
------------------
From the date hereof until the Closing Date, the Seller shall not, directly
or indirectly, encourage or initiate discussions or negotiations with, or
provide any information to or cooperate with, or participate in any discussions
or negotiations relating to any offers by, any corporation, partnership, person,
or other entity or group, other than the Purchaser, concerning the purchase of
all or substantially all of the assets of, or similar transaction involving, the
Seller's business or the sale of all or substantially all of the capital stock
of the Seller, or any merger or other business combination of the Seller with
any such other entity or group.
6.4 Access.
-------
The Purchaser and its employees, agents, attorneys, accountants and other
representatives have been given full access to the Seller's properties, assets,
facilities, and books and records and have been furnished with such additional
information with respect to the business and properties of the Seller's business
or the Seller as the Purchaser or such representative has requested. The Seller
shall provide to the Purchaser such additional information with respect to the
Transferred Assets between the date hereof and the Closing Date as the Purchaser
or its representatives may reasonably request. The Purchaser shall hold, and
shall cause its representatives to hold, in strict confidence, and shall not
disclose, and shall cause its representatives not to disclose, any information
given to it or its representatives regarding the Seller or the Seller's
business, except that the Purchaser may disclose such information (i) to
employees, representatives, attorneys or accountants in order to complete the
Purchaser's due diligence investigation, (ii) if such information is in the
public domain, or comes into the public domain through no fault of the Purchaser
or its representatives, or (iii) if such information is required to be disclosed
by the Purchaser in order to comply with law, but only upon prior notice to the
Seller. In the event of termination of this Agreement, the Purchaser and its
representatives shall return to the Seller all copies of statements, documents,
schedules or other written information obtained in connection therewith and
shall promptly turn over or destroy all reports or analyses prepared by the
Purchaser, or its representatives based thereon.
6.5 Violations of Law.
------------------
If, prior to the Closing Date, the Seller receives an administrative or
other order relating to any violation of any law, rule or regulation of any
federal, state, local or other regulatory or administrative body, including
rules regarding the employment of labor and equal employment
<PAGE>
opportunity, the Seller may elect to remove or correct all such violations and
to be responsible for the costs of removing or correcting the same, including
the payment of any fines or back pay that may be assessed for any such
violation.
6.6 Public Announcements.
---------------------
No party hereto shall make, or permit any of its affiliates or
representatives to make, any news release or other public disclosure of this
Agreement or the transactions contemplated hereby without the prior approval of
the other parties hereto, which approval shall not be unreasonably withheld.
ARTICLE 7
CONDITIONS PRECEDENT TO CLOSING BY THE PURCHASER
The obligation of the Purchaser to purchase the Transferred Assets and to
consummate the transactions contemplated hereby, is subject to the fulfillment
and satisfaction by the Seller or waiver in writing by the Purchaser prior to or
at the Closing Date of each of the following conditions:
7.1 Accuracy of Representations and Warranties.
-------------------------------------------
The representations and warranties of the Seller contained in this
Agreement and the Related Agreements and in any schedule attached hereto and
thereto shall be true and correct in all material respects on and as of the
Closing Date with the same effect as though such representations and warranties
had been made on and as of such date and the Purchaser shall have received a
certificate, executed by the President and the Secretary of the Seller, dated
the closing Date, to such effect, subject to the actual knowledge of the
principals of the Seller.
7.2 Performance Thresholds
----------------------
Pagecount shall:
(i) have a minimum of 250,000 subscribers on whose Web sites a
Pagecount banner has been displayed at least once in the month prior to the
Closing;
(ii) Pagecount shall have a minimum of 50,000,000 advertising
impressions per month which are non-adult and non-X-rated and a minimum of
20,000,000 advertising impressions which are adult or X-rated;
(iii) Pagecount shall not have long term agreements that cannot be
terminated within thirty (30) days' notice that exceed twenty-five (25%) percent
of the non-adult and non-X-rated advertising inventory;
<PAGE>
7.3 Authorization.
--------------
All corporate and shareholder action necessary to authorize the execution,
delivery and performance by the Seller of this Agreement and the transactions
contemplated hereby shall have been duly and validly taken.
7.4 No Material Adverse Change.
---------------------------
There shall not have occurred any Material Adverse Change taken as a whole
since the date of this Agreement.
7.5 Bill of Sale.
-------------
The Seller shall have executed and delivered to the Purchaser a bill of
sale conveying to the Purchaser all of the tangible and intangible personal
assets to be acquired by the Purchaser, substantially in the form attached
hereto as Exhibit D (the "Bill of Sale").
--------- ------------
7.6 Non-Competition Agreement.
--------------------------
Seller, Sal D'Ambera, Mark Burke and Paul Burke shall have executed and
delivered to the Purchaser a non-competition agreement, substantially in the
form attached hereto as Exhibit E (the "Non-Competition Agreement").
--------- -------------------------
7.7 Security Agreement.
-------------------
The Purchaser shall have executed and delivered to the Seller a Security
Agreement, substantially in the form attached hereto as Exhibit F (the "Security
--------- --------
Agreement").
- ---------
7.8 Management Agreement.
---------------------
The Seller shall have executed and delivered to the Purchaser the
Management Agreement. The Security Agreement, Management Agreement, Escrow
Agreement and Noncompetition Agreement, are sometimes referred to herein
collectively as the "Related Agreements."
-------------------
7.9 Opinion of the Seller's Counsel.
--------------------------------
The Purchaser shall have received opinions from the Seller's counsel, dated
the Closing Date, substantially in the form attached hereto as Exhibit G.
---------
7.10 Third Party Consents and Governmental Authorizations.
-----------------------------------------------------
All consents and approvals of third parties required to permit the Seller
to consummate the transactions contemplated hereby, shall have been obtained by
the Seller.
7.11 Releases.
---------
The Purchaser shall have received Releases from Mark Burke and Paul Burke
in substantially the form of Exhibit H hereto.
---------
<PAGE>
7.12 Certificates; Assignments.
--------------------------
(a) The Purchaser shall have received from the Seller certificates, (i) as
of the most recent practicable date, as to the legal existence of the Seller
issued by the Secretary of State of the State of Maryland and the tax status of
the Seller issued by the Maryland Department of Assessment and Taxation and (ii)
dated the Closing Date by the Secretary of the Seller, as to the incumbency and
signatures of those officers of the Seller authorized to execute this Agreement
and the Related Agreements and resolutions of the Board of Directors and
shareholders of the Seller authorizing this Agreement and the transactions
contemplated hereby.
(b) The Purchaser shall have received written certificates of assignment,
notarized and otherwise in form and content acceptable to the Purchaser,
confirming the assignment to the Purchaser of the copyrights and trademarks
which are included within the Transferred Assets substantially in the form of
Exhibit I hereto.
- ---------
7.13 Other Matters.
--------------
All proceedings to be taken in connection with the transactions
contemplated by this Agreement and all documents incident thereto shall be
reasonably satisfactory in form and substance to the Purchaser and its counsel,
and the Purchaser shall have received copies of all such documents and other
evidences as it or its counsel may reasonably request.
ARTICLE 8
CONDITIONS PRECEDENT TO CLOSING BY THE SELLER
The obligation of the Seller to sell the Transferred Assets and to
consummate the transactions contemplated hereby, is subject to the fulfillment
and satisfaction by the Purchaser or waiver in writing by the Seller prior to or
at the Closing Date of each of the following conditions:
8.1 Accuracy of Representations and Warranties.
-------------------------------------------
The representations and warranties of the Purchaser contained in this
Agreement and the Related Agreements shall be true and correct in all material
respects as of the Closing Date with the same effect as though such
representations and warranties had been made on and as of such date, and the
Seller shall have received a certificate, executed by an officer of the
Purchaser, dated the Closing Date to such effect.
8.2 Security Agreement.
-------------------
The Purchaser shall have executed and delivered to the Seller the Security
Agreement.
8.3 Management Agreement.
---------------------
The Purchaser shall have executed and delivered to the Seller a counterpart
of the Management Agreement.
<PAGE>
8.4 Opinion of Purchaser's Counsel.
-------------------------------
The Seller shall have received an opinion from Morrison & Foerster LLP,
counsel to the Purchaser, dated the Closing Date, addressed to the Seller,
substantially in the form attached hereto as Exhibit J.
---------
8.5 Authorization.
--------------
All corporate and shareholder action necessary to authorize the execution,
delivery and performance by the Purchaser of this Agreement and the Related
Agreements and the transactions contemplated hereby and thereby shall have been
duly and validly taken, and Seller shall have received a certificate executed by
an executive officer of the Purchaser, dated the Closing Date, to such effect.
8.6 Other Matters.
--------------
All proceedings to be taken in connection with the transactions by this
Agreement and all documents incident thereto shall be reasonably satisfactory in
form and substance to the Seller and its counsel, and the Seller shall have
received copies of all such documents and other evidences as it or its counsel
may reasonably request.
ARTICLE 9
FURTHER ASSURANCES
9.1 Additional Instruments.
-----------------------
From time to time after the Closing, each party shall execute and deliver
such other and further instruments of conveyance, assignment, transfer and
consent, and take such other action, as the other party may reasonably request
for the more effective conveyance and transfer of ownership of the Transferred
Assets and the performance by the parties of their obligations under this
Agreement and the Related Agreements.
9.2 Distribution of Sale Proceeds.
------------------------------
Seller acknowledges that it has certain obligations as to distribution of
the proceeds from the sale of the Transferred Assets to its shareholders and may
be subject to claims of others due to the sale of the Transferred Assets and
undertakes to timely perform such obligations or to contest or settle any claims
for which Seller has a good faith defense, if appropriate, and to indemnify and
defend Purchaser for any claims asserted against Purchaser in connection
therewith.
<PAGE>
ARTICLE 10
INDEMNIFICATION
10.1 Indemnification by Seller.
--------------------------
(a) In the event the Seller (i) breaches or is deemed to have breached any
of the representations and warranties contained in this Agreement and the
Related Agreements, or (ii) fails to perform or comply with any of the covenants
and agreements set forth in this Agreement and the Related Agreements, the
Seller shall hold harmless, indemnify and defend the Purchaser, and each of its
directors, officers, shareholders, attorneys, representatives and agents
(collectively, Purchaser's "Agents"), from and against any Damages incurred or
------
paid by the Purchaser to the extent such Damages arise or result from a breach
by Seller of any such representations or warranties or a violation of any
covenant in this Agreement. For purposes of Article 10, "Damages" shall mean any
-------
and all costs, losses, damages, liabilities, demands, claims, suits, actions,
judgments, causes of action, assessments or expenses, including interest,
penalties, fines and attorneys' fees and expenses incident thereto, incurred in
connection with any claim for indemnification arising out of this Agreement, and
any and all amounts paid in settlement of any such claim.
10.2 Indemnification by the Purchaser.
---------------------------------
In the event the Purchaser (i) breaches or is deemed to have breached any
of the representations and warranties contained in this Agreement and the
Related Agreements or (ii) fails to perform or comply with any of the covenants
and agreements set forth in this Agreement and the Related Agreements, then the
Purchaser shall hold harmless, indemnify and defend Seller and Seller's Agents
from and against any Damages incurred or paid by the Seller to the extent such
Damages arise or result from a breach by the Purchaser of any such
representations and warranties or a violation of any covenant in this Agreement.
10.3 Limitation of Liability.
------------------------
The cumulative liability of the parties pursuant to this Agreement and the
Related Agreements shall be limited as set forth below; provided, however, that
either party's liability shall not be limited to the extent the representations,
warranties, covenants or other statements or information given by such party
fail to meet the standard set forth in Section 10b-5(2) of the Rules promulgated
under the Securities Exchange Act of 1934, as amended, or to the extent Seller
fails to perform its obligations under Section 9.2:
(a) Pagecount's liability shall be limited to the amount of the Holdback.
(b) XOOM's liability shall be limited to the amount payable under this
Agreement and the Note.
(c) The respective indemnification obligations of the parties shall not be
effective unless, in the case of either party, the aggregate dollar amount of
Damages exceeds $32,500, in which case such indemnification shall be from the
first dollar of Damages.
<PAGE>
10.4 Notification of Claims.
-----------------------
If any party or parties (the "Indemnified Party") reasonably believes that
-----------------
it is entitled to indemnification hereunder, or otherwise receives notice of the
assertion or commencement of any third-party claim, action, or proceeding (a
"Third-Party Claim"), with respect to which such other party or parties (the
- ------------------
"Indemnifying Party") is obligated to provide indemnification pursuant to
- -------------------
Section 10.1 or 10.2 above, the Indemnified Party shall promptly give the
Indemnifying Party written notice of such claim for Indemnification (an
"Indemnity Claim"). Any claim for indemnification under Article 10 must be
- ----------------
brought prior to the expiration of the survival period for the representation
and warranty as set forth in Section 10.1. The delivery of such notice of
Indemnity Claim ("Claim Notice") shall be a condition precedent to any liability
------------
of the Indemnifying Party for indemnification hereunder. The Indemnifying Party
shall have twenty (20) days from the receipt of a Claim Notice (the "Notice
------
Period") to notify the Indemnified Party of whether or not the Indemnifying
- ------
Party disputes its liability to the Indemnified Party with respect to such
Indemnity Claim
10.5 Resolution of Claims.
---------------------
(a) With respect to any Indemnity Claim involving a Third-Party Claim,
following prompt notification of the Indemnifying Party, the Indemnifying Party
shall have the option of proceeding with the defense of the Third Party Claim
provided (i) the Indemnifying Party has either not disputed its liability for
the Indemnity pursuant to Section 17.1 or the liability of the Indemnifying
Party for the Indemnity Claim has been determined pursuant to Section 17.1, (ii)
the Indemnifying Party has appointed counsel acceptable to the Indemnified Party
(whose approval shall not be unreasonably withheld) and (iii) the Indemnifying
Party shall have assumed and agreed to bear all reasonable costs related to the
Indemnity Claim and reimbursed the Indemnified Party for reasonable costs
incurred, if any, by the Indemnifying Party prior to assuming the defense.
During such defense proceedings, the Indemnifying Party shall keep the
Indemnified Party informed of all material developments and events relating to
the proceedings. The Indemnified Party shall have a right to be present at the
negotiation, defense and settlement of such Third-Party Claim. The Indemnifying
Party shall not agree to any settlement of the Third-Party Claim without the
consent of the Indemnified Party, which consent shall not be unreasonably
withheld.
(b) With respect to any Indemnity Claim not involving a Third-Party Claim,
if the Indemnifying Party disputes its liability within the Notice Period, the
liability of the Indemnifying Party shall be resolved in accordance with Section
17.1.
(c) In the event that an Indemnified Party makes an Indemnity Claim in
accordance with Section 10.3 and the Indemnifying Party does not dispute its
liability within the Notice Period, the amount of such Indemnity Claim shall be
conclusively deemed a liability of the Indemnifying Party.
10.6 Survival of Representations and Warranties.
-------------------------------------------
Except for the claims for which Seller's liability is not limited pursuant
to Section 10.3, which claims shall survive until the expiration of the
applicable statute of limitations, any claim
<PAGE>
for any loss, liability, cost, damage or expense relating to the representations
and warranties set forth in this Agreement shall survive the Closing and the
consummation of the transactions contemplated hereby for a period of one (1)
year after the Closing Date; provided however, that all such representations,
warranties and covenants shall survive after the applicable survival period with
respect to any claim made by a party prior to the expiration thereof until, and
shall expire when, such claim is finally resolved. The parties hereto shall be
entitled to rely upon such representations and warranties whether or not either
party relied on the representations and warranties or had knowledge, acquired
before or after the date hereof, from its own investigation or otherwise, of any
fact at variance with or any breach of any such representation or warranty.
ARTICLE 11
TERMINATION
11.1 Termination Prior to Closing Date.
----------------------------------
This Agreement may be terminated and the transactions contemplated hereby
abandoned at any time prior to the Closing Date as follows:
(a) by mutual consent of the Seller and the Purchaser;
(b) by the Purchaser if any of the conditions set forth in Article 7 hereof
shall have become impossible of fulfillment and shall not have been waived by
the Purchaser;
(c) by the Seller if any of the conditions set forth in Article 8 hereof
shall have become impossible of fulfillment and shall not have been waived by
the Seller;
(d) by either the Seller or the Purchaser if any action, suit or proceeding
before any court or other governmental body or agency shall have been instituted
to restrain, modify or prohibit the transactions contemplated hereby, unless
contested in good faith or unless the party against whom the action, suit or
proceeding is commenced agrees to indemnify the other party against all
liability arising therefrom, and the other party agrees to accept such
indemnification; and
(e) by either the Purchaser or the Seller if the transactions contemplated
hereby are not consummated on or before July __, 1998 for any reason other than
the failure of the party seeking termination to fulfill the conditions set forth
in Article VII hereof, if the Seller, or Article VIII hereof, if the Purchaser.
11.2 Effect of Termination.
----------------------
If this Agreement is terminated pursuant hereto, this Agreement shall
become void and of no further force and effect except that such termination
shall be without prejudice to the rights of any party because of the non-
satisfaction of conditions set forth in Articles VII and VIII hereof resulting
from the intentional or willful breach or violation of the representations,
warranties, covenants or agreements of another party under this Agreement.
<PAGE>
11.3 Termination After Closing Date.
-------------------------------
This Agreement may be terminated by Purchaser after the closing by
Purchaser's delivery of the Transferred Assets (and any additional collateral in
which Seller has a security interest) to Seller, except after an IPO, Corporate
Transaction or Financing or if any of the foregoing transactions closes within
60 days after such delivery, and Seller shall retain (or have the right to
receive) all sums paid or payable until the date of such termination.
ARTICLE 12
REMEDIES
12.1 Remedies.
---------
The Seller agrees that the Transferred Assets are unique and that the
Purchaser will be irreparably harmed in the event this Agreement is not
specifically enforced. The parties further agree that it is impossible to
measure in money the damage that will accrue by reason of a refusal by the
Seller to perform its obligations under this Agreement. Therefore, the Seller
hereby acknowledges that, in the event that the Purchaser shall institute any
action to enforce the provisions of this Agreement, the Purchaser will not have
an adequate remedy at law and that injunctive or other equitable relief will not
constitute any hardship upon the Seller.
ARTICLE 13
COVENANTS OF THE SELLER AND THE PURCHASER AFTER THE CLOSING
The Seller covenants and agrees with the Purchaser and the Purchaser
covenants and agrees with the Seller, provided the Closing occurs hereunder:
13.1 Change of Name.
---------------
The Seller agrees that upon payment in full of the Note it will take such
action, and sign and file such instruments as shall be necessary to change its
name to a name not including the words "Pagecount" or any variation or
---------
derivative thereof or any name confusingly similar thereto.
13.2 Uniform Tax Treatment.
----------------------
The parties agree that the allocation of consideration set forth herein
among the Transferred Assets as determined by the Purchaser (the "Tax
---
Allocation") shall be used by them for all federal and state income tax
purposes, including, but not limited to, reporting pursuant to Section 1060 of
the Internal Revenue Code of 1986, as amended. Prior to filing IRS Form 8594
("Asset Acquisition Statement Under Section 1060") with respect to the
- ------------------------------------------------
transactions described herein, the parties shall provide to each other a true
and correct copy of IRS Form 8594 which each intends to file with respect to
these transactions.
<PAGE>
13.3 Cooperation.
------------
The parties to this Agreement shall cooperate, including, without
limitation, during times of audit by taxing authorities and in preparation of
Tax returns, to avoid payment of duplicate or inappropriate Taxes, and each
party shall furnish, at the reasonable request of the other, proof of payment of
any such Taxes or any other documentation that is a prerequisite to avoiding
payment of a duplicate or inappropriate Tax. Such cooperation shall include,
without limitation, furnishing information regarding prior years' Tax returns
and related work papers, rulings, and determinations by any Tax authority.
ARTICLE 14
RIGHT OF SET-OFF
14.1 Right of Set-Off.
-----------------
Subject to the limitations on Seller's liability as set forth in Section
10.3 above, with respect to any amounts that may be due to any party from any
other party hereunder or otherwise, such party shall have the right to set-off
such amounts against and to apply them to any amount otherwise payable by such
party to the other party pursuant to this Agreement and the Related Agreements.
The right of set-off provided for in this Section shall be in addition to any
other rights or remedies that may be otherwise available to such party and the
exercise of such right of set-off shall not operate as a waiver of any such
other rights; provided, however, that Purchaser's total liability shall not
--------
exceed the liability described in 10.3.
ARTICLE 15
EXPENSES OF THE PARTIES
Each party will pay its respective expenses incurred in connection with the
negotiation, execution and performance of this Agreement, and in the case of the
Seller, such expenses shall be paid out of the proceeds of the purchase price
paid hereunder.
<PAGE>
ARTICLE 16
NOTICES
16.1 Notices.
--------
Any notice to any party hereto given pursuant to this Agreement shall be in
writing addressed as follows:
if to the Seller: Pagecount, Inc.
1701 Edmondson Avenue
Baltimore, MD 21228
Telephone: (410) 788-8298
Telecopier: (410) 788-7485
with a copy to: Shulman, Rogers, Gandal, Pordy & Ecker, P.A.
11921 Rockville Pike
3rd Floor
Rockville, MD 20852
Attn: James A. Powers, Esq.
Telephone (301) 230-5231
if to the Purchaser: XOOM, Inc.
433 California Street, Suite 910
San Francisco, CA 94104
Attn: Laurent Massa, President
Telephone: (415) 445-2525
Telecopier: (415) 445-2526
with a copy to: Morrison & Foerster LLP
425 Market Street
San Francisco, California 94105
Attn: Bruce A. Mann, Esq.
Telephone: (415) 268-7000
Telecopier: (415) 268-7522
Any such address may be changed by any party by written notice to the other
party. Any notice shall be deemed delivered (i) if transmitted by electronic
facsimile transmission, when the appropriate number and answerback are
transmitted, (ii) if delivered personally, when received, or (iii) if mailed by
registered or certified mail, postage prepaid, return receipt requested, when
received.
<PAGE>
ARTICLE 17
DISPUTE RESOLUTION
17.1 Arbitration.
------------
Any controversy or claim between or among the parties, their agents,
employees and affiliates, including but not limited to those arising out of or
relating to this Agreement or the Related Agreements, shall, at the option of
any party, be resolved through mandatory arbitration in accordance with the
rules then in effect of the American Arbitration Association ("AAA") and Title 9
---
of the U. S. Code. All statutes of limitations or any waivers contained herein
which would otherwise be applicable shall apply to any arbitration proceeding
under this Section 17.1. The parties agree that related arbitration proceedings
may be consolidated. The arbitrator shall prepare written reasons for the
award. The location of the arbitration shall be, for a claim brought by the
Purchaser, in Baltimore, Maryland (and Purchaser hereby consents to jurisdiction
in Maryland for such purpose), and for a claim brought by the Seller, in San
Francisco, California. The arbitrator or arbitrators shall be generally skilled
in the legal and business aspects of the subject matter at issue. If the
parties so agree, a single arbitrator shall be selected jointly by the Purchaser
and the Seller to settle the dispute. If the parties cannot agree upon the
selection of an arbitrator within fifteen (15) days after the receipt by one
party from the other of a notice of arbitration, then each party shall within
fifteen (15) days after the expiration of said fifteen (15) day period select
one arbitrator. If either party fails to appoint an arbitrator within that
fifteen (15) days period, the other party may designate an arbitrator for the
party who failed to make such appointment. The two arbitrators shall select a
third arbitrator within fifteen (15) days after their appointment; if the two
arbitrators selected by the parties cannot agree upon a third arbitrator, the
third arbitrator shall be appointed by the AAA. The arbitrators shall promptly
determine whether and in what amount a payment should be made to prevailing
party subject to Section 10.3 and shall submit a written report of their
decision to the Purchaser and the Seller. The decision of the majority of the
arbitrators shall be binding upon all parties. Judgment upon the award rendered
may be entered in any court having jurisdiction.
17.2 Provisional Remedies and Self Help.
-----------------------------------
No provision of, or the exercise of any rights under, Section 17.1 shall
limit the right of any party to exercise self help remedies such as set-off, or
to obtain provisional or ancillary remedies such as injunctive relief or the
appointment of a receiver from a court having jurisdiction before, during or
after the pendency of any arbitration.
ARTICLE 18
MISCELLANEOUS
18.1 Entire Agreement; Waivers.
--------------------------
This Agreement (including all attachments hereto) comprises the entire
agreement between the parties hereto as to the subject matter hereof and
supersedes all prior agreements and understandings between them relating
thereto. Each party may extend the time for, or waive the
<PAGE>
performance of, any of the obligations of the other, waive any inaccuracies in
the representations or warranties of the other, or waive compliance by the other
with any of the covenants or conditions contained in this Agreement, but only by
an instrument in writing signed by the party granting such extension or waiver.
18.2 Attorneys Fees.
---------------
If any legal action, arbitration, mediation or other proceeding is brought
for the enforcement of this Agreement or the Related Agreements, or because of
an alleged dispute, breach, default, or misrepresentation in connection with any
of the provisions of this Agreement or the Related Agreements, the successful or
prevailing party or parties shall be entitled to recover reasonable attorneys'
fees and other costs incurred in that action or proceeding, in addition to any
other relief to which it or they may be entitled.
18.3 Governing Law.
--------------
This Agreement is made and shall be construed in accordance with the laws
of the State of Delaware.
18.4 Successors and Assigns.
-----------------------
This Agreement shall inure to the benefit of, and be binding upon and
enforceable against, the respective successors and assigns of the parties hereto
but may not be assigned by any party without the prior written consent of the
other parties.
18.5 Captions.
---------
Captions are supplied herein for convenience only and shall not be deemed a
part of this Agreement for any purpose.
18.6 Counterparts.
-------------
This Agreement may be executed in any number of counterparts, each of which
shall be deemed an original for all purposes.
18.7 Severability.
-------------
If any term or provision of this Agreement or the application thereof to
any person or circumstances shall to any extent be invalid or unenforceable, the
remainder of this Agreement or the application of such terms or provisions to
persons or circumstances other than those as to which it is invalid or
unenforceable, shall not be affected thereby and each term and provision of this
Agreement shall be valid and enforced to the fullest extent permitted by law.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written by their duly authorized officers.
The Seller:
PAGECOUNT, INC.
By: /s/ Sal D'Ambera
--------------------------------
Sal D'Ambera, President
The Purchaser:
XOOM, INC.
By: /s/ Laurent Massa
-------------------------------
Name: Laurent Massa
Title: CEO
<PAGE>
PAGECOUNT DISCLOSURE SCHEDULE
(THIS SCHEDULE HAS NOT BEEN FILED AS IT HAS BEEN DEEMED IMMATERIAL TO AN
INVESTMENT DECISION PURSUANT TO THE PROVISIONS OF ITEM 601(B)(2) OF REGULATION
S-K. THE REGISTRANT AGREES TO FURNISH A COPY OF THIS EXHIBIT TO THE COMMISSION
UPON REQUEST.)
<PAGE>
EXHIBIT A
MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT (this "Agreement") is made effective as of July
---------
30, 1998, by and between XOOM, INC., a Delaware corporation ("XOOM"), and
----
PAGECOUNT, INC., a Maryland corporation ("Pagecount").
---------
RECITALS
1. Pagecount offers, operates and maintains a software utility created by
Pagecount (a "Pagecounter") on the Web that permits a Person with a Website to
-----------
monitor traffic on their Website, offered free of charge to any person with a
Website.
2. XOOM offers, operates and maintains a network for Persons to construct
Web pages.
3. Pursuant to an Asset Purchase Agreement dated July 24, 1998 (the
"Asset Purchase Agreement"), XOOM purchased from Pagecount the Pagecount Service
------------------------
in consideration for cash and a promissory note in the original principal amount
of $1.2 million (the "Note").
----
4. Pending payment in full of the Note (less the Holdback), and in order
to assure that Pagecount, in the event the Note is not paid in full, can recover
the Pagecount Service intact and maintain effective control over the Transferred
Assets constituting the Pagecount Service in the interim, XOOM and Pagecount
have agreed that Pagecount will continue to operate the Pagecount Service
pursuant to the terms and conditions of this Agreement.
NOW, THEREFORE, the parties hereto hereby agree as follows:
ARTICLE 1
DEFINITIONS
1.1 Defined Terms.
--------------
For the purposes of this Agreement, capitalized terms when used herein
shall have the meanings set forth in the Asset Purchase Agreement and the
following meanings:
Banner Inventory: The aggregate of all banners appearing with a Pagecounter
----------------
on which Pagecount can sell advertising space, determined by the number of
impressions with a Pagecounter in any given calendar month.
<PAGE>
Contract: All contracts and agreements to which Pagecount is party as of
--------
the date hereof and at any time while this Agreement is in effect, including,
but not limited to, contracts for advertising on Pagecounter banners.
Management Fee: The fixed, monthly management fee payable by XOOM to
--------------
Pagecount pursuant to Section 3.1.
Operating Budget: The annual operating budget described in Section
----------------
2.1(h).
Pagecount's Best Efforts: The application by Pagecount of its best skill
------------------------
and judgment in performing the obligations set forth herein in order to perform
a given task in an expeditious and economical manner consistent with Pagecount's
present practices and sound management and business practices.
Person: A natural person, a corporation, a business trust, an
------
association, a company, a joint venture, a partnership or any other type of
entity.
XOOM/Pagecount Operating Account: The bank account described in Section
--------------------------------
2.2(c).
ARTICLE 2
PAGECOUNT'S DUTIES
2.1 Management Services.
--------------------
Pagecount agrees to provide XOOM management services so as to keep the
Pagecount Service operational and functional on the Web on behalf of XOOM, as
more fully described below, pending payment in full of the Note (less the
Holdback) and, after payment of the Note, to transfer the Transferred Assets and
operations of Pagecount relating to the Pagecount Service to XOOM. To achieve
the foregoing, objectives, Pagecount shall, using Pagecount's Best Efforts:
(a) Contract Administration/Compliance. Monitor and enforce compliance with
-----------------------------------
all Contracts, including Contract commencement, renewal and termination
consistent with past practices, subject to the provisions herein, and
communicate with XOOM regarding the same;
(b) Reports. Promptly report to XOOM all problems or situations which may
-------
affect the Pagecount Service or require XOOM's involvement, including, without
limitation, law suits and potential law suits, prospective government
investigations and approvals and settlements of any disputes;
(c) Documents. As part of the performance of its obligations hereunder,
---------
execute Contracts on behalf of XOOM in the ordinary course of business, provided
that XOOM shall be informed in advance of any material Contracts and shall have
approved them as to form and content;
<PAGE>
(d) Insurance. On behalf of XOOM, obtain and maintain necessary insurance
---------
coverage for the operation of the Pagecount Service as deemed sufficient by
XOOM, and provide XOOM with certificates of insurance naming XOOM as an
additional loss payee and further providing that such insurance coverage may not
be canceled or terminated by Pagecount without forty-five (45) days prior
written notice to that effect having been given to XOOM. Pagecount shall
deliver to XOOM satisfactory evidence of such continuous insurance coverage on a
periodic basis.
(e) Compliance with Laws. Comply with any and all statutes, ordinances,
--------------------
rules and regulations pertaining to the Pagecount Service and the requirements
of any Contract consistent with past practices and sound business practice, and
promptly notify XOOM of any violation of any statute, ordinance, rule or
regulation or any threatened claims, suits or actions concerning or relating to
the Transferred Assets of which Pagecount becomes aware, except to the extent
such noncompliance or violation would not have a Material Adverse Effect on the
Pagecount Service;
(f) Management of Personnel. Hire, supervise, and discharge the personnel
-----------------------
necessary to maintain and operate the Pagecount Service. All such personnel
hired will be employees solely of Pagecount or of independent contractors
retained by Pagecount and not of XOOM. Pagecount shall hire, train, discipline
and discharge such employees in compliance with all applicable federal and state
labor laws, rules and regulations and consistent with generally accepted good
employment practice in the state in which such work is performed. Pagecount
will not discriminate against any employee or applicant for employment because
of race, religion, creed, color, sex or national origin or otherwise in
violation of applicable law;
(g) Hardware Maintenance. Maintain all of its hardware in good working
---------------------
order consistent with past practices in such manner as to support the continuous
smooth operation of the Pagecount Service;
(h) Operating Budget. Submit to XOOM for XOOM's review, revision and
----------------
approval in a format as mutually agreed from time to time, a proposed Operating
Budget for the operation and maintenance of the Pagecount Service. The Operating
Budget shall include, without limitation, detailed income and expense
categories. The Operating Budget that shall be in effect as of the date hereof
is attached hereto as Schedule 2.1(h). Pagecount shall obtain written advance
---------------
approval from XOOM for any non-budgeted or otherwise non-authorized expenditures
(which shall not be unreasonably withheld);
(i) Records, Books of Accounts. Keep full and detailed accounts, consistent
with Pagecount's present accounting practices after instituting reasonable
recommendations by XOOM or its auditors, and exercise such controls as may be
reasonable or necessary for proper financial management hereunder. XOOM and its
accountants shall, upon reasonable notification be afforded access to the books,
records, and Contracts relating to Pagecount and the Pagecount Service for
inspection and copying by XOOM or its designated representatives. Financial
reporting will include, but not be limited to, actual and projected balance
sheets, profit and loss statements, cash flows, bank reconciliations, accounts
receivable and payable statements, and annual budgets. Pagecount shall prepare
or cause to be prepared all of the foregoing in reasonable detail, and shall
promptly furnish any and all other financial information as may from time to
time be reasonably requested by XOOM. All balance sheets, operating statements
and
<PAGE>
statements of cash flows shall be prepared by Pagecount in accordance with
generally accepted accounting principles consistently applied, and the balance
sheet, operating statement and the statement of cash flows shall, if requested
by XOOM, be accompanied by an opinion of independent certified public
accountants selected and paid for by XOOM. Pagecount's regular operational
reporting to XOOM will cover the items specified in Schedule 2.1(i) hereto;
(j) Audit. Prepare all books and records for audit in such manner as XOOM
-----
or its auditor may reasonably request, and shall assist XOOM's auditors in the
performance of its duties and audits for each period during the term hereof, and
for the fiscal year immediately following the termination of this Agreement;
(k) Collections. Collect all accounts receivable, and other sums and
------------
charges due under any obligation and immediately deposit same on behalf of XOOM
into the XOOM/Pagecount Operating Account. Pagecount is authorized to endorse
any checks for such income, whether payable to the order of XOOM or Pagecount,
for deposit into the XOOM/Pagecount Operating Account (as defined in Section
2.2(c). Pagecount will have sole signatory authority over all Pagecount bank
accounts other than the XOOM/Pagecount Operating Account, and XOOM will not
attempt to terminate such authority until the Note is paid in full;
(l) Warranty Regarding Staffing. Pagecount shall select the quantity and
---------------------------
quality of the staff who will be responsible for providing the services
described in the Agreement with the same skill and judgment which Pagecount
would use if it bore full risk of profit and loss with respect to such
activities.
2.2 Management of XOOM Funds.
-------------------------
(a) Revenue Stream. All revenues from the Pagecount Service during the term
--------------
hereof shall be revenues of XOOM and shall be collected by Pagecount for the
account of XOOM.
(b) Bank Accounts. Pagecount shall maintain its existing banking
-------------
arrangements except as otherwise approved by XOOM or specified herein.
(c) XOOM's Operating Account. XOOM shall open and maintain a separate
------------------------
account ("XOOM/Pagecount Operating Account") at the bank currently used by
--------------------------------
Pagecount and Pagecount shall, on a weekly basis, deposit into such account all
cash receipts and revenues from operation of the Pagecount Service. Pagecount
shall submit to XOOM, together with the monthly financial statements, a
reconciliation report showing all deposits made to XOOM's Operating Account.
(d) Transfers. Transfers from and to XOOM's Operating Account shall be,
---------
where possible: (i) direct intra-bank transfers, if the transferor and
transferee accounts are maintained at the same bank, or (ii) transferred by
federal wire in immediately available funds, if the transferor and transferee
accounts are maintained at different banks.
<PAGE>
2.3 Legal Support Services.
-----------------------
Pagecount shall:
(a) Proceedings. Pursue legal proceedings to enforce legal rights of XOOM
-----------
in the Transferred Assets; provided, however, that such legal proceedings shall
-------- -------
be approved in writing by XOOM prior to their commencement, and shall be
conducted by legal counsel selected or approved by XOOM at XOOM's expense.
(b) Attorneys, Accountants, Consultants. Upon receiving the prior approval
-----------------------------------
of XOOM in each instance, engage as necessary the services of such attorneys,
accountants and other outside professional consultants approved by XOOM to
provide professional services as may be necessary to carry out Pagecount's
duties under this Agreement.
(c) Service of Process. Advise XOOM promptly in writing of any summons,
------------------
subpoena, or other similar legal process, and any notice, letter, or other
communication whatsoever which affects or relates to Pagecount or the Pagecount
Service or XOOM which are served upon or received by Pagecount or of which
Pagecount has knowledge.
2.4 XOOM-Pagecount Meetings.
------------------------
Upon reasonable request of either party, XOOM (or its representative) and
Pagecount or its representative shall conduct meetings to discuss the management
and operation of the Pagecount Service.
ARTICLE 3
PAGECOUNT'S COMPENSATION, REIMBURSEMENT AND PAYMENT
3.1 Management Fee.
---------------
In consideration for the management services of Pagecount described herein,
XOOM shall pay Pagecount a fixed monthly management fee of twenty-eight thousand
five hundred and five dollars ($28,505) to be used by Pagecount to pay its
overhead costs and costs of operations, except as provided herein. If it shall
become necessary or appropriate for Pagecount to render services which were not
contemplated and which result in material costs which were not contemplated in
establishing the compensation specified in this Section 3.1, Pagecount and XOOM
shall negotiate reasonably to establish appropriate additional compensation for
such services for Pagecount.
<PAGE>
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
4.1 XOOM's Representations and Warranties.
--------------------------------------
XOOM represents and warrants to Pagecount that:
(a) Authorization. XOOM has all requisite power and authority to enter into
-------------
this Agreement and to carry out its obligations hereunder. No further action
will be necessary on the part of XOOM to make this Agreement valid, binding upon
and enforceable against XOOM in accordance with its terms.
(b) No Breach of Other Obligations. The execution, delivery and performance
------------------------------
of this Agreement by XOOM does not conflict with and will not result in a breach
or violation or constitute a default by XOOM in the observance, performance, or
fulfillment of any obligation, covenant or condition contained in any agreement,
contract, lease, mortgage, indenture, instrument, judgment, decree or order to
which XOOM is a party or by which XOOM may be bound or attached.
(c) Prompt and Good Faith Responses to Requests and Issues. In the course
------------------------------------------------------
of performing its responsibilities as described above, Pagecount will bring
matters to XOOM's attention which require decisions, direction, and possible
financial resolution by XOOM. In rendering such decisions, direction or
contribution XOOM warrants that it will act with reasonable promptness and in
good faith.
(d) Maintenance of Business. Until payment of the Note in full, XOOM will
-----------------------
take all reasonable efforts to insure that, if the Note is not paid in full for
whatever reason, that the business of Pagecount can effectively be separated
from XOOM as a viable stand-alone business enterprise. During such time, XOOM
will not compete with the Pagecount Service or take steps to diminish the value
or significantly alter the Transferred Assets. Until payment of the Note in
full, XOOM will not interfere with Pagecount's control over and operation of the
Pagecount Service except as specified herein.
4.2 Pagecount's Representations and Warranties.
-------------------------------------------
Pagecount represents and warrants to XOOM that:
(a) Authorization. Pagecount has all requisite power and authority to enter
-------------
into this Agreement and to carry out its obligations hereunder. No further
action will be necessary on the part of Pagecount to make this Agreement valid,
binding upon and enforceable against Pagecount in accordance with its terms.
(b) No Breach of Other Obligations. The execution, delivery and performance
------------------------------
of this Agreement by Pagecount does not conflict with and will not result in a
breach or violation or constitute a default by Pagecount in the observance,
performance, or fulfillment of any
<PAGE>
obligations, covenant or condition contained in any agreement, contract, lease,
mortgage, indenture, instrument, judgment, decree or order to which Pagecount is
a party or by which Pagecount may be bound or attached.
(c) Capability. Pagecount has the necessary experience, equipment,
----------
personnel and capability to perform its obligations under this Agreement.
(d) No Violation of Law. The execution, delivery and performance of this
-------------------
Agreement has been duly authorized by the Board of Directors of Pagecount and
does not conflict with Pagecount's Articles of Incorporation and Bylaws and, to
Pagecount's knowledge, is not in violation of any provision of law.
(e) No Transfer of Ownership or Assignment. Without the express written
--------------------------------------
consent of XOOM, Pagecount shall not transfer nor permit a transfer of any
interest in either this Agreement or the Asset Purchase Agreement, nor shall it
permit a change, either directly or indirectly, in control of Pagecount;
provided, however, that nothing herein shall be construed as constituting a
- -------- -------
default by Pagecount if (i) any member of Pagecount's management dies or becomes
unable to perform his or her functions due to any illness or other disability;
or (ii) any shares of Pagecount are transferred in connection with estate
planning by Pagecount's shareholders, or by will and the laws of descent and
distribution.
(f) Prompt and Good Faith Responses to Requests and Issues. In the course
------------------------------------------------------
of its performance hereunder, XOOM will bring matters to Pagecount's attention
which require decisions, direction, and possible financial resolution by
Pagecount. In rendering such decisions, direction or contribution, Pagecount
warrants that it will act with reasonable promptness and in good faith.
ARTICLE 5
OPERATIONAL COVENANTS
5.1 Maintenance/Enhancement of the Pagecount Service.
-------------------------------------------------
Pagecount shall maintain and enhance the Pagecount Service in cooperation
and consultation with XOOM's engineering staff in an effort to increase the
number of Websites using a Pagecounter; provided, however, that Pagecount shall
-------- -------
not be obligated to make capital investments in additional hardware or software
required due to any increase in the number of Pagecounters after the date
hereof. Pagecount acknowledges that any hardware that XOOM contributes,
purchases or finances for use in the Pagecount System shall remain the property
of XOOM, but such property shall be subject to Pagecount's security interest and
otherwise subject to the terms of the Security Agreement.
5.2 Sale of Banners.
----------------
Pagecount shall permit XOOM to take over sales of 50% of Pagecount's Banner
Inventory as it exists during the term of this Agreement, and to the extent
necessary, shall promptly terminate or renegotiate its Contracts so as to first
meet the requirements of this
<PAGE>
Section 5.2 within thirty days of the date hereof. Pagecount acknowledges that
XOOM shall have the exclusive right to any increase in Banner Inventory
developed by XOOM from XOOM's subscriber base after the date hereof, subject to
Pagecount's right to house banners set forth in Section 5.7 and the content
restrictions set forth in Section 5.8.
5.3 Delivery of Transferred Assets; Transfer of Operations.
-------------------------------------------------------
Upon payment in full of the Note (less the Holdback), Pagecount shall
deliver the Transferred Assets to XOOM at XOOM's expense, and assist XOOM in
integrating the Pagecount System into XOOM's operations with minimal
interruption of service by performing all of the requirements described in
Schedule 5.3 hereto.
5.4 Negative Covenants.
-------------------
While this Agreement is in effect, Pagecount shall not, without XOOM's
prior written consent (which shall not be unreasonably withheld):
(a) Increase the amount of compensation to its employees approved in the
Operating Budget or grant any bonus or other additional compensation to its
employees or independent contractors other than normal sales commissions; or
(b) Engage in any business other than the operation and management of the
Pagecount Service, except to the extent as would not have a Material Adverse
Effect on the Pagecount Service.
5.5 Best Efforts.
-------------
The parties hereby covenant that they shall use their best efforts to
perform all of their obligations hereunder.
5.6 ISP Fees.
---------
During the term of this Agreement, XOOM shall pay all internet service
provider fees in connection with the operation of the Pagecount Service.
5.7 House Banners.
--------------
During the term hereof, 10% of all Banner Inventory shall be utilized for
Pagecount's house banners and, at XOOM's discretion, a minimum of 10% of such
inventory shall be utilized for XOOM's house banners, provided, however, that
-------- -------
the 10% available for XOOM's and Pagecount's house banners shall be counted as
part of the Banner Inventory of XOOM and Pagecount pursuant to Section 5.2.
5.8 Content Restrictions.
---------------------
XOOM covenants that, during the term hereof, all banners advertising
objectionable products or content shall only be displayed on Websites that are
X-rated or adult in nature, as determined jointly by Pagecount and XOOM.
<PAGE>
ARTICLE 6
INDEMNIFICATION AND LIMITATION OF LIABILITY
6.1 Pagecount's Indemnification.
----------------------------
Pagecount shall indemnify, defend and hold XOOM, its affiliates, and their
officers, directors, employees and agents harmless from and against any and all
losses, liabilities, claims and damages, including without limitation attorneys'
fees and costs (collectively, "Losses"), arising out of or relating to
------
Pagecount's performance of the services described in this Agreement that is
grossly negligent or intentionally destructive, except to the extent of Losses
due to XOOM's intentional or grossly negligent breach of its obligations
hereunder.
6.2 XOOM's Indemnification.
-----------------------
XOOM shall indemnify, defend and hold Pagecount and its officers,
directors, employees and agents harmless from and against any and all Losses
arising out of or relating to: (i) Losses arising from third party claims
relating to the performance by Pagecount of services under this Agreement,
except to the extent Pagecount shall be obligated to indemnify XOOM with respect
to such Losses under the provisions of Section 6.1; or (ii) any material failure
of XOOM in the performance of its obligations to Pagecount under this Agreement.
6.3 Indemnification Procedures.
---------------------------
The indemnification procedures set forth in Sections 10.4 and 10.5 of the
Asset Purchase Agreement shall apply to any claim for indemnification hereunder.
ARTICLE 7
TERM AND TERMINATION
7.1 Term.
-----
This Agreement shall terminate upon the first to occur of (i) XOOM's
payment in full of the Note (less the Holdback), (ii) the Maturity Date, (iii)
Pagecount's foreclosure on the Transferred Assets, or (iv) the mutual agreement
of Pagecount and XOOM; provided, however, that Pagecount shall not be deemed to
have fully performed its obligations hereunder unless it has fully complied with
the provisions of Section 5.3, and provided further, that the indemnification
-------- -------
obligations of the parties pursuant to Article VI shall survive for a period of
one year after termination or expiration of this Agreement and the provisions of
Section 8.12 shall survive indefinitely.
7.2 System Failure.
---------------
In the event Pagecount fails to maintain the Pagecount Service up and
running on the Internet for an aggregate of 24 hours in any 48 hour period, and
provided that XOOM is current in its obligations under the Note, Pagecount
shall, at XOOM's expense, deliver all of the
<PAGE>
Transferred Assets and operations of the Pagecount Service to XOOM for operation
by XOOM, and XOOM shall accept such delivery. Following delivery of the
Transferred Assets pursuant to this Section 7.2(b), XOOM's obligation to pay the
Management Fee shall terminate, but all of XOOM's other obligations pursuant to
the Asset Purchase Agreement, Note and Security Agreement shall remain in full
force and effect.
7.3 Bankruptcy.
-----------
In the event either party to this Agreement shall become insolvent, file a
petition in bankruptcy or receivership, seek protection from creditors under the
federal bankruptcy laws, make an assignment for the benefit of creditors, or
take advantage of any other insolvency laws, or if an involuntary petition in
bankruptcy is filed against either party that is not dismissed within seventy-
five (75) days following filing, the other party may immediately, and without
prior notice to the other, terminate this Agreement.
ARTICLE 8
MISCELLANEOUS
8.1 Waiver.
-------
The delay or failure of XOOM or Pagecount in exercising any right, power or
privilege hereunder or any single or partial exercise of any such right, power
or privilege or any abandonment or discontinuance of steps to enforce such a
right, power or privilege shall not affect such right, power or privilege. Any
waiver, permit, consent or approval of any kind by XOOM or Pagecount of any
breach or event giving rise to a right of termination hereunder, or any waiver
of any provisions or conditions of this Agreement must be in writing and shall
be effective only to the extent set forth in writing.
8.2 Notices.
--------
All notices, approvals, consents and other communications to XOOM or
Pagecount under or in connection with this Agreement shall be pursuant to the
notice provisions in the Asset Purchase Agreement.
8.3 Applicable Law.
---------------
This Agreement shall be governed by and construed in accordance with the
laws of the State of Delaware without regard for the conflicts of laws
principals thereof.
8.4 Complete Agreement; Amendments.
------------------------------
This Agreement is a complete integration of every agreement and
representation made by and between XOOM and Pagecount with respect to the
subject matter hereof, and no implied covenant or prior oral or written
agreement shall be held to vary the provisions hereof, any law or custom to the
contrary notwithstanding. No amendment or modification of this Agreement shall
be effective unless incorporated in a written instrument executed by both XOOM
and
<PAGE>
Pagecount. XOOM and Pagecount agree to execute such other documents and
instruments as may be reasonably requested by the other party and as may be
necessary to effect the terms of this Agreement.
8.5 Underlining, Headings.
---------------------
The use of underlining and the use of headings for paragraphs and
subparagraphs herein are only for convenience and ease of reference and shall in
no way expand, define, or limit the scope or intent of any provision of this
Agreement.
8.6 Binding Effect.
---------------
The provisions of this Agreement shall be binding upon and inure to the
benefit of XOOM and Pagecount, and their respective successors and permitted
assigns, as the context of this Agreement may require. Throughout this
Agreement, unless clearly inapplicable to the context, the singular shall
include the plural and the use of a pronoun of one gender shall refer to all
genders.
8.7 Time of the Essence.
--------------------
Time is of the essence in XOOM's and Pagecount's observance and performance
of their respective obligations hereunder.
8.8 Severability.
-------------
If any provision of this Agreement is held to be invalid or unenforceable,
the validity and enforceability of the other provisions of this Agreement will
remain unaffected.
8.9 Computation of Time Periods.
----------------------------
All periods of time referred to in this Agreement shall include all
Saturdays, Sundays and state or national holidays; provided, however, that if
-------- -------
the last date to perform any act or given any notice with respect to this
Agreement shall fall on a Saturday, Sunday or state or national holiday, such
act or notice may be timely performed or given on the next succeeding day which
is not a Saturday, Sunday or state or national holiday.
8.10 Counterparts; Facsimile.
------------------------
The parties hereto agree that this document may be executed in
counterparts, each of which shall be deemed an original, and said counterparts
shall together constitute one and the same document, binding all of the parties
hereto, notwithstanding that all of the parties are not signatory to the
original or the same counterparts. For all purposes, including, without
limitation, recordation, filing and delivery of this document, duplicate
unexecuted and unacknowledged pages of the counterparts may be discarded and the
remaining pages assembled as one document. Facsimile transmitted signatures
shall be deemed effective.
<PAGE>
8.11 Assignment by Pagecount.
------------------------
Other than in connection with the consummation of the transactions
described in the recitals hereto, Pagecount shall not assign or encumber its
interest in the Agreement or any part thereof, and any attempted assignment or
encumbrance shall be null and void.
8.12 Dispute Resolution.
-------------------
Any controversy, claim or dispute of whatever nature arising out of or
relating to this Agreement or the validity, enforceability, breach or
termination of this Agreement, whether such controversy, claim or dispute is
based upon statute, contract, tort, common law or otherwise, and whether such
controversy, claim or dispute existed prior to or arises after the date of this
Agreement (any such controversy, claim or dispute being a "Dispute"), shall be
-------
resolved in confidential proceedings and in accordance with the procedures set
forth in this section, which procedures shall be the sole and exclusive
procedures for the resolution of any Dispute.
(a) Negotiations. XOOM and Pagecount, promptly and in good faith, shall
------------
attempt to resolve any Dispute by negotiation between the Chairman of XOOM or
his designee, on behalf of XOOM and the Chairman of Pagecount, on behalf of
Pagecount. Any party to this Agreement may give to the other party to this
Agreement written notice of any Dispute and, within seven (7) days after the
giving of such notice, the recipient of such notice shall give a written
response to the other party to this Agreement. Each notice of a Dispute and
each response to any such notice shall include a statement of the position of
the party giving such notice or response in respect of such Dispute and a
summary of the arguments supporting such position. Within fourteen (14) days
after the giving of a notice of a Dispute under this subsection, the
representatives of XOOM and Pagecount shall meet at a mutually acceptable time
and place, and thereafter as often as such persons reasonably deem necessary, to
attempt to resolve such Dispute. All reasonable requests for information made
by any party to this Agreement shall be honored. If any Dispute has not been
resolved by negotiation pursuant to this subsection within twenty-eight (28)
days after the giving of the notice of such Dispute, then any party to this
Agreement may initiate arbitration of such Dispute pursuant to Section 8.12(b).
All negotiations and arbitration pursuant to Section 8.12(b) shall be
confidential and such negotiations shall be treated as compromise and settlement
negotiations. Nothing said or disclosed, and no document produced, in the
course of such negotiations or arbitration, as the case may be, which is not
independently discoverable shall be offered or received as evidence or used for
impeachment or for any other purpose in any arbitration or litigation.
(b) Arbitration. If any Dispute has not been resolved by negotiation
-----------
pursuant to Section 8.12(a), then such Dispute shall be determined by
arbitration in accordance with the arbitration provisions of the Asset Purchase
Agreement; provided; however that pending the outcome of such arbitration, XOOM
shall continue to pay Pagecount the Management Fee so long as (i) Pagecount
continues to deposit all revenues from the Pagecount Service into the
XOOM/Pagecount Operating Account and (ii) the amount of such revenues equals or
exceeds the amount of the Management Fee.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
XOOM: XOOM, Inc.
By:____________________________________
Name:__________________________________
Its:___________________________________
Pagecount: Pagecount, Inc.
By:____________________________________
Name:__________________________________
Title:_________________________________
<PAGE>
EXHIBIT B
SECURED PROMISSORY NOTE
$1,200,000
July 30, 1998
San Francisco, California
FOR VALUE RECEIVED, the undersigned XOOM, Inc. ("Debtor") promises to
pay to the order of Pagecount, Inc. ("Pagecount"), at 171 Edmondson Avenue,
Baltimore, MD 21228, or such other place as Pagecount may designate in writing,
the principal sum of One Million Two Hundred Thousand Dollars ($1,200,000),
together with interest in arrears from the date hereof on the unpaid principal
balance hereunder from time to time owing at the rate of seven percent (7%) per
annum. Interest shall be compounded monthly, and all calculations of interest
shall be on the basis of a 365-day year.
Payments of principal and interest shall be made in equal and
consecutive monthly installments of principal and interest, each in the amount
of Fifty-Three Thousand Seven Hundred Twenty-Seven Dollars ($53,727) (each an
"Installment"), commencing on the first monthly anniversary of the date hereof
and continuing on the same day of each month thereafter, with all outstanding
principal and interest due on or before 270 days from the date hereof (the
"Maturity Date"), unless this Note is earlier accelerated pursuant to the terms
hereof. Debtor may prepay this Note, in part or in full, at any time without
penalty, at Debtor's sole discretion. Any prepayments shall be applied first to
accrued interest and then to principal.
This Note is issued pursuant to that Asset Purchase Agreement dated
July 24, 1998 (the "Agreement") between Debtor and Pagecount. Capitalized terms
used herein and not otherwise defined shall have the meanings given them in the
Agreement.
Upon (i) the first to occur of Debtor's receipt of the proceeds of an
IPO, the closing of a Corporate Transaction, Change of Control, or Financing,
or (ii) Debtor's failure to cure any default hereunder twenty days after having
received written notice of such default from Pagecount, given pursuant to the
Agreement, the entire unpaid balance of this Note, together with interest
accrued thereon, shall be immediately due and payable. Any amounts owed
hereunder upon acceleration of this Note shall bear interest at the annual rate
of twelve percent (12%) or such lesser rate as is the maximum rate allowable by
law.
Upon the Maturity Date, acceleration or in the event Debtor opts to prepay
this Note in full, Debtor shall, pursuant to the Agreement, deposit the final
$200,000 of principal hereunder into an escrow account governed under that
Escrow Agreement of even date herewith by and among Debtor, Pagecount and an
escrow agent, upon which this Note shall be deemed paid in full.
<PAGE>
This Note shall be secured by Debtor's entire interest in the Collateral
(as defined in the Security Agreement of even date herewith by and between
Debtor and Pagecount (the "Security Agreement")). If Debtor defaults in any
payment due hereunder, upon acceleration or otherwise, and fails to cure such
default within 20 days after Pagecount's giving notice thereof to Debtor
pursuant to the Agreement, Pagecount shall be entitled to foreclose on its
security interest in the Collateral and to retain any Installments and other
payments received from Debtor. Notwithstanding the foregoing, Debtor may, at
any time, discharge and satisfy its outstanding payment and performance
obligations to Pagecount under this Note and the Agreement by delivering the
Collateral to Pagecount, except if an IPO, Corporate Transaction, Change of
Control or Financing has closed, or any of the aforesaid transactions closes
within 60 days of Debtor's delivery of the Collateral.
If any legal action is necessary to enforce or collect this Note, the
prevailing party shall be entitled to reasonable attorneys' fees in addition to
any other relief to which that party may be entitled, whether or not suit on
this Note is filed, and all such costs and expenses shall be payable on demand.
This Note may not be modified orally, but only by an agreement in
writing signed by the party against whom such agreement is sought to be
enforced. Debtor hereby waives presentment, protest, demand, diligence, and
notice of dishonor and of nonpayment.
This Note shall be interpreted and enforced in all respects in accordance
with the internal laws of the State of Delaware.
IN WITNESS WHEREOF, the undersigned has caused this Note to be executed by
its officers duly authorized to do so.
DEBTOR:
XOOM, INC.
By:__________________________
Laurent Massa, President
APPROVED AND ACCEPTED
PAGECOUNT, INC.
By:________________________
Sal D'Ambera, President
<PAGE>
EXHIBIT C
ESCROW AGREEMENT
(THIS EXHIBIT HAS NOT BEEN FILED AS IT HAS BEEN DEEMED IMMATERIAL TO AN
INVESTMENT DECISION PURSUANT TO THE PROVISIONS OF ITEM 601(B)(2) OF REGULATION
S-K. THE REGISTRANT AGREES TO FURNISH A COPY OF THIS EXHIBIT TO THE COMMISSION
UPON REQUEST.)
<PAGE>
EXHIBIT D
BILL OF SALE
(THIS EXHIBIT HAS NOT BEEN FILED AS IT HAS BEEN DEEMED IMMATERIAL TO AN
INVESTMENT DECISION PURSUANT TO THE PROVISIONS OF ITEM 601(B)(2) OF REGULATION
S-K. THE REGISTRANT AGREES TO FURNISH A COPY OF THIS EXHIBIT TO THE COMMISSION
UPON REQUEST.)
<PAGE>
EXHIBIT E
NONCOMPETE AGREEMENT
(THIS EXHIBIT HAS NOT BEEN FILED AS IT HAS BEEN DEEMED IMMATERIAL TO AN
INVESTMENT DECISION PURSUANT TO THE PROVISIONS OF ITEM 601(B)(2) OF REGULATION
S-K. THE REGISTRANT AGREES TO FURNISH A COPY OF THIS EXHIBIT TO THE COMMISSION
UPON REQUEST.)
<PAGE>
EXHIBIT F
SECURITY AGREEMENT
(THIS EXHIBIT HAS NOT BEEN FILED AS IT HAS BEEN DEEMED IMMATERIAL TO AN
INVESTMENT DECISION PURSUANT TO THE PROVISIONS OF ITEM 601(B)(2) OF REGULATION
S-K. THE REGISTRANT AGREES TO FURNISH A COPY OF THIS EXHIBIT TO THE COMMISSION
UPON REQUEST.)
<PAGE>
EXHIBIT G
OPINION OF SELLER'S COUNSEL
(THIS EXHIBIT HAS NOT BEEN FILED AS IT HAS BEEN DEEMED IMMATERIAL TO AN
INVESTMENT DECISION PURSUANT TO THE PROVISIONS OF ITEM 601(B)(2) OF REGULATION
S-K. THE REGISTRANT AGREES TO FURNISH A COPY OF THIS EXHIBIT TO THE COMMISSION
UPON REQUEST.)
<PAGE>
EXHIBIT H
RELEASES
(THIS EXHIBIT HAS NOT BEEN FILED AS IT HAS BEEN DEEMED IMMATERIAL TO AN
INVESTMENT DECISION PURSUANT TO THE PROVISIONS OF ITEM 601(B)(2) OF REGULATION
S-K. THE REGISTRANT AGREES TO FURNISH A COPY OF THIS EXHIBIT TO THE COMMISSION
UPON REQUEST.)
<PAGE>
EXHIBIT I
ASSIGNMENT OF TRADEMARKS AND TRADEMARK APPLICATIONS
(THIS EXHIBIT HAS NOT BEEN FILED AS IT HAS BEEN DEEMED IMMATERIAL TO AN
INVESTMENT DECISION PURSUANT TO THE PROVISIONS OF ITEM 601(B)(2) OF REGULATION
S-K. THE REGISTRANT AGREES TO FURNISH A COPY OF THIS EXHIBIT TO THE COMMISSION
UPON REQUEST.)
<PAGE>
EXHIBIT J
OPINION OF PURCHASER'S COUNSEL
(THIS EXHIBIT HAS NOT BEEN FILED AS IT HAS BEEN DEEMED IMMATERIAL TO AN
INVESTMENT DECISION PURSUANT TO THE PROVISIONS OF ITEM 601(B)(2) OF REGULATION
S-K. THE REGISTRANT AGREES TO FURNISH A COPY OF THIS EXHIBIT TO THE COMMISSION
UPON REQUEST.)
<PAGE>
EXHIBIT 10.15
FIRST AMENDMENT TO ASSET PURCHASE AGREEMENT
This First Amendment to Asset Purchase Agreement (this "Amendment") is
---------
made and entered into as of July 27, 1998 by and between Revolutionary Software,
Inc., a California corporation ("Seller"), and XOOM, Inc., a Delaware
------
corporation ("Buyer").
-----
RECITALS
--------
A. Seller and Buyer entered into an Asset Purchase Agreement dated
June 11, 1998 (the "Agreement") pursuant to which Buyer purchased from Seller
certain Software Assets (as defined therein).
B. Seller and Buyer wish to amend the Agreement as set forth herein.
NOW THEREFORE, Seller and Buyer hereby amend the Agreement as follows:
1. Definitions. Capitalized terms used herein and not otherwise
-----------
defined shall the meanings given them in the Agreement.
2. Amendments.
----------
(a) Section 1.1 of the Agreement is amended by adding the
following new definitions:
"Fair Market Value" means, after the date Buyer has completed an
-----------------
IPO, the price per share set forth on the cover of the prospectus for
the Company's IPO.
"IPO" shall mean the closing of an initial public offering of
---
common stock of the Seller.
(b) Section 2.2(a) of the Agreement is amended by deleting the
number "192,077" and replacing it with the number "243,989."
------- -------
(c) Section 2.2(d) of the Agreement is deleted in its entirety,
and replaced with a new Section 2.2(d) which shall read as follows:
Up to an additional 51,912 Shares ("Earnout Shares"), in two separate
--------------
issuances of 25,956 Earnout Shares each, contingent upon Seller's
timely achieving either or both of the targets set forth on Exhibit B
hereto (the "Earnout Targets) in its
<PAGE>
capacity as a Consultant to Buyer, provided, however, that if there is
-------- -------
an IPO (i) prior to Seller's meeting both of such Earnout Targets
(until the relevant deadline has expired), Seller shall be issued
Common Stock having a Fair Market Value of $400,000, together with
additional cash consideration in the amount of $260,000, in full
satisfaction of Buyer's obligations with respect to the Earnout
Shares, and (ii) after Seller has met one but not both of the Earnout
Targets, Seller shall be issued Common Stock having an aggregate Fair
Market Value of $200,000, together with additional cash consideration
of $130,000 in satisfaction of Seller's contingent liability for
25,956 of the Earnout Shares; provided, however, that if Buyer has
--------- -------
not completed an IPO, Seller shall automatically be issued all 51,912
Earnout Shares, regardless of whether or not Seller has met the
Earnout Targets, upon the closing of any of the Transactions described
in Section 2.3 (except 2.3(i)), unless Seller and Buyer mutually agree
that consummation of such Transaction will not cause it to be
materially more difficult or impossible for Seller to meet the Earnout
Targets.
(d) The text of Section 2.3 of the Agreement is deleted in its
entirety and replaced with a new Section 2.3 which shall read as follows:
If, from the date of the Closing until the date on which Buyer has
completed an IPO, (i) Buyer obtains additional equity financing
through a private placement of its securities, (ii) Buyer enters into
an agreement for the sale of all or substantially all of the assets of
Buyer, (iii) there is a sale by shareholders of Buyer of more than
fifty percent (50%) of the outstanding voting stock of Buyer ("Common
------
Stock"), or (iv) Buyer effects a merger with or into another entity
-----
where it is not the survivor (other than a merger solely for the
purpose of changing the state of incorporation or effecting a
recapitalization of Buyer) and shareholders of Buyer prior to such
merger own less than 50% of the outstanding voting securities of the
survivor, (any of subsections (i), (ii) (iii) or (iv), a
"Transaction"), and the valuation of Buyer for purposes of any such
-----------
Transaction is less than $25 million, the Seller shall be entitled to
receive, rounded down to the nearest whole number of shares, an
additional number of shares of Common Stock calculated as (A) (1)
$426,411 divided by (2) the per share valuation of Buyer's Common
Stock in the Transaction, minus (B) the aggregate number of shares of
-----
Common Stock issued or issuable to the Seller under this Agreement
other than pursuant to this Section 2.3. For any Transaction, such
additional shares of Common Stock shall be deemed issued to the Seller
immediately prior to the closing thereof. Buyer's obligations under
this Section 2.3 shall terminate upon the closing of any Transaction
other than a Transaction pursuant to subsection (i). The price
protection formula in this Section 2.3 shall also apply to the Earnout
Shares issueable pursuant to Section 2.2(d).
3. No Other Changes. All other provisions of the Agreement shall
----------------
remain in full force and effect.
<PAGE>
4. Counterparts. This Amendment may be executed in counterparts,
------------
each of which shall be deemed an original which, when taken together, shall be
deemed one document.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed on their respective behalf, by their respective officers
thereunto duly authorized, as of the day and year first above written.
REVOLUTIONARY SOFTWARE,
INC.
a California corporation
By: Evan Schaffer
--------------------------------
Name: Evan Schaffer, President
XOOM, INC.
a Delaware corporation
By: Laurent Massa
--------------------------------
Laurent Massa, President
<PAGE>
EXHIBIT 10.16
FIRST AMENDMENT
TO
AGREEMENT AND PLAN OF MERGER
----------------------------
THIS FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER (this
"Amendment") dated as of July 28, 1998 is entered into by and among XOOM, Inc.,
a Delaware corporation ("XOOM"), XOOM GBT Merger Corp., a California corporation
(the "Company"), and Robert Kohler ("Shareholder").
RECITALS
A. Pursuant to an Agreement and Plan of Merger dated June 11, 1998
(the "Agreement"), Global Bridges Technologies, Inc., a California corporation,
was merged into the Company, with the Company as the surviving entity.
B. XOOM, the Company and the Shareholder now wish to amend certain
provisions of the Agreement relating to the consideration payable to Shareholder
pursuant to the Agreement.
NOW THEREFORE, THE PARTIES HEREBY AMEND THE AGREEMENT AS FOLLOWS.
1. Definitions. Capitalized terms used herein and not otherwise
-----------
defined shall have the meanings given them in the Agreement.
2. Amendments.
----------
(a) Section 2.3 of the Agreement is hereby amended by adding new
subsections (d), (e), (f), (g) and (h) to read as follows:
(d) Additional Shares. In addition to the XOOM Common
-----------------
Stock issued to Shareholder pursuant to Section 2.3(a),
Shareholder shall, as of the date hereof, be issued 25,956 shares
------
of XOOM Stock as part of the Merger Consideration.
(e) Certain Definitions. For purposes of Section 2.3:
-------------------
(i) a "Member" is a person who has subscribed to
XOOM's website by selecting a subscriber name, providing an active
e-mail address and a zip code or country and given permission for
XOOM to include such person in its e-mail distributions, and
Shareholder shall be deemed to have "closed" a transaction
bringing in new Members if (A) the
<PAGE>
transaction identified by Shareholder is closed and (B) Shareholder
has made himself reasonably available to assist XOOM, if so requested,
to close such transaction.
(ii) "Fair Market Value" means the price per share set forth
on the cover of the prospectus for the XOOM's initial public offering
("IPO").
(f) Additional Members. After the date hereof, Shareholder shall
------------------
attempt to close transactions that generate, in the aggregate, in
excess of one million (1,000,000) new Members.
(g) Additional IPO Consideration. Upon the closing of an
----------------------------
IPO prior to fulfillment of the vesting targets set forth in Section
2.3(h), Shareholder shall be issued shares of XOOM Common Stock having
a Fair Market Value of $200,000, together with $130,000 in cash, in
full satisfaction and in lieu of any additional shares owed to
Shareholder pursuant to Section 2.3(h).
(h) Vesting Targets. If XOOM closes any of the
---------------
Transactions described in Section 2.4(iii) or (iv) or (v) prior to or
after the deadline for Shareholder's closing transactions that
generate, in the aggregate, in excess of one million (1,000,000) new
Members for XOOM, which is June 10, 2000; provided, however, that at
--------- -------
least 500,000 new Members shall have subscribed to XOOM's services no
later than December 31, 1998, and Shareholder has timely met such new
Member achievement target, then Shareholder shall be issued an
additional 25,956 shares of XOOM Common Stock, which shall be subject
------
to the restrictions on XOOM Common Stock in this Agreement, and XOOM
shall have no further liability pursuant to above subsection (g).
(b) Section 2.2 of the Agreement is amended by changing the reference
to "Section 2.3(d)" in the fifteenth line thereof to "Section 2.4" and the
reference to "Section 2.3" in the twenty-first line thereof to "Section 2.4."
3. No Other Changes. All other provisions of the Agreement shall remain
----------------
in full force and effect
4. Counterparts. This Amendment may be executed in counterparts, each of
------------
which shall be deemed an original which, when taken together, shall be deemed
one document.
IN WITNESS WHEREOF, this Amendment has been executed by the parties hereto
as of the day and year first above written.
2
<PAGE>
THE COMPANY:
XOOM GBT Merger Corp.
By: /s/ Laurent Massa
-------------------------------------
Name: Laurent Massa
Title: CEO
XOOM:
XOOM, Inc.
By:/s/ Laurent Massa
--------------------------------------
Name: Laurent Massa
Title: CEO
THE SHAREHOLDER:
/s/ Robert Kohler
-----------------------------------------
Robert Kohler
3
<PAGE>
EXHIBIT 10.17
Robert Ellis
241 Blvd. St Germain
75007 Paris
France
August 4, 1997
Dear Bob,
Following our various conversations, we would like to confirm the following:
1. The share price contained in the Common Stock purchase Agreement dated
February 13, 1997 has been re-valued from 60 cents a share to 30 cents a
share. Your $100,000 investment now represents a total of 333,334 shares. A
new Common Stock Purchase Agreement reflecting this adjustment is attached.
This Agreement replaces the former one. Please sign one copy and send it
back to me.
2. You will invest another $200,000 in the current round at a valuation of 30
cents a share representing a total of 666,666 new shares. Please send a
check to the attention of Xoom Software, Inc. or wire the funds to Wells
Fargo Bank, 464 California Street, San Francisco, CA 94163, account # 0439
621 681, ABA# 122 101 191. Please sign and send back to me a copy of the
Stock Purchase Agreement dated August 4, 1997.
3. You will receive a Board seat that will be guaranteed at least until the
company is sold or file for an Initial Public Offering. At that point, it
would be at the discretion of the underwriters. It is however our intention
to retain you on the Board as long as possible, including after an IPO.
4. You will work for Xoom for a period of 18 months. You will be compensated by
receiving $200,000 worth of stock options at the current valuation i.e.
666,666 shares. These options will have a strike price of $.01 (1 cent) a
share and will vest monthly over the 18 months period. Xoom expects you to
work an average of 30 hours a week from home, the Xoom office or wherever
you may be. Xoom will reimburse you for all reasonable Xoom related
expenses.
<PAGE>
Bob, we are extremely happy to have you aboard. Chris and I think that your
expertise will be extremely valuable to Xoom. Please sign below or call me if
you have any question.
Best regards
/s/ Laurent Massa
- ---------------------------
Laurent Massa
Chief Executive Officer
Accepted:
/s/ Robert Ellis
------------------------------
Robert Ellis
<PAGE>
EXHIBIT 10.18
CONSULTING AGREEMENT
--------------------
This Consulting Agreement ("Agreement") is made and entered into as of the
fifteenth day of May 1998 by and between XOOM, Inc ("Company"), a Delaware
corporation, and James J. Heffernan ("Consultant"). Company desires to engage
Consultant as an independent contractor to perform consulting services for
Company and Consultant is willing to perform such services, on the terms and
conditions set forth below. In consideration of the mutual promises contained
herein, the parties agree as follows:
1. SERVICES AND COMPENSATION
-------------------------
(a) Company hereby engages Consultant, and Consultant accepts such
engagement, subject to the terms and conditions contained herein, to perform for
Company the services described in Attachment 1 (the "Services"). If Company
requests and Consultant agrees to provide additional Services, the parties will
sign a separate Attachment to this Agreement describing the additional Services
and compensation. Each Attachment for new services shall be successively
numbered (e.g., 1., 2, etc). Each Attachment for changes to existing Services
shall be successively numbered (e.g. 1.A, 1.B, etc.). All Attachment(s) must be
executed by the parties, and are subject to the terms and conditions of this
Agreement. Consultant agrees to use reasonable commercial efforts to meet any
delivery dates for work product set forth in the Attachment(s) and to deliver
work product to Company that conforms to the project specifications set forth in
such Attachment(s). Consultant warrants that the Services will be performed in
accordance with all reasonable professional standards for similar services.
(b) In consideration for the performance of the Services by
Consultant, Company agrees to pay Consultant the compensation set forth in the
applicable Attachment on a net 30 basis following receipt of Consultant's
invoice. Company shall not be responsible for any expenses or costs incurred by
Consultant that are not identified in any Attachment, unless authorized in
advance in writing by Company.
2. CONFIDENTIALITY
---------------
(a) "Confidential Information" means any Company proprietary
information, technical data, trade secrets or know-how, including, but not
limited to, research, product plans, products, services, customers, customer
lists, markets, software, developments, inventions, processes, formulas,
technology, designs, drawings, engineering, hardware configuration information,
marketing, finances or other business information disclosed by Company either
directly or indirectly in writing, orally or by drawings or inspection of parts
or equipment.
(b) Consultant will not, during or subsequent to the term of this
Agreement, use Company's Confidential Information for any purpose whatsoever
other than the performance of the Services on behalf of Company or disclose
Company's Confidential Information to any third party, and it is understood that
said Confidential Information shall remain the sole property of Company.
Consultant further agrees to take all reasonable precautions to prevent any
unauthorized disclosure of such Confidential Information including, but not
limited to, having each employee of Consultant, if any, with access to any
Confidential Information, execute a nondisclosure agreement containing
provisions in Company's favor substantially similar to
1
<PAGE>
Sections 2, 3 and 5 of this Agreement. Confidential Information does not include
information which (i) is known to Consultant at the time of disclosure to
Consultant by Company as evidenced by written records of Consultant, (ii) has
become publicly known and made generally available through no wrongful act of
Consultant or (iii) has been rightfully received by Consultant from a third
party who is authorized to make such disclosure. Without Company's prior written
approval, Consultant will not directly or indirectly disclose to anyone the
existence of this Agreement or the fact that Consultant has this arrangement
with Company.
(c) Consultant agrees that Consultant will not, during the term of
this Agreement, improperly use or disclose any proprietary information or trade
secrets of any former or current employer or other person or entity with which
Consultant has an agreement or duty to keep in confidence information acquired
by Consultant in confidence, if any, and that Consultant will not bring onto the
premises of Company any unpublished document or proprietary information
belonging to such employer, person or entity unless consented to in writing by
such employer, person or entity. Consultant will indemnify Company and hold it
harmless from and against all claims, liabilities, damages and expenses,
including reasonable attorneys fees and costs of suit, arising out of or in
connection with any violation or claimed violation of a third party's rights
resulting in whole or in part from Company's use of the work product of
Consultant under this Agreement.
(d) Consultant recognizes that Company has received and in the
future will receive from third parties their confidential or proprietary
information subject to a duty on Company's part to maintain the confidentiality
of such information and to use it only for certain limited purposes. Consultant
agrees that Consultant owes Company and such third parties, during the term of
this Agreement and thereafter, a duty to hold all such confidential or
proprietary information in the strictest confidence and not to disclose it to
any person, firm or corporation or to use it except as necessary in carrying out
the Services for Company consistent with Company's agreement with such third
party.
(e) Upon the termination of this Agreement, or upon Company's
earlier request, Consultant will deliver to Company all of Company's property or
Confidential Information in tangible form that Consultant may have in
Consultant's possession or control.
3. OWNERSHIP
---------
(a) Consultant agrees that all results and proceeds of Consultant's
services, including without limitation all project deliverables, work-in-
progress, copyrightable material, notes, records, drawings, designs, inventions,
improvements, developments, discoveries and trade secrets (collectively, "Work
Product") conceived, made or discovered by Consultant, solely or in
collaboration with others, during the period of this Agreement which relate in
any manner to the business of Company that Consultant may be directed to
undertake, investigate or experiment with or which Consultant may become
associated with in work, investigation or experimentation in the line of
business of Company in performing the Services hereunder, are the sole property
of Company. In addition, any Work Product which constitute copyrightable subject
matter shall be considered "works made for hire" as that term is defined in the
United States Copyright Act with Company as the sole author and owner thereof.
Consultant further agrees to assign and does hereby irrevocably and fully assign
to Company without reservation all
2
<PAGE>
right, title and interest in and to the Work Product, including without
limitation all rights therein and thereto throughout the universe in perpetuity
in any and all media whether now known or hereafter devised, and any and all
copyrights, patents, mask work rights trade secrets, database rights or other
intellectual property rights relating thereto, however denominated. Consultant
hereby waives any so-called "moral rights" in and to the Work Products and
agrees to waive and not assert any so-called "moral rights" against Company or
its successors, assigns or licensees.
(b) Consultant agrees to assist Company, or its designee, at
Company's expense, in every proper way to secure Company's rights in the Work
Product, to confirm the assignment to and ownership of the Work Product by
Company, and to secure Company's rights to any copyrights, patents, mask work
rights or other intellectual property rights relating thereto in any and all
countries, including the disclosure to Company of all pertinent information and
data with respect thereto, the execution of all applications, specifications,
oaths, assignments and all other instruments which Company shall deem necessary
in order to apply for and obtain such rights and in order to assign and convey
to Company, its successors, assigns and nominees the sole and exclusive rights,
title and interest in and to such Work Product, and any copyrights, patents,
mask work rights or other intellectual property rights relating thereto.
Consultant further agrees that Consultant's obligation to execute or cause to be
executed, when it is in Consultant's power to do so, any such instrument or
papers shall continue after the termination of this Agreement.
(c) Consultant agrees that if, in the course of performing the
Services, Consultant incorporates into any Work Product developed hereunder any
invention, improvement, development, concept, discovery or other proprietary
information owned by Consultant or in which Consultant has an interest,
Consultant shall notify Company in advance and obtain Company's prior written
consent, and Company is hereby granted and shall have a nonexclusive, royalty-
free, perpetual, irrevocable, worldwide license to make, have made, modify, use
and sell such item as part of or in connection with such Work Product.
(d) Consultant agrees that if Company is unable for any reason to
promptly secure Consultant's signature for any document confirming Company's
ownership rights hereunder, or to apply for or to pursue any application for any
United States or foreign patents or mask work or copyright registrations or
recordations covering the Work Product assigned to Company above, then
Consultant hereby irrevocably designates and appoints Company and its duly
authorized officers and agents as Consultant's agent and attorney-in-fact, which
appointment shall be deemed a power coupled with an interest, to act for and in
Consultant's behalf and stead to execute and file any such applications and to
do all other lawfully permitted acts to further the confirmation of Company's
ownership rights hereunder and the prosecution and issuance of patents,
copyright and mask work registrations thereon with the same legal force and
effect as if executed by Consultant.
4. REPORTS
-------
Consultant agrees that it will from time to time during the term of
this Agreement or any extension thereof keep Company advised as to Consultant's
progress in performing the Services hereunder and that Consultant will, as
requested by Company, prepare written reports
3
<PAGE>
with respect thereto. It is understood that the time required in the preparation
of such written reports shall be considered time devoted to the performance of
Consultant's Services.
5. CONFLICTING OBLIGATIONS
-----------------------
Consultant certifies that Consultant has no outstanding agreement or
obligation that is in conflict with any of the provisions of this Agreement, or
that would preclude Consultant from complying with the provisions hereof, and
further certifies that Consultant will not enter into any such conflicting
Agreement during the term of this Agreement.
6. TERM AND TERMINATION
--------------------
(a) This Agreement will commence on the date first written above and
will continue until the earlier of (i) final completion of the Services or (ii)
earlier termination as provided below.
(b) Upon such termination all rights and duties of the parties
toward each other shall cease except:
(i) that Company shall be obliged to pay, within thirty (30)
days of the effective date of termination, all amounts owing to Consultant for
unpaid Services and related expenses, if any, in accordance with the provisions
of Section 1 (Services and Compensation) hereof; provided that this Agreement
was not terminated by Company due to the breach or default by Consultant; and
(ii) Sections 2 (Confidentiality), 3 (Ownership) and 8
(Independent Contractor) shall survive termination of this Agreement, and
(iii) Consultant shall return to Company any and all Work
Product, whether completed or in progress, and all materials supplied by Company
to Consultant, including without limitation, software, tapes, listings, document
or equipment.
7. ASSIGNMENT
----------
The Services to be performed by Consultant hereunder are personal in
nature, and Company has engaged Consultant as a result of Consultant's unique
expertise relating to such Services. Neither this Agreement nor any right,
interest, duty or obligation hereunder may be assigned, transferred or delegated
by either party without the express written consent of the other party.
8. INDEPENDENT CONTRACTOR
----------------------
Nothing in this Agreement shall in any way be construed to constitute
Consultant as an agent, employee or representative of Company, but Consultant
shall perform the Services hereunder as an independent contractor. Consultant
agrees to furnish (or reimburse Company for) all tools and materials necessary
to accomplish this contract, and shall incur all expenses associated with
performance, except as expressly provided in the Attachment(s) of this
Agreement. Consultant acknowledges and agrees that Consultant is obligated to
report as
4
<PAGE>
income all compensation received by Consultant pursuant to this Agreement, and
Consultant agrees to and acknowledges the obligation to pay all self-employment
and other taxes thereon. Consultant further agrees to indemnify Company and hold
it harmless to the extent of any obligation imposed on Company (i) to pay in
withholding taxes or similar items or (ii) resulting from Consultant's being
determined not to be an independent contractor.
9. BENEFITS
--------
Consultant acknowledges and agrees, and it is the intent of the
parties hereto, that Consultant receive no benefits from Company, either as an
independent contractor or employee. If Consultant is reclassified by a state or
federal agency or court as an employee for tax or other purposes, Consultant
will become a non-benefit employee and will receive no benefits from Company,
except those mandated by state or federal law, even if by the terms of the
benefit plans or programs of Company in effect at the time of such
reclassification Consultant would otherwise be eligible for such benefits.
10. ARBITRATION AND EQUITABLE RELIEF
--------------------------------
(a) Except as provided in Section 10(d) below, Company and
Consultant agree that any dispute or controversy arising out of, relating to or
in connection with the interpretation, validity, construction, performance,
breach or termination of this Agreement shall be settled by binding arbitration
to be held in Santa Clara, California in accordance with the Commercial
Arbitration Rules of the American Arbitration Association as then in effect (the
"Rules"). The decision of the arbitrator shall be final, conclusive and binding
on the parties to the arbitration. Judgment may be entered on the arbitrator's
decision in any court of competent jurisdiction.
(b) The arbitrator(s) shall apply California law to the merits of
any dispute or claim, without reference to conflicts of law rules. Consultant
hereby consents to the personal jurisdiction of the state and federal courts
located in California for any action or proceeding arising from or relating to
this Agreement or relating to any arbitration in which the parties are
participants.
(c) Company and Consultant shall each pay one-half of the costs and
expenses of such arbitration, and each shall separately pay its counsel fees and
expenses.
(d) Consultant agrees that it would be impossible or inadequate to
measure and calculate Company's damages from any breach of the covenants set
forth in Sections 2 or 3 herein. Accordingly, Consultant agrees that if
Consultant breaches Sections 2 or 3, Company will have available, in addition to
any other right or remedy available, the right to obtain from any court of
competent jurisdiction an injunction restraining such breach or threatened
breach and specific performance of any such provision. Consultant further agrees
that no bond or other security shall be required in obtaining such equitable
relief and Consultant hereby consents to the issuances of such injunction and to
the ordering of such specific performance.
(e) CONSULTANT HAS READ AND UNDERSTANDS SECTION 10, WHICH DISCUSSES
ARBITRATION. CONSULTANT UNDERSTANDS THAT BY SIGNING THIS AGREEMENT, CONSULTANT
AGREES TO SUBMIT ANY CLAIMS
5
<PAGE>
ARISING OUT OF, RELATING TO, OR IN CONNECTION WITH THIS AGREEMENT, OR THE
INTERPRETATION, VALIDITY, CONSTRUCTION, PERFORMANCE, BREACH OR TERMINATION
THEREOF, EXCEPT AS PROVIDED IN SECTION 10(D), TO BINDING ARBITRATION, AND THAT
THIS ARBITRATION CLAUSE CONSTITUTES A WAIVER OF CONSULTANT'S RIGHT TO A JURY
TRIAL AND RELATES TO THE RESOLUTION OF ALL DISPUTES RELATING TO ALL ASPECTS OF
THE RELATIONSHIP BETWEEN THE PARTIES.
11. INDEMNITY
---------
Consultant agrees to defend and indemnify Company from and against
any and all claims, demands or liability arising out of or relating to (i) any
injury to persons or damage to property caused by breach of contract, willful
misconduct or negligent acts by Consultant or by the acts of persons furnished
by Consultant in the performance of this Agreement, or (ii) any alleged
infringement by the Work Product of any copyright, trademark, trade secret,
patent or other intellectual property right of any third party.
12. GOVERNING LAW
-------------
This Agreement, the rights and obligations of the parties hereto, and
any claims or disputes thereto, shall be governed by and construed in accordance
with the laws of the State of California without reference to conflict of law
principles.
13. ENTIRE AGREEMENT
----------------
This Agreement is the entire agreement of the parties and supersedes
any prior or contemporaneous agreements between them, whether written or oral,
with respect to the subject matter hereof. This Agreement may not be modified,
replaced or rescinded except pursuant to a written instrument signed by a duly
authorized representative of each party. If any provision of this Agreement is
determined by a court of competent jurisdiction or other adjudicative body, such
determination shall not affect the validity or enforceability of any other part
or provision of this Agreement. Waiver of any breach, or failure to enforce any
term of this Agreement shall not be deemed a waiver of any breach or right to
enforce which may thereafter occur, and no waiver hereunder shall be effective
unless in writing and signed by a duly authorized representative of the party to
be charged with such waiver.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
<TABLE>
<S> <C>
COMPANY: James J. Heffernan
_________________________
/s/ Laurent Massa /s/ James J. Heffernan
- --------------------------------- -------------------------------------
Authorized Signature Authorized Signature
Laurent Massa James J. Heffernan
- --------------------------------- -------------------------------------
C.E.O Consultant
Address: 433 California Street, Suite 910 Address: 15908 Rose Avenue
San Francisco, CA 94104 Los Gatos, CA 95030
</TABLE>
7
<PAGE>
ATTACHMENT 1
SERVICES AND COMPENSATION
This Schedule describes Services to be provided by Consultant to Company under
this Consulting Agreement dated May 15, 1998.
1. Description of Services: Provide Financial and Investor Relations advise
-----------------------
during the pre-IPO period and for a period of 18 months and to serve as a
member of the Board of Directors.
2. Services to be completed by (date): The initial term of the agreement is 18
months.
3. Fee for Services: Consultant will receive Options for 25,000 shares at the
current Fair Market Value and they will vest over a 24 month period; in
addition, Consultant will receive an additional 25,000 shares when the
Company has a successful IPO. Consultant will also be paid $10,000 per month
for 18 months--paid in the form of Common Stock.
4. Consultant will also receive a fee (payable in Common Stock of the Company)
equal to 5% of any investments, which are made by investors, which
Consultant introduces to the Company during the period of May 15, 1998
through June 30, 1998.
<TABLE>
<S> <C>
COMPANY: James J. Heffernan
_________________________
/s/ Laurent Massa /s/ James J. Heffernan
- --------------------------------- -------------------------------------
Authorized Signature Authorized Signature
Laurent Massa James J. Heffernan
- --------------------------------- -------------------------------------
C.E.O Consultant
May 15 1998 5/15/98
- --------------------------------- -------------------------------------
Date Date
</TABLE>
<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>
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>
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>
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 July 24, 1998 (except for the last four
paragraphs of Note 8 as to which the date is October 13, 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. 1 to the Registration Statement (Form S-1 No. 333-
62395) and related Prospectus of Xoom.com, Inc. for the registration of its
Common Stock.
Ernst & Young LLP
Palo Alto, California /s/ Ernst & Young LLP
October 15, 1998
