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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED JUNE 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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Commission File Number 000-25139
XOOM.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 88-0361536
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
300 MONTGOMERY STREET, SUITE 300
SAN FRANCISCO, CALIFORNIA 94104
(415) 288-2500
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $0.0001 Par Value
(TITLE OF CLASS)
--------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes /X/ No / /
The number of shares outstanding of Registrant's Common Stock, $0.0001 par
value, was 18,129,978 at June 30, 1999.
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XOOM.COM, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Part I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
June 30, 1999 and December 31, 1998....................................... 1
Condensed Consolidated Statements of Operations
Three and six months ended June 30, 1999 and 1998......................... 2
Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 1999 and 1998................................... 3
Notes to Condensed Consolidated Financial Statements...................... 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................... 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk................ 25
Part II OTHER INFORMATION
Item 1. Legal Proceedings......................................................... 39
Item 2. Changes in Securities and Use of Proceeds................................. 39
Item 3. Quantitative and Qualitative Disclosures about Market Risk................ 40
Item 4. Submission of Matters to a Vote of Security Holders....................... 40
Item 6. Exhibits and Reports on Form 8-K.......................................... 41
Signatures................................................................ 42
</TABLE>
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XOOM.COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and marketable securities............. $165,413 $ 56,575
Accounts receivable, net..................................... 3,025 1,368
Inventories.................................................. 793 322
Other current assets......................................... 2,450 308
-------- --------
Total current assets.................................... 171,681 58,573
Fixed assets, net............................................... 4,499 2,071
Investments..................................................... 53,615 --
Intangible assets, net.......................................... 61,353 5,517
Other assets.................................................... 1,316 713
-------- --------
Total assets............................................ $292,464 $ 66,874
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................. $ 3,516 $ 1,229
Accrued compensation and related expenses.................... 1,101 497
Other accrued liabilities.................................... 2,217 1,568
Notes payable................................................ 1,103 1,276
Deferred revenue............................................. 2,676 443
Contingency accrual.......................................... 1,000 1,000
-------- --------
Total current liabilities............................... 11,613 6,013
Deferred revenue, less current portion.......................... 2,500 --
Other long-term liabilities..................................... 429 528
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.0001 par value:
Authorized shares--5,000,000
Issued and outstanding shares--none in 1999 and 1998....... -- --
Common stock, $0.0001 par value:
Authorized shares--40,000,000
Issued and outstanding shares--18,129,978 and 13,699,555
in 1999 and 1998, respectively.......................... 304,253 75,606
Notes receivable from stockholders........................... (995) --
Deferred compensation........................................ (499) (904)
Accumulated deficit.......................................... (24,837) (14,369)
-------- --------
Total stockholders' equity.............................. 277,922 60,333
-------- --------
Total liabilities and stockholders' equity............ $292,464 $ 66,874
-------- --------
-------- --------
</TABLE>
See accompanying notes.
1
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XOOM.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenue:
E-commerce.................................................. $ 3,297 $ 1,157 $ 5,933 $ 1,834
Advertising................................................. 3,210 272 4,975 355
Licensing................................................... 18 287 39 376
------- ------- -------- -------
Total net revenue...................................... 6,525 1,716 10,947 2,565
Cost of e-commerce............................................. 2,607 621 4,649 899
Cost of advertising............................................ 75 -- 75 --
Cost of licensing.............................................. -- 19 -- 27
------- ------- -------- -------
Cost of net revenue....................................... 2,682 640 4,724 926
------- ------- -------- -------
Gross profit................................................... 3,843 1,076 6,223 1,639
Operating expenses:
Operating and development................................... 1,551 773 2,700 1,349
Sales and marketing......................................... 5,104 455 7,538 717
General and administrative.................................. 2,043 785 3,666 1,099
Amortization of deferred compensation....................... 175 728 405 807
Purchased in-process research and development............... 2,603 330 2,603 660
Amortization of intangible assets........................... 1,442 346 2,304 346
------- ------- -------- -------
Total operating expenses............................... 12,918 3,417 19,216 4,978
------- ------- -------- -------
Loss from operations........................................... (9,075) (2,341) (12,993) (3,339)
Other income, net........................................... 2,333 2 2,943 --
------- ------- -------- -------
Net loss....................................................... (6,742) (2,339) $(10,050) $(3,339)
------- ------- -------- -------
------- ------- -------- -------
Net loss per share--basic and diluted........................... $ (0.40) $ (0.33) $ (0.66) $ (0.52)
------- ------- -------- -------
------- ------- -------- -------
Number of shares used in per share calculation--basic and
diluted..................................................... 16,777 6,983 15,288 6,402
------- ------- -------- -------
------- ------- -------- -------
</TABLE>
See accompanying notes.
2
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XOOM.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 1998
---- ----
<S> <C> <C>
Cash used in operating activities:
Net loss................................................................................ $ (10,050) $(3,339)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Purchased in-process research and development......................................... 2,603 660
Depreciation and amortization......................................................... 708 225
Amortization of intangible assets..................................................... 2,304 346
Amortization of deferred compensation................................................. 405 807
Issuance of common stock in exchange for Classic Media Holdings
license rights..................................................................... -- 100
Issuance of stock options to consultants.............................................. -- 103
Issuance of common stock to directors and consultants................................. 458 10
Changes in operating assets and liabilities:
Accounts receivable................................................................ (1,510) (537)
Inventories........................................................................ (471) (65)
Other current assets............................................................... (2,136) (8)
Intangible assets.................................................................. -- 1,567
Other assets....................................................................... (653) (207)
Accounts payable................................................................... 2,287 370
Accrued compensation and related expenses.......................................... 604 91
Other accrued liabilities.......................................................... 35 174
Deferred revenue................................................................... (342) 16
--------- -------
Net cash (used in) provided by operating activities........................................ (5,758) 313
Cash used in investing activities:
Purchases of fixed assets.......................................................... (2,907) (360)
Purchase of investments............................................................ (162,528) --
Maturities of investments.......................................................... 7,500 --
Cash paid in connection with the purchase of certain assets from Revolutionary
Software, Inc. ................................................................ -- (273)
Business combinations, net of cash acquired........................................ (975) (230)
-------- -------
Net cash used in investing activities...................................................... (158,910) (863)
Cash provided by financing activities:
Proceeds from issuance of common stock in secondary public offering................ 166,597 --
Proceeds from issuance of common stock............................................. -- 4,374
Proceeds from exercise of stock options............................................ 1,182 --
Proceeds from issuance of notes payable to stockholders............................ -- 335
Principal payments on capital lease obligations.................................... (16) --
Repayment of notes payable......................................................... (252) (111)
-------- -------
Net cash provided by financing activities.................................................. 167,511 4,598
-------- -------
Net increase in cash and cash equivalents.................................................. 2,843 4,048
Cash and cash equivalents at beginning of period........................................... 54,575 6
-------- -------
Cash and cash equivalents at end of period................................................. $ 57,418 $ 4,054
-------- -------
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</TABLE>
3
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XOOM.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------
1999 1998
---- ----
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES:
Non-cash transactions:
Issuance of common stock in connection with business and technology acquisitions......... $ 60,410 $ 4,218
-------- -------
-------- -------
Issuance of notes payable in conjunction with business and technology acquisitions....... $ -- $ 1,906
-------- -------
-------- -------
Investment in a company in connection with a media contract.............................. $ 5,000 $ --
-------- -------
-------- -------
Issuance of common stock in exchange for stock subscriptions receivable................... $ -- $ 261
-------- -------
-------- -------
Issuance of common stock in exchange for cancellation of notes payable to
stockholder............................................................................. $ -- $ 150
-------- -------
-------- -------
Common stock issued to satisfy Paralogic Corporation legal obligation.................... $ -- $ 165
-------- -------
-------- -------
Deferred compensation resulting from grant of stock options.............................. $ -- $ 972
-------- -------
-------- -------
Cash paid for interest....................................................................... $ 32 $ --
-------- -------
-------- -------
</TABLE>
See accompanying notes.
4
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XOOM.COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements at June 30, 1999 and
1998 and for the three and six-month periods then ended are unaudited and
reflect all adjustments (consisting only of normal recurring adjustments)
which are, in the opinion of management, necessary for a fair presentation of
the financial position and operating results for the interim periods. The
condensed consolidated financial statements at June 30, 1999 should be read
in conjunction with the consolidated financial statements and notes thereto,
together with management's discussion and analysis of financial condition and
results of operations, contained in the Company's Annual Report to
Stockholders incorporated by reference in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1998. The results of operations
for the three and six months ended June 30, 1999 are not necessarily
indicative of the results for the entire fiscal year ending December 31, 1999.
2. BUSINESS COMBINATIONS AND TECHNOLOGY ACQUISITIONS
During the six months ended June 30, 1999, the Company made business
acquisitions described in the paragraphs that follow, each of which has been
accounted for as a purchase. The condensed consolidated financial statements
include the operating results of each business from the date of acquisition.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT. 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. The values assigned to
purchased in-process technology were determined by identifying the on-going
research projects for which technological feasibility had not been achieved
and assessing the state of completion of the research and development effort.
The state of completion was determined by estimating the costs and time
incurred to date relative to those costs and time to be incurred to develop
the purchased in-process technology into commercially viable products,
estimating the resulting net cash flows only from the percentage of research
and development efforts complete at the date of acquisition, and discounting
the net cash flows back to their present value. The discount rate included a
factor that took into account the uncertainty surrounding the successful
development of the purchased in-process technology projects.
PURCHASED TECHNOLOGY. To determine the values of purchased
technology, 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 lifecycles.
ACQUIRED WORKFORCE. To determine the values of the acquired
workforce, employees were identified who would require significant cost to
replace and train. Then each employee's fully-burdened cost (salary,
benefits, overhead), the cost to train the employee, and the recruiting costs
(locating, interviewing, hiring) were estimated. These costs were then summed
up and tax effected to estimate the value of the assembled workforce.
Amounts allocated to purchased technology, goodwill and other
intangible assets are being amortized on a straight-line basis over periods
of three to four years.
FOCUSED PRESENCE, INC.
On April 1, 1999, the Company acquired 100% of the outstanding shares
Focused Presence, Inc., a company that operates a global directory of small
businesses. The purchase consideration consisted of 21,894 shares of the
5
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Company's common stock with an estimated fair value of $77.23 per share, and
acquisition costs of approximately $4,000. The Company accounted for this
acquisition as a purchase.
The purchase consideration was allocated to the acquired assets and
assumed liabilities based on fair values as follows (in thousands):
<TABLE>
<S> <C>
Cash............................................ $ 1
Other current assets............................ 61
Fixed assets, net............................... 3
Goodwill........................................ 1,760
Liabilities assumed............................. (130)
-------
Total purchase consideration.................... $ 1,695
-------
-------
</TABLE>
MIGHTYMAIL NETWORKS, INC.
On May 3, 1999, the Company acquired 100% of the outstanding shares of
MightyMail Networks, Inc., a developer of an enhanced e-mail product that
enables customization of e-mail according to user preferences. The purchase
consideration consisted of 268,761 shares of the Company's common stock with
an estimated fair value of $72.10 per share, the assumption of 9,061 and
12,121 employee stock options at a price per share of $70.47 and $55.91,
respectively, and acquisition costs of approximately $300,000. In addition,
67,186 shares of the Company's common stock were placed into an escrow
account. Of the shares held in escrow, 25% will be released in November 1999
and in May 2000, if certain performance objectives are met, and 50% will be
released in May 2000, upon the expiration of certain indemnification
obligations.
The purchase consideration was allocated to the acquired assets and
assumed liabilities based on fair values as follows (in thousands):
<TABLE>
<S> <C>
Accounts receivable............................................... $ 19
Net fixed assets.................................................. 132
Other long-term assets............................................ 50
Notes receivable from shareholders................................ 995
Purchased in-process research and development charged to
operations in the quarter ended June 30, 1999.................. 1,082
Purchased technology.............................................. 3,321
Acquired workforce................................................ 176
Goodwill ........................................................ 17,735
Liabilities assumed............................................... (396)
--------
Total purchase consideration...................................... $ 23,114
--------
--------
</TABLE>
NET FLOPPY, INC.
On May 5, 1999, the Company acquired 100% of the outstanding shares
of Net Floppy, Inc., a provider of online file storage for web users. The
purchase consideration consisted of 7,528 shares of the Company's common
stock with an estimated fair value of $72.10 per share, approximately
$560,000 in cash, and approximately $57,000 of acquisition costs. In
addition, 7,526 shares of the Company's common stock were placed into an
escrow account. Of the shares held in escrow, 50% will be released if certain
performance objectives are met in November 1999 and 50% will be released in
May 2000, upon the expiration of certain indemnification obligations.
The purchase consideration was allocated to the acquired assets and
assumed liabilities based on fair values as follows (in thousands):
<TABLE>
<S> <C>
Accounts receivable and other current assets.................. $ 2
Goodwill .................................................... 1,443
Liabilities assumed........................................... (5)
--------
Total purchase consideration.................................. $ 1,440
--------
--------
</TABLE>
PARALOGIC SOFTWARE CORPORATION
On June 16, 1999, the Company acquired 100% of the outstanding
shares of Paralogic Software Corporation, a provider of Java based community
products and services, such as customizable chat rooms, discussion boards,
guestbooks and event calendars. The purchase consideration consisted of
654,018 shares of common stock at $47.13 per share, the assumption of 82,733
and 12,001 employee stock options at a price per share of $46.67 and $33.05,
respectively, and acquisition costs of approximately $315,000.
6
<PAGE>
The purchase consideration was allocated to the acquired assets and
assumed liabilities based on fair values as follows (in thousands):
<TABLE>
<S> <C>
Cash......................................................... $ 134
Accounts receivable and other current assets................. 21
Net fixed assets............................................. 43
Purchased in-process research and development charged to
operations in the quarter ended June 30, 1999............. 1,521
Purchased technology......................................... 4,986
Acquired workforce........................................... 81
Goodwill ................................................... 28,639
Liabilities assumed.......................................... (29)
--------
Total purchase consideration................................. $ 35,396
--------
--------
</TABLE>
SUMMARY OF PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT, PURCHASED
TECHNOLOGY AND ACQUIRED WORKFORCE. The intangible assets, as of June 30, 1999,
including all acquisitions, are summarized as follows (in thousands):
<TABLE>
<S> <C>
Acquired workforce........................................... $ 257
Purchased technology......................................... 10,662
Goodwill ................................................... 54,580
--------
Intangible assets........................................ 65,499
Accumulated amortization..................................... (4,146)
--------
Intangible assets, net................................... $ 61,353
--------
--------
</TABLE>
The total purchased in-process research and development that had no
alternative future use, and as such was charged to operations in the three
months ended June 30, 1999 is summarized below (in thousands):
<TABLE>
<S> <C>
MightyMail Networks, Inc..................................... $ 1,082
Paralogic Software Corporation............................... 1,521
--------
Total purchased in-process research and development.......... $ 2,603
--------
--------
</TABLE>
The following unaudited pro forma summary represents the
consolidated results of operations as if all the acquisitions to date had
occurred at the beginning of the periods presented and are not intended to be
indicative of future results.
<TABLE>
<CAPTION>
Period Ended June 30,
(IN THOUSANDS) 1999 1998
---- ----
(unaudited)
<S> <C> <C>
Pro forma net revenue........................................ $ 11,362 $ 3,659
Pro forma loss from operations............................... (18,948) (10,397)
Pro forma net loss........................................... (16,002) (10,422)
Pro forma net loss per share-basic and diluted............... (1.05) (1.40)
Number of shares used in pro forma per share
calculation - basic and diluted........................... 15,288 7,429
</TABLE>
The pro forma results are not necessarily indicative of what
actually would have occurred if the acquisitions had been in effect for the
entire period presented and are not intended to be a projection of future
results. In-process research and development charges of $2,603,000 and
$330,000 were excluded from the pro forma net loss and pro forma net loss per
share figures for the periods ended June 30, 1999 and 1998, respectively.
7
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NBC INTERNET, INC.
On May 9, 1999, the Company, certain subsidiaries of the Company,
SNAP! LLC, National Broadcasting Company, Inc., and certain of its affiliates
and CNET, Inc. entered into a series of definitive agreements relating to the
formation of a new company to be named NBC Internet, Inc. On each of June 11,
1999, and July 8, 1999, an amendment to one of each definitive agreements was
signed. The terms of the original agreement and each amendment are filed with
the Securities and Exchange Commission.
3. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company has classified all marketable securities as
available-for-sale. Available-for-sale securities are carried at amounts that
approximate fair market value based on quoted market prices. Realized gains
and losses and declines in value judged to be other-than-temporary on
available-for-sale securities are included in interest income. Interest on
securities classified as available-for-sale is also included in interest
income.
The following is a summary of available-for-sale securities (in
thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Demand and money market instrument accounts.................. $ 57,418 $ 8,731
Corporate bonds and notes.................................... 84,495 36,444
Market auction preferred stock............................... 23,500 11,400
---------- --------
Total available-for-sale securities....................... 165,413 56,575
Less amounts included in cash and cash equivalents........... (57,418) (54,575)
---------- --------
Marketable securities..................................... $ 107,995 $ 2,000
---------- --------
---------- --------
</TABLE>
The cost of securities sold is based on the specific identification
method. All available-for-sale securities at June 30, 1999 have maturity
dates in 1999 and 2000.
4. NOTES RECEIVABLE FROM STOCKHOLDERS
On June 16, 1999, in connection with its acquisition of MightyMail
Networks, Inc., the Company assumed stock subscriptions receivable from
related parties in exchange for shares of common stock. As of June 30, 1999,
outstanding subscriptions receivable amounted to approximately $995,000. All
amounts mature by April 2002 and bear interest at a rate of 5.28% per annum.
5. STOCKHOLDERS' EQUITY
SECONDARY PUBLIC OFFERING
On April 9, 1999, the Company completed a secondary public offering
of its common stock and issued 4,600,000 shares (including 600,000 shares
issued in connection with the exercise of the underwriter over-allotment
option) at a price of $66.00 per share. Of the 4,600,000 shares of common
stock sold in the offering, 2,659,800 were sold by the Company and 1,940,200
shares were sold by existing stockholders. The Company received net proceeds
from the offering of approximately $167 million.
1998 EMPLOYEE STOCK PURCHASE PLAN
The Company's 1998 Employee Stock Purchase Plan was terminated by
the Board of Directors in May 1999.
8
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6. NET LOSS PER SHARE
Basic and diluted net loss per share is calculated using the
weighted average number of common shares outstanding. Diluted net 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 (using the treasury stock
method) are excluded from the computation of net loss per share as their
effect is anti-dilutive.
7. COMPREHENSIVE INCOME (LOSS)
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130")
which establishes new rules for the reporting and display of comprehensive
income (loss) and its components. The adoption of this Statement had no
impact on the Company's net loss or stockholders' equity. SFAS 130 requires
unrealized gains and losses on the Company's available-for-sale securities to
be included in other comprehensive loss.
The components of the Company's comprehensive loss are as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss $ (6,742) $ (2,339) $ (10,050) $ (3,339)
Unrealized loss on investments (418) -- (418) --
-------- -------- --------- --------
Comprehensive loss (7,160) (2,339) $ (10,468) $ (3,339)
-------- -------- --------- --------
-------- -------- --------- --------
</TABLE>
8. LEGAL PROCEEDINGS
In January 1998, the Company became aware that Imageline, Inc.
("Imageline") claimed to own the copyright in certain images that a third
party, Sprint Software Pty Ltd ("Sprint") had licensed to the Company. Some
clip art images that Imageline alleged infringed Imageline's copyright were
included by the Company in versions of the Company's Web Clip Empire product
and licensed by the Company to third parties, including other software clip
publishers. The Company's contracts with such publishers require the Company
to indemnify the publisher if copyrighted material licensed from the Company
infringes a copyright. Imageline claims that the Company's infringement of
Imageline's copyrights is ongoing. The Company and Imageline had engaged in
discussions, but were unable to reach any agreement regarding a resolution of
this matter.
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 of 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
9
<PAGE>
agreements with the Company. In addition, the Company may be subject to
claims by third parties seeking indemnification from the Company in
connection with the alleged infringement of the Imageline copyrights.
On September 17, 1998, Imageline filed a counterclaim, which
Imageline amended in January 1999, seeking up to $60.0 million in damages. In
March 1999, the parties completed the discovery process and filed separate
motions for summary judgment. On April 5, 1999, the Court granted one of the
Company's motions for partial summary judgment and stayed the case to allow
Imageline to file all necessary copyright registration applications to cover
the clip art images.
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 was 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. Based on information available to date management
does not believe that the outcome of this matter will have a material effect
on the Company's financial position, results of operations and cash flows
over and above the $1,000,000 accrued in the 1997 financial statements. 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.
Zoom Telephonics, Inc. filed a lawsuit against the Company in
September 1998 alleging trademark infringement and related statutory
violations. The Company was not served with Zoom Telephonics' complaint until
January 1999. Zoom Telephonics has demanded that the Company stop using the
XOOM trademark and has asked for an unspecified amount of money damages. The
Company responded to the complaint in February 1999. In April 1999, Zoom
Telephonics filed a motion for a preliminary injunction to stop the Company
from using any mark containing "Xoom." In June 1999, the Company filed an
opposition to Zoom Telephonics' motion for preliminary injunction and filed a
motion to suspend all proceedings in this matter until September 30, 1999.
Although the Company believes that Zoom's claims are without merit, such
litigation could have a material adverse effect on the Company's business,
results of operations and financial condition, particularly if such
litigation forces the Company to make substantial changes to its name and
trademark usage. However, based on information available to date, the Company
does not believe that the ultimate outcome of this matter will have a
material adverse effect on its results of operations, cash flows, or
financial position.
9. RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("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. This statement
is effective for financial statements for periods beginning after December
15, 1997. The adoption of this statement did not have a significant impact on
the way the Company reports information in its annual statements and interim
financial reports.
10. SUBSEQUENT EVENTS
On July 12, 1999, a subsidiary of the Company filed a Form S-4 with
the Securities and Exchange Commission under such subsidiary's new corporate
name, NBC Internet, Inc.
On July 29, 1999, the Company issued 960,028 shares to National
Broadcasting Company, Inc. for $57.29 per share in connection with a Stock
Purchase Agreement dated June 11, 1999. The Company received proceeds of
$55.0 million. The Stock Purchase Agreement is filed on Form 8-K with the
Securities and Exchange Commission.
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On August 3, 1999, the Company acquired 100% of the outstanding
shares of Liquid Market, Inc., the developer of a next-generation on-line
comparison shopping guide and purchasing service. The purchase consideration
consisted of 930,426 shares of the Company's common stock with an estimated
fair value of $40.70 per share. In addition, 212,202 shares of the Company's
common stock will be placed into an escrow account. Of the shares held in
escrow, 50% will be released on various milestone dates prior to June 2000,
upon the completion of certain performance objectives, and 50% will be
released in August 2000, upon the expiration of certain indemnification
obligations. The Company will account for this acquisition as a purchase.
On August 3, 1999, the Company acquired all of the outstanding
shares of Private One, Inc., a designer and developer of a secure e-mail
software service. The purchase consideration consisted of 60,000 shares of
the Company's common stock. In addition, 12,000 shares of the Company's
common stock will be placed into an escrow account. Of the shares held in
escrow, 25% will be released in February 2000, and 25% in August 2000, or
upon the completion of certain milestones, whichever is earlier. The
remaining 50% of the shares held in escrow will be released in August 2000,
upon the expiration of certain indemnification obligations. The Company will
account for this acquisition as a purchase.
In August 1999, the Company entered into a 10-year non-cancelable
leasing agreement for approximately 187,000 square feet of office space
located in San Francisco, California. Minimum lease commitments for the years
ended December 31, 1999, 2000, 2001, 2002, 2003, and thereafter are
approximately $339,000, $4,707,000, $5,655,000 $5,655,000, $5,655,000, and
$34,539,000, respectively. In August 1999, in connection with the lease
agreement, the Company entered into an irrevocable letter of credit with a
commercial bank in the amount of $4,500,000 as a security deposit payable to
the landlord.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE DISCUSSION IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" CONTAINS TREND ANALYSES AND OTHER
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF
1934. ALL STATEMENTS, TREND ANALYSES AND OTHER INFORMATION CONTAINED HEREIN
RELATIVE TO MARKETS FOR XOOM.COM's SERVICES AND PRODUCTS AND TRENDS IN
REVENUE, AS WELL AS OTHER STATEMENTS INCLUDING SUCH WORDS AS "ANTICIPATE,"
"BELIEVE," "PLAN," "ESTIMATE," "EXPECT," "GOAL," AND "INTEND" AND OTHER
SIMILAR EXPRESSIONS CONSTITUTE FORWARD-LOOKING STATEMENTS. THESE
FORWARD-LOOKING STATEMENTS ARE SUBJECT TO BUSINESS AND ECONOMIC RISKS, AND
XOOM.COM'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF THE PROPOSED MERGER WITH NBC MEDIA
CORPORATION, WHICH IS EXPECTED TO CLOSE IN THE FOURTH QUARTER OF 1999, AND
OTHER FACTORS SET FORTH ELSEWHERE HEREIN, INCLUDING "CERTAIN RISK FACTORS
WHICH MAY IMPACT FUTURE OPERATING RESULTS," PAGE 28, AS WELL AS FACTORS SET
FORTH IN XOOM.COM'S ANNUAL REPORT ON FORM 10-K.
GENERAL
Xoom.com is one of the fastest growing direct e-commerce companies
on the Internet. We attract members to our community site with a variety of
free services, including homepages, e-mail, chat rooms, electronic
newsletters, clip art and software libraries, page counters and online
greeting cards. Our members can also join topical communities where they can
exchange ideas and information. Members may also enter specialized forums
such as Investor Place, Women's Circle or Health & Fitness, where they can
gain access to professional content and special product and service offers
available only on our Web site. Upon registration, members agree to receive
periodic offers of products and services via e-mail. These competitively
priced and continuously updated offers include computer software, computer
accessories and peripherals, consumer electronics, clip art on CD-ROM and
collectible items. In addition, we offer services such as a travel club, long
distance telephone services and a DVD club. Our new offerings will include
services such as home and auto insurance, wireless telecommunications
services and membership clubs, and products such as magazine subscriptions,
appliances, games, photography supplies and gardening tools, among others. We
believe that our rapidly growing base of self-qualified members provides us
with highly attractive e-commerce opportunities. In addition, we believe that
our high levels of traffic and the number of unique users that visit our site
or affiliated sites on which we offer services on a monthly basis present an
attractive platform for advertising.
We were incorporated in April 1996 and commenced offering products
for sale on our Web site in March 1997. From inception through December 1996,
we had no sales and our operating activities related primarily to developing
necessary computer infrastructure, recruiting personnel, raising capital and
initial planning and development of the Xoom.com site. For the period
beginning with the operation of the Xoom.com site through December 31, 1997,
we 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.
From inception through June 30, 1999, we generated total net revenue
of approximately $20.1 million. Since January 1998, the number of members has
grown from 100,000 to 9.2 million as of July 31, 1999.
We have not achieved profitability on a quarterly or annual basis to
date, and anticipate that we will incur net losses for the foreseeable
future. The extent of these losses will depend, in part, on the amount and
rates of growth in our net revenue from e-commerce and advertising. We expect
our operating expenses to increase significantly,
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especially in the areas of sales and marketing and brand promotion. As a
result, we will need to increase our quarterly net revenue to achieve
profitability. We believe that period-to-period comparisons of our operating
results are not meaningful and that you should not rely upon the results for
any period as an indication of future performance. Our business, results of
operations and financial condition will be materially and adversely affected
if:
- net revenue does not grow at anticipated rates;
- increases in operating expenses are not offset by commensurate
increases in net revenue; or
- we are unable to adjust operating expense levels in light of net
revenue.
We expect operating expenses will continue to increase in the future
as we continue to seek to expand our business. To the extent that these
expenses are not accompanied by an increase in net revenue, our business,
results of operations and financial condition could be materially adversely
affected. Our operating losses might increase in the future, and we cannot
guarantee that we will ever achieve or sustain profitability. See "Certain
Risk Factors Which Might Impact Future Operating Results--We cannot assure
you that we will be profitable because we have operated our business only for
a short period of time."
Since January 1, 1999, we have entered into various business and
technology acquisitions, license arrangements and strategic alliances in
order to build our communities, provide community-specific content, generate
additional traffic, increase the number of members and establish additional
sources of net revenue. In April 1999, we acquired Focused Presence, Inc., a
company that operates a global directory of small businesses, for
approximately $1.7 million. In May 1999 we acquired Net Floppy, Inc, a
provider of online file storage for Web users for approximately $1.4 million,
and we acquired MightyMail Networks, Inc., a developer of an enhanced e-mail
product that enables customization of e-mail according to user preferences
for approximately $23.1 million. In June 1999, we acquired Paralogic Software
Corporation, which provides Web site authoring and community building tools,
such as Java based community products and services, including customizable
chat rooms, discussion boards, guestbooks and event calendars, for
approximately $35.4 million.
Because most Internet business acquisitions involve the purchase of
significant amounts of intangible assets, acquisitions of such businesses
also result in the recording of goodwill, purchased technology, and acquired
workforce, and significant charges for purchased in-process research and
development. During the three months ended June 30, 1999, we expensed $2.6
million for purchased in-process research and development and $1.4 million
for the amortization of goodwill, purchased technology, and acquired
workforce. During the same period ended June 30, 1998, we expensed $330,000
for purchased in-process research and development and $346,000 for the
amortization of goodwill and purchased technology. During the six months
ended June 30, 1999, we expensed $2.6 million for purchased in-process
research and development and $2.3 million for the amortization of goodwill,
purchased technology, and acquired workforce. During the same period ended
June 30, 1998, we expensed $660,000 for purchased in-process research and
development and $346,000 for the amortization of goodwill and purchased
technology.
We intend to continue making acquisitions to increase online reach
and membership and to seek additional strategic alliances with content and
distribution partners, including alliances that create co-branded sites
through which we market our services. Acquisitions carry numerous risks and
uncertainties, including:
- difficulties in integrating 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 we
have little or no prior experience; and
- potential loss of key employees of acquired entities.
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We cannot guarantee that we will be able to successfully integrate
any businesses, products, technologies or personnel that might be acquired in
the future. A failure to successfully integrate acquired entities or assets
could have a material adverse effect on our business, results of operations
and financial condition. In addition, we cannot guarantee that we will be
successful in identifying and closing transactions with potential acquisition
candidates. See "Certain Risk Factors Which Might Impact Future Operating
Results--If we are unable to successfully integrate future acquisitions into
our operation, then our business and results of operations could be adversely
affected."
International sales comprised approximately 13% of total net revenue
for the three months ended June 30, 1999 and they represented 32% of total
net revenue for the same period ended June 30, 1998. This consisted of
$818,000 in net revenue for the three months ended June 30, 1999 and $554,000
in net revenue for the same period ended June 30, 1998. International sales
comprised approximately 16% of total net revenue for the six months ended
June 30, 1999 and 31% of total net revenue for the same period ended June 30,
1998. This consisted of $1.7 million in net revenue during the six months
ended June 30, 1999 and $802,000 in net revenue during the same period ended
June 30, 1998. The decreases in the percentage of international revenue in
both periods are due to the overall increase in domestic revenue. See
"Certain Risk Factors Which Might Impact Future Operating Results--Our
international operations are subject to risks that could have a material
adverse effect on our results of operations."
We will need to increase our inventory levels in the future to
support a wider base of e-commerce products and to take advantage of volume
purchase discounts. We contract with a third party warehousing and order
fulfillment company to stock inventory and ship products directly to
customers. We take title to this inventory, have responsibility for this
inventory, and record inventory on our 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. These risks include, but are not
limited to, product obsolescence, excess inventory, and inventory shortages
resulting in unfulfilled orders, which could materially adversely affect
operating results in the future. See "Certain Risk Factors Which Might Impact
Future Operating Results--Any failure of our network infrastructure could
have a material adverse effect on our results of operations" and "--We depend
on our vendors and suppliers."
As a strategic response to changes in the competitive environment,
we might from time to time make certain pricing, service or marketing
decisions or pursue business combinations that could have a material adverse
effect on our business, results of operations and financial condition. In
order to accelerate the promotion of the Xoom.com brand, we intend to
significantly increase our marketing budget, which could materially and
adversely affect our business, results of operations and financial condition.
We expect to experience seasonality in our 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 our 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 our operating results, and these patterns could have a material adverse
effect on our business, results of operations and financial condition.
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RESULTS OF OPERATIONS
The following table presents certain consolidated statement of
operations data for the periods indicated as a percentage of total net
revenue.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenue:
E-commerce............................................... 50.5% 67.4% 54.2% 71.5%
Advertising.............................................. 49.2 15.9 45.4 13.8
Licensing................................................ 0.3 16.7 0.4 14.7
------ ------ ------ ------
Total net revenue................................... 100.0 100.0 100.0 100.0
Cost of net revenue(1):
Cost of e-commerce....................................... 40.0 36.2 42.5 35.0
Cost of advertising revenue.............................. 1.1 -- 0.7 --
Cost of licensing........................................ -- 1.1 -- 1.1
------ ------ ------ ------
Cost of net revenue........................................ 41.1 37.3 43.2 36.1
------ ------ ------ ------
Gross profit.................................................. 58.9 62.7 56.8 63.9
Operating expenses:
Operating and development................................ 23.8 45.0 24.7 52.6
Sales and marketing...................................... 78.2 26.5 68.8 28.0
General and administrative............................... 31.3 45.8 33.5 42.8
Purchased in-process research and development............ 2.7 42.4 3.7 31.5
Amortization of deferred compensation.................... 39.9 19.2 23.8 25.7
Amortization of intangible assets........................ 22.1 20.2 21.0 13.5
------ ------ ------ ------
Total operating expenses............................ 198.0 199.1 175.5 194.1
------ ------ ------ ------
Loss from operations.......................................... (139.1) (136.4) (118.7) (130.2)
Interest income............................................... 36.3 0.1 27.5 --
Interest expense.............................................. (0.5) -- (0.6) --
------ ------ ------ ------
Net loss...................................................... (103.3)% (136.3)% (91.8)% (130.2)%
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
(1) There were no material costs of advertising revenue during 1998.
NET REVENUE
Total net revenue for the three months ended June 30, 1999 was $6.5
million, an increase of approximately $4.8 million over revenues of $1.7
million for the three months ended June 30, 1998. Total net revenue for the
six months ended June 30, 1999 was $10.9 million, an increase of
approximately $8.3 million over revenues of $2.6 for the six months ended
June 30, 1998. The increases in both the three-month and six-month periods
were primarily due to the following three factors: (A) the expansion of our
membership base; (B) an increase in the frequency of e-mail offerings and
broader product offerings (which resulted in an increase in product sales
through e-commerce); and (C) an increase in Web-based advertising (our higher
Web site traffic increased our attractiveness to advertisers).
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E-COMMERCE REVENUE
E-commerce revenue increased to $3.3 million in the three months
ended June 30, 1999 from $1.2 million in the three months ended June 30,
1998. E-commerce revenue increased to $5.9 million in the six months ended
June 30, 1999 from $1.8 million in the six months ended June 30, 1998. The
increases in net revenue in both periods are primarily due to the expansion
of our membership base, which resulted in an increase in product sales, as
well as expansion of the breadth of products offered. The percentage of our
total net revenue attributable to e-commerce revenue decreased to 50.5% in
the three months ended June 30, 1999 from 67.4% in the three months ended
June 30, 1998. The percentage of our total net revenue attributable to
e-commerce revenue decreased to 54.2% in the six months ended June 30, 1999
from 71.5% in the six months ended June 30, 1998. The decreases in both
periods were due to the fact that advertising revenue grew at a more rapid
rate than e-commerce revenue during the three and six months ended June 30,
1999 as compared to the three and six months ended June 30, 1998. We expect
e-commerce revenue to continue to account for a large percentage of net
revenue as we expand our product offerings and increase our direct e-commerce
response rates through better member demographic information and targeting of
product offers.
We believe that offering our customers attractive prices is an
essential component of our business strategy. We may in the future increase
the discounts we offer our customers and may otherwise alter our pricing
structures and policies. We anticipate that any increase in discounts or
price reductions will reduce gross margins below those we experienced for the
three and six months ended June 30, 1999 and 1998.
ADVERTISING REVENUE
Advertising revenue increased to $3.2 million in the three months
ended June 30, 1999 from $272,000 in the three months ended June 30, 1998.
Advertising revenue increased to $5.0 million in the six months ended June
30, 1999 from $355,000 in the six months ended June 30, 1998. The percentage
of our total net revenue attributable to advertising revenue increased to
49.2% in the three months ended June 30, 1999 from 15.9% in the three months
ended June 30, 1998. The percentage of our total net revenue attributable to
advertising revenue increased to 45.4% in the six months ended June 30, 1999
from 13.8% in the six months ended June 30, 1998. The increases in
advertising revenue in each period in both absolute dollars and in percentage
of net revenue are primarily a result of the increase in our membership,
increased site traffic, and expansion of our advertising sales force. As our
membership base continues to grow and the demand for advertising on our
Web-site remains strong, we can expect that our advertising revenues will
continue to represent a large percentage of our overall net revenue.
LICENSING REVENUE
Licensing revenue decreased to $18,000 in the three months ended
June 30, 1999 from $287,000 in the three months ended June 30, 1998.
Licensing revenue decreased to $39,000 in the six months ended June 30, 1999
from $376,000 in the three months ended June 30, 1998. As we expand our
e-commerce and advertising revenue, we can expect that licensing revenue will
continue to represent a small percentage of net revenue.
COST OF NET REVENUE
Gross margins decreased to 58.9% in the three months ended June 30,
1999 from 62.7% in the three months ended June 30, 1998. Gross margins
decreased to 56.8% in the six months ended June 30, 1999 from 63.9% in the
six months ended June 30, 1998. Both decreases were a result of a change in
the overall product mix. In the three and six months ended June 30, 1999, we
began selling a broader range of products than in the three and six months
ended June 30, 1998. The new product mix includes higher priced items (such
as DVD's and digital cameras) that have lower gross margin percentages.
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COST OF E-COMMERCE REVENUE
Cost of e-commerce revenue consists primarily of the costs of
merchandise sold to customers, credit card commissions, product fulfillment,
and outbound shipping and handling costs. Cost of e-commerce was $2.6 million
for the three months ended June 30, 1999 and it was $621,000 for the same
period ended June 30, 1998. Cost of e-commerce revenue was $4.6 million for
the six months ended June 30, 1999 and it was $899,000 for the same period
ended June 30, 1998. As a percentage of e-commerce revenue, the cost of
e-commerce was 40.0% for the three months ended June 30, 1999 and it was
36.2% for the same period ended June 30, 1998. As a percentage of e-commerce
revenue, the cost of e-commerce was 42.5% for the six months ended June 30,
1999 and it was 35.0% for the same period ended June 30, 1998. The increase
was primarily attributable to the fact that in 1999 we broadened our product
offerings. Our new product offerings included items with higher costs than in
the prior year.
COST OF ADVERTISING REVENUE
Cost of advertising revenue consists primarily of revenue share
amounts we pay to our customers for advertising sold on co-branded sites.
Cost of advertising revenue was $75,000 in the three and six months ended
June 30, 1999 and it was $0 in the same periods ended June 30, 1998. This
increase is primarily a result of the increase in our membership, and the
expansion of our advertising and business development sales forces.
COST OF LICENSING REVENUE
Cost of licensing revenue consists primarily of royalties on net
revenue from license fees. Cost of licensing revenue were $0 for the three
months ended June 30, 1999 and they were $19,000 for the same period ended
June 30, 1998. Cost of license fees were $0 during the six months ended
June 30, 1999 and they were $27,000 during the same period ended June 30,
1998. We expect that cost of licensing revenue should continue to be a small
percentage of total cost of revenues as compared to the cost of e-commerce
revenues.
The mix of products we sell will impact our gross margins and the
overall mix of e-commerce revenue, advertising revenue and licensing revenue.
We typically recognize higher gross margins on advertising revenue and
licensing revenue. We expect that shifts in the mix of sales could adversely
impact our overall gross margin and could materially adversely impact our
business, results of operations and financial condition.
OPERATING AND DEVELOPMENT EXPENSES
Operating and development expenses consist primarily of payroll and
related expenses for development and network operations personnel and
consultants, costs related to systems infrastructure including Web site
hosting, and costs of acquired content to enhance our Web site. Operating and
development expenses increased to $1.6 million in the three months ended June
30, 1999 from $773,000 in the three months ended June 30, 1998. Operating and
development expenses increased to $2.7 million in the three months ended June
30, 1999 from $1.3 million in the three months ended June 30, 1998. We
believe operating and development expenses will increase significantly in the
future, especially in relation to Web site hosting costs, as our membership
grows, thus requiring additional bandwidth to support the many free services
offered to members. We believe that we will need to make significant
investments in our Web site to remain competitive. Therefore, we expect that
our operating and development expenses will continue to increase in absolute
dollars for the foreseeable future.
Operating and development costs decreased as a percentage of total
net revenue to 23.8% in the three months ended June 30, 1999 from 45.0% in
the three months ended June 30, 1998. Operating and development costs
decreased as a percentage of total net revenue to 24.7% in the six months
ended June 30, 1999 from 52.6% in the six months ended June 30, 1998. The
decreases in operating and development expense as a percentage of total
revenue in both periods was due to the overall growth in net revenue.
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SALES AND MARKETING EXPENSES
Sales and marketing expenses consist primarily of payroll and
related expenses for personnel engaged in sales, marketing, publishing and
customer support, as well as advertising and promotional expenditures. Sales
and marketing expenses increased to $5.1 million in the three months ended
June 30, 1999 from $455,000 in the three months ended June 30, 1998. Sales
and marketing expenses increased to $7.5 million in the six months ended June
30, 1999 from $717,000 in the six months ended June 30, 1998. 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 our sales and marketing strategy as well as increased public
relations and other promotional and advertising expenses. Additionally, in
connection with the proposed business combination of the Company, SNAP! LLC
and certain Internet assets of NBC, we incurred a $424,000 charge related to
the cancellation of an advertising contract in the three and six months ended
June 30, 1999. We expect to continue hiring additional personnel and to
pursue a branding and marketing campaign. Therefore, we expect marketing and
sales expenses to continue to increase significantly in absolute dollars.
Sales and marketing expenses increased as a percentage of total net
revenue to 78.2% in the three months ended June 30, 1999 from 26.5% in the
three months ended June 30, 1998. Sales and marketing expenses increased as a
percentage of total net revenue to 68.8% in the six months ended June 30,
1999 from 28.0% in the six months ended June 30, 1998. The increase in sales
and marketing expenses as a percentage of total revenue in both periods is
due to the hiring of new sales and marketing personnel and other promotional
and advertising expenses.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consist primarily of payroll and
related costs for general corporate functions, including finance, accounting,
business development, human resources, investor relations, facilities and
administration, as well as legal fees, insurance, and fees for professional
services and directors. General and administrative expenses increased to $2.0
million in the three months ended June 30, 1999 from $785,000 in the three
months ended June 30, 1998. General and administrative expenses increased to
$3.7 million in the six months ended June 30, 1999 from $1.1 million in the
six months ended June 30, 1998. The absolute dollar increases from period to
period in general and administrative expenses were primarily due to increases
in the number of general and administrative personnel, professional services,
directors' fees and facility expenses to support the growth of our
operations. We expect general and administrative expenses to increase in
absolute dollars in future periods as we expand our staff, incur additional
costs related to our operations, and are subject to additional requirements
of being a publicly traded company.
General and administrative expenses decreased as a percentage of
total net revenue to 31.3% in the three months ended June 30, 1999 from 45.8%
in the three months ended June 30, 1998. General and administrative expenses
decreased as a percentage of total net revenue to 33.5% in the six months
ended June 30, 1999 from 42.8% in the six months ended June 30, 1998. The
decreases in operating and development expense as a percentage of total
revenue in both periods was due to the overall growth in net revenue.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
For the three months ended June 30, 1999 we recognized the cost of
purchased in-process research and development of $2,603,000 in connection
with the acquisitions of MightyMail Networks, Inc. and Paralogic Software
Corporation, and for the same period ended June 30, 1998 we recognized
$330,000 in connection with the acquisition of Paralogic Corporation. For the
six months ended June 30, 1999 we recognized the cost of purchased in-process
research and development of $2,603,000 in connection with the acquisitions of
MightyMail Networks, Inc. and Paralogic Software Corporation, and for the
same period ended June 30, 1998 we recognized $660,000 in
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connection with the acquisitions of Paralogic Corporation and the purchase of
certain assets of Revolutionary Software, Inc.
ACQUISITIONS DURING THE SIX-MONTH PERIOD ENDED JUNE 30, 1999
MIGHTYMAIL NETWORKS, INC.
In connection with the MightyMail Networks, Inc. acquisition, we
acquired MightyMail Networks' e-mail platform. The MightyMail platform allows
branding material and marketing content to be placed within person-to-person
e-mail that is sent by individuals to individuals. The MightyMail application
runs on an Oracle database and Unix operating system. All the application
code is written using Java Servlets running on a servlet-enabled Web server.
The MightyMail application uses a three-tiered architecture common to most
Internet applications: an interface layer, an application layer, and a
database layer. In addition, MightyMail uses a custom mail agent that links
into a standard mail transfer agent. In the future, we expect that this
custom mail agent will be useable by any standard mail protocol for users who
wish to run the MightyMail application running in their own mail environment.
At the time of the acquisition, version 1.0 of the MightyMail
technology was functional as a commercially viable product. However, the
current product has various e-mail options and is not a truly customizable
product with a rich library of content or business user interface. In fact,
version 1.0 is approximately half of the true customizable, rich-e-mail
product originally intended to be developed. At the time of the acquisition,
MightyMail Networks was developing a second version of the MightyMail
Networks technology, which was not completely functional as a commercially
viable product. Version 2.0 of the MightyMail technology will be fully
customizable, have access to a rich library of content, have the ability to
add surveys, be compatible with corporate servers, have e-mail wizards, allow
end-users to create their own content and enable the inclusion of photographs.
The nature, amount and timing of the remaining estimated efforts
necessary to develop version 2.0 of the MightyMail technology include:
(A) Integration with Xoom.com's existing webmail system
("XoomMail"): This integration will bring MightyMail capabilities (the
ability to compose rich e-mail) to XoomMail's existing account holders, which
now exceed 700,000 users.
(B) Re-architecting of the MightyMail platform to be technically
compatible with the Xoom.com technology infrastructure. The primary
compatibility issue will be the integration of Apache Web server technology
in place of the current Java Web Server from Sun Microsystems.
As of the date of the technology's valuation, we estimated that 50%
of the research and development effort had been completed at the date of
acquisition and expected the remaining research and development efforts
relating to the completion of the version 2.0 MightyMail technology would
require approximately six months of effort from the date of valuation through
its release date in the fourth quarter of 1999. We estimated that three
full-time engineers would be required to complete the in-process projects.
These projects included the use of one full-time engineer for six months to
work on the Apache Web server integration efforts, and two full-time
engineers for 6 months to work on the MightyMail/XoomMail integration
efforts. Accordingly, we have estimated that the total estimated research and
development costs to complete MightyMail version 2.0 are $170,000. We
anticipate completion of the project in the fourth quarter of 1999.
PARALOGIC SOFTWARE CORPORATION
In connection with the Paralogic Software Corporation acquisition,
we acquired Paralogic Software Corporation's product Anexa.com, a powerful
combination of Web site authoring and community building tools that allows
users to instantly create comprehensive Web sites including state-of-the-art
Java chat rooms, discussions and administrative features. Anexa.com provides
features including multi-media albums, discussion forums, events, chat, news
announcements, classified ads, guest books, membership databases and
community administration. In connection with this acquisition we also
obtained ParaChat Professional, chat software that is licensed to individuals
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and businesses. This software is hosted by a server and is supported by a
staff of engineers, both of which were acquired in conjunction with the
Paralogic Software Corporation acquisition. (This is in contrast to the
purchase of the ParaChat Personal Network, which we acquired in connection
with the purchase of Paralogic Corporation in March 1998. The ParaChat
Personal Network is hosted by Xoom.com, and is based on a free chat service
that Xoom.com members can download on to their Web pages).
At the time of acquisition, the current versions of Anexa.com and
ParaChat Professional were functional as commercially viable products.
However, these current versions do not represent the more robust,
feature-rich products that Paralogic Software Corporation envisioned and
intended to develop next twelve months from the acquisition date. The future
versions of these products would incorporate a number of significant
additional features including enhanced scalability as traffic is added, RDBMS
support, e-mail verification, improved directory services, search capability,
instant messaging, file sharing capability, home page publishing, additional
administration and management tools, calendar and address book capabilities,
polls, gift gallery, greeting cards, voice chat, and white board
functionality. The nature of the remaining estimated efforts necessary to
develop the acquired, incomplete next versions of Anexa.com and ParaChat
Professional into commercially viable products include:
(A) ANEXA.COM. These changes fall into the following categories: new
features (like Paralogic Instant Messenger, support for Uniplanet calendar
and support for MightyMail mail); feature enhancements and upgrades (like
Media Albums Plus to handle MP3 files, moderated message boards and improved
event notification); user interface enhancements: administration tools; and
fixing bugs.
(B) PARACHAT PROFESSIONAL. These changes fall into the following
categories: new features (like voice chat and HTML chat to extend the chat
experience); user interface enhancements; support for moderated events
(improve stage/audience metaphor, accept/deny audience questions, etc):
administration tools (like a filth filter and "Chat 911" to help manage
abusive behavior in chat rooms); support for internationalization; and fixing
bugs (improved registration process, etc).
As of the date of the technology's valuation, we estimated that 17% of
the research and development effort had been completed at the date of
acquisition and expected the remaining research and development efforts
relating to the completion of the new versions of Anexa.com and ParaChat
Professional technology would require approximately nine months of effort
from the date of valuation through its expected release date of March, 2000.
These projects include the use of eight engineers, spending 75% of their time
on the project, for nine months, to create the new versions of the products,
at an estimated total cost to complete of $576,000.
ACQUISITIONS DURING THE SIX-MONTH PERIOD ENDED JUNE 30, 1998
PARALOGIC CORPORATION
In connection with the Paralogic Corporation acquisition, we acquired
Paralogic Corporation's base of chat members, called the ParaChat Personal
Network, as well as the rights to use the underlying chat technology, called
ParaChat Personal. ParaChat Personal 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 Xoom.com'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, ParaChat Personal 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 Personal technology into a commercially viable product included:
As of the date of the technology's valuation, we estimated that 55% of
the research and development effort had been completed at the date of
acquisition and expected the remaining research and development efforts
relating to the completion of the ParaChat Personal technology would require
approximately six months of effort from the date
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of valuation through its release date of September 1, 1998. As of the date of
valuation, we expected the benefit of the acquired project to begin
immediately after the estimated completion date. We expected that the
in-process project would be developed to technological feasibility concurrent
with the September 1998 release date. We estimated that three full-time
engineers would be required to complete the in-process projects. These
projects included the use of 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 Personal in-process project were $112,500.
We completed the project by the scheduled date and the actual costs of
completion were not materially different than estimated.
REVOLUTIONARY SOFTWARE, INC.
The technology that we acquired from Revolutionary Software was a
Web-based e-mail technology known as SiteMail. This in-process Web-based
e-mail technology was designed to allow users to receive and send e-mail
through the Internet using a Web browser. Since the technology was Web-based,
it would allow for the integration of e-mail functionality into Web sites and
would be accessible by any Web-connected device anywhere in the world.
Furthermore, by integrating e-mail into a specific site, it would force 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, we estimated that approximately 50% of the
research and development effort had been completed and expected the remaining
research and development efforts relating to the completion of the SiteMail
technology to continue from the date of acquisition through the release date
of November 1998. The remaining development effort was estimated to require
approximately 4.5 months of engineering effort. We 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. We
completed the project by the scheduled date and the actual costs of
completion were not materially different than estimated.
AMORTIZATION OF DEFERRED COMPENSATION
We have recorded deferred stock compensation charges of $0 during the
three months ended June 30, 1999 and we recorded charges of $913,000 for the
same period ended June 30, 1998. We have recorded deferred stock compensation
charges of $0 during the six months ended June 30, 1999 and we recorded
charges of $972,000 for the same period ended June 30, 1998. The deferred
compensation charges account for the difference between the exercise price
and the deemed fair value of certain stock options we granted to our
employees. We cannot guarantee that we will not accrue additional charges,
which could have a material adverse effect on our business, results of
operations and financial condition.
Deferred compensation reflects the amortization of stock compensation
charges resulting from stock options and restricted stock purchase
agreements. We have recorded amortization of deferred compensation of
$175,000 during the three months ended June 30, 1999 and we recorded $728,000
during the same period ended June 30, 1998. We have recorded amortization of
deferred compensation of $405,000 during the six months ended June 30, 1999
and we have recorded $807,000 during the same period ended June 30, 1998.
AMORTIZATION OF INTANGIBLE ASSETS
Amortization of intangible assets totaled $1.4 million for the three
months ended June 30, 1999 and it was $346,000 for the same period ended June
30, 1998. Amortization of intangible assets totaled $2.3 million for the six
months ended June 30, 1999 and it totaled $346,000 for the same period ended
June 30, 1998. The additional amounts recorded in the periods ended June 30,
1999 represent amortization of intangible assets and goodwill resulting from
our acquisitions of Focused Presence, Inc., MightyMail Networks, Inc., Net
Floppy, Inc., and
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Paralogic Software Corporation, amortized over periods ranging from 36 to 48
months. The amounts recorded in the periods ended June 30, 1998, represent
amortization of intangible assets and goodwill resulting from our
acquisitions of Paralogic Corporation, Global Bridges Technologies, Inc., and
the purchase of certain assets of Revolutionary Software, Inc., amortized
over periods ranging from 24 to 42 months.
For the acquisitions in the periods ended June 30, 1999, we have
determined the appropriateness of the estimated useful lives related to the
intangible assets based on general and specific analysis. In general, the
Internet is characterized by rapid technological change, changes in users and
customer requirements and preferences, frequent new product and service
introductions and the emergence of new industry standards and practices.
The market for community-based direct selling channels on the Internet is
new and rapidly evolving, and competition for members, consumers, visitors
and advertisers is intense. In addition, we attract members to our Web site
with a variety of free services, including home pages, e-mail, chat rooms,
electronic newsletters, clip art and software libraries, online greeting
cards and page counters. In order to continue attracting members using these
various methods, the free services must be constantly updated and improved.
With respect to the purchased technology associated with the business and
technology acquisitions, we considered the effects of obsolescence, demand,
competition, and other economic factors. Due to the rapid technological
change involved in the Internet, we estimated that new technologies would
replace the intangible assets relating to the purchased technology within a
36 to 48 month period.
With respect to the goodwill associated with all of the acquisitions, we
considered the effects of obsolescence, demand, competition, other economic
factors and expected actions of competitors and others. Based on these
considerations, we determined the positive effect of the acquisitions, and
therefore the life of the goodwill, to be 24 to 48 months. See "Factors
Affecting Operating Results--If we are unable to integrate new technologies
and standards effectively, the results of our operations could be adversely
affected," "--Any increase in competition could adversely affect our ability
to maintain or improve our position in the market relative to that of our
competitors which could have a material adverse effect on our business and
results of operations" and "--If we are unable to successfully integrate
future acquisitions into our operation, then our business and results of
operations could be adversely affected."
OTHER INCOME, NET
Other income, net represents interest we earned on our cash and
investments, offset by interest expense we paid on our borrowings. We have
recorded approximately $2.4 million in interest income in the three months
ended June 30, 1999 and we recorded $2,000 in the same period ended June 30,
1998. We have recorded approximately $3.0 million in interest income in the
three months ended June 30, 1999 and we recorded $0 during the same period
ended June 30, 1998. This increase was primarily due to the increased cash
balances available to invest as a result of our initial public offering in
December 1998 and our secondary public offering in April 1999.
Interest expense represents interest charges related to notes payable
and capital leases. Interest expense recorded in the three months ended June
30, 1999 was approximately $35,000 and interest expense during the same
period ended June 30, 1998 was approximately $0. Interest expense recorded in
the six months ended June 30, 1999 was approximately $65,000 and interest
expense during the same period ended June 30, 1998 was approximately $0.
LIQUIDITY AND CAPITAL RESOURCES
Prior to our initial public offering, we financed our operations
primarily through the private placement of common stock. On December 9, 1998,
we completed our initial public offering of common stock, in which we issued
4,600,000 shares of common stock at a price of $14.00 per share. Proceeds
from the offering were approximately $57.3 million, net of offering costs. On
April 9, 1999, we completed a secondary public offering of our common stock
and issued 4,600,000 shares (including 600,000 shares issued in connection
with the exercise of the underwriter over-allotment option) at a price of
$66.00 per share. Of the 4,600,000 shares of common stock sold
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in the offering, 2,659,800 were sold by Xoom.com and 1,940,200 shares were
sold by existing stockholders. Proceeds from the follow-on offering were
approximately $167 million, net of offering costs.
As of June 30, 1999, we had cash and cash equivalents and marketable
securities of approximately $165.4 million. We regularly invest excess funds
in short-term money market funds, government securities and commercial paper.
Net cash used in operating activities for the six months ended June 30,
1999 was $5.7 million, and net cash provided by operating activities for the
six months ended June 30, 1998 was $313,000. Cash used in operating
activities in the period ended June 30, 1999 was primarily the result of net
losses ($10.1 million) and an increase in accounts receivable related to the
growth of advertising revenues ($1.5 million), partially offset by
amortization of intangible assets ($2.3 million) and in-process research and
development charges ($2.6 million) related to our acquisitions, amortization of
deferred compensation incurred in connection with the granting of options to
employees to purchase common stock ($405,000), and an increase in current
liabilities as a result of the growth of our business ($2.6 million). In the
six months ended June 30, 1998, cash provided by operating activities was
primarily the result of net losses ($3.3 million) which were offset by
charges to in-process research and development ($660,000), the amortization
of intangibles ($346,000), and the increase in intangible assets (1.6
million), all of which were related to the acquisitions of Paralogic
Corporation, Global Bridges Technologies, Inc., and certain assets of
Revolutionary Software, Inc.
Net cash used in investing activities for the six months ended June 30,
1999 was $158.9 million and it was $863,000 in the same period ended June 30,
1998. Cash used in investing activities during the six months ended June 30,
1999 was primarily related to the purchase of marketable securities for
$162.5 million. The cash used in investing activities in each period was also
related to purchases of fixed assets and net cash paid for business
acquisitions. From time to time, we expect to evaluate the acquisition of
products, businesses and technologies that complement our business. These
acquisitions may involve cash investments.
Net cash provided by financing activities for the six months ended June
30, 1999 was $167.5 million and it was $4.6 million for the same period ended
June 30, 1998. Cash provided by financing activities in the six months ended
June 30, 1999 was primarily related to proceeds from our secondary public
offering, partially offset by the repayment of notes payable. Cash provided
by financing activities in the six months ended June 30, 1998 was primarily
attributable to net proceeds from the issuance of common stock, partially
offset by the repayment of notes payable.
We believe that we have the financial resources needed to meet our
presently anticipated business requirements, including capital expenditure
and strategic operating programs, for at least the next 12 months.
Thereafter, if cash generated by operations is insufficient to satisfy our
liquidity requirements, we may need to sell additional equity or debt
securities or obtain additional credit facilities. The sale of additional
equity or convertible debt securities may result in additional dilution to
our stockholders. We may not be able to raise any such capital on terms
acceptable to us or at all.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. As a result,
software that records only the last two digits of the calendar year may not
be able to distinguish whether "00" means 1900 or 2000. This may result in
software failures or the creation of erroneous results.
We have conducted an internal review of software systems which we use
for site management, network monitoring, quality assurance, transaction
processing and fulfillment services. Because we developed these software
systems internally, beginning at inception in 1996 when the Year 2000 problem
already had some visibility, we were largely able to anticipate four digit
requirements. In conjunction with ongoing reviews of our own products and
services, we are also reviewing our computer infrastructure, including
network equipment and servers. We do
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not anticipate material problems with network equipment, as our current
configuration was installed within the last three years. Similarly, we
purchased most of our servers in 1997 and 1998. With this relatively current
equipment, we do not anticipate material Year 2000 compliance problems, and
we will replace any servers that cannot be updated either in the normal
replacement cycle or on an accelerated basis. We have also internally
standardized our personal computers on Windows NT 4.0, using reasonably
current service packs, which we are advised by our vendor are Year 2000
compliant. We use multiple software systems for internal business purposes,
including accounting, e-mail, development, human resources, customer service
and support and sales tracking systems. All of these applications have been
purchased within the last three years.
We have made inquiries of vendors of systems we believe to be mission
critical to our business regarding their Year 2000 readiness. Although we
have received various assurances, we have not received affirmative
documentation of Year 2000 compliance from any of these vendors and we have
not performed any operational tests on our internal systems. We generally do
not have contractual rights with third party providers should their equipment
or software fail due to Year 2000 issues. If this third party equipment or
software does not operate properly with regard to Year 2000, we may incur
unexpected expenses to remedy any problems. These expenses could potentially
include purchasing replacement hardware and software. We have not determined
the state of compliance of certain third-party suppliers of services such as
warehousing and fulfillment services, phone companies, long distance
carriers, financial institutions and electric companies, the failure of any
one of which could severely disrupt our ability to carry on our business.
We anticipate that our review of Year 2000 issues and any remediation
efforts will continue throughout calendar 1999. The costs incurred to date to
remediate our Year 2000 issues have not been material. If any Year 2000
issues are uncovered with respect to these systems or our other internal
systems, we believe that we will be able to resolve these problems without
material difficulty, as replacement systems are available on commercially
reasonable terms. We presently estimate that the total remaining cost of
addressing Year 2000 issues will not exceed $150,000. We derived these
estimates using a number of assumptions, including the assumption that we
have already identified our most significant Year 2000 issues. However, these
assumptions may not be accurate, and actual results could differ materially
from those anticipated. In view of our Year 2000 review and remediation
efforts to date, the recent development of our products and services, the
recent installation of our networking equipment and servers, and the limited
activities that remain to be completed, we do not consider contingency
planning to be necessary at this time.
Our applications operate in complex network environments and directly
and indirectly interact with a number of other hardware and software systems.
We are unable to predict to what extent our business may be affected if our
systems or the systems that operate in conjunction with them experience a
material Year 2000 failure. Known or unknown errors or defects that affect
the operation of our software and systems could result in delay or loss of
revenue, interruption of services, cancellation of contracts and memberships,
diversion of development resources, damage to our reputation, increased
service and warranty costs, and litigation costs, any of which could
adversely affect our business, financial condition and results of operations.
The most likely worst case scenario is that the Internet fails and we are
unable to offer any services on our community site or make any of our direct
e-commerce offerings.
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CERTAIN RISK FACTORS WHICH MAY IMPACT FUTURE OPERATING RESULTS
This report on Form 10-Q contains forward looking statements which
involve risks and uncertainties. Our actual results could differ materially
from those anticipated by such forward looking statements as a result of
certain factors, including those set forth below.
WE CANNOT ASSURE YOU THAT WE WILL BE PROFITABLE BECAUSE WE HAVE OPERATED OUR
BUSINESS ONLY FOR A SHORT PERIOD OF TIME
Xoom.com was founded in April 1996 and has a limited operating history.
An investor in our common stock must consider the risks and difficulties
frequently encountered by early stage companies in new and rapidly evolving
markets, particularly those involved in e-commerce and the Internet. These
risks include:
- - the level of use of the Internet and online services and consumer
acceptance of the Internet and other online services, particularly direct
e-mail marketing, for the purchase of consumer products such as those we
offer;
- - the lack of broad acceptance of the community model on the Internet;
- - our inability to generate significant e-commerce revenue or premium service
revenue from our members;
- - our inability to maintain and increase levels of traffic on the Xoom.com
Web site;
- - our failure to continue to develop and extend the Xoom.com brand;
- - our inability to attract or retain members;
- - our inability to meet minimum guaranteed impressions under advertising
agreements;
- - our failure to anticipate and adapt to a developing market;
- - our inability to upgrade and develop our systems and infrastructure and
attract new personnel in a timely and effective manner;
- - the failure of our server and networking systems to efficiently handle our
Web traffic; and
- - our inability to effectively manage rapidly expanding operations.
We cannot be certain that our business strategy will be successful or
that we will successfully address these risks.
As of June 30, 1999, we had an accumulated deficit of $24.8 million.
Although we have experienced growth in our net revenue, members, customers
and reach in recent periods, these growth rates are not sustainable and will
decrease in the future. To date, we have not been profitable on either a
quarterly or an annual basis, and we expect to incur net losses for the
foreseeable future. We expect our operating expenses to increase
significantly, especially in the areas of sales and marketing and brand
promotion, and, as a result, we will need to increase our revenue to become
profitable. If our revenue does not grow as expected or increases in our
expenses are not in line with forecasts, there could be a material adverse
effect on our business, results of operations and financial condition.
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THE UNPREDICTABILITY OF OUR QUARTER-TO-QUARTER RESULTS COULD CAUSE OUR STOCK
PRICE TO BE VOLATILE OR DECLINE
Our operating results have fluctuated in the past and will likely
continue to do so in the future. Some of the factors that could cause our
operating results to fluctuate are:
- - the level of demand for the services and products offered in our direct
e-mail marketing and our ability to meet the demand in a timely manner;
- - consumers' receptiveness to e-commerce and to direct e-mail marketing in
particular;
- - developments relating to advertising on the Web;
- - timely deployment and expansion of our network and network architectures;
- - new services offered by our competitors that affect the level of traffic on
our Web site and the continuing expansion of our membership base;
- - our ability to predict demand for products and services we offer and to
optimize inventory levels accordingly;
- - marketing costs that we will need to incur in order to maintain and enhance
the Xoom.com brand name;
- - the loss of key business relationships;
- - the mix of domestic and international sales;
- - the costs of acquiring technology or businesses and our ability to integrate
them into our operations; and
- - economic conditions generally, as well as those specific to the Internet and
related industries.
To respond to these and other factors, we may need to make business
decisions that could have a material adverse effect on our quarterly
operating results.
Our business fluctuates on a seasonal basis. Traffic on our site has
historically been lower during the summer and year-end vacation and holiday
periods when people tend to spend less time on the Internet. Advertising
revenue also varies with the seasons. Typically, advertisers spend less
during the first and third calendar quarters. Web-based commerce and
advertising are relatively new, which means that new trends may develop that
could affect the results of our operations.
As a relatively new company, it is difficult for us to plan or
anticipate our operating expenses based on our limited historical financial
data. If our actual revenue is lower than predicted, we may be unable to
adjust our operating expenses accordingly.
A substantial portion of our net revenue is from short-term advertising
contracts, usually one to two months in length. That means our quarterly net
revenue is a function of the contracts we enter into within the quarter and
our ability to adjust spending in light of any net revenue shortfalls. To
date, our advertising revenue comes from a small to medium group of customers
whose composition periodically changes. For example, during the six months
ended June 30, 1999, our five largest advertisers accounted for approximately
19% of our total advertising revenue. As a result, the cancellation of even a
small number of these advertising contracts could affect our operating
results. Advertising revenue is also linked to the level of traffic on our
Web site, so if traffic is less than the level expected by our advertising
customers, our revenue from this source could be affected. We have guaranteed
our advertisers a minimum number of impressions on our Web site. Reduced
traffic on our Web site would cause us to fall short in meeting this minimum
requirement and as a result we may give credits to our advertisers and reduce
advertising rates, which would lead to a reduction in our revenue from
advertising.
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The Internet has not been available for a sufficient period of time to
gauge its effectiveness as an advertising medium when compared with
traditional media. Notwithstanding, there is intense competition among
sellers of advertising space on the Web. This makes it difficult to project
pricing models or to anticipate whether we will be successful in selling
advertising space and relying on advertising as a substantial source of
revenue.
Due to the foregoing factors, we believe that period-to-period
comparisons of our operating results are not necessarily meaningful, you
should not view them as indicators of our future performance. If our
operating results in any period fall below the expectations of securities
analysts and investors, the market price of our shares would likely decline.
BECAUSE OUR BUSINESS MODEL IS UNPROVEN AND DEPENDS ON MAINTAINING AND
EXPANDING OUR MEMBERSHIP BASE, WE DO NOT KNOW WHETHER OUR BUSINESS MODEL WILL
ULTIMATELY BE VIABLE AND PROFITABLE
Our business model relies on using our community platform and membership
base to generate revenues from different sources. To be profitable, we will
need to provide goods and services that are attractive to our members,
advertisers and vendors. We have relied on member-generated content and the
"grassroots" voluntary promotional efforts of our members to develop and
maintain our profile as a community site. A decline in voluntary promotional
activities by our members or member-generated content could make our Web site
less attractive. We cannot be sure that Internet users will continue to be
interested in communities on the Web, or that direct e-mail marketing will
prove to be a profitable or effective method of selling goods and services.
Our future success also depends on the continued growth in the use of
the Internet and the Web. Use of the Internet for retail transactions is a
recent development and the continued demand and growth of a market for
services and products via the Internet is uncertain. For the six months ended
June 30, 1999, e-commerce was the source of approximately 54% of our total
net revenue. The Internet may ultimately prove not to be a viable commercial
marketplace for a number of reasons, including:
- unwillingness of consumers to shift their purchasing from traditional
retailers to online purchases;
- lack of acceptable security for data and concern for privacy of
personal information;
- limitations on access and ease of use;
- congestion leading to delayed or extended response times;
- inadequate development of Web infrastructure to keep pace with
increased levels of use;
- increased or excessive government regulation; and
- problems regarding intellectual property ownership.
Because of these factors, we do not know whether our business model will
ultimately be viable and profitable.
OUR INTERNATIONAL OPERATIONS ARE SUBJECT TO RISKS THAT COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS
We market and sell our products in the United States and
internationally. Approximately 16% of our net revenue during the first two
quarters of 1999 came from sales outside the United States. We plan to
establish additional operations or form business partnerships in other parts
of the world. The expansion of our existing international operations and
entry into additional international markets will require substantial
management attention and financial resources. We cannot be certain that our
investment in establishing operations in other
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countries will produce the desired levels of revenue. In addition,
international operations are subject to other inherent risks and problems,
including:
- the impact of recessions in economies outside the United States;
- greater difficulty in accounts receivable collections;
- unexpected changes in regulatory requirements;
- difficulties and costs of staffing and managing foreign operations;
- reduced protection for intellectual property rights in some countries;
- political and economic instability;
- the introduction of the euro;
- fluctuations in currency exchange rates; and
- difficulty in maintaining effective communications due to distance,
language and cultural barriers.
Some or all of the above factors could have a material adverse effect on
the results of our operations.
ANY FAILURE OF OUR NETWORK INFRASTRUCTURE COULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR RESULTS OF OPERATIONS
Our success depends upon the capacity, reliability and security of our
networking hardware and software infrastructure. We have 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, network monitoring, quality assurance,
transaction processing and fulfillment services. Currently, the system has
2.5 terabytes of unformatted disk space, supports over 14 million hits per
day, has a peak bandwidth of over 90 megabits per second and transfers about
1 terabyte of data each day.
We must continue to expand and adapt our system infrastructure to keep
pace with the increase in the number of our members who use the free services
we provide. Demands on our infrastructure that exceed our current forecasts
could result in technical difficulties with our Web site. Any system failure
that interferes with the access to our Web site and the use of the free
services we provide could diminish the level of traffic on our Web site.
Continuing or repeated system failures could impair our reputation and brand
name and reduce our commerce and advertising revenue. At present, we do not
know if we will be able to scale our systems to handle a larger amount of
traffic at higher transmission speeds. Expanding our network infrastructure
will require substantial financial, operational and management resources in
the remainder of 1999 and future periods, all of which could affect the
results of our operations.
We developed our systems for maintaining our Web site, processing
transactions and managing orders internally. If, in the future, we cannot
modify these systems to accommodate increased traffic and an increased volume
of transactions and orders, we could suffer slower response time, problems
with customer service and delays in reporting accurate financial information.
Any of these factors could significantly and adversely impact the results of
our operations.
We use network servers that are housed separately by application at
Exodus Communications, Inc. in Santa Clara, California and Frontier Global
Center in Sunnyvale, California. Our site is connected to the Internet via
multiple DS-3 and OC-3 links on a 24 hour-a-day, seven days per week basis by
Exodus and Frontier Global Center. Exodus and Frontier Global Center also
provide and manage power and environmentals for our networking
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and server equipment. We manage and monitor our servers and network remotely
from our headquarters in San Francisco, California. We strive to rapidly
develop and deploy high-quality tools and features into our system without
interruption or degradation in service.
Although the agreements we have with our hosting companies give us
remedies for service interruptions, we cannot guarantee that:
- we will have uninterrupted access to the Internet;
- our members will be able to reach our Web site; or
- communications via our Web site will be secure.
Any disruption in the Internet access provided by Exodus or Frontier
Global Center, or any interruption in the service that Exodus or Frontier
Global Center receives from other providers, or any failure of Exodus or
Frontier Global Center to handle higher volumes of Internet users to the
Xoom.com site could have a material adverse effect on our business, results
of operations and financial condition.
Despite precautions taken by us and by the companies that host our Web
site, our system is susceptible to natural and man-made disasters such as
earthquakes, fires, floods, power loss and sabotage. Our system is also
vulnerable to disruptions from computer viruses and attempts by hackers to
penetrate our network security. Hackers have succeeded in penetrating our
network security in the past, and we expect such attempts to continue from
time to time.
We are covered for loss of income from some of the events listed above
by a $1.0 million insurance policy, but this insurance may not be adequate to
cover all instances of system failure. We have insurance coverage of $1.25
million against loss of income due to earthquakes, but this amount may be
insufficient, especially given the frequency of earthquakes in Northern
California.
Any of the events listed above could cause us interference, delays, or
service interruptions and adversely affect our business and results of
operations.
BREACHES OF OUR NETWORK SECURITY COULD ALSO DISRUPT THE OPERATION OF OUR WEB
SITE AND JEOPARDIZE THE SECURITY OF CONFIDENTIAL INFORMATION STORED IN OUR
SERVERS
Our system is also vulnerable to disruptions from computer viruses and
attempts by hackers to penetrate our network security. Hackers have succeeded
in penetrating our network security in the past, and we expect such attempts
to continue from time to time. We may need to devote substantial capital and
resources to protect against the threat of unauthorized penetration of our
network security. Breaches of our network security could also disrupt the
operation of our Web site and jeopardize the security of confidential
information stored in our servers. The occurrence of any of the events listed
above could cause us to lose members and also expose us to liability and
result in litigation, all of which could have an adverse effect on our
operations.
WE DEPEND ON OUR VENDORS AND SUPPLIERS
We rely on other companies for critical aspects of our business. Banta
Corporation is primarily responsible for fulfilling orders for products and
services sold via our Web site and in response to direct e-mail marketing.
Substantially all of our revenue from e-commerce comes from these sales. We
do not have a written agreement with Banta. If our relationship with Banta
were to terminate without sufficient advance notice, our operations would be
negatively affected, even if we were able to establish a relationship with a
comparable vendor to fulfill orders. An unanticipated termination of our
relationship with Banta would be particularly damaging during the fourth
calendar quarter, in which a high percentage of our annual sales are made. We
would also be affected by problems
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experienced by Banta, such as insufficient capacity and damage from human
error, sabotage, fire, flood, power loss and other similar man-made or
natural disasters. The success of our specific e-mail direct e-commerce
campaigns depends on the timely supply of inventory by the manufacturers and
suppliers of the products we offer for sale to our members. In particular, we
rely on Logic General, Inc. for all of our CD-ROM products, DVDs and DVD-ROMs
that contain software, clip art and classic movies. The failure of Logic
General or other suppliers on whom we depend would adversely affect the
results of our operations.
IMPOSITION OF NEW TAXES OR FEES BY THE FEDERAL GOVERNMENT OF THE UNITED
STATES OR BY FOREIGN GOVERNMENTS ON INTERNET TRANSACTIONS OR ON THE USE OF
THE INTERNET AS A MEANS OF COMMUNICATION COULD ALSO ADVERSELY AFFECT US
We do not currently collect sales or similar taxes for goods that we
ship into states other than California and New York. Imposition of sales or
other similar taxes on our sales of merchandise by states or countries where
we ship goods could have a material adverse effect on our results of
operations. Imposition of new taxes or fees by the Federal government of the
United States or by foreign governments on Internet transactions or on the
use of the Internet as a means of communication could also adversely affect
us.
DIFFICULTIES WE MAY ENCOUNTER DEALING WITH OUR GROWTH AND EXPANSION COULD
ADVERSELY AFFECT THE RESULTS OF OUR OPERATIONS
Our rapid rate of growth places a significant strain on our resources
due to:
- the need to manage relationships with various strategic partners,
technology licensors, members, advertisers, and other third parties;
- difficulties in hiring and retaining skilled personnel necessary to
support our business;
- the need to train and manage our growing employee base; and
- pressures for the continued development of our financial and
information management systems.
Difficulties we may encounter dealing successfully with the above risks
relating to our rapid growth could adversely affect the results of our
operations.
THE LOSS OF KEY PERSONNEL, OR THE INABILITY TO ATTRACT AND RETAIN ADDITIONAL,
QUALIFIED PERSONNEL, COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF
OPERATIONS
Our success depends to a significant degree upon the continued
contributions of our executive management team, most of whom have worked
together only for a short time. We do not carry key man life insurance on the
lives of any of our employees, including senior management. Our success will
also depend upon the continued service of our senior management team as well
as technical, marketing and sales personnel. Competition for qualified
employees is intense. Our employees may voluntarily terminate their
employment with us at any time. Our success also depends upon our ability to
attract and retain additional highly qualified management, technical, sales
and marketing and customer support personnel. Locating personnel with the
combination of skills and attributes required to carry out our strategy is
often a lengthy process. The loss of key personnel, or the inability to
attract and retain additional, qualified personnel, could have a material
adverse effect on our results of operations.
THE RESULTS OF OUR OPERATIONS COULD BE ADVERSELY AFFECTED IF OUR INVESTMENT
OF FINANCIAL AND OTHER RESOURCES IN PROMOTING OUR BRAND DOES NOT GENERATE A
CORRESPONDING INCREASE IN NET REVENUE, OR IF THE EXPENSE OF PROMOTING OUR
BRAND NAME BECOMES EXCESSIVE
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As the number of Internet sites grow, brand recognition will play an
increasingly important role. Establishing and promoting the Xoom.com brand in
the face of pressures from our competitors will be critical to developing our
member base and strategic and commercial relationships. We will be required
to continue to devote substantial financial and other resources to
maintaining the distinctiveness of our brand to our members, advertisers and
commerce partners through:
- Web advertising and marketing;
- traditional media advertising campaigns in print, radio, billboards
and television; and
- providing a high quality community experience.
The results of our operations could be adversely affected if our
investment of financial and other resources in promoting our brand does not
generate a corresponding increase in net revenue, or if the expense of
promoting our brand name becomes excessive. Changes in the quality and type
of services we offer and the character of our company as perceived by our
members could make our Web site less attractive to our members, advertisers,
and strategic partners, all of which would have a material adverse effect on
the results of our operations.
IF WE ARE UNABLE TO INTEGRATE NEW TECHNOLOGIES AND STANDARDS EFFECTIVELY, THE
RESULTS OF OUR OPERATIONS COULD BE ADVERSELY AFFECTED
Our ability to remain competitive in our area of business will depend,
in part, on our ability to:
- enhance and improve the responsiveness, functionality and features of
our Web site;
- continue to develop our technical expertise;
- develop and introduce new services and technology to meet changing
customer needs and preferences;
- influence and respond to emerging industry standards and other
technological changes in a timely and cost effective manner; and
- license leading technologies useful in our business.
We cannot assure you that we will be successful in responding to the
above technological and industry challenges in a timely and cost-effective
way. If we are unable to integrate new technologies and standards
effectively, there could be an adverse effect on our results of our
operations.
PRIVACY CONCERNS, GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES COULD HAVE AN
ADVERSE EFFECT ON OUR BUSINESS AND RESULTS OF OPERATIONS
Laws and regulations that apply directly to communications or commerce
over the Internet are becoming more prevalent. The most recent session of the
United States Congress resulted in Internet laws regarding children's
privacy, copyrights, taxation and the transmission of sexually explicit
material. The European Union recently enacted its own privacy regulations.
The law of the Internet, however, remains largely unsettled, even in areas
where there has been some legislative action. It may take years to determine
whether and how existing laws that govern intellectual property, privacy,
libel and taxation apply to the Internet. The development of laws governing
these areas may decrease the growth in the use of the Internet, which could
adversely impact our business. In addition, the growth and development of the
e-commerce market may prompt calls for more stringent consumer protection
laws, both in the United States and abroad, that may impose additional
burdens on companies conducting business online. The adoption or modification
of laws or regulations relating to the Internet could adversely affect our
business.
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The Federal Communications Commission ("FCC") is currently reviewing its
regulatory positions on data transmissions over telecommunications networks
and could seek to impose some form of telecommunications carrier regulation
on telecommunications functions of information services. State public utility
commissions generally have declined to regulate information services,
although the public service commissions of some states continue to review
potential regulation of such services. Future regulation or regulatory
changes could have an adverse effect on our business and results of
operations.
OUR FAILURE TO ATTRACT ADVERTISING REVENUE IN QUANTITIES AND AT RATES THAT
ARE SATISFACTORY TO US COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS,
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
We have derived a material portion of our net revenue to date from the
sale of advertisements, including banner advertising revenue. For the six
months ended June 30, 1999, advertising revenue represented approximately 45%
of our total net revenue. During the same period, our five largest
advertising customers accounted for approximately 19% of advertising revenue
(approximately 9% of total net revenue). We intend to continue to rely on
advertising as a significant source of revenue.
It is uncertain whether Web advertising will continue to grow at a rate
that will support expansion in our net revenue. 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 our
suppliers and advertisers have only limited experience with the Web as a
sales and advertising medium. 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.
It is also possible that in the future certain Internet access providers
will act to block or limit the use of e-mail direct e-commerce solicitations,
whether at their own behest or at the request of users. Members may also
choose not to receive our e-mail offerings or may fail to respond to such
offerings. Moreover, "filter" software programs that limit or remove
advertising from a Web user's desktop are available. If these programs become
popular, there could be a material adverse effect upon the viability of
advertising on the Web and on our business, results of operations and
financial condition.
ANY INCREASE IN COMPETITION COULD ADVERSELY AFFECT OUR ABILITY TO MAINTAIN OR
IMPROVE OUR POSITION IN THE MARKET RELATIVE TO THAT OF OUR COMPETITORS, WHICH
COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND RESULTS OF OPERATIONS
The market for community-based direct selling channels on the Internet
is new and rapidly evolving. Competition for members, consumers, visitors and
advertisers is intense and is expected to increase over time. Barriers to
entry are relatively low. Other companies that are primarily focused on
creating Web-based communities on the Internet and with whom we compete are
Tripod and WhoWhere, subsidiaries of Lycos, GeoCities, recently acquired by
Yahoo!, and theglobe.com. We also face competition and compete for visitors
and traffic with Web directories, search engines, shareware archives, content
sites, online service providers, and traditional media companies such as ABC,
America Online, CBS, CNET, Excite, Infoseek, Lycos, NBC, Netscape, Microsoft,
Time Warner and Yahoo!.
We also expect intense competition in the e-commerce market from an ever
increasing number of companies selling goods and services over the Internet,
particularly goods and services that relate to the use of computers. These
competitors include:
- traditional computer retailers including CompUSA and Micro
Electronics's MicroCenter;
- various mail-order retailers including CDW Computer Centers, Micro
Warehouse, Insight Enterprises, Inc., PC Connection, Inc. and Creative
Computers;
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- internet-focused retailers including Amazon.com, Egghead's Egghead.com,
software.net, and New England Circuit Sales' NECX Direct;
- manufacturers that sell directly over the Internet including Dell
Computer, Gateway 2000, Apple Computer and many software companies;
- a number of online service providers including America Online and the
Microsoft Network that offer computer products directly or in
partnership with other retailers;
- some non-computer retailers such as Wal-Mart Stores that sell a limited
selection of computer products in their stores; and
- computer products distributors that may develop direct sales channels
to the consumer market.
Increased competition from these and other sources could require us to
respond to competitive pressures by establishing pricing, marketing and other
programs or seeking out additional strategic alliances or acquisitions that
may be less favorable to us than we could otherwise establish or obtain, and
thus could have a material adverse effect on our business, prospects,
financial condition and results of operations.
Many of our competitors have longer operating histories in the Web
market, greater name recognition, larger customer bases and significantly
greater financial, technical and marketing resources. In addition,
substantially all of our current advertising customers and strategic partners
also have established collaborative relationships with some of our
competitors or other high-traffic Web sites. Our advertising customers might
also conclude that other Internet businesses, such as search engines,
commercial online services and sites that offer professional editorial
content, are more effective sites for advertising. Moreover, we may be unable
to maintain the high level of traffic on our Web site or our member base,
which would make our site less attractive than those of our competitors. Any
of these factors could adversely affect our ability to maintain or improve
our position in the market relative to that of our competitors.
OUR INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS COULD HAVE A
MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND FINANCIAL CONDITION
We view our technology as proprietary and try to protect it under
existing United States and international laws relating to protection of
intellectual property. We have also developed internal procedures to control
access and dissemination of our proprietary information. Despite our
precautions, third parties may succeed in misappropriating our intellectual
property or independently developing similar intellectual property.
Protecting our intellectual property against infringement could result in
substantial legal and other costs and could divert our limited management
resources and attention. This could adversely impact our business and the
results of our operations.
Some of the technology incorporated in our Web site is based on
technology licensed from third parties. As we continue to introduce new
services, we may need to license additional technology. If we are unable to
timely license needed technology on commercially reasonable terms, we could
experience delays and reductions in the quality of our services, all of which
could adversely affect our business and results of operations. Our reputation
and the value of our proprietary information could also be adversely affected
by actions of third parties to whom we license our proprietary information
and intellectual property. If someone asserts a claim relating to proprietary
technology or information against us, we may seek licenses to such
intellectual property. We cannot assure you, however, that we could obtain
licenses on commercially reasonable terms, if at all. The failure to obtain
the necessary licenses or other rights could have a material adverse effect
on our business and results of operations.
Although we do not believe we infringe the proprietary rights of any
third parties, we cannot assure you that third parties will not assert claims
against us in the future. From time to time, we have been subject to claims
of alleged infringement of intellectual property rights of others on the
basis of our actions and the content generated by
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our members. These categories of claims, whether or not meritorious, could
result in litigation and become a drain on our management and financial
resources. If successful, claims of this nature could subject us to
liability, injunctive relief restricting our use of intellectual property
important to our operations, and could ultimately cause us to lose rights to
some of our intellectual property. Any of these events could have a material
adverse effect on our business and results of operations.
WE COULD BE SUBJECT TO LIABILITY FOR ONLINE CONTENT THAT MAY NOT BE COVERED
BY OUR INSURANCE
The nature and breadth of information disseminated on our Web site and
through the sites of our members could expose us to liability in various
areas, including claims relating to:
- product information and reviews we offer;
- the content and publication of various materials based on defamation,
libel, negligence, personal injury and other legal theories;
- copyright or trademark infringement and wrongful action due to the
actions of third parties;
- use of third party content made available through our Web site or
through content and material posted by members on their home pages or
in chat rooms and bulletin boards; and
- damages arising from the use or misuse of the free e-mail services we
offer.
Claims of these kinds against us would result in our incurring
substantial costs and would also be a drain on our financial and other
resources. If there were a sufficient number or severity of claims of this
nature, we would need to implement measures to reduce our exposure and
potential liability. In addition to being a drain on our resources, this may
also require taking measure that could make our services less attractive to
our members and visitors. This in turn could reduce traffic on our Web site,
negatively impact our member base, and reduce our revenue from e-commerce and
advertising. We carry general liability insurance in the aggregate amount of
$2.0 million and umbrella coverage in an aggregate amount of $5.0 million.
This coverage may be insufficient to cover expenses and losses arising in
connection with any claims against us. To the extent our insurance coverage
does not cover liability or expenses we incur, our business and results of
operations would be adversely affected.
WE COULD FACE LIABILITY FROM LEGAL PROCEEDINGS THAT COULD ADVERSELY AFFECT
OUR BUSINESS AND RESULTS OF OPERATIONS
We are litigating a dispute with Imageline, Inc., which claims to own
the copyright in certain clip art images licensed to us by Sprint Software
Pty Ltd, an unrelated third party. Some of the disputed images were included
in versions of our Web Clip Empire CD-ROM product licensed by us to third
parties, including other software clip publishers. The images licensed from
Sprint Software generated less than 1.0% of our total net revenue in 1998,
and since September 30, 1998, we have not received any net revenue for images
licensed from Sprint Software.
To resolve this matter, we filed a lawsuit against Imageline in August
1998 in the United States District Court for the Eastern District of
Virginia. We asked for a declaration with respect to Imageline's allegations
of copyright infringement regarding the clip art images. In September 1998
Imageline filed a counterclaim, which they amended in January 1999, seeking
up to $60 million in damages. In March 1999, the parties completed the
discovery process and filed separate motions for partial summary judgment. On
April 5, 1999, the court granted one of our motions for partial summary
judgment and stayed the case to allow Imageline to file all necessary
copyright registration applications to cover the clip art images.
We believe that the claims asserted in Imageline's counterclaim are
without merit and continue to defend against them vigorously. As part of the
lawsuit, we are seeking to enforce our right to indemnification under our
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license agreement with Sprint Software for any damages that may be imposed on
us, although we do not know whether Sprint Software will be able to fulfill
its indemnity obligations. Depending on the outcome of the litigation, we may
also need to indemnify third parties for damages in connection with the use
of the Imageline images. An unfavorable outcome in this litigation could
adversely affect our business and results of operations.
Zoom Telephonics, Inc. filed a lawsuit against us in September 1998 in
the United States District Court for the District of Massachusetts alleging
trademark infringement and related statutory violations. We were not served
with Zoom Telephonics' complaint until January 1999. Zoom Telephonics has
demanded that we stop using the XOOM trademark and has asked for an
unspecified amount of money damages. We responded to the complaint in
February 1999. In April 1999, Zoom Telephonics filed a motion for preliminary
injunction to stop us from using any mark containing "Xoom." In June 1999, we
filed an opposition to oppose Zoom Telephonics' motion for preliminary
injunction and filed a motion to suspend all proceedings in this matter until
September 30, 1999. We believe that the claims asserted by Zoom Telephonics
are without merit and intend to defend against them vigorously. We cannot
assure you, however, that the results of this litigation will be favorable to
us. An adverse result of the litigation could have a material adverse effect
on our business and results of operations, particularly if the litigation
forces us to make substantial changes to our name and trademark usage. Any
name change could result in confusion to consumers and investors, which could
adversely affect the results of our operations and the market price of our
common stock.
IF WE ARE UNABLE TO SUCCESSFULLY INTEGRATE FUTURE ACQUISITIONS INTO OUR
OPERATION, THERE COULD BE AN ADVERSE EFFECT ON OUR BUSINESS AND RESULTS OF
OPERATIONS
Acquiring complementary businesses, products and technologies is an
integral part of our business strategy. Some of the risks attendant to this
acquisition strategy are:
- difficulties and expenses of integrating the operations and personnel
of acquired companies into our operations while preserving the
goodwill of the acquired entity;
- the additional financial resources that may be needed to fund the
operations of acquired companies;
- the potential disruption of our business;
- our management's ability to maximize our financial and strategic
position by incorporating acquired technology or businesses;
- the difficulty of maintaining uniform standards, controls, procedures
and policies;
- the potential loss of key employees of acquired companies;
- the impairment of relationships with employees and customers as a
result of changes in management; and
- increasing competition with other entities for desirable acquisition
targets.
Any of the above risks could prevent us from realizing significant
benefits from our acquisitions. In addition, the issuance of our common stock
in acquisitions will dilute our stockholder interests in our company, while
the use of cash will deplete our cash reserves. Finally, if we are unable to
account for our acquisitions under the "pooling of interests" method of
accounting, we may incur significant, one-time write-offs and amortization
charges. These write-offs and charges could decrease our future earnings or
increase our future losses. Due to all of the foregoing, implementing our
acquisition strategy may have a material adverse effect on our business and
results of operations.
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IF OUR CAPITAL IS INSUFFICIENT TO PROMOTE OUR BUSINESS, AND IF WE CANNOT
OBTAIN NEEDED FINANCING, WE WILL BE UNABLE TO PROMOTE OUR BRAND NAME, EXPLOIT
ACQUISITION OPPORTUNITIES AND OTHERWISE MAINTAIN OUR POSITION RELATIVE TO
THAT OF OUR COMPETITORS
We believe that the proceeds from our initial public offering and our
secondary offering in April 1999, will be sufficient to support our
operations for the next 12 months. Notwithstanding, we may need to raise
additional funds to maintain and develop our position in the marketplace. It
may be difficult or impossible for us to obtain financing on favorable terms.
Raising funds by issuing equity securities or convertible debt securities
will dilute the percentage ownership of our current stockholders. Also, new
securities we may issue may have rights senior to the rights of our common
stock. If we cannot obtain needed financing, we will be unable to promote our
brand name, exploit acquisition opportunities and otherwise maintain our
position relative to that of our competitors.
IF IMPORTANT STRATEGIC RELATIONSHIPS ARE DISCONTINUED FOR ANY REASON, THERE
WOULD BE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND FINANCIAL CONDITION
Although our strategic relationships are a key factor in our overall
business strategy, our strategic partners may not view their relationships
with us as significant to their own business. There is a risk that parties
with whom we have strategic alliance agreements may not perform their
obligations as agreed. Our arrangements with strategic partners generally do
not establish minimum performance requirements but instead rely on the
voluntary efforts of our partners. In addition, most of our agreements with
strategic partners may be terminated by either party with little notice. If
important strategic relationships are discontinued for any reason, our
business and results of operations may be adversely affected.
YEAR 2000 ISSUES COULD NEGATIVELY AFFECT OUR BUSINESS
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. As a result,
software that records only the last two digits of the calendar year may not
be able to distinguish whether "00" means 1900 or 2000. This may result in
software failures or the creation of erroneous results.
We have conducted an internal review of software systems which we use
for site management, network monitoring, quality assurance, transaction
processing and fulfillment services. Because we developed these software
systems internally, beginning at inception in 1996 when the Year 2000 problem
already had some visibility, we were largely able to anticipate four digit
requirements. In conjunction with ongoing reviews of our own products and
services, we are also reviewing our computer infrastructure, including
network equipment and servers. We do not anticipate material problems with
network equipment, as our current configuration was installed within the last
three years. Similarly, we purchased most of our servers in 1997 and 1998.
With this relatively current equipment, we do not anticipate material Year
2000 compliance problems, and we will replace any servers that we cannot
update either in the normal replacement cycle or on an accelerated basis. We
have also internally standardized our personal computers on Windows NT 4.0,
using reasonably current service packs, which we are advised by our vendor
are Year 2000 compliant. We use multiple software systems for internal
business purposes, including accounting, e-mail, development, human
resources, customer service and support and sales tracking systems. All of
these applications have been purchased within the last three years.
We have made inquiries of vendors of systems we believe to be mission
critical to our business regarding their Year 2000 readiness. Although we
have received various assurances, we have not received affirmative
documentation of Year 2000 compliance from any of these vendors and we have
not performed any operational tests on our internal systems. We generally do
not have contractual rights with third party providers should their equipment
or software fail due to Year 2000 issues. If this third party equipment or
software does not operate properly with regard to Year 2000, we may incur
unexpected expenses to remedy any problems. These expenses could potentially
include purchasing replacement hardware and software. We have not determined
the state of compliance of certain third-party suppliers of services such as
warehousing and fulfillment services, phone
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companies, long distance carriers, financial institutions and electric
companies, the failure of any one of which could severely disrupt our ability
to carry on our business.
We anticipate that our review of Year 2000 issues and any remediation
efforts will continue throughout calendar 1999. The costs incurred to date to
remediate our Year 2000 issues have not been material. If any Year 2000
issues are uncovered with respect to these systems or our other internal
systems, we believe that we will be able to resolve these problems without
material difficulty, as replacement systems are available on commercially
reasonable terms. We presently estimate that the total remaining cost of
addressing Year 2000 issues will not exceed $150,000. We derived these
estimates using a number of assumptions, including the assumption that we
have already identified our most significant Year 2000 issues. However, these
assumptions may not be accurate, and actual results could differ materially
from those anticipated. In view of our Year 2000 review and remediation
efforts to date, the recent development of our products and services, the
recent installation of our networking equipment and servers, and the limited
activities that remain to be completed, we do not consider contingency
planning to be necessary at this time.
Our applications operate in complex network environments and directly
and indirectly interact with a number of other hardware and software systems.
We are unable to predict to what extent our business may be affected if our
systems or the systems that operate in conjunction with it experience a
material Year 2000 failure. Known or unknown errors or defects that affect
the operation of our software and systems could result in delay or loss of
revenue, interruption of services, cancellation of contracts and memberships,
diversion of development resources, damage to our reputation, increased
service and warranty costs, and litigation costs, any of which could
adversely affect our business, financial condition and results of operations.
The most likely worst case scenario is that the Internet fails and we are
unable to offer any services on our community site or make any of our direct
e-commerce offerings.
OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE
The trading price of our common stock has been and is likely to be
highly volatile. Our stock price could be subject to wide fluctuations in
response to a variety of factors, including:
- actual or anticipated variations in quarterly operating results;
- announcements of technological innovations;
- new products or services offered by us or our competitors;
- changes in financial estimates by securities analysts;
- conditions or trends in the e-commerce market;
- our announcement of significant acquisitions, strategic partnerships,
joint ventures or capital commitments;
- additions or departures of key personnel;
- sales of common stock; and
- other events or factors that may be beyond our control.
In addition, the Nasdaq National Market, where most publicly held
Internet companies are traded, has recently experienced extreme price and
volume fluctuations. These fluctuations often have been unrelated or
disproportionate to the operating performance of these companies. Many
Internet companies' stocks are trading at multiples which are substantially
above historical levels.
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These trading prices and multiples may not be sustainable. These broad market
and industry factors may materially adversely affect the market price of our
common stock, regardless of our actual operating performance. In the past,
following periods of volatility in the market price of a company's
securities, securities class action litigation often has been instituted
against that company. Litigation like this, if instituted, could result in
substantial costs and a diversion of management's attention and resources.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are litigating a dispute with Imageline, Inc., which claims to own
the copyright in certain clip art images licensed to us by Sprint Software
Pty Ltd, an unrelated third party. Some of the disputed images were included
in versions of our Web Clip Empire CD-ROM product licensed by us to third
parties, including other software clip publishers. The images licensed from
Sprint Software generated less than 1.0% of our total net revenue in 1998,
and since September 30, 1998, we have not received any net revenue for images
licensed from Sprint Software.
To resolve this matter, we filed a lawsuit against Imageline in August
1998 in the United States District Court for the Eastern District of
Virginia. We asked for a declaration with respect to Imageline's allegations
of copyright infringement regarding the clip art images. In September 1998
Imageline filed a counterclaim, which they amended in January 1999, seeking
up to $60 million in damages. In March 1999, the parties completed the
discovery process and filed separate motions for partial summary judgment. On
April 5, 1999, the court granted one of our motions for partial summary
judgment and stayed the case to allow Imageline to file all necessary
copyright registration applications to cover the clip art images.
We believe that the claims asserted in Imageline's counterclaim are
without merit and continue to defend against them vigorously. As part of the
lawsuit, we are seeking to enforce our right to indemnification under our
license agreement with Sprint Software for any damages that may be imposed on
us, although we do not know whether Sprint Software will be able to fulfill
its indemnity obligations. Depending on the outcome of the litigation, we may
also need to indemnify third parties for damages in connection with the use
of the Imageline images. An unfavorable outcome in this litigation could
adversely affect our business and results of operations.
Zoom Telephonics, Inc. filed a lawsuit against us in September 1998 in
the United States District Court for the District of Massachusetts alleging
trademark infringement and related statutory violations. We were not served
with Zoom Telephonics' complaint until January 1999. Zoom Telephonics has
demanded that we stop using the XOOM trademark and has asked for an
unspecified amount of money damages. We responded to the complaint in
February 1999. In April 1999, Zoom Telephonics filed a motion for preliminary
injunction and request for oral argument to stop us from using any mark which
contains "Xoom." In June 1999, we filed an opposition to Zoom Telephonics'
motion for preliminary injunction and filed a motion to suspend all
proceedings until September, 30, 1999. We believe that the claims asserted by
Zoom Telephonics are without merit and intend to defend against them
vigorously. We cannot assure you, however, that the results of this
litigation will be favorable to us. An adverse result of the litigation could
have a material adverse effect on our business and results of operations,
particularly if the litigation forces us to make substantial changes to our
name and trademark usage. Any name change could result in confusion to
consumers and investors, which could adversely affect the results of our
operations and the market price of our common stock.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
USE OF PROCEEDS FROM SALES OF REGISTERED SECURITIES. We commenced our
secondary public offering on April 9, 1999 pursuant to a Registration
Statement on Form S-1 (File No. 333-74441) effective on April 19, 1999. The
managing underwriter of the offering was Bear, Stearns & Co., Inc. In the
secondary offering we sold an aggregate of 4,600,000 shares of our common
stock (including 600,000 shares sold pursuant to the exercise of the
Underwriters' over-allotment option) at a price of $66 per share. Of the
4,600,000 shares of common stock sold in the offering, 2,659,800 were sold by
Xoom.com and 1,940,200 shares were sold by existing stockholders. The sale of
the 2,659,800 shares of common stock generated aggregate gross proceeds of
$175,547,000. We received net proceeds from the offering of approximately
$166,600,000, after deducting underwriting discounts and commissions of
$7,900,000 and our expenses of the offering of approximately $1,050,000.
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In our initial public offering on December 9, 1998, we sold an aggregate
of 4,600,000 shares of our common stock (including 600,000 shares sold
pursuant to the exercise of the Underwriters' over-allotment option) at an
initial price of $14 per share. The sale of these 4,600,000 shares of Common
Stock generated aggregate gross proceeds of $64,400,000. We received net
proceeds from the offering of approximately $57,342,000, after deducting
underwriting discounts and commissions of $4,508,000 and our expenses of the
offering of approximately $2,550,000.
Through June 30, 1999 we used a portion of the proceeds from our public
offerings as follows: (i) $8.7 million of net cash used for general corporate
purposes, including working capital and capital expenditures; (ii) $2.7
million of cash used for the repayment of notes payable issued in connection
with the execution of a loan agreement, the acquisition of Pagecount, Inc.,
the acquisition of Global Bridges Technologies, Inc., the purchase of certain
assets of Revolutionary Software, Inc., and the license of certain technology
from ArcaMax, Inc.; (iii) $975,000 of net cash used in connection with the
acquisitions of Focused Presence, Inc., MightyMail Networks, Inc., Net
Floppy, Inc., and Paralogic Software Corporation; and (iv) $268,000 of cash
used for the repayment of capital lease obligations and other notes payable.
The remaining $211.3 million of the net proceeds shall be used for general
corporate purposes, including working capital, capital expenditures,
expanding operations internationally, potential acquisitions and promotional
campaigns. The amounts actually expended by us for such purposes may vary
significantly and will depend on a number of factors, including our future
revenue and cash generated by operations and the other factors described
under "Certain Risk Factors Which May Impact Future Operating Results."
Accordingly, our management retains broad discretion in the allocation of the
net proceeds of the offerings. 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, we evaluate potential
acquisitions of such businesses, technologies and product offerings.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKETABLE SECURITIES. We had marketable securities of $108.0 million as
of June 30, 1999. These marketable securities consist of highly liquid
investments with original maturities at the date of purchase of between three
and twelve months. We had long-term investments of $48.6 million as of June
30, 1999. These long-term investments consist of investments with original
maturities as of the date of purchase of more than twelve months. These
investments are subject to interest rate risk and will fall in value if
market interest rates increase. A hypothetical increase in market interest
rates by 10 percent from levels as of June 30, 1999 would cause the fair
value of these investments to decline by an immaterial amount. Because we are
not required to sell these investments before maturity, we have the ability
to avoid realizing losses on these investments due to a sudden change in
market interest rates. However, we could choose to sell these investments
before maturity at a loss. Declines in interest rates over time will,
however, reduce our interest income.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 26, 1999, the Company held its Annual Meeting of Shareholders. At
the meeting, the shareholders elected as directors Chris Kitze (with
11,733,597 affirmative votes and 8,540 votes withheld), Laurent Massa (with
11,733,556 affirmative votes and 8,581 votes withheld), Bob Ellis (with
11,733,357 affirmative votes and 8,780 votes withheld), Jamesh Heffernan
(with 11,713,167 affirmative votes and 28,970 votes withheld), Jeffrey
Ballowe (with 11,733,506 affirmative votes and 8,631 votes withheld), Philip
Schlein (with 11,733,271 affirmative votes and 8,866 votes withheld) and
Robert C. Harris, Jr. (with 11,733,296 affirmative votes and 8,841 votes
withheld).
The shareholders also approved an amendment to the 1998 Stock Incentive
Plan increasing the number of shares of the Company's Common Stock reserved
for issuance thereunder by 3,000,000 shares (with 8,835,453 affirmative
votes, 974,213 negative votes, 7,290 votes withheld, and 1,925,181 broker
non-votes).
The shareholders also approved an amendment to the Company's Restated
Certificate of Incorporation to increase the number of authorized shares of
common stock from 40,000,000 shares to 80,000,000 (with 11,229,765
affirmative votes, 504,577 negative votes, and 7,795 votes withheld).
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ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<S> <C>
10.1 Agreement and Plan of Merger, dated as of May 3, 1999, by and among
Xoom.com, Inc., XOOM Acquisition Sub, Inc. and MightyMail Networks, Inc.*
10.2 Agreement and Plan of Merger, dated as of June 10, 1999, by and among
the Registrant, XMCM Sub, Inc., Paralogic Software Corporation and
certain shareholders of Paralogic Software Corporation named therein.**
10.3 Amendment No. 1 to the Agreement and Plan of Merger, dated as of June
14, 1999, by and among the Registrant, XMCM Sub, Inc., Paralogic
Software Corporation and certain shareholders of Paralogic Software
Corporation named therein.**
10.4 Registrant's 1998 Stock Incentive Plan and form of agreement
thereunder, as amended.
27.1 Financial Data Schedule
</TABLE>
* Incorporated by reference to Xoom.com report on form 8-K filed on May 5, 1999.
** Incorporated by reference to Xoom.com report on form 8-K filed on July 1,
1999.
(b) REPORTS ON FORM 8-K
We filed the following reports on Form 8-K during the three months
ended June 30, 1999:
1. On May 5, 1999, the Company filed a report on Form 8-K announcing
that it had completed the acquisition of MightyMail Networks, Inc.,
pursuant to an Agreement and Plan of Merger, dated as of May 3, 1999.
2. On May 6, 1999, the Company filed a report on Form 8-K announcing
that it had completed the acquisition of all of the outstanding limited
liability interests of Netfloppy.com, LLC, a limited liability company
organized under the laws of the Commonwealth of Virginia.
3. On May 21, 1999, the Company filed a report on Form 8-K announcing
that the Company, National Broadcasting Company, Inc. and certain of
its affiliates (collectively, "NBC"), CNET, Inc. ("CNET") and SNAP! LLC
entered into a series of definitive agreements (the "NBC Agreements")
relating to the formation of a new company to be named NBC Internet,
Inc. ("NBCi") upon consummation of all the transactions contemplated by
the NBC Agreements. NBCi is expected to include the businesses of the
Company, SNAP! LLC and certain of NBC's Internet assets (including
NBC.com, Videoseeker.com and NBC Interactive Neighborhood) and a 10%
ownership interest in CNBC.com.
4. On June 16, 1999, the Company filed a report on Form 8-K announcing
that (i) the Company and National Broadcasting Company, Inc.("NBC")
entered into a Stock Purchase Agreement, pursuant to which, NBC will
acquire 960,028 shares of the Company's common stock for $57.29 per
share in cash; and (ii) the Company and certain of its subsidiaries,
NBC and certain of its affiliates entered into an Amended and Restated
Agreement and Plan of Contribution, Investment and Merger (the "Amended
Agreement") which amended and restated the Agreement and Plan of
Contribution, Investment and Merger, dated as of May 9, 1999, among the
same parties.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized,
XOOM.com, Inc.
Date: August 12, 1999
By: /S/ JOHN HARBOTTLE
-----------------------------------
John Harbottle
VICE PRESIDENT OF FINANCE AND
CHIEF FINANCIAL OFFICER
(duly authorized officer and
principal financial officer)
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Exhibit 10.4
XOOM, INC.
1998 STOCK INCENTIVE PLAN
1. PURPOSES OF THE PLAN. The purposes of this Stock Incentive Plan are
to attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees, Directors and
Consultants and to promote the success of the Company's business.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "ADMINISTRATOR" means the Board or any of the Committees
appointed to administer the Plan.
(b) "APPLICABLE LAWS" means the legal requirements relating to
the administration of stock incentive plans, if any, under applicable provisions
of federal securities laws, California 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 Awards granted to residents
therein.
(c) "AWARD" means the grant of an Option, Restricted Stock,
SAR or other right or benefit under the Plan.
(d) "AWARD AGREEMENT" means the written agreement evidencing
the grant of an Award executed by the Company and the Grantee, including any
amendments thereto.
(e) "BOARD" means the Board of Directors of the Company.
(f) "CHANGE IN CONTROL" means a change in ownership or control
of the company effected through the following transaction, other than a Change
in Control that is also a sale of Common Stock to the general public pursuant to
a registration statement filed with and declared effective by the Securities and
Exchange Commission under the Securities Act of 1933, as amended: the direct or
indirect acquisition (including pursuant to the issuance of authorized, but
unissued securities of the Company) 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 pursuant to a tender offer or exchange
offer made directly to the Company's stockholders that occurs after the
Registration Date.
(g) "CODE" means the Internal Revenue Code of 1986, as
amended.
(h) "COMMITTEE" means any committee appointed by the Board to
administer the Plan.
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(i) "COMMON STOCK" means the common stock of the Company.
(j) "COMPANY" means XOOM, Inc.
(k) "CONSULTANT" means any person who is engaged by the
Company or Related Entity to render consulting or advisory services as an
independent contractor and is compensated for such services.
(l) "CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR CONSULTANT"
means that the provision of services to the Company or a Related Entity in any
capacity of Employee, Director or Consultant, is not interrupted or terminated.
Continuous Status as an Employee, Director or Consultant shall not be considered
interrupted in the case of (i) any approved leave of absence, (ii) transfers
between locations of the Company or among the Company, any Related Entity, or
any successor, in any capacity of Employee, Director or Consultant, or (iii) any
change in status as long as the individual remains in the service of the Company
or a Related Entity in any capacity of Employee, Director or Consultant (except
as otherwise provided in the Award Agreement). An approved leave of absence
shall include sick leave, military leave, or any other authorized personal
leave. For purposes of Incentive Stock Options, no such leave may exceed ninety
(90) days, unless reemployment upon expiration of such leave is guaranteed by
statute or contract.
(m) "CORPORATE TRANSACTION" means any of the following
stockholder-approved transactions to which the Company is a party:
(i) 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;
(ii) 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 the complete
liquidation or dissolution of the Company; or
(iii) 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; provided that if such merger is
preceded by a Change in Control within six (6) months of the merger, then a
Corporate Transaction will be deemed to have occurred if securities possessing
more than fifty percent (50%) of the total combined voting power of the
Company's outstanding securities are transferred pursuant to such merger to a
person or persons different from those who held such securities immediately
prior to such Change in Control.
(n) "DIRECTOR" means a member of the Board.
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<PAGE>
(o) "EMPLOYEE" means any person, including an Officer or
Director, who is an employee of the Company or any Related Entity. The payment
of a director's fee by the Company shall not be sufficient to constitute
"employment" by the Company.
(p) "EXCHANGE ACT" means the Securities Exchange Act of 1934,
as amended.
(q) "FAIR MARKET VALUE" means, as of any date, the value of
Common Stock determined as follows:
(i) Where there exists a public market for the Common
Stock, the Fair Market Value shall be (A) the closing price for a Share 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
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 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
Administrator deems reliable; or
(ii) In the absence of an established market of the
type described in paragraph (i), above, for the Common Stock, the Fair Market
Value thereof shall be determined by the Administrator in good faith and in a
manner consistent with Section 260.140.50 of Title 10 of the California Code of
Regulations.
(r) "GRANTEE" means an Employee, Director or Consultant who
receives an Award under the Plan.
(s) "INCENTIVE STOCK OPTION" means an Option intended to
qualify as an incentive stock option within the meaning of Section 422 of the
Code.
(t) "NON-QUALIFIED STOCK OPTION" means an Option not intended
to qualify as an Incentive Stock Option.
(u) "OFFICER" means a person who is an officer of the Company
within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.
(v) "OPTION" means a stock option granted pursuant to the
Plan.
(w) "PARENT" means a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(x) "PLAN" means this 1998 Stock Incentive Plan.
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<PAGE>
(y) "REGISTRATION DATE" means the closing of the first sale of
Common Stock to the general public pursuant to a registration statement filed
with and declared effective by the Securities and Exchange Commission under the
Securities Act of 1933, as amended.
(z) "RELATED ENTITY" means any Parent, Subsidiary and any
business, corporation, partnership, limited liability company or other entity in
which the Company, a Parent or a Subsidiary holds a significant ownership
interest, directly or indirectly as determined by the Plan Administrator.
(aa) "RESTRICTED STOCK" means Shares issued under the Plan to
the Grantee for such consideration, if any, and subject to such restrictions on
transfer, rights of first refusal, repurchase provisions, forfeiture provisions,
and other terms and conditions as established by the Administrator.
(bb) "SAR" means a stock appreciation right entitling the
Grantee to Shares or cash compensation, as established by the Administrator,
measured by appreciation in the value of Common Stock.
(cc) "SHARE" means a share of the Common Stock.
(dd) "SUBSIDIARY" means a "subsidiary corporation," whether
now or hereafter existing, as defined in Section 424(f) of the Code.
3. STOCK SUBJECT TO THE PLAN.
(a) Subject to the provisions of Section 11(a), below, the
maximum aggregate number of Shares which may be issued pursuant to all Awards
(including Incentive Stock Options) is 5,000,000 Shares. The Shares may be
authorized, but unissued, or reacquired Common Stock. Notwithstanding the
foregoing, the total number of Shares issuable upon exercise of all outstanding
Awards shall not exceed a number of Shares which is equal to 30% of the then
outstanding shares of the Company, as calculated in accordance with the
conditions and exclusions of California Corporate Securities Rule 260.140.45,
unless a percentage higher than 30% is approved by at least two-thirds of the
outstanding Shares entitled to vote.
(b) If an Award expires or becomes unexercisable without
having been exercised in full, or is surrendered pursuant to an Award exchange
program, or if any unissued Shares are retained by the Company upon exercise of
an Award in order to satisfy the exercise price for such Award or any
withholding taxes due with respect to such Award, such unissued or retained
Shares shall become available for future grant or sale under the Plan (unless
the Plan has terminated). Shares that actually have been issued under the Plan
pursuant to an Award shall not be returned to the Plan and shall not become
available for future distribution under the Plan, except that if unvested Shares
are forfeited, or repurchased by the Company at their original purchase price,
such Shares shall become available for future grant under the Plan.
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<PAGE>
4. ADMINISTRATION OF THE PLAN.
(a) PLAN ADMINISTRATOR. With respect to grants of Awards to
Employees, Directors, Officers or Consultants, the Plan shall be administered by
(A) the Board or (B) a Committee (or a subcommittee of the Committee) designated
by the Board, which Committee shall be constituted in such a manner as to
satisfy Applicable Laws. Once appointed, such Committee shall continue to serve
in its designated capacity until otherwise directed by the Board. The Board may
authorize one or more Officers to grant such Awards and may limit such authority
as the Board determines from time to time.
(b) MULTIPLE ADMINISTRATIVE BODIES. The Plan may be
administered by different bodies with respect to Directors, Officers,
Consultants, and Employees who are neither Directors nor Officers.
(c) POWERS OF THE ADMINISTRATOR. Subject to Applicable Laws
and the provisions of the Plan (including any other powers given to the
Administrator hereunder), and except as otherwise provided by the Board, the
Administrator shall have the authority, in its discretion:
(i) to select the Employees, Directors and
Consultants to whom Awards may be granted from time to time hereunder;
(ii) to determine whether and to what extent Awards
are granted hereunder;
(iii) to determine the number of Shares or the amount
of other consideration to be covered by each Award granted hereunder;
(iv) to approve forms of Award Agreement for use
under the Plan;
(v) to determine the terms and conditions of any
Award granted hereunder;
(vi) to establish additional terms, conditions, rules
or procedures to accommodate the rules or laws of applicable foreign
jurisdictions and to afford Grantees favorable treatment under such laws;
provided, however, that no Award shall be granted under any such additional
terms, conditions, rules or procedures with terms or conditions which are
inconsistent with the provisions of the Plan;
(vii) to amend the terms of any outstanding Award
granted under the Plan, including a reduction in the exercise price (or base
amount on which appreciation is measured) of any Award to reflect a reduction in
the Fair Market Value of the Common Stock since the grant date of the Award,
provided that any amendment that would adversely affect the Grantee's rights
under an outstanding Award shall not be made without the Grantee's written
consent;
5
<PAGE>
(viii) to construe and interpret the terms of the
Plan and Awards granted pursuant to the Plan; and
(ix) to take such other action, not inconsistent with
the terms of the Plan, as the Administrator deems appropriate.
(d) EFFECT OF ADMINISTRATOR'S DECISION. All decisions,
determinations and interpretations of the Administrator shall be conclusive and
binding on all persons.
5. ELIGIBILITY. Awards other than Incentive Stock Options may be
granted to Employees, Directors and Consultants. Incentive Stock Options may be
granted only to Employees of the Company, a Parent or a Subsidiary. An Employee,
Director or Consultant who has been granted an Award may, if otherwise eligible,
be granted additional Awards. Awards may be granted to such Employees, Directors
or Consultants who are residing in foreign jurisdictions as the Administrator
may determine from time to time.
6. TERMS AND CONDITIONS OF AWARDS.
(a) TYPE OF AWARDS. The Administrator is authorized under the
Plan to award any type of arrangement to an Employee, Director or Consultant
that is not inconsistent with the provisions of the Plan and that by its terms
involves or might involve the issuance of (i) Shares, (ii) an Option, a SAR or
similar right with an exercise or conversion privilege at a fixed or variable
price related to the Common Stock and/or the passage of time, the occurrence of
one or more events, or the satisfaction of performance criteria or other
conditions, or (iii) any other security with the value derived from the value of
the Common Stock or securities issued by a Related Entity. Such awards include,
without limitation, Options, sales or bonuses of Restricted Stock, SARs, and an
Award may consist of one such security or benefit, or two or more of them in any
combination or alternative.
(b) DESIGNATION OF AWARD. Each Award shall be designated in
the Award Agreement. In the case of an Option, the Option shall be designated as
either an Incentive Stock Option or a Non-Qualified Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of Shares subject to Options designated as Incentive Stock Options which
become exercisable for the first time by a Grantee during any calendar year
(under all plans of the Company or any Parent or Subsidiary) exceeds $100,000,
such excess Options, to the extent of the Shares covered thereby in excess of
the foregoing limitation, shall be treated as Non-Qualified Stock Options. For
this purpose, Incentive Stock Options shall be taken into account in the order
in which they were granted, and the Fair Market Value of the Shares shall be
determined as of the date the Option with respect to such Shares is granted.
(c) CONDITIONS OF AWARD. Subject to the terms of the Plan, the
Administrator shall determine the provisions, terms, and conditions of each
Award including, but not limited to, the Award vesting schedule, repurchase
provisions, rights of first refusal, forfeiture provisions, form of payment
(cash, Shares, or other consideration) upon settlement of the Award, payment
contingencies, and satisfaction of any performance criteria. The performance
criteria established by the Administrator may be based on any one of, or
combination of, increase in share price,
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earnings per share, total stockholder return, return on equity, return on
assets, return on investment, net operating income, cash flow, revenue, economic
value added, personal management objectives, or other measure of performance
selected by the Administrator. Partial achievement of the specified criteria may
result in a payment or vesting corresponding to the degree of achievement as
specified in the Award Agreement.
(d) DEFERRAL OF AWARD PAYMENT. The Administrator may establish
one or more programs under the Plan to permit selected Grantees the opportunity
to elect to defer receipt of consideration upon exercise of an Award,
satisfaction of performance criteria, or other event that absent the election
would entitle the Grantee to payment or receipt of Shares or other consideration
under an Award. The Administrator may establish the election procedures, the
timing of such elections, the mechanisms for payments of, and accrual of
interest or other earnings, if any, on amounts, Shares or other consideration so
deferred, and such other terms, conditions, rules and procedures that the
Administrator deems advisable for the administration of any such deferral
program.
(e) AWARD EXCHANGE PROGRAMS. The Administrator may establish
one or more programs under the Plan to permit selected Grantees to exchange an
Award under the Plan for one or more other types of Awards under the Plan on
such terms and conditions as determined by the Administrator from time to time.
(f) SEPARATE PROGRAMS. The Administrator may establish one or
more separate programs under the Plan for the purpose of issuing particular
forms of Awards to one or more classes of Grantees on such terms and conditions
as determined by the Administrator from time to time.
(g) EARLY EXERCISE. The Award may, but need not, include a
provision whereby the Grantee may elect at any time while an Employee, Director
or Consultant to exercise any part or all of the Award prior to full vesting of
the Award. Any unvested Shares received pursuant to such exercise may be subject
to a repurchase right in favor of the Company or to any other restriction the
Administrator determines to be appropriate.
(h) TERM OF AWARD. The term of each Award shall be the term
stated in the Award Agreement, provided, however, that the term shall be no more
than ten (10) years from the date of grant thereof. However, in the case of an
Incentive Stock Option granted to a Grantee who, at the time the Option is
granted, owns stock representing more than ten percent (10%) of the voting power
of all classes of stock of the Company or any Parent or Subsidiary, the term of
the Incentive Stock Option shall be five (5) years from the date of grant
thereof or such shorter term as may be provided in the Award Agreement.
(i) NON-TRANSFERABILITY OF AWARDS. Awards may not be sold,
pledged, assigned, hypothecated, transferred, or disposed of in any manner other
than by will or by the laws of descent or distribution and may be exercised,
during the lifetime of the Grantee, only by the Grantee.
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(j) Time of Granting Awards. The date of grant of an Award
shall for all purposes be the date on which the Administrator makes the
determination to grant such Award, or such other date as is determined by the
Administrator. Notice of the grant determination shall be given to each
Employee, Director or Consultant to whom an Award is so granted within a
reasonable time after the date of such grant.
7. AWARD EXERCISE OR PURCHASE PRICE, CONSIDERATION, TAXES AND RELOAD
OPTIONS.
(a) Exercise or Purchase Price. The exercise or purchase
price, if any, for an Award shall be as follows:
(i) In the case of an Incentive Stock Option:
(A) granted to an Employee who, at the time
of the grant of such Incentive Stock Option owns stock representing more than
ten percent (10%) of the voting power of all classes of stock of the Company or
any Parent or Subsidiary, the per Share exercise price shall be not less than
one hundred ten percent (110%) of the Fair Market Value per Share on the date of
grant.
(B) granted to any Employee other than an
Employee described in the preceding paragraph, the per Share exercise price
shall be not less than one hundred percent (100%) of the Fair Market Value per
Share on the date of grant.
(ii) In the case of a Non-Qualified Stock Option:
(A) granted to a person who, at the time of
the grant of such Option, owns stock representing more than ten percent (10%) of
the voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be not less than one hundred ten
percent (110%) of the Fair Market Value per Share on the date of grant.
(B) granted to any person other than a
person described in the preceding paragraph, the per Share exercise price shall
be not less than eighty-five percent (85%) of the Fair Market Value per Share on
the date of grant.
(iii) In the case of the sale of Shares:
(A) granted to a person who, at the time of
the grant of such Award, or at the time the purchase is consummated, owns stock
representing more than ten percent (10%) of the voting power of all classes of
stock of the Company or any Parent or Subsidiary, the per Share purchase price
shall be not less than one hundred percent (100%) of the Fair Market Value per
share on the date of grant.
(B) granted to any person other than a
person described in the preceding paragraph, the per Share purchase price shall
be not less than eighty-five percent (85%) of the Fair Market Value per Share on
the date of grant.
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(iv) In the case of other Awards, such price as is
determined by the Administrator.
(b) CONSIDERATION. Subject to Applicable Laws, the
consideration to be paid for the Shares to be issued upon exercise or purchase
of an Award including the method of payment, shall be determined by the
Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant). In addition to any other types of
consideration the Administrator may determine, the Administrator is authorized
to accept as consideration for Shares issued under the Plan the following:
(i) cash;
(ii) check;
(iii) delivery of Grantee's promissory note with such
recourse, interest, security, and redemption provisions as the Administrator
determines as appropriate;
(iv) if the exercise occurs on or after the
Registration Date, surrender of Shares or delivery of a properly executed form
of attestation of ownership of Shares as the Administrator may require
(including withholding of Shares otherwise deliverable upon exercise of the
Award) which have a Fair Market Value on the date of surrender or attestation
equal to the aggregate exercise price of the Shares as to which said Award shall
be exercised (but only to the extent that such exercise of the Award would not
result in an accounting compensation charge with respect to the Shares used to
pay the exercise price unless otherwise determined by the Administrator);
(v) if the exercise occurs on or after the
Registration Date, delivery of a properly executed exercise notice together with
such other documentation as the Administrator and the broker, if applicable,
shall require to effect an exercise of the Award and delivery to the Company of
the sale or loan proceeds required to pay the exercise price; or
(vi) any combination of the foregoing methods of
payment.
(c) TAXES. No Shares shall be delivered under the Plan to any
Grantee or other person until such Grantee or other person has made arrangements
acceptable to the Administrator for the satisfaction of any foreign, federal,
state, or local income and employment tax withholding obligations, including,
without limitation, obligations incident to the receipt of Shares or the
disqualifying disposition of Shares received on exercise of an Incentive Stock
Option. Upon exercise of an Award the Company shall withhold or collect from
Grantee an amount sufficient to satisfy such tax obligations.
(d) RELOAD OPTIONS. In the event the exercise price or tax
withholding of an Option is satisfied by the Company or the Grantee's employer
withholding Shares otherwise deliverable to the Grantee, the Administrator may
issue the Grantee an additional Option, with
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<PAGE>
terms identical to the Award Agreement under which the Option was exercised, but
at an exercise price as determined by the Administrator in accordance with the
Plan.
8. EXERCISE OF AWARD.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A STOCKHOLDER.
(i) Any Award granted hereunder shall be exercisable
at such times and under such conditions as determined by the Administrator under
the terms of the Plan and specified in the Award Agreement but in the case of an
Option, in no case at a rate of less than 20% per year over five (5) years from
the date the Option is granted, subject to reasonable conditions such as
continued employment. However, in the case of an Option granted to an Officer,
Director or Consultant, the Award Agreement may provide that the Option may
become fully exercisable, subject to reasonable conditions such as continued
employment, at any time or during any period established in the Award Agreement.
(ii) An Award shall be deemed to be exercised when
written notice of such exercise has been given to the Company in accordance with
the terms of the Award by the person entitled to exercise the Award and full
payment for the Shares with respect to which the Award is exercised has been
received by the Company. Until the issuance (as evidenced by the appropriate
entry on the books of the Company or of a duly authorized transfer agent of the
Company) of the stock certificate evidencing such Shares, no right to vote or
receive dividends or any other rights as a stockholder shall exist with respect
to Shares subject to an Award, notwithstanding the exercise of an Option or
other Award. The Company shall issue (or cause to be issued) such stock
certificate promptly upon exercise of the Award. No adjustment will be made for
a dividend or other right for which the record date is prior to the date the
stock certificate is issued, except as provided in the Award Agreement or
Section 11(a), below.
(b) EXERCISE OF AWARD FOLLOWING TERMINATION OF EMPLOYMENT,
DIRECTOR OR CONSULTING RELATIONSHIP. In the event of termination of a grantee's
Continuous Status as an Employee, Director or Consultant for any reason other
than disability or death (but not in the event of a Grantee's change of status
from Employee to Consultant or from Consultant to Employee), such Grantee may,
but only within three (3) months after the date of such termination (but in no
event later than the expiration date of the term of such Award as set forth in
the Award Agreement), exercise his or her Award to the extent that the Grantee
was entitled to exercise it at the date of such termination or to such other
extent as may be determined by the Administrator. The Grantee's Award Agreement
may provide that upon the event of termination of the Grantee's Continuous
Status as an Employee, Director or Consultant for "Cause," the Grantee's right
to exercise the Award shall terminate concurrently with the termination of
Grantee's Continuous Status as an Employee, Director or Consultant. The term
"Cause" shall be as defined in the Award Agreement. If the Grantee should die
within three (3) months after the date of such termination, the Grantee's estate
or the person who acquired the right to exercise the Award by bequest or
inheritance may exercise the Award to the extent that the Grantee was entitled
to exercise it at the date of such termination within twelve (12) months of the
Grantee's date of death, but in no event later than the expiration date of the
term of such Award as set forth
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in the Award Agreement. In the event of a Grantee's change of status from
Employee to Consultant, an Employee's Incentive Stock Option shall convert
automatically to a Non-Qualified Stock Option on the day three (3) months and
one day following such change of status. To the extent that the Grantee is not
entitled to exercise the Award at the date of termination, or if Grantee does
not exercise such Award to the extent so entitled within the time specified
herein, the Award shall terminate.
(c) DISABILITY OF GRANTEE. In the event of termination of a
Grantee's Continuous Status as an Employee, Director or Consultant as a result
of his or her disability, Grantee may, but only within twelve (12) months from
the date of such termination (and in no event later than the expiration date
of the term of such Award as set forth in the Award Agreement), exercise the
Award to the extent otherwise entitled to exercise it at the date of such
termination; provided, however, that if such disability is not a "disability"
as such term is defined in Section 22(e)(3) of the Code, in the case of an
Incentive Stock Option such Incentive Stock Option shall automatically convert
to a Non-Qualified Stock Option on the day three (3) months and one day
following such termination. To the extent that the Grantee is not entitled to
exercise the Award at the date of termination, or if Grantee does not exercise
such Award to the extent so entitled within the time specified herein, the
Award shall terminate.
(d) DEATH OF GRANTEE. In the event of the death of a Grantee,
the Award may be exercised at any time within twelve (12) months following the
date of death (but in no event later than the expiration of the term of such
Award as set forth in the Award Agreement), by the Grantee's estate or by a
person who acquired the right to exercise the Award by bequest or inheritance,
but only to the extent that the Grantee was entitled to exercise the Award at
the date of death. If, at the time of death, the Grantee was not entitled to
exercise his or her entire Award, the Shares covered by the unexercisable
portion of the Award shall immediately revert to the Plan. If, after death, the
Grantee's estate or a person who acquired the right to exercise the Award by
bequest or inheritance does not exercise the Award within the time specified
herein, the Award shall terminate.
(e) BUYOUT PROVISIONS. The Administrator may at any time offer
to buy out for a payment in cash or Shares, an Award previously granted, based
on such terms and conditions as ffthe Administrator shall establish and
communicate to the Grantee at the time that such offer is made.
9. CONDITIONS UPON ISSUANCE OF SHARES.
(a) Shares shall not be issued pursuant to the exercise of an
Award unless the exercise of such Award 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.
(b) As a condition to the exercise of an Award, the Company
may require the person exercising such Award to represent and warrant at the
time of any such exercise that the Shares are being purchased only for
investment and without any present intention to sell or
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<PAGE>
distribute such Shares if, in the opinion of counsel for the Company, such a
representation is required by any Applicable Laws.
10. REPURCHASE RIGHTS. If the provisions of an Award Agreement grant to
the Company the right to repurchase Shares upon termination of the Grantee's
Continuous Status as an Employee, Director or Consultant, the Award Agreement
shall provide that the repurchase price will be either:
(a) Not less than the Fair Market Value of the Shares to be
repurchased on the date of termination of the Grantee's Continuous Status as an
Employee, Director or Consultant, and the right to repurchase must be exercised
for cash or cancellation of purchase money indebtedness for the Shares within
ninety (90) days of the termination of the Grantee's Continuous Status as an
Employee, Director or Consultant (or in the case of Shares issued upon exercise
of Awards after the date of termination of the Grantee's Continuous Status as an
Employee, Director or Consultant, within ninety (90) days after the date of the
Award exercise), and the right terminates when the Company's securities become
publicly traded; or
(b) The original purchase price, provided that the right to
repurchase at the original purchase price lapses at the rate of at least twenty
percent (20%) of the Shares subject to the Award per year over five (5) years
from the date the Award is granted (without respect to the date the Award was
exercised or became exercisable), and the right to repurchase must be exercised
for cash or cancellation of purchase money indebtedness for the Shares within
ninety (90) days of termination of the Grantee's Continuous Status as an
Employee, Director or Consultant (or in the case of Shares issued upon exercise
of Awards after the date of termination of the Grantee's Continuous Status as an
Employee, Director or Consultant, within ninety (90) days after the date of the
Award exercise).
(c) In addition to the restrictions set forth in (a) and (b)
above, the Shares held by an Officer, Director or Consultant may be subject to
additional or greater restrictions.
11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR CORPORATE
TRANSACTION.
(a) ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. Subject to any
required action by the stockholders of the Company, the number of Shares covered
by each outstanding Award, and the number of Shares which have been authorized
for issuance under the Plan but as to which no Awards have yet been granted or
which have been returned to the Plan, as well as the price per share of Common
Stock covered by each such outstanding Award, shall be proportionately adjusted
for 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, or any other similar event resulting in
an increase or decrease in the number of issued shares of Common Stock. Except
as expressly provided herein, 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
number or price of Shares subject to an Award.
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(b) CORPORATE TRANSACTION. In the event of a proposed
Corporate Transaction, the Administrator shall notify the Grantee at least
fifteen (15) days prior to such proposed Corporate Transaction and each Award
which is at the time outstanding under the Plan shall immediately prior to the
specified effective date of such Corporate Transaction, automatically become
fully vested and exercisable and be released from any restrictions on transfer
and repurchase or forfeiture rights with respect to seventy-five percent (75%)
of the unvested Shares at the time represented by such Award. Notwithstanding
the foregoing, the Administrator, in its discretion, may prevent the
acceleration of vesting and release from any restrictions on transfer and
repurchase or forfeiture rights of any outstanding Award with respect to any
Corporate Transaction. To the extent it has not been previously exercised, the
Award will terminate immediately prior to the consummation of such proposed
Corporate Transaction, unless the Award is assumed or an equivalent Award is
substituted by the successor corporation or a Parent or Subsidiary of such
successor corporation. For the purposes of this subsection, the Award shall be
considered assumed if, following the Corporate Transaction, the Award confers,
for each Share subject to the Award immediately prior to the Corporate
Transaction, (i) the consideration (whether stock, cash, or other securities or
property) received in the Corporate Transaction by holders of Common Stock for
each Share subject to the Award held on the effective date of the Corporate
Transaction (and if holders were offered a choice of consideration, the type of
consideration chosen by the holders of a majority of the outstanding Shares), or
(ii) the right to purchase such consideration in the case of an Option or
similar Award; provided, however, that if such consideration received in the
Corporate Transaction was not solely common stock of the successor corporation
or its Parent, the Administrator may, with the consent of the successor
corporation, provide for the consideration to be received upon the exercise or
exchange of the Award for each Share subject to the Award to be solely common
stock of the successor corporation or its Parent equal in fair market value to
the per share consideration received by holders of Common Stock in the Corporate
Transaction.
12. 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.
13. AMENDMENT, SUSPENSION OR TERMINATION OF THE PLAN.
(a) The Board may at any time amend, suspend or terminate the
Plan. To the extent necessary to comply with Applicable Laws, the Company shall
obtain stockholder approval of any Plan amendment in such a manner and to such a
degree as required.
(b) No Award may be granted during any suspension of the Plan
or after termination of the Plan.
(c) Any amendment, suspension or termination of the Plan shall
not affect Awards already granted, and such Awards shall remain in full force
and effect as if the Plan had not been amended, suspended or terminated, unless
mutually agreed otherwise between the Grantee and the Administrator, which
agreement must be in writing and signed by the Grantee and the Company.
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14. RESERVATION OF SHARES.
(a) The Company, during the term of the Plan, will at all
times reserve and keep available such number of Shares as shall be sufficient to
satisfy the requirements of the Plan.
(b) The inability of the Company to obtain authority from any
regulatory body having jurisdiction, which authority is deemed by the Company's
counsel to be necessary to the lawful issuance and sale of any Shares hereunder,
shall relieve the Company of any liability in respect of the failure to issue or
sell such Shares as to which such requisite authority shall not have been
obtained.
15. NO EFFECT ON TERMS OF EMPLOYMENT. The Plan shall not confer upon
any Grantee any right with respect to continuation of employment or consulting
relationship with the Company, nor shall it interfere in any way with his or her
right or the Company's right to terminate his or her employment or consulting
relationship at any time, with or without cause.
16. 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. Any Award exercised
before stockholder approval is obtained shall be rescinded if stockholder
approval is not obtained within the time prescribed, and Shares issued on the
exercise of any such Award shall not be counted in determining whether
stockholder approval is obtained.
17. INFORMATION TO GRANTEES. The Company shall provide to each Grantee,
during the period for which such Grantee has one or more Awards outstanding,
copies of financial statements at least annually, and all annual reports and
other information which is provided to all stockholders of the Company.
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XOOM.COM, INC. 1998 STOCK INCENTIVE PLAN
NOTICE OF STOCK OPTION GRANT
Optionee's Name and Address:
----------------------------------
----------------------------------
----------------------------------
You have been granted an option to purchase shares of Common Stock of
the Company, subject to the terms and conditions of the Plan and the Option
Agreement, as follows:
Grant Number
----------------------------------
Date of Grant
----------------------------------
Vesting Commencement Date
----------------------------------
Exercise Price per Share $
----------------------------------
Total Number of Shares Granted
----------------------------------
Total Exercise Price $
----------------------------------
Type of Option: Incentive Stock Option
----------------------------------
Non-Qualified Stock Option
----------------------------------
Expiration Date:
----------------------------------
VESTING SCHEDULE:
Subject to other limitations set forth in the Option Agreement, the
Option may be exercised, i.e., "vest," in whole or in part, in accordance with
the following schedule:
(i) [Twenty-five percent (25%) of the Shares subject to the Option
shall vest at the end of the twelfth full month after the
Vesting Commencement Date, after which 1/48th of the Shares
subject to the Option shall vest on the last day of each
calendar month thereafter]; LESS THAN TWENTY-FIVE PERCENT
(25%) OF THE SHARES SUBJECT TO THE OPTION SHALL VEST AT THE
END OF THE TWELFTH FULL MONTH AFTER THE VESTING COMMENCEMENT
DATE, AND AN ADDITIONAL TWENTY-FIVE PERCENT 25% OF THE SHARES
SUBJECT TO THE OPTION SHALL VEST ON EACH YEARLY ANNIVERSARY OF
THE VESTING COMMENCEMENT DATE THEREAFTER. GREATER THAN LESS
THAN NOTE: USE SECOND ALTERNATIVE FOR VESTING TERMS FOR
INCENTIVE STOCK OPTION, IF $100,000 ISO RULE WOULD BE VIOLATED
UNDER 1 YEAR VESTING FOLLOWED BY MONTHLY VESTING GREATER THAN
(ii) During any authorized leave of absence, the vesting of the
Option as provided in this schedule shall cease after the
leave of absence exceeds a period of ninety (90) days. Vesting
of the Option shall resume upon the Optionee's termination of
the leave of absence and return to service with the Company or
a Related Entity;
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(iii) In the event of the Optionee's change in status from Employee
to Consultant, vesting of the Option shall continue only to
the extent determined by the Administrator as of such change
in status.
TERMINATION PERIOD:
The Option may be exercised as to the number of shares that are Vested
on the date of termination within three (3) months from termination of the
Optionee's Continuous Status as an Employee, Director or Consultant or such
longer period as may be applicable upon death or disability of the Optionee as
provided in the Option Agreement. In the event of the Optionee's change in
status from Employee to Consultant or Consultant to Employee, the Option shall
remain in effect; provided, however, that in the event of a change in status
from Employee to Consultant, the Optionee's Incentive Stock Option shall cease
to be treated as an Incentive Stock Option and shall be treated as a
Non-Qualified Stock Option on the day three (3) months and one day following
such change in status. In no event shall the Option be exercised later than the
Expiration Date as provided above.
IN WITNESS WHEREOF, the Company and the Optionee have executed this
Notice of Stock Option Grant and agree that the Option is to be governed by the
terms and conditions of this Notice of Stock Option Grant, the Plan, and the
Option Agreement.
XOOM.com, Inc.,
a Delaware corporation
By:
----------------------------------
Its:
----------------------------------
THE OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE
OPTION HEREOF IS EARNED ONLY BY CONTINUING CONSULTANCY OR EMPLOYMENT AT THE WILL
OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR
ACQUIRING SHARES HEREUNDER). THE OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT
NOTHING IN THIS NOTICE OF STOCK OPTION GRANT, THE OPTION AGREEMENT, NOR IN THE
COMPANY'S 1998 STOCK INCENTIVE PLAN, SHALL CONFER UPON THE OPTIONEE ANY RIGHT
WITH RESPECT TO CONTINUATION OF EMPLOYMENT OR CONSULTANCY BY THE COMPANY, NOR
SHALL IT INTERFERE IN ANY WAY WITH THE OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT
TO TERMINATE THE OPTIONEE'S EMPLOYMENT OR CONSULTANCY AT ANY TIME, WITH OR
WITHOUT CAUSE.
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<PAGE>
The Optionee acknowledges receipt of a copy of the Plan and the Option
Agreement, and represents that he is familiar with the terms and provisions
thereof, and hereby accepts the Option subject to all of the terms and
provisions thereof. The Optionee has reviewed this Notice of Stock Option Grant,
the Plan, and the Option Agreement in their entirety, has had an opportunity to
obtain the advice of counsel prior to executing the Notice of Stock Option Grant
and fully understands all provisions of this Notice of Stock Option Grant, the
Plan, and the Option Agreement. The Optionee hereby agrees to accept as binding,
conclusive and final all decisions or interpretations of the Board or
Administrator upon any questions arising under this Notice of Stock Option
Grant, the Plan, and the Option Agreement. The Optionee further agrees to notify
the Company upon any change in the residence address indicated in this Notice of
Stock Option Grant.
Dated: Signed:
----------------------------- ----------------------------
Optionee
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<PAGE>
XOOM.COM, INC. 1998 STOCK INCENTIVE PLAN
STOCK OPTION AGREEMENT
1. GRANT OF OPTION. XOOM.com, Inc., a Delaware corporation (the "Company"),
hereby grants to the Optionee named in the Notice of Stock Option Grant (the
"Optionee"), an option (the "Option") to purchase the total number of shares of
Common Stock (the "Shares") set forth in the Notice of Stock Option Grant (the
"Notice"), at the exercise price per share set forth in the Notice (the
"Exercise Price") subject to the terms, definitions and provisions of the Notice
and the Company's 1998 Stock Incentive Plan (the "Plan") adopted by the Company,
which are incorporated herein by reference. Unless otherwise defined herein, the
terms defined in the Plan shall have the same defined meanings in this Option
Agreement.
If designated in the Notice as an Incentive Stock Option, the Option is
intended to qualify as an Incentive Stock Option as defined in Section 422 of
the Code. Nevertheless, to the extent that it exceeds the $100,000 rule of
Section 422(d) of the Code, the Option shall be treated as a Non-Qualified Stock
Option.
2. EXERCISE OF OPTION.
(a) RIGHT TO EXERCISE. The Option shall be exercisable during its term
in accordance with the Vesting Schedule set out in the Notice and with the
applicable provisions of the Plan and this Option Agreement. In the event of
termination of Optionee's Continuous Status as an Employee, Director or
Consultant, the Option shall be exercisable in accordance with the applicable
provisions of the Plan and this Option Agreement. The Option shall be subject to
the provisions of Section 11(b) of the Plan relating to the exercisability or
termination of the Option in the event of a Corporate Transaction. No partial
exercise of the Option may be for less than the lesser of five percent (5%) of
the total number of Shares subject to the Option or the remaining number of
Shares subject to the Option. In no event shall the Company issue fractional
Shares.
(b) METHOD OF EXERCISE. The Option shall be exercisable only by
delivery of an Exercise Notice (attached as EXHIBIT A) which shall state the
election to exercise the Option, the whole number of Shares in respect of which
the Option is being exercised, and such other provisions as may be required by
the Administrator. Such Exercise Notice shall be signed by the Optionee and
shall be delivered in person or by certified mail to the Secretary of the
Company accompanied by payment of the Exercise Price. The Option shall be deemed
to be exercised upon receipt by the Company of such written notice accompanied
by the Exercise Price.
No Shares will be issued pursuant to the exercise of the Option unless
such issuance and such exercise shall comply with all Applicable Laws. Assuming
such compliance, for income tax purposes, the Shares shall be considered
transferred to the Optionee on the date on which the Option is exercised with
respect to such Shares.
(c) TAXES. No Shares will be issued to the Optionee or other person
pursuant to the exercise of the Option until the Optionee or other person has
made arrangements acceptable to
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the Administrator for the satisfaction of foreign, federal, state and local
income and employment tax withholding obligations.
3. METHOD OF PAYMENT. Payment of the Exercise Price shall be by any of the
following, or a combination thereof, at the election of the Optionee; provided,
however, that such exercise method does not then violate an Applicable Law:
(a) cash;
(b) check;
(c) surrender of Shares or delivery of a properly executed form of
attestation of ownership of Shares as the Administrator may require (including
withholding of Shares otherwise deliverable upon exercise of the Option) which
have a Fair Market Value on the date of surrender or attestation equal to the
aggregate Exercise Price of the Shares as to which the Option is being exercised
(but only to the extent that such exercise of the Option would not result in an
accounting compensation charge with respect to the Shares used to pay the
exercise price); or
(d) delivery of a properly executed Exercise Notice together with such
other documentation as the Administrator and the broker, if applicable, shall
require to effect an exercise of the Option and delivery to the Company of the
sale or loan proceeds required to pay the Exercise Price.
4. RESTRICTIONS ON EXERCISE. The Option may not be exercised if the issuance of
the Shares subject to the Option upon such exercise would constitute a violation
of any Applicable Laws.
5. TERMINATION OF RELATIONSHIP. In the event the Optionee's Continuous Status as
an Employee, Director or Consultant terminates, the Optionee may, to the extent
otherwise so entitled at the date of such termination (the "Termination Date"),
exercise the Option during the Termination Period set out in the Notice. Except
as provided in Sections 7 and 8, below, to the extent that the Optionee was not
entitled to exercise the Option on the Termination Date, or if the Optionee does
not exercise the Option within the Termination Period, the Option shall
terminate.
6. DISABILITY OF OPTIONEE. In the event the Optionee's Continuous Status as an
Employee, Director or Consultant terminates as a result of his or her
disability, the Optionee may, but only within twelve (12) months from the
Termination Date (and in no event later than the Expiration Date), exercise the
Option to the extent otherwise entitled to exercise it on the Termination Date;
provided, however, that if such disability is not a "disability" as such term is
defined in Section 22(e)(3) of the Code and the Option is an Incentive Stock
Option, such Incentive Stock Option shall cease to be treated as an Incentive
Stock Option and shall be treated as a Non-Qualified Stock Option on the day
three (3) months and one day following the Termination Date. To the extent that
the Optionee was not entitled to exercise the Option on the Termination Date, or
if the Optionee does not exercise the Option to the extent so entitled within
the time specified herein, the Option shall terminate.
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<PAGE>
7. DEATH OF OPTIONEE. In the event of the Optionee's death, the Option may be
exercised at any time within twelve (12) months following the date of death (and
in no event later than the Expiration Date), by the Optionee's estate or by a
person who acquired the right to exercise the Option by bequest or inheritance,
but only to the extent the Optionee could exercise the Option at the date of
death. To the extent that the Optionee was not entitled to exercise the Option
on the date of death, or if the Option is not exercised to the extent so
entitled within the time specified herein, the Option shall terminate.
8. NON-TRANSFERABILITY OF OPTION. The Option may not be transferred in any
manner otherwise than by will or by the laws of descent or distribution and may
be exercised during the lifetime of the Optionee only by the Optionee. The terms
of the Option shall be binding upon the executors, administrators, heirs and
successors of the Optionee.
9. TERM OF OPTION. The Option may be exercised only within the term set out in
the Notice and may be exercised during such term only in accordance with the
Plan and the terms of this Option Agreement.
10. TAX CONSEQUENCES. Set forth below is a brief summary as of the date of this
Option Agreement of some of the federal tax consequences of exercise of the
Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE,
AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD
CONSULT A TAX ADVISER BEFORE EXERCISING THE OPTION OR DISPOSING OF THE SHARES.
(a) EXERCISE OF INCENTIVE STOCK OPTION. If the Option qualifies as an
Incentive Stock Option, there will be no regular federal income tax liability
upon the exercise of the Option, although the excess, if any, of the Fair Market
Value of the Shares on the date of exercise over the Exercise Price will be
treated as an adjustment to the alternative minimum tax for federal tax purposes
and may subject the Optionee to the alternative minimum tax in the year of
exercise.
(b) EXERCISE OF INCENTIVE STOCK OPTION FOLLOWING DISABILITY. If the
Optionee's Continuous Status as an Employee, Director or Consultant terminates
as a result of disability that is not total and permanent disability as defined
in Section 22(e)(3) of the Code, to the extent permitted on the date of
termination, the Optionee must exercise an Incentive Stock Option within three
(3) months of such termination for the Incentive Stock Option to be qualified as
an Incentive Stock Option.
(c) EXERCISE OF NON-QUALIFIED STOCK OPTION. There may be a regular
federal income tax liability upon the exercise of a Non-Qualified Stock Option.
The Optionee will be treated as having received compensation income (taxable at
ordinary income tax rates) equal to the excess, if any, of the Fair Market Value
of the Shares on the date of exercise over the Exercise Price. If the Optionee
is an Employee or a former Employee, the Company will be required to withhold
from the Optionee's compensation or collect from the Optionee and pay to the
applicable taxing authorities an amount in cash equal to a percentage of this
compensation income at the time of exercise, and may refuse to honor the
exercise and refuse to deliver Shares if such withholding amounts are not
delivered at the time of exercise.
3
<PAGE>
(d) DISPOSITION OF SHARES. In the case of a Non-Qualified Stock Option,
if Shares are held for at least one year, any gain realized on disposition of
the Shares will be treated as long-term capital gain for federal income tax
purposes and subject to tax at a maximum rate of 20%. In the case of an
Incentive Stock Option, if Shares transferred pursuant to the Option are held
for at least one year after receipt of the Shares and are disposed of at least
two years after the Date of Grant, any gain realized on disposition of the
Shares also will be treated as long-term capital gain for federal income tax
purposes and subject to the same tax rates and holding periods that apply to
Shares acquired upon exercise of a Non-Qualified Stock Option. If Shares
purchased under an Incentive Stock Option are disposed of within such one-year
or two-year periods, any gain realized on such disposition will be treated as
compensation income (taxable at ordinary income rates) to the extent of the
difference between the Exercise Price and the lesser of (i) the Fair Market
Value of the Shares on the date of exercise, or (ii) the sale price of the
Shares.
11. ENTIRE AGREEMENT: GOVERNING LAW. The Notice, the Plan and this Option
Agreement constitute the entire agreement of the parties with respect to the
subject matter hereof and supersede in their entirety all prior undertakings
and agreements of the Company and the Optionee with respect to the subject
matter hereof, and may not be modified adversely to the Optionee's interest
except by means of a writing signed by the Company and Optionee. IN THAT
REGARD, THIS AGREEMENT OPTION FULLY SATISFIES THE OBLIGATION OF THE COMPANY
TO GRANT OPTIONEE THE OPTIONS DESCRIBED IN THE COMPANY'S OFFER LETTER TO
OPTIONEE PRIOR TO OPTIONEE'S BECOMING AN EMPLOYEE OR CONSULTANT OF THE
COMPANY, AND, IN THE EVENT OF ANY CONFLICT BETWEEN THE OPTION DESCRIBED IN
SUCH OFFER LETTER OR AGREEMENT AND THIS OPTION AGREEMENT, THE TERMS AND
CONDITIONS OF THIS OPTION AGREEMENT SHALL CONTROL. These agreements are
governed by California law except for that body of law pertaining to conflict
of laws.
12. HEADINGS. The captions used in the Notice and this Option Agreement are
inserted for convenience and shall not be deemed a part of the Option for
construction or interpretation.
13. INTERPRETATION. Any dispute regarding the interpretation of the Notice,
the Plan, and this Option Agreement shall be submitted by the Optionee or by
the Company forthwith to the Board or the Administrator that administers the
Plan, which shall review such dispute at its next regular meeting. The
resolution of such dispute by the Board or the Administrator shall be final
and binding on all persons.
14. FURTHER ASSURANCES. Optionee shall execute such further instruments and
take such further actions as may be requested BY the Company as reasonably
necessary to carry out the intent and purposes of this Option Agreement.
15. SUCCESSORS AND ASSIGNS. The Company may assign any of its rights under
this Option Agreement to single or multiple assignees, and this Option
Agreement shall inure to the benefit of the successors and assigns of the
Company. Subject to the restrictions on transfer herein set forth, this
Agreement shall be binding upon Optionee and his or her heirs, executors,
administrators, successors and assigns.
4
<PAGE>
16. NOTICES. Any notice required or permitted hereunder shall be given in
writing and shall be deemed effectively given upon personal delivery or upon
deposit in the United States mail by certified mail, with postage and fees
prepaid, addressed to the Company at its primary business office and to
Optionee at its address as shown below beneath its signature, or to such
other address as such party may designate in writing from time to time to the
other party.
5
<PAGE>
EXHIBIT A
XOOM.COM, INC. 1998 STOCK INCENTIVE PLAN
EXERCISE NOTICE
XOOM.com, Inc.
300 Montgomery Street, Suite 300
San Francisco, CA 94104
Attention: Secretary
1. EXERCISE OF OPTION. Effective as of today, ________ __, ____, the undersigned
(the "Optionee") hereby elects to exercise the Optionee's option to purchase
shares of the Common Stock (the "Shares") of XOOM.com, Inc. (the "Company")
under and pursuant to the Company's 1998 Stock Incentive Plan (the "Plan") and
the [ ] Incentive [ ] Non-Qualified Stock Option Agreement and the within Notice
of Stock Option Grant. The Optionee herewith delivers to the Company the full
Exercise Price for the Shares.
Total Number of Option Shares to Exercise (A):
---------------------------------
Exercise Price per Share (B): $
-----------------------------------------------
Total Amount to be Tendered (A x B): $
-----------------------------------------
2. REPRESENTATIONS OF THE OPTIONEE. The Optionee acknowledges that the Optionee
has received, read and understood the Notice of Stock Option Grant, the Plan and
the Option Agreement and agrees to abide by and be bound by their terms and
conditions.
3. RIGHTS AS STOCKHOLDER. Until the stock certificate evidencing such Shares is
issued (as evidenced by the appropriate entry on the books of the Company or of
a duly authorized transfer agent of the Company), no right to vote or receive
dividends or any other rights as a stockholder shall exist with respect to the
Shares, notwithstanding the exercise of the Option.
4. TAX CONSULTATION. The Optionee understands that the Optionee may suffer
adverse tax consequences as a result of the Optionee's purchase or disposition
of the Shares. The Optionee represents that the Optionee has consulted with any
tax consultants the Optionee deems advisable in connection with the purchase or
disposition of the Shares and that the Optionee is not relying on the Company
for any tax advice.
5. TAXES. The Optionee agrees to satisfy all applicable federal, state and local
income and employment tax withholding obligations and herewith delivers to the
Company the full amount of such obligations or has made arrangements acceptable
to the Company to satisfy such obligations. In the case of an Incentive Stock
Option, the Optionee also agrees, as partial consideration for the designation
of the Option as an Incentive Stock Option, to notify the
A-1
<PAGE>
Company in writing within thirty (30) days of any disposition of any shares
acquired by exercise of the Option if such disposition occurs within two (2)
years from the Grant Date or within one (1) year from the date the Shares were
transferred to the Optionee. If the Company is required to satisfy any federal,
state or local income or employment tax withholding obligations as a result of
such an early disposition, the Optionee agrees to satisfy the amount of such
withholding in a manner that the Administrator prescribes.
Submitted by: Accepted by:
OPTIONEE: XOOM.com, Inc.
By:
------------------------------------
Its:
- ------------------------- ------------------------------------
(Signature)
ADDRESS: ADDRESS:
- -------- --------
- ------------------------
- ------------------------
A-2
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