<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 19, 1999
REGISTRATION NO. 333-84557
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
ZAPME! CORPORATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 7370 91-1836242
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
ZAPME! CORPORATION
3000 EXECUTIVE PARKWAY, SUITE 150
SAN RAMON, CA 94583
(925) 543-0300
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
LANCE MORTENSEN
CHAIRMAN
ZAPME! CORPORATION
3000 EXECUTIVE PARKWAY
SAN RAMON, CA 94583
(925) 543-0300
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
COPIES TO:
MARK A. BERTELSEN, ESQ. NORA L. GIBSON, ESQ.
DON S. WILLIAMS, ESQ. PETER S. BUCKLAND, ESQ.
MICHAEL S. ELLIS, ESQ. TAYLOR L. STEVENS, ESQ.
WILSON SONSINI GOODRICH & ROSATI BRIAN E. COVOTTA, ESQ.
Professional Corporation BROBECK, PHLEGER & HARRISON LLP
650 Page Mill Road Spear Street Tower
Palo Alto, CA 94304 One Market
(650) 493-9300 San Francisco, CA 94105
(415) 442-0900
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
--------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE>
EXPLANATORY NOTE
This registration statement contains two forms of prospectus: (1) one
prospectus to be used in connection with our underwritten offering and (2) one
prospectus to be used in connection with our non-underwritten offering of common
stock to various employees and affiliates of Gilat Satellite Networks. The
non-underwritten prospectus is identical to the underwritten prospectus in all
respects except for the front cover page, the back cover page and the pages
including the Plan of Distribution, each of which is included herein after the
last page of the underwritten prospectus and is labeled "Alternate Page for the
Concurrent Offering Prospectus". Final forms of each prospectus will be filed
with the Commission pursuant to Rule 424(b) under the Securities Act of 1933.
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these securities and it is
not soliciting an offer to buy these securities in any state where the offer or
sale is not permitted.
<PAGE>
Subject to Completion
Preliminary Prospectus dated October 18, 1999
P_R_O_S_P_E_C_T_U_S
9,000,000 SHARES
[ZAPME! LOGO]
COMMON STOCK
--------------
This is ZapMe! Corporation's initial public offering of common stock and
consequently no public market currently exists for our stock.
We expect the public offering price to be between $10.00 and $12.00 per
share. After pricing the offering, we expect that the common stock will trade on
the Nasdaq National Market under the symbol "IZAP."
INVESTING IN OUR COMMON STOCK INVOLVES RISKS WHICH ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 5 OF THIS PROSPECTUS.
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<CAPTION>
PER SHARE TOTAL
----------- --------------
<S> <C> <C>
Public offering price........................................ $ $
Underwriting discount........................................ $ $
Proceeds, before expenses, to ZapMe! Corporation............. $ $
</TABLE>
The underwriters may also purchase up to an additional 1,350,000 shares from
us at the public offering price, less the underwriting discount, within 30 days
from the date of this prospectus to cover over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The shares of common stock will be ready for delivery in New York, New York
on or about , 1999.
------------------
MERRILL LYNCH & CO.
DEUTSCHE BANC ALEX. BROWN
THOMAS WEISEL PARTNERS LLC
WIT CAPITAL CORPORATION
------------------
The date of this prospectus is , 1999.
<PAGE>
INSIDE FRONT COVER PAGE
DIAGRAMS, DESCRIPTIONS AND CAPTIONS
1. Top caption: ZapMe! Network.
2. Center: The front inside cover contains a map of the United States that
shows the range of ZapMe!'s broadband interactive network. A satellite is
pictured sending communications to ZapMe!'s network operation centers, as
well as to states where ZapMe! has either already installed computer labs or
has contracted to do so.
Caption: Our broadband interactive network provides: Free high-end PC's,
software, installation and support to schools; the latest technology tools
and educational resources, including over 10,000 indexed third-party
educational sites and Microsoft software; free "always on" satellite
connection to the Internet; engaging, media-rich experience designed
primarily for students aged 13-19; advanced communications tools to network
students, teachers and parents.
INSIDE BACK COVER PAGE
PHOTOGRAPHS AND CAPTIONS
1. Top caption: ZapMe! Network.
2. Center: Color photo of students using the ZapMe! network in school.
3. Bottom: Color photo of six students.
<PAGE>
TABLE OF CONTENTS
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PAGE
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Prospectus Summary......................................................................................... 1
Risk Factors............................................................................................... 5
Special Note Regarding Forward-Looking Statements.......................................................... 20
Use of Proceeds............................................................................................ 21
Dividend Policy............................................................................................ 21
Capitalization............................................................................................. 22
Dilution................................................................................................... 25
Selected Financial Data.................................................................................... 27
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 28
Business................................................................................................... 37
Management................................................................................................. 52
Certain Transactions....................................................................................... 63
Principal Stockholders..................................................................................... 66
Description of Capital Stock............................................................................... 68
Shares Eligible for Future Sale............................................................................ 73
Underwriting............................................................................................... 75
Legal Matters.............................................................................................. 77
Experts.................................................................................................... 78
Available Information...................................................................................... 78
Index to Financial Statements.............................................................................. F-1
</TABLE>
------------------------
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you different information. If anyone provides you different or inconsistent
information, you should not rely on it. We are not, and the underwriters are
not, making an offer to sell these securities in any jurisdiction where the
offer or sale is not permitted. You should assume that the information appearing
in this prospectus is accurate as of the date on the front cover of this
prospectus only. Our business, financial condition, results of operations and
prospects may have changed since that date.
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY MAY NOT CONTAIN ALL THE INFORMATION THAT MAY BE IMPORTANT TO
YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING THE FINANCIAL DATA AND
RELATED NOTES, BEFORE MAKING AN INVESTMENT DECISION. YOU SHOULD CAREFULLY
CONSIDER, AMONG OTHER THINGS, THE MATTERS SET FORTH IN "RISK FACTORS."
OUR COMPANY
ZapMe! is building a broadband interactive network that brings the latest
technology tools and educational resources to schools for free. For each school
participating in the ZapMe! network, we provide free PCs, software, installation
and support, as well as a free, "always on" connection to the Internet using a
satellite system. The ZapMe! network, which is designed primarily for students
aged 13-19, makes education more engaging and entertaining by providing a rich
media computer experience that is free and easy to use. We plan to extend the
ZapMe! network into the home in order to enhance a student's educational
experience and promote better communication among students, teachers and
parents.
Each school participating in the ZapMe! network typically receives 15
high-end, multimedia PCs with 17-inch monitors, a computer server that is
equipped to receive satellite transmissions, and a laser printer, as well as
broadband access to the ZapMe! Netspace and the Internet. The ZapMe! Netspace is
our proprietary, easy-to-use interface that provides access to over 10,000
Internet sites that we identify, review and index for easy reference and other
aggregated content, applications, and services, including Microsoft Word, Excel
and PowerPoint. In addition, we provide a range of educational and communication
tools, including ZapMail, our network email program, and ZapPoints, a membership
program that rewards students for using the ZapMe! network. Because ZapMe!'s
network employs a satellite system, a ZapMe! lab does not require extensive
rewiring to connect to the Internet.
We believe that by providing schools with free PCs and broadband
connectivity to the Internet, we will help to alleviate the significant
technology funding gap in schools, and provide greater educational and economic
opportunity to students of all demographic backgrounds by giving them access to
the digital tools and electronic information that are critical in today's
knowledge-based economy. Moreover, the ZapMe! network will provide a platform
for the school community to engage in many important activities, including
providing teachers and administrators with access to Internet-based educational
content, cost-effective school e-commerce solutions, and school fundraising
opportunities. In connection with many of these core activities, the ZapMe!
network has established strategic alliances with a wide range of companies to
further enhance the educational experience. In addition, we plan to enter into
additional strategic alliances to enhance our technology, gain access to
compelling educational content, add new features and functionality, or generate
sponsorship and e-commerce revenues.
In particular, in the Fall of the 1999-2000 school year, the ZapMe! network
will:
- Enable schools and students to obtain equipment from leading technology
and document management companies, including Dell, the primary provider of
PC's and servers for our network, and Xerox, the primary provider of
printers for our network;
- Offer access to educational testing and training programs, through an
exclusive strategic relationship with Sylvan, a leading provider of
educational services to students in grades K-12;
- Create convenient, low-cost purchasing options for teachers and
administrators interested in purchasing school supplies, software and
supplementary materials from School Specialty, Inc., the largest supplier
of non-textbook education products to educators in the U.S.; and
- Facilitate safe and effective implementation of school fundraising
activities, such as online magazine drives with New Sub Services, the
world's largest provider of magazine subscriptions.
Funding for the development, installation and maintenance of the ZapMe!
network is provided by a combination of corporate sponsorships and e-commerce
relationships. We expect to derive additional revenue from partners and other
sources from after-school use of ZapMe! labs and participation in fundraising
activities. In particular, we will receive additional revenue from Sylvan, which
has
1
<PAGE>
committed to sharing a percentage of its profits resulting from joint activities
on the ZapMe! network. Participating sponsors have the opportunity to underwrite
public service messages, as well as corporate sponsorships appropriate for
ZapMe! network users, including students aged 13-19, teachers and
administrators.
We intend to aggressively grow our installed base of schools and increase
our number of users by installing ZapMe! labs in schools throughout the country.
As our installed base of schools and number of users grow, we intend to
stimulate demand for, and use of, our educational network at home. Students and
parents will be able to log on to the ZapMe! network from home in order to
communicate with other ZapMe! users, as well as access ZapMe! applications and
features unique to the home version. We believe that ZapMe! will increase
parental involvement in schools by facilitating communication with teachers.
As of July 31, 1999, there were more than 250 school districts, representing
over 6,000 K-12 schools, including more than 2,000 middle and high schools, that
have approved and signed a three-year contract with us that permits us to
install a ZapMe! lab at those districts' schools. As of July 31, 1999, we had
installed ZapMe! labs in over 220 schools, which had an average of more than
1,000 students, representing over 220,000 students, each of whom has access to a
free ZapMe! account upon request. While the home version of the ZapMe! Network
is free and is designed to work with a home user's existing Internet access
account, ZapMe! plans on directly offering home users a modestly priced ZapMe!
branded Internet access account in the event the home user does not have an
existing account or wishes to purchase Internet access through ZapMe!. In the
Fall of the 1999-2000 school year, ZapMe! will expand current programs and
incentives to encourage network usage.
CORPORATE INFORMATION
We incorporated in California in June 1997 under the name Satellite Online
Solutions, Inc. In October 1998 we changed our name to ZapMe! Corporation. Our
principal executive offices are located at 3000 Executive Parkway, San Ramon,
CA, 94583, and our telephone number at that location is (925) 543-0300. Our main
web site address is WWW.ZAPME.COM. The reference to our Internet address does
not constitute incorporation by reference of the information contained at this
web site.
ZapMe! and the ZapMe! logo, ZapMail, ZapPoints, ZapSearch, ZapMe! Home, and
I Need To Know are unregistered trademarks of ZapMe!. All other brand names or
trademarks appearing in this prospectus are the property of their respective
holders.
ASSUMPTIONS
Except as otherwise noted, all information in this prospectus assumes:
- our reincorporation from California to Delaware, which will be completed
prior to the effective date of this offering, has already taken place;
- the conversion of all outstanding shares of our preferred stock into
common stock upon the completion of this offering;
- no exercise of the underwriters' over-allotment option; and
- the sale of a total of 454,545 shares to various Series D shareholders
associated with Gilat Satellite Networks in a concurrent public offering
at the initial public offering price minus the underwriting discount and
commissions.
CONCURRENT OFFERING
Concurrently with our underwritten public offering, we are offering directly
to various Series D shareholders associated with Gilat Satellite Networks, at
the initial public offering price minus the underwriting discount and
commissions, an aggregate of 454,545 shares or our common stock. Although these
shareholders have indicated an intention to purchase the shares in the
concurrent offering, they are not obligated to do so. The sale of shares to any
of these shareholders in the concurrent offering is not
dependent on the sale of shares to the others, and we might not sell any shares
in the concurrent
2
<PAGE>
offering. If these shareholders do not purchase their full allotment of shares
in the concurrent offering, we will not sell any of the remainder of those
allotted shares. In this prospectus, we refer to the offering of the 9,000,000
shares hereby as the "underwritten offering," to the offering of 454,545 shares
of common stock as the "concurrent offering" and to the underwritten offering
and the concurrent offering together as the "offerings."
THE OFFERINGS
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<S> <C>
Common stock offered in the underwritten
offering................................... 9,000,000 shares
Common stock offered in the concurrent
offering................................... 454,545 shares
Common stock to be outstanding after the
offerings.................................. 42,360,834 shares
Use of proceeds.............................. For general corporate purposes, including
expansion of operations, working capital,
product development and other corporate
expenses.
Nasdaq National Market symbol................ IZAP
</TABLE>
The above table is based on shares outstanding as of June 30, 1999. This
table excludes, as of June 30, 1999:
- 2,512,857 shares of common stock issuable upon exercise of options
outstanding under our 1997 Stock Option Plan and 1998 Stock Option Plan at
a weighted average exercise price of $1.87 per share and 386,493 shares
reserved for future issuance under the plans; and
- 895,890 shares of common stock issuable upon exercise of outstanding
warrants, of which 755,890 shares at a weighted average exercise price of
$3.84 per share were outstanding at June 30, 1999.
"Common stock to be outstanding after the offering" in the above table
includes:
- 2,030,000 shares of Series E Preferred Stock sold in August 1999;
- 303,125 additional shares issuable to holders of the Series C preferred
stock on closing of this offering assuming an initial public offering
price of $11.00 per share and that the closing of the offering occurs on
September 30, 1999;
- 437,216 additional shares issuable to holders of the Series D preferred
stock on closing of this offering assuming an initial public offering
price of $11.00 per share and that the closing of the offering occurs on
September 30, 1999; and
- 24,787 additional shares issuable to holders of the Series E preferred
stock on closing of this offering assuming an initial public offering
price of $11.00 per share and that the closing of the offering occurs on
September 30, 1999.
The number of additional shares issuable to holders of the Series C
preferred stock, Series D preferred stock and Series E preferred stock would be
higher if the actual offering price is lower or the closing of the offering is
later, and lower if the actual offering price is higher or the closing of the
offering is earlier. See "Management--Incentive Stock Plans," beginning on page
58, for a detailed description of our incentive stock plans; "Description of
Capital Stock," beginning on page 69, for a detailed description of our capital
stock; and note 3 of "Notes to Financial Statements," beginning on page F-12,
for a detailed description of our stockholders' equity.
3
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SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 25,
1997
(INCEPTION) SIX MONTHS ENDED
THROUGH YEAR ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, ---------------------
1997 1998 1998 1999
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<S> <C> <C> <C> <C>
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Revenue..................................................... $ -- $ -- $ -- $ 147
Loss from operations........................................ (570) (4,995) (1,028) (9,096)
Net loss.................................................... (581) (5,031) (1,063) (9,067)
Net loss applicable to common stockholders.................. (581) (5,637) (1,063) (12,838)
Net loss per share, basic and diluted....................... $ (0.05) $ (0.48) $ (0.09) $ (0.95)
Shares used in calculation of net loss per share, basic and
diluted................................................... 11,183 11,685 11,859 13,517
Pro forma net loss per share, basic and diluted
(unaudited)............................................... $ (0.32) $ (0.36)
Shares used in computing pro forma net loss per share, basic
and diluted (unaudited)................................... 15,993 25,462
</TABLE>
See note 1 of notes to financial statements, beginning on page F-9, for an
explanation of the determination of the number of shares used in computing per
share data.
<TABLE>
<CAPTION>
JUNE 30, 1999
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PRO FORMA PRO FORMA AS
ACTUAL PRO FORMA AS ADJUSTED FURTHER ADJUSTED
--------- ----------- ----------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 19,855 $ 29,355 $ 120,425 $ 125,075
Working capital.......................................... 15,597 25,097 116,167 120,817
Total assets............................................. 32,146 41,646 132,716 137,366
Capital lease obligations................................ 6,705 6,705 6,705 6,705
Redeemable convertible preferred stock................... 6,080 6,080 -- --
Stockholders' equity..................................... 14,960 24,460 121,610 126,260
</TABLE>
The balance sheet data table set forth above summarizes:
- actual balance sheet data;
- pro forma balance sheet data giving effect to the sale of 2,030,000 shares
of Series E preferred stock in August 1999, with net proceeds of
approximately $9.5 million; and
- pro forma as adjusted balance sheet data, adjusted to give effect to the
sale by ZapMe! in the underwritten offering of 9,000,000 shares of common
stock offered through this prospectus, at an assumed initial public
offering price of $11.00 per share, and after deducting the estimated
underwriting discount and estimated offering expenses payable by us and
the conversion of all outstanding shares of preferred stock, including the
shares of Series E preferred stock, into shares of common stock, which was
computed using an assumed initial public offering price of $11.00 per
share and an assumed closing date of September 30, 1999.
- pro forma as further adjusted balance sheet data, adjusted to give effect
to the underwritten offering and the sale of an additional 454,545 shares
in the concurrent offering using an assumed initial public offering price
of $11.00 per share, less the underwriting discount and commissions.
4
<PAGE>
RISK FACTORS
THIS OFFERING AND AN INVESTMENT IN OUR COMMON STOCK INVOLVE A HIGH DEGREE OF
RISK. YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND THE OTHER
INFORMATION IN THIS PROSPECTUS BEFORE INVESTING IN OUR COMMON STOCK. OUR
BUSINESS AND RESULTS OF OPERATIONS COULD BE SERIOUSLY HARMED BY ANY OF THE
FOLLOWING RISKS. THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE DUE TO ANY
OF THESE RISKS, AND YOU MAY LOSE PART OR ALL OF YOUR INVESTMENT.
WE HAVE AN UNPROVEN BUSINESS MODEL AND A LIMITED OPERATING HISTORY WHICH MAKES
AN EVALUATION OF OUR BUSINESS DIFFICULT
Because we were incorporated in June 1997 and only launched our network in
June 1998, we have a limited operating history on which investors can base an
evaluation of our business and prospects. Our revenue and income potential are
unproven and our business model is unique, constantly evolves and will continue
to evolve. We only recently began generating revenue from sponsorships and to
date we have not generated any revenue from e-commerce or network services. We
have limited insight into trends that may emerge and affect our business.
An investor in our common stock must carefully consider the risks and
difficulties frequently encountered by companies in an early stage of
development, as well as the risks we face due to our participation in a new and
rapidly evolving market. Our business strategy may not be successful and we may
not successfully overcome these risks. Please see "Management's Discussion and
Analysis of Financial Condition and Results of Operations," beginning on page
28, for more detailed information on our limited operating history.
WE HAVE A HISTORY OF LOSSES, AND WE EXPECT LOSSES AND SIGNIFICANT INCREASES IN
OUR OPERATING EXPENSES FOR THE FORESEEABLE FUTURE
We incurred net losses of approximately $14.7 million for the period of
inception through June 30, 1999. These losses resulted primarily from costs
related to developing the ZapMe! network, deploying the ZapMe! network to
schools and developing content and features for the ZapMe! network. We have not
achieved profitability. We expect to have increasing net losses and negative
cash flows for the foreseeable future. The size of these net losses will depend,
in part, on the rate of growth in our revenues from our sponsors, e-commerce
offerings and network services and on the level of our expenses. We intend to
increase our operating expenses substantially as we:
- increase the number of users of our network through the deployment of our
network to additional schools;
- increase our network usage through marketing activities and the addition
of new features; and
- increase our general and administrative functions to support our growing
operations.
As a result, we expect that our operating expenses will increase
significantly for the foreseeable future. With increased expenses, we will need
to generate significant additional revenues to achieve profitability.
Consequently, it is possible that we will never achieve profitability, and even
if we do achieve profitability, we may not sustain or increase profitability on
a quarterly or annual basis in the future. If we do not achieve or sustain
profitability in the future, then we may be unable to continue our operations.
WE EXPECT OUR QUARTERLY FINANCIAL RESULTS TO FLUCTUATE AND OUR EARLY STAGE OF
DEVELOPMENT LIMITS OUR ABILITY TO PREDICT REVENUES AND EXPENSES PRECISELY
Our quarterly and annual operating results have varied in the past and are
likely to fluctuate significantly in the future due to a variety of factors,
many of which are outside of our control. Factors
5
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that might cause quarterly fluctuations in our operating results include the
factors described in the subheadings below. To respond to these and other
factors, we may need to make business decisions that could impact our quarterly
operating results. Most of our expenses, such as lease payment obligations,
employee compensation and rent, are relatively fixed in the short term.
Moreover, our expense levels are based, in part, on our expectations regarding
future revenue levels. As a result, if total revenues for a particular quarter
are below our expectations we could not proportionately reduce our operating
expenses for that quarter. Therefore, this revenue shortfall would have a
disproportionate effect on our expected operating results for that quarter.
Consequently, we believe that period-to-period comparisons of our operating
results are not necessarily meaningful, and should not be viewed as indicators
of our future performance. In addition, during future periods our quarterly or
annual operating results may fail to meet the expectations of securities
analysts or investors. In this case the trading price of our common stock would
likely decrease.
OUR METHODS OF GENERATING REVENUES ARE NEW AND LARGELY UNTESTED AND IF WE ARE
UNABLE TO ESTABLISH AND CONTINUE TO GENERATE MULTIPLE REVENUE STREAMS OUR FUTURE
REVENUE GROWTH WILL SUFFER
The success of our business will depend on our ability to generate revenue.
We have only recently begun to generate revenue, and because our methods of
generating revenue are new and largely untested we may generate lower revenues
than we expect. Further, if we are unable to generate multiple new sources of
revenue, our future revenue growth will suffer. We initially expect to receive
the majority of our revenue from:
- sponsorships;
- e-commerce; and
- network services, including marketing and profit sharing fees.
From inception through June 30, 1999, we generated approximately 90% of our
revenue from sponsorships. Although we expect to generate a portion of our
future revenue through e-commerce, we have not generated any e-commerce revenue
through June 30, 1999. As a result, our expected primary methods of generating
revenue are relatively new to us and largely untested.
We expect that revenue from sponsorships will make up a significant amount
of our revenue for the foreseeable future, although we may never achieve
significant sponsorship revenue. If Internet and online advertising do not
continue to grow, or if sponsorship on the ZapMe! network does not achieve
market acceptance, our revenues generated from sponsorships will be lower than
expected, and may be insufficient to support our business model. See
"Business--Our Strategy," beginning on page 41, for more detailed information
regarding sponsorship revenue.
The success of our e-commerce initiative depends on our users being willing
to engage in commerce over our network and more generally upon the adoption of
the Internet as a medium for commerce by a broad base of customers and our
users. If this market fails to develop or develops more slowly than expected, or
if our e-commerce services do not achieve market acceptance, our revenue
generated from e-commerce will be lower than expected.
In the future, we expect to generate revenue through network services. For
example, we have entered into an agreement with a strategic partner who will use
the ZapMe! labs after school hours and, in return, will pay us a portion of its
revenue or profits. We anticipate entering into other arrangements like this
one; however, if we are unable to structure such arrangements, if they develop
more slowly then expected, or if our partners are unable or unwilling to make
full and effective use of our ZapMe! labs and network, our revenue generated
from network services will be lower then expected.
6
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OUR BUSINESS AND FUTURE REVENUE GROWTH WILL SUFFER IF WE FAIL TO RETAIN AND GROW
OUR USER BASE, GENERATE FREQUENT AND RECURRING USAGE BY OUR USERS, OR
DEMONSTRATE THAT OUR USERS ARE ACTUALLY USING OUR SERVICE
The success of our business will depend on our ability to add users and
demonstrate to sponsors that our users are using the ZapMe! network on a regular
basis. Our ability to grow our user base depends largely on our ability to
deploy our network to additional schools and extend our network to home users.
If we are unable to rapidly deploy our network to a large number of additional
schools, we will not be able to grow our core school user base, and our ability
to generate revenue and implement our strategy will be severely limited. Our
ability to grow our user base also depends on our success with the development
and implementation of programs designed to help schools encourage their students
to register.
We must also encourage our users to use our service regularly and for long
periods of time. We have developed programs and features to encourage this type
of use of our network; however, these programs could fail, in whole or in part.
There are also a variety of reasons why our users might not continue to
regularly use our service. Some users may dislike our dynamic billboard, which
is always present. Users may find that our features and content are not
sufficiently compelling to continue regular use, or may turn to other Internet
providers for such services, such as email. A number of our users may not
actively use our service for periods of time. If we are not able to demonstrate
to our sponsors that we have an active and growing user base, sponsors may
choose not to enter into sponsorship agreements with us and our revenue
generated from sponsorships would suffer.
WE RELY HEAVILY ON OUR KEY PARTNERS AND IF THEY TERMINATE THEIR STRATEGIC
ALLIANCES WITH US OR IF THE ARRANGEMENT FAILS TO MEET OUR OBJECTIVES WE MAY
EXPERIENCE DIFFICULTY OR DELAYS IN INSTALLING AND MAINTAINING OUR NETWORK AND
OUR REVENUE GROWTH MAY SUFFER
Our current strategic alliance relationships include: Dell, Gilat and
Spacenet, Microsoft, New Sub Services, School Specialty, Sylvan, Toshiba and
Xerox. We rely heavily on our strategic alliance relationships. These agreements
involve many aspects of our business and in some cases include the sale of
equity securities to these companies. These types of arrangements are complex
and will require a great deal of effort to operate successfully. As a result,
there are many risks related to these arrangements, including some that we may
not have foreseen. It is difficult to assess the likelihood of occurrence of
these risks, including the lack of success of the overall arrangement to meet
the parties' objectives. If we fail to maintain these relationships, or if our
partners do not perform to our expectations, our ability to deploy our network
to additional schools, the performance of our network, and our ability to
generate revenues may all be harmed. Specific examples of these strategic
alliance relationships include: (1) our agreements with Sylvan relating to the
use of our network and labs outside of school hours, (2) our agreement with Dell
relating to the acquisition and integration of our computer lab equipment, and
(3) our agreements with Spacenet relating to the installation of our network and
labs as well as the operation of our network.
WE ARE DEPENDENT ON THIRD PARTIES TO DEPLOY OUR NETWORK TO SCHOOLS AND SUPPORT
IT ONCE INSTALLED
We plan to rapidly deploy our network to additional schools across the
country. We have used, and plan to continue to use, third parties such as Gilat
and Spacenet, and Inacom, to install and support the ZapMe! network in each
school. In the past we have experienced difficulties resulting from the failure
of former third party integrators to manage successfully a wide-scale deployment
into a school environment. Such failures resulted in delays in the scheduled
deployment of our network to additional schools. We have recently entered into
relationships with nationally recognized parties to install software on the
computers, to install the ZapMe! lab in each school site and to serve as the
general contractor to oversee the installation process. However, these parties
may not be able to install schools on a wide scale according to our schedule.
While we do not currently anticipate additional changes of
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our third party installers, any further changes would cause delays in the
deployment of the ZapMe! network and any inability to install schools according
to our plan could limit or eliminate revenue generated from sponsorships,
e-commerce and network services. Further, if we do need to hire substitute or
additional third party installers of our network we cannot assure you that we
will be able to do so on terms as favorable as our current arrangements, or at
all, which could result in higher installation costs to us as well as potential
delays in our deployment.
We also rely on third parties to provide the majority of support necessary
to maintain the ZapMe! network and labs once installed. Any inability to
maintain or delays to the maintenance of this equipment would lead to lower
revenue generated from sponsorship and network services.
OUR DEPENDENCE ON SHORT-TERM SPONSORSHIP CONTRACTS EXPOSES US TO GREATER
PRESSURE ON OUR SPONSORSHIP PRICES AND ALLOWS SPONSORS TO QUICKLY CEASE THEIR
SPONSORSHIPS
A substantial portion of our sponsorship revenue is and will continue to be
derived from short-term contracts. Consequently, we may not be able to command
higher prices typically associated with more comprehensive arrangements.
Further, many of our sponsors will be able to cease advertising on our network
quickly and without penalty, thereby increasing our exposure to competitive
pressures. Our current sponsors may not continue to purchase advertisements and
we may not be able to secure new contracts from existing or future sponsors at
attractive rates or at all.
WE DERIVE A SIGNIFICANT PORTION OF OUR REVENUE FROM A SMALL NUMBER OF SPONSORS
AND OUR REVENUE MAY DECLINE SIGNIFICANTLY IF ANY MAJOR SPONSOR CANCELS OR DELAYS
A PURCHASE
A small number of sponsors account for a significant portion of our revenue,
and we anticipate that this trend will continue. For example, in the near-term
we expect to derive a substantial portion of our revenue from an agreement with
Sylvan, and anticipate that this agreement will continue to account for a
meaningful percentage of our revenue through December 31, 2003, when it expires.
GE Americom accounted for approximately 87% of our revenue during the six-month
period ended June 30, 1999. Our revenue from sponsorships will not increase if
we are unable to renew our material agreements, replace such agreements with
similar agreements with new sponsors, or sufficiently diversify our sponsor base
so that we do not rely on a small number of sponsors for a significant portion
of our revenue.
OUR VARIED SALES CYCLES COULD HARM OUR RESULTS OF OPERATIONS IF FORECASTED SALES
ARE DELAYED OR DO NOT OCCUR
The length of time between the date of initial contact with a potential
sponsor and the execution of a contract with the potential sponsor varies
significantly and depends on the nature of the arrangement. Furthermore,
contracting with potential sponsors is subject to delays over which we have
little or no control, including:
- potential sponsors' adoption of the ZapMe! network, which is an entirely
new advertising medium, as an acceptable use of advertising budgets;
- potential sponsors' budgetary constraints;
- potential sponsors' internal acceptance reviews; and
- the possibility of cancellation or delay of projects by sponsors.
During any given sales cycle, we may expend substantial funds and management
resources and yet not obtain sponsorship revenue. Our results of operations for
a particular period may suffer if sales to sponsors forecasted in a particular
period are delayed or do not otherwise occur.
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OPPOSITION TO OUR NETWORK, ADVERTISING IN SCHOOLS AND UNRESTRICTED INTERNET
ACCESS MAY LEAD TO NEGATIVE PUBLICITY, REGULATORY CONTROL, LEGAL ACTION,
BOYCOTTS OR OTHER ACTIONS THAT COULD HARM OUR BUSINESS
We expect to generate a significant portion of our revenue from sponsorships
purchased by marketers interested in addressing our student population across
the ZapMe! network in schools. This
business model may prove controversial and lead to negative publicity as well as
action by the government or private interests to restrict or stop our network.
To date, some third parties that oppose corporate advertising in schools, as
well as sponsorships on the ZapMe! network, have engaged in publicity campaigns
to deter sponsors from dealing with the companies engaging in advertising or
sponsorship activities and have sought legislation to curb this practice. In
particular, California recently enacted a law that imposes additional procedural
requirements before local public school boards can enter into contracts
involving advertising in schools. In particular, starting in the year 2000,
California public school boards must (a) notice a public hearing and make
certain findings regarding the importance and affordability of a covered product
or service, such as the ZapMe! network, before entering into new contracts and
(b) give parents the right to opt in writing that their children not
participate. This law could delay deployment of the ZapMe! network and reduce
student participation in California. Similar or more restrictive legislation is
possible in other states and at the local and federal levels.
Anti-school-advertising groups have had some successes in the past seeking
regulation and boycotts of companies that advertise in schools, such as Channel
One, a wholly owned subsidiary of Primedia, Inc. Moreover, any new restriction,
law or regulation pertaining to online media, sponsorships or e-commerce in
schools, or the application or interpretation of existing laws, could decrease
the demand for our service, increase our cost of doing business or otherwise
have a negative impact on our business.
The Internet is the subject of an increasing number of laws and regulations.
These laws or regulations may relate to liability for information retrieved from
or transmitted over the Internet, online content regulation, user privacy,
taxation and the quality of products and services. In addition, these new laws
have not yet been interpreted by the courts, and consequently their
applicability and reach are not defined. Moreover, the applicability to the
Internet of existing laws governing issues such as intellectual property
ownership, copyright, defamation, obscenity and personal privacy is uncertain
and developing. We may be subject to claims that our services violate such laws.
Any new legislation or regulation in the United States or abroad or the
application of existing laws and regulations to the Internet could impose
significant restrictions, requirements or additional costs on our business,
require us to change our operating methods, or subject us to additional
liabilities and cause the price of our common stock to decline. Please see
"Business--Government Regulation," beginning on page 50, for more detailed
information on regulations that might affect our business.
WE ARE DEPENDENT ON OUR NETWORK INFRASTRUCTURE, AND IN PARTICULAR ON SATELLITES
AND SATELLITE TRANSMISSION TECHNOLOGY, AND ANY FAILURE OF OUR NETWORK WOULD HARM
OUR OPERATIONS
Our business plan calls for rapidly deploying our network to many additional
schools. Our network infrastructure may not be able to support the demands this
growth places on it and its performance and reliability may decline. We have
experienced and may in the future experience interruptions in service as a
result of outages and other delays occurring throughout our network
infrastructure. If these outages or delays occur frequently in the future, use
of our network could grow more slowly or decline.
Our network operations center and our communications and other computer
hardware are also subject to disruptions which are beyond our control and for
which we may not have adequate insurance. Fire, floods, earthquakes, power loss,
telecommunications failures, break-ins and similar events could damage our
communications hardware and other network operations.
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Each school installed with the ZapMe! network is connected to our network
through a satellite link. The complete or partial loss of the satellite used to
transmit data to schools could affect the performance of our network. Our
network currently uses a single satellite. Orbiting satellites are subject to
the risk of failing prematurely due to mechanical failure, a collision with
objects in space or an inability to maintain proper orbit. Any such loss of the
use of the satellite could prevent us from delivering our services. This
interruption in services would continue until either a new substitute satellite
is placed into orbit, or until our services were moved to a different satellite.
Moving to an alternate satellite would require us to redirect all of the
satellite dishes in our network which is a very time consuming and expensive
process. The loss of a satellite could also result in increased costs of using
satellites. We are dependent on transmissions from the satellite to our customer
sites, and these transmissions may be interrupted or experience other
difficulty, which could result in service interruptions and delays in our
network. In addition, the use of the satellite to provide transmissions to our
customers requires a direct line of sight between the satellite and the receiver
at the school and is subject to distance and rain attenuation. In markets which
experience heavy rainfall we may need to use greater power to maintain
transmission quality. Such changes may require Federal Communications
Commission, or FCC, approval which may not be granted.
WE MAY BE SUBJECT TO THIRD PARTY ABUSES OF OUR NETWORK, SUCH AS "SPAM" OR
"HACKING," WHICH COULD LEAD TO INTERRUPTIONS IN OUR SERVICE AND OTHER ADVERSE
CONSEQUENCES WHICH COULD BE EXPENSIVE TO FIX, SUBJECT US TO LIABILITY OR RESULT
IN LOWER USE OF OUR NETWORK THAN WE EXPECT
The future success of our business depends on the security of our network.
Computer viruses or problems caused by our users or other third parties, such as
the sending of excessive volumes of unsolicited bulk email or "spam," could lead
to interruptions, delays, or cessation in service to our users. In addition, the
sending of "spam" through our network could result in third parties asserting
claims against us. We may not prevail in such claims and our failure to do so
could result in large judgments which would harm our business. Users or other
third parties could also potentially jeopardize the security of confidential
information stored in our computer systems by their inappropriate use of the
Internet, including "hacking," which could cause losses to us or our users or
deter persons from using our services. Users or third parties may also
potentially expose us to liability by "identity theft," or posing as another
ZapMe! user. Unauthorized access by current and former employees or others could
also potentially jeopardize the security of confidential information stored in
our computer systems and those of our users.
We expect that our users will increasingly use the Internet for commercial
transactions in the future. Any network malfunction or security breach could
cause these transactions to be delayed, not completed at all, or completed with
compromised security. Users or others may assert claims of liability against us
as a result of any failure by us to prevent these network malfunctions and
security breaches, and may deter others from using our services, which could
cause our business prospects to suffer. Although we intend to continue using
industry-standard security measures, such measures have been circumvented in the
past, and we cannot assure you that these measures will not be circumvented in
the future. In addition, to alleviate problems caused by computer viruses or
other inappropriate uses or security breaches, we may have to interrupt, delay,
or cease service to our users, which could severely harm our business.
WE ARE DEPENDENT ON OUR LEASED SATELLITE BANDWIDTH AND IF SUCH LEASES WERE
TERMINATED OR OTHERWISE UNAVAILABLE TO US WE COULD BE SUBJECTED TO SIGNIFICANT
ADDITIONAL COSTS OR RESTRICTIONS ON OUR BUSINESS
We currently lease satellite bandwidth from GE Americom and in the future
expect to sublease satellite bandwidth from Spacenet. If, for any reason, the
leases were to be terminated, we might not be able to renegotiate new leases
with GE Americom or Spacenet or another satellite provider on favorable terms,
if at all.
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The satellite industry is a highly regulated industry. In the United States,
operation and use of satellites requires licenses from the FCC. As a lessee of
satellite space, we could in the future be indirectly subject to new laws,
policies or regulations or changes in the interpretation or application of
existing laws, policies or regulations, any of which may modify the present
regulatory environment in the United States. While we believe that our satellite
access providers will be able to obtain all U.S. licenses and authorizations
necessary to operate effectively, they may not continue to be successful in
doing so. Our failure to indirectly obtain some or all necessary licenses or
approvals could impose significant additional costs and restrictions on our
business, require us to change our operating methods, or result in our no longer
being able to provide our service to affected users.
IF WE ARE UNABLE TO COMPETE EFFECTIVELY AGAINST OUR CURRENT AND POTENTIAL
COMPETITORS THEN WE MAY LOSE USERS TO OTHER SERVICES WHICH COULD RESULT IN LOWER
USAGE OF OUR NETWORK AS WELL AS LOWER THAN EXPECTED REVENUES
The market for the ZapMe! network is new and rapidly evolving, and we expect
competition in and around this market to intensify in the future. While we do
not believe any of our competitors currently offer the functionality offered by
the ZapMe! network, we face competition from a number of companies who provide
services and functionality similar to portions of our network, who market
products and services to a similar base of users, or both, and who could in the
future seek to compete more directly with us. In this light, we believe our
current and potential competitors (and potential partners) include America
Online and Channel One, as well as Disney and Hughes Electronics. For more
information on our competitive position and our competitors, please see
"Business-- Competition," which begins on page 48.
Many of our existing competitors, as well as potential new competitors, have
longer operating histories, greater name recognition, larger customer bases and
significantly greater financial, technical and marketing resources than we do.
This may allow them to devote greater resources than we can to the development
and promotion of their products and services. Many of these competitors offer a
wider range of products and services than we do. These products and services may
attract users to our competitors' sites and, consequently, result in lower usage
of our network.
SCHOOLS MAY USE ALTERNATIVE MEANS TO ACQUIRE COMPUTERS AND INTERNET ACCESS,
WHICH COULD REDUCE OUR POTENTIAL USER BASE AND MAY LEAD TO LOWER THAN EXPECTED
REVENUES
An immediate attraction of deploying our network is free access to computers
and the Internet. However, for a variety of reasons, schools may decide to use
other methods to acquire computers and Internet access. If schools decide to use
means other than deployment of our network, it will limit our user base, and
consequently we will have lower than expected revenues from sponsorships,
e-commerce and network services. Aside from purchasing the computers and
Internet access from already existing budgets or from donations from parents or
other members of the community, some other methods of acquiring computer
equipment and Internet access that schools may turn to include the government
subsidized E-Rate and various free computer equipment and Internet access
companies and offerings. See "Business--Alternative Sources of Computer
Equipment and Internet Access," beginning on page 49, for additional information
on the other alternatives.
WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL CAPITAL TO FUND OUR OPERATIONS WHEN
NEEDED
We expect to use the net proceeds of this offering primarily for general
corporate purposes, including expanding our sales and marketing activities,
continuing investments in technology and product development and other capital
expenditures, as well as working capital and other corporate expenses, including
the funding of net losses from operations. We believe that such proceeds,
together with our existing capital resources, will be sufficient to meet our
cash requirements for at least the next twelve months. However, our cash
requirements are large, and depend on several factors, including
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cash outflows due to lease obligations, the rate of expansion of our installed
school base, the availability of equipment leases on competitive terms, our
success in generating revenues, the growth of sales and marketing, and other
factors. If capital requirements vary materially from those currently planned,
we may require additional financing sooner than anticipated.
If additional funds are raised through the issuance of equity securities,
the percentage ownership of our stockholders will be reduced, stockholders may
experience additional dilution, or these equity securities may have rights,
preferences or privileges senior to those of the holders of our common stock. If
additional funds are raised through the issuance of debt securities, such
securities would have rights, preferences and privileges senior to holders of
common stock and the term of such debt could impose restrictions on our
operations. Additional financing may not be available when needed on terms
favorable to us or at all. If adequate funds are not available or are not
available on acceptable terms, we may be unable to deploy our network, develop
or enhance our services, take advantage of future opportunities or respond to
competitive pressures.
WE ARE DEPENDENT ON THE CONTINUED GROWTH IN USE AND POPULARITY OF OUR NETWORK
AND THE INTERNET BY OUR USERS AND OUR ABILITY TO SUCCESSFULLY ANTICIPATE THE
FREQUENTLY CHANGING TASTES OF OUR USERS
Our business is unlikely to be successful if the popularity of the Internet
and related media in school as an educational tool and among students in general
does not continue to increase. Even if the popularity of the Internet and
related media does increase, the success of our network in particular depends on
our ability to anticipate and keep current with the frequently changing tastes
of our users, primarily students age 13-19. Any failure on our part to
successfully anticipate, identify or react to changes in styles, trends or
preferences of our users would lead to reduced interest in and use of the ZapMe!
network and therefore limit opportunities for sponsorship sales as well as
e-commerce. Moreover, the ZapMe! brand could be eroded by misjudgments in
service offerings or a failure to keep our content current with the evolving
preferences of our audience.
SEASONAL AND CYCLICAL PATTERNS MAY AFFECT OUR REVENUE AND RESULTS OF OPERATIONS
We believe that in-school advertising and e-commerce sales will be lower
during the Summer, in late December and early January and during other school
holiday periods when most users of the ZapMe! network will be on vacation and
away from school. In addition, advertising sales in traditional media, such as
television and radio, generally are lower in the first and third calendar
quarters of each year. If our market makes the transition from an emerging to a
more developed market, these traditional seasonal and cyclical patterns may
develop in the future. These patterns would exacerbate seasonality to which we
are subject by further reducing advertising revenues in the first and third
calendar quarter of each year. Seasonal and cyclical patterns in online
advertising and e-commerce in general may also affect our revenue. Because our
operating history is so limited, it is difficult for us to accurately predict
these trends and plan accordingly. Since our operating expenses are based on
future revenue performance, it is possible that seasonal fluctuations could
materially and adversely affect our revenue and results of operations.
OUR NETWORK IS NEW AND WE MAY NEED TO DEVELOP TOOLS TO ATTRACT SPONSORS AND
PARTNERS
It is important to our sponsors that we accurately measure the user base
demographics and sponsorship delivery on our network. We are currently
implementing systems designed to leverage known non-identifying demographic data
about our users, including age, gender, and location identified by zip code, in
such a way as to permit sponsors to address their intended market segment. This
effort may be complicated by the remote nature of the ZapMe! labs in which this
information is generated and recorded before being transmitted back to our
network operations center. If we fail to implement these systems successfully,
we may not be able to accurately evaluate the demographic characteristics of our
users. Sponsors may choose not to advertise on our network or may pay less for
sponsorships if they perceive our measurements to be unreliable.
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No standard measurement currently exists to determine the effectiveness or
market reach of the advertising that is available on our network. We may need to
develop standard measurements in order to support and promote our network as a
significant advertising medium. If such standards do not develop, it could be
difficult to attract sponsors and sponsorship revenue.
OUR EFFORTS TO DEVELOP WIDESPREAD BRAND RECOGNITION ARE LIKELY TO BE EXPENSIVE
AND MAY FAIL
The development of our brand is important to our future success. If we fail
to develop sufficient brand recognition, our ability to attract advertising and
sponsorship revenue may be impaired, and our revenue will suffer. In order to
build our brand awareness we must succeed in our brand marketing efforts,
deliver features and services that are engaging to our users, provide
high-quality content and increase user traffic to the ZapMe! network. These
efforts have required, and will continue to require, significant expenses. We
cannot assure you that we will be successful in developing our brand.
WE MAY BE LIABLE OR INCUR ADDITIONAL COSTS FOR OUR USE OR DISTRIBUTION OF OUR
USERS' INFORMATION
We could be subject to liability claims for misuses of information collected
from our users, such as for unauthorized marketing purposes, and will face
additional expenses to analyze and comply with increasing regulation in this
area. In addition, the Federal Trade Commission, or FTC, is in the process of
issuing final regulations governing collection of personal information from
children under 13, has submitted proposals to the Internet industry regarding
the rights and safety of children using the Internet, and is expected to issue
additional regulations in this area. We are sensitive to the impetus for these
regulations, and accordingly, we currently collect only non-personally
identifying information during user registration, including age, gender, and
location by zip code. We use this non-personal information internally to
determine how to improve our service, applications and features and to focus our
advertisements and communications. We also use this information externally on an
aggregated, non-individually identifiable basis to provide our sponsors with the
demographics of our user base and response rate to their media. We may in the
future collect names and other personal information for users over 13 in
connection with contests and other promotions, but will not distribute this
information externally, and may sell our user information on an aggregated,
non-individual basis. We could incur additional expenses, or be required to
alter, or eliminate, various current practices if new regulations regarding the
use or distribution of personal and other information collected online are
introduced or if our privacy practices are investigated.
WE MAY BE SUBJECT TO LIABILITY FOR PRODUCTS SOLD THROUGH OUR NETWORK
To date, we have had very limited experience in the sale of products online
and the development of relationships with manufacturers or suppliers of such
products. However, we plan to develop a range of e-commerce opportunities.
Consumers may sue us if any of the products that we sell online are defective,
fail to perform properly or injure the user. Liability claims resulting from our
sale of products could require us to spend significant time and money in
litigation or to pay significant damages.
WE MAY BE SUBJECT TO LIABILITY FOR PUBLISHING OR DISTRIBUTING CONTENT OVER OUR
NETWORK
We may be subject to claims relating to content that is published on or
downloaded from the ZapMe! network. We also could be subject to liability for
content that is accessible from our network through links to other web sites or
that is posted by members in chat rooms or bulletin boards. Although we carry
general liability insurance, our insurance may not cover potential claims of
this type, such as defamation or trademark infringement, or may not be adequate
to cover all costs incurred in defense of potential claims or to indemnify us
for all liability that may be imposed. In addition, any claims like this, with
or without merit, could require us to change our network in a manner that could
be less attractive to our customers and would result in the diversion of our
financial resources and management personnel.
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WE MAY NOT BE ABLE TO DELIVER VARIOUS SERVICES IF THIRD PARTIES FAIL TO PROVIDE
RELIABLE SOFTWARE, SYSTEMS AND RELATED SERVICES TO US
All of our advertisements are served using software licensed from
NetGravity. While there is other software available, it would substantially
disrupt our business in the near term to switch to another provider. As such, we
are reliant on NetGravity and its software. If NetGravity's software fails to
perform as expected, or if we are not able to renew such agreement or license or
internally develop similar software in the future, we may not be able to
effectively display advertisements to our users. In such event, our revenue from
sponsorships would likely suffer. On July 13, 1999, DoubleClick, an Internet
advertising provider, and NetGravity announced that they had entered into a
merger agreement pursuant to which DoubleClick will acquire NetGravity in a
stock-for-stock transaction. We cannot predict how this acquisition will affect
our relationship with NetGravity.
In addition we are dependent on various third parties for other software,
systems and related services. Several of the third parties that provide software
and services to us have a limited operating history, have relatively immature
technology and are themselves dependent on reliable delivery of services from
others. As a result, our ability to deliver various services to our users may
suffer due to the failure of these third parties to provide reliable software,
systems and related services to us.
THE INABILITY TO OBTAIN KEY SOFTWARE FROM THIRD PARTIES MAY HARM OUR BUSINESS
We rely on software licensed from third parties, including applications that
are integrated with internally developed software and used in our products. Most
notably, we license remote management software and Windows NT. These third-party
technology licenses may not continue to be available to us on commercially
reasonable terms, or at all, and we may not be able to obtain licenses for other
existing or future technologies that we desire to integrate into our products.
Our business could be seriously harmed if we cannot maintain existing
third-party technology licenses or enter into licenses for other existing or
future technologies needed for our products.
OUR SUCCESS DEPENDS UPON THE SUCCESSFUL DEVELOPMENT OF NEW SERVICES AND FEATURES
IN THE FACE OF RAPIDLY EVOLVING TECHNOLOGY
Our market is characterized by rapidly changing technologies, frequent new
service introductions and evolving industry standards. The recent growth of the
Internet and intense competition in our industry exacerbate these market
characteristics. Our future success will depend on our ability to adapt to
rapidly changing technologies by continually improving the performance, features
and reliability of our network. We may experience difficulties that could delay
or prevent the successful development, introduction or marketing of new
features, content or network services. In addition, our new enhancements must
meet the requirements of our current and prospective users and must achieve
significant market acceptance. We could also incur substantial costs if we need
to modify our service or infrastructures to adapt to these changes.
FAILURE TO MANAGE THE GROWTH OF OUR OPERATIONS COULD HARM OUR BUSINESS AND
STRAIN OUR MANAGERIAL, OPERATIONAL AND FINANCIAL RESOURCES
We have rapidly and significantly expanded our operations. We anticipate
that further significant expansion will be required to grow our user base if we
are to be successful in implementing our business strategy. We may not be able
to implement management information and control systems in an efficient and
timely manner, and our current or planned personnel, systems, procedures and
controls may not be adequate to support our future operations. If we are unable
to manage growth effectively, our business would suffer. During 1998, we
increased the number of employees from 12 to 45, and during the first six months
of 1999, we added 43 additional employees. This expansion is placing a
significant strain on our managerial, operational and financial resources. Most
of our existing senior management personnel, including Rick Inatome, our Chief
Executive Officer, Don Kingsborough, our Senior Vice President, Sales and
Marketing, William S. Burwell, our Chief Information Officer and Bob
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Rudy, our Vice President of Operations, joined us within the last six months.
Some other key managerial, technical and operations personnel have not yet been
fully integrated. To manage the expected growth of our operations and personnel,
we will be required to:
- improve existing and implement new operational, financial and management
controls, reporting systems and procedures;
- install new management information systems; and
- train, motivate and manage our sales and marketing, engineering, technical
and customer support employees.
THE LOSS OF KEY PERSONNEL MAY HURT OUR ABILITY TO OPERATE OUR BUSINESS
EFFECTIVELY
Our success depends to a significant degree upon the continued contributions
of the principal members of our sales, engineering and management departments,
many of whom perform important management functions and would be difficult to
replace. Specifically, we believe that our future success is highly dependent on
our senior management, and in particular on Lance Mortensen, our Chairman, and
Rick Inatome, our Chief Executive Officer. We do not have employment contracts
with our key personnel. The loss of the services of any key personnel,
particularly senior management, could seriously harm our business.
IF WE ARE UNABLE TO RETAIN AND HIRE ADDITIONAL QUALIFIED PERSONNEL AS NECESSARY,
WE MAY NOT BE ABLE TO SUCCESSFULLY ACHIEVE OUR OBJECTIVES
We have recently hired and anticipate continuing to hire additional
engineering, sales, marketing, e-commerce, customer support and accounting
personnel. We may not be able to attract and retain the necessary personnel to
accomplish our business objectives, and we may experience constraints that will
adversely affect our ability to deploy the ZapMe! network in a timely fashion or
to support our users and operations. We have at times experienced, and continue
to experience, difficulty in recruiting qualified personnel. Recruiting
qualified personnel is an intensely competitive and time-consuming process.
WE ARE CURRENTLY IN ARBITRATION WITH ONE OF OUR FORMER OFFICERS, WHICH IF
RESOLVED AGAINST US COULD RESULT IN OUR OBLIGATION TO PAY LARGE DAMAGES OR
ACCELERATED VESTING OF THE OFFICER'S ZAPME! STOCK
We filed a demand for arbitration with our former President and Director,
Frank J. Vigil, related to his employment at and departure from ZapMe!. Mr.
Vigil filed a response to our demand and a counterclaim. We cannot assure you
that we will prevail in this arbitration, and any decision against us could
result in an obligation to pay some or all of the damages Mr. Vigil has sought
in his counterclaim. These damages could be substantial. Notably, under the
terms of his employment agreement and related agreements, Mr. Vigil was
permitted to purchase 1.35 million shares of common stock of ZapMe!. Some of
those shares were subject to a right of repurchase by ZapMe! at the time of Mr.
Vigil's separation from ZapMe!. Mr. Vigil may claim that, under the terms of his
employment agreement, the closing of this offering could result in the
cancellation of the right of repurchase and the full vesting of his stock. A
decision against us with regard to the validity of the employment contract and
related agreements could therefore result in the complete vesting of Mr. Vigil's
stock. See "Business--Legal Proceedings" on page 51 for more detailed
information on this arbitration.
THE PURCHASERS IN THE OFFERING WILL EXPERIENCE DILUTION DUE TO OUR OBLIGATION TO
ISSUE ADDITIONAL SHARES TO VARIOUS PREFERRED STOCKHOLDERS IN CONNECTION WITH THE
OFFERING
On August 27, 1998 we sold 600,000 shares of Series C preferred stock. On
December 3, 1998, February 1, 1999, March 31, 1999 and May 28, 1999, we sold an
aggregate of 5,894,110 shares of Series D preferred stock. On August 4, 1999, we
sold 2,030,000 shares of Series E preferred stock. Generally, the shares of
Series C, Series D and Series E preferred stock will convert to common stock
15
<PAGE>
on a one-to-one basis. However, rights granted to the holders of the Series C,
Series D and Series E preferred stock under our Certificate of Incorporation
will require us to issue additional shares of common stock.
The holders of our Series C preferred stock, Series D preferred stock and
Series E preferred stock are entitled to per annum dividends equal to ten
percent, fifteen percent and seven and one half percent, respectively, of the
liquidation value of their stock, initially set at $5 per share. The dividend
will be payable upon the closing of this offering in shares of additional common
stock in the amount equal to the dividend amount.
The holders of our Series C preferred stock and Series D preferred stock
will also be entitled to receive additional newly issued shares of common stock
upon the closing of this offering if the offering price does not exceed $15 per
share in the case of the Series C preferred stock and $10 per share in the case
of the Series D preferred stock.
By way of example, if the offering price is $11.00 per share and the
offering closes on September 30, 1999, the Series C stockholders, Series D
stockholders and Series E stockholders would be entitled to receive
approximately 303,125 shares, 437,216 shares and 24,787 shares, respectively.
When such issuance of additional shares of common stock occurs, current and
prospective stockholders will suffer additional dilution with a resulting
increase in net loss applicable to common stockholders of $8,416,000 which will
also result in an increase in net loss per share applicable to common
stockholders. Depending on the timing of our offering, and in particular, on the
offering price, this dilution could be substantial. Please see "Description of
Capital Stock--Preferred Stock," beginning on page 68, for more information
about our preferred stock.
WE COULD BE REQUIRED TO RECORD A SIGNIFICANT ACCOUNTING EXPENSE UPON THE VESTING
OF A WARRANT
As part of our agreement with Sylvan, we issued a warrant to purchase
150,000 shares of our common stock at $5.00 per share. This warrant becomes
exercisable if Sylvan meets a specified milestone by December 31, 2003. The
Company recorded deferred stock compensation of approximately $974,000 during
the six months ended June 30, 1999. The amount was computed using the
Black-Scholes option valuation model, and will be remeasured at each measurement
date. The Company could be required to record additional significant non-cash
accounting expense based on the value of the warrant during the life of the
warrant. The value of the warrant at each measurement date will depend on the
value of our common stock at that time.
WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT DILUTE OUR STOCKHOLDERS AND RESULT IN
INCREASED DEBT AND ASSUMPTION OF CONTINGENT LIABILITIES
As part of our business strategy, we expect to review acquisition prospects
that would complement our current product offerings, augment our market
coverage, enhance our technical capabilities, or otherwise offer growth
opportunities. While we have no current agreements or negotiations underway with
respect to any such acquisitions, we may acquire businesses, products or
technologies in the future. In the event of such future acquisitions, we could:
- issue equity securities which would dilute current stockholders'
percentage ownership;
- incur substantial debt; or
- assume contingent liabilities.
Such actions by us could have a detrimental effect on our results of
operations and/or the price of our common stock. Acquisitions also entail
numerous risks, including:
- difficulties in assimilating acquired operations, technologies, products
or personnel;
- unanticipated costs associated with the acquisition that could materially
adversely affect our results of operations;
16
<PAGE>
- negative effects on our reported results of operations from acquisition
related charges and of amortization of acquired technology and other
intangibles;
- diversion of management's attention from other business concerns;
- adverse effects on existing business relationships with suppliers and
customers;
- risks of entering markets in which we have no or limited prior experience;
and
- potential loss of key employees of acquired organizations.
CONTROL BY EXISTING STOCKHOLDERS MAY LIMIT YOUR ABILITY TO INFLUENCE THE OUTCOME
OF DIRECTOR ELECTIONS AND OTHER MATTERS REQUIRING STOCKHOLDER APPROVAL
Upon completion of the offerings, our executive officers, directors and
principal stockholders and their affiliates will own 24,292,501 shares or
approximately 56.6% of the outstanding shares of common stock (54.9% if the
underwriters' over-allotment option is exercised in full), assuming that the
preferred stock converts to common stock at a ratio of one-to-one. These
stockholders, if acting together, would be able to significantly influence all
matters requiring approval by our stockholders, including the election of
directors and the approval of mergers or other business combination
transactions. This concentration of ownership could have the effect of delaying
or preventing a change in our control or otherwise discouraging a potential
acquirer from attempting to obtain control of us. These results could in turn
have a negative effect on the market price of the common stock or prevent our
stockholders from realizing a premium over the market prices for their shares of
common stock. For information about the ownership of common stock by our
executive officers, directors and principal stockholders please refer to
"Principal Stockholders," which begins on page 66.
OUR STOCK PRICE MAY BE VOLATILE AND YOU MAY NOT BE ABLE TO RESELL SHARES AT OR
ABOVE THE OFFERING PRICE
A public market for our common stock has not previously existed. We cannot
predict the extent to which investor interest in ZapMe! will lead to the
development of a trading market or how liquid that market might become. The
initial public offering price for the shares will be determined by negotiations
between us and the representatives of the Underwriters and may not be indicative
of prices that will prevail in the trading market. The trading price of our
common stock could be subject to wide fluctuations in response to factors
unrelated to our operating results such as:
- announcements of technological innovations, significant acquisitions,
strategic alliance relationships, joint ventures or capital commitments by
us or our competitors;
- new products or services offered by us or our competitors;
- changes in financial estimates by securities analysts;
- additions or departures of key personnel; and
- sales of common stock.
In addition, the stock market in general and the Nasdaq National Market and
technology companies in particular have experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating
performance of such companies. Some of these fluctuations may be due to
speculative trading by individual investors, including investors commonly
referred to as "day traders." The trading prices of many technology companies'
stocks are at or near historical highs and these trading prices and multiples
are substantially above historical levels. These trading prices and multiples
may not be sustained. 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 has
often been instituted against such companies. Such litigation, if instituted,
could result in substantial costs and a diversion of management's attention and
resources.
17
<PAGE>
POSSIBLE INFRINGEMENT OF INTELLECTUAL PROPERTY RIGHTS COULD HARM OUR BUSINESS
We seek to protect our intellectual property and to respect the intellectual
property rights of others. To protect our own intellectual property, we rely on
U.S. and international law regarding copyright, patents, trademarks and trade
secrets as well as confidentiality agreements with employees, consultants,
contractors and business partners. We cannot guarantee that we will succeed in
obtaining, registering, policing or defeating challenges to our intellectual
property rights, or that we will avoid claims that we are infringing the rights
of others. Please refer to "Business--Intellectual Property," beginning on page
49, for information on steps we have taken to protect our intellectual property.
Despite our efforts to protect our intellectual property, we may be
unsuccessful in doing so. We may be unable to obtain patents or register
trademarks for a variety of reasons, including a mistaken belief that these
items are eligible for intellectual property protection or that we are the
entity entitled to this protection, if any. Our copyrights and trade secrets may
similarly turn out to be ineligible for legal protection. In addition, parties
may attempt to disclose, obtain or use its proprietary information despite, or
in the absence of, a confidentiality agreement. Some foreign countries do not
protect intellectual property rights to the same extent as the United States,
and intellectual property law in the United States is still uncertain and
evolving as applied to Internet-related industries. The status of domain names
and the regulatory bodies in charge of them is also unsettled. Any inability to
register or otherwise protect our intellectual property rights could seriously
harm our business since it could enable competitors to copy important features
on our network.
Furthermore, third parties may assert intellectual property infringement
claims against ZapMe!. These claims, possibly including those from companies
from which we license key technology for its operations, could result in
significant liability, the inability to use key rights and technologies, and the
invalidation of our own proprietary rights. In addition, regardless of the
outcome, any litigation could be time-consuming, expensive, and distracting of
management's time and attention.
FAILURE OF COMPUTER SYSTEMS AND SOFTWARE PRODUCTS TO BE YEAR 2000 COMPLIANT
COULD NEGATIVELY IMPACT OUR BUSINESS
Many currently installed computer systems and software products only accept
two digits to identify the year in any date. Thus, the year 2000 will appear as
"00," which the system might consider to be the year 1900 rather than the year
2000. This could result in system failures, delays or miscalculations causing
disruptions to our operations. The failure of systems maintained by third
parties to be Year 2000 compliant could cause us to incur significant expense to
remedy any problems, reduce our revenues from such third parties or otherwise
seriously damage our business. A significant Year 2000-related disruption of the
network services or equipment that third-party vendors provide to us could also
cause our members or visitors to consider seeking alternate providers or cause
an unmanageable burden on our technical support.
Our failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, some of our normal business activities or
operations. Please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000 Readiness Disclosure," beginning
on page 34, for a detailed description of our state of year 2000 readiness.
SUBSTANTIAL FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD CAUSE
OUR STOCK PRICE TO FALL
Sales of a large number of shares of our common stock in the public market
after this offering or the perception that such sales could occur could cause
the market price of our common stock to drop. Upon completion of this offering a
significant number of shares will be freely transferable without restriction or
registration under the Securities Act of 1933.
In addition, as soon as practicable after the date of this prospectus, we
intend to file a registration statement on Form S-8 with the Securities and
Exchange Commission covering the shares of common stock reserved for issuance
under our 1997 Stock Option Plan, 1998 Stock Plan and 1999 Employee
18
<PAGE>
Stock Purchase Plan and for options issued outside such plans. Sales of a large
number of shares could have an adverse effect on the market price for our common
stock.
After this offering, the holders of a significant number of shares will have
rights with respect to registration of such shares for sale to the public. If
such holders, by exercising their registration rights, cause a large number of
securities to be registered and sold in the public market, such sales could have
an adverse effect on the market price for our common stock. If we were to
include in a company-initiated registration shares held by such holders pursuant
to the exercise of their registration rights, such sales may have an adverse
effect on our ability to raise needed capital. Please see "Shares Eligible for
Future Sale," beginning on page 73, for additional details on the number of
shares which may be sold in the public market.
OUR CHARTER DOCUMENTS WILL MAKE IT MORE DIFFICULT TO ACQUIRE US AND MAY
DISCOURAGE TAKE-OVER ATTEMPTS AND THUS DEPRESS THE MARKET PRICE OF OUR STOCK
Provisions of our Certificate of Incorporation and Bylaws could make it more
difficult for a third party to acquire us, even if doing so would be beneficial
to our stockholders. For example, stockholder meetings may be called only by our
board of directors, the chairman of the board or the president. Further,
advanced notice is required prior to stockholder proposals and stockholders may
not act by written consent. We also have authorized preferred stock that is
undesignated, making it possible for the board of directors to issue preferred
stock with voting or other rights or preferences that could impede the success
of any attempt to change control of ZapMe!.
Delaware law also could make it more difficult for a third party to acquire
us. Specifically, Section 203 of the Delaware General Corporation Law may have
an anti-takeover effect with respect to transactions not approved in advance by
the board of directors, including discouraging attempts that might result in a
premium over the market price for the shares of common stock held by our
stockholders.
THE PURCHASERS IN THE OFFERING WILL IMMEDIATELY EXPERIENCE SUBSTANTIAL DILUTION
IN NET TANGIBLE BOOK VALUE
Because our common stock has been sold previously at prices substantially
less than the initial public offering price that you will pay, you will suffer
immediate and substantial dilution in pro forma net tangible book value. The
exercise of outstanding options and warrants, or the issuance of additional
shares of preferred stock, may result in further dilution. See "Dilution,"
beginning on page 25, for further information regarding the dilution in the net
tangible book value of the shares purchased in this offering, and "Description
of Capital Stock," beginning on page 68, for information regarding potential
additional dilution to the value of our common stock.
19
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements in "Prospectus Summary,"
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere. These statements relate to
future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential" or "continue" or the negative of such terms or other
comparable terminology. These statements are only predictions and involve known
and unknown risks, uncertainties and other factors, including the risks outlined
under "Risk Factors," that may cause our or our industry's actual results,
levels of activity, performance or achievements to be materially different from
any future results, levels or activity, performance or achievements expressed or
implied by such forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of such statements. We
are under no duty to update any of the forward-looking statements after the date
of this prospectus to conform such statements to actual results.
20
<PAGE>
USE OF PROCEEDS
The net proceeds to ZapMe! from the sale of the common stock in the
offerings are estimated to be approximately $95.7 million (approximately $109.5
million if the underwriters' over-allotment option is exercised in full)
assuming an initial public offering price of $11.00 per share and after
deducting the estimated underwriting discount and estimated offering expenses.
We currently expect to use the net proceeds of the offerings for various
purposes, including expanding our sales and marketing activities (approximately
$8.0 million), continuing investments in technology and product development
(approximately $1.0 million), paying fees required under a service agreement to
establish and maintain school sites (approximately $3.3 million), as well as
working capital and other corporate expenses (approximately $59.7 million),
including principal payments on debt and the funding of net losses from
operations. We expect to use approximately $2.6 million of the net proceeds for
principal and interest payments on capital lease obligations due within the next
twelve months. From November 1998 to June 1999, we incurred lease obligations of
approximately $7.1 million primarily to acquire computer equipment at schools.
The leases have a term of 36 months and bear per annum interest rates ranging
from 9.0% to 18.6%. These amounts are preliminary estimates based on
management's current plans, which are based on currently available information
and market conditions, and may change as a result of future developments. The
amounts we actually expend for such working capital and other purposes may also
vary significantly based on the amount of our future revenues and the other
factors described under "Risk Factors." In addition, while we intend to finance
the cost of deploying our network into schools through third party or OEM lease
finance programs, it is likely that not all the costs of network equipment will
be covered by such finance programs. To this extent, we currently intend to
utilize approximately $8.0 million of the proceeds from the offering for such
purpose. Our management will retain broad discretion in the allocation of the
net proceeds of this offering. A portion of the net proceeds may also be used to
acquire or invest in complementary businesses, technologies, product lines or
products. However, we have no current plans, agreements or commitments with
respect to any such acquisition, and we are not currently engaged in any
negotiations with respect to any such transaction. Pending such uses, the net
proceeds of this offering will be invested in short term, interest-bearing,
investment grade securities.
DIVIDEND POLICY
We have never declared nor paid cash dividends on our capital stock. We
currently intend to retain any future earnings to finance the growth and
development of our business and therefore do not anticipate paying any cash
dividends in the foreseeable future. Any future determination to pay cash
dividends will be at the discretion of the board of directors and will be
dependent upon our financial condition, results of operations, capital
requirements, general business condition and such other factors as the board of
directors may deem relevant.
21
<PAGE>
CAPITALIZATION
The table below sets forth the following information:
- our actual capitalization as of June 30, 1999;
- our pro forma capitalization after giving effect to our sale of 2,030,000
shares of Series E preferred stock in August 1999, with net proceeds of
approximately $9.5 million;
- our pro forma as adjusted capitalization to give effect to the sale by
ZapMe! of 9,000,000 shares of common stock offered through this
prospectus, assuming an initial public offering price of $11.00 per share,
and after deducting the estimated underwriting discount and estimated
offering expenses payable by us and the conversion of all outstanding
shares of preferred stock into shares of common stock which was computed
using an assumed initial public offering price of $11.00 per share and an
assumed closing date of September 30, 1999; and
- our pro forma as further adjusted capitalization, adjusted to give effect
to the underwritten offering and the sale of an additional 454,545 shares
in the concurrent offering using an assumed initial public price of $11.00
per share, less the underwriting discount and commissions.
22
<PAGE>
This information should be read in conjunction with our financial statements
and related notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1999
------------------------------------------------------
PRO FORMA PRO FORMA AS
ACTUAL PRO FORMA AS ADJUSTED FURTHER ADJUSTED
---------- ----------- ----------- ----------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Capital lease obligations, net of current portion......... $ 4,613 $ 4,613 $ 4,613 $ 4,613
Redeemable convertible preferred stock, $0.01 par value,
issuable in series; 600,000 shares authorized, issued
and outstanding, actual; no shares authorized, issued or
outstanding pro forma, pro forma as adjusted and pro
forma as further adjusted............................... 6,080 6,080 -- --
Stockholders' equity:
Convertible preferred stock, $0.01 par value; 16,357,671
shares authorized (including 600,000 shares designated
as redeemable convertible preferred stock), 15,151,781
shares issued and outstanding, actual; 5,000,000
shares authorized, 17,181,781 shares issued and
outstanding pro forma and no shares issued and
outstanding, pro forma as adjusted and pro forma as
further adjusted...................................... 30,155 39,655 -- --
Common stock, $0.01 par value; 50,000,000 shares
authorized, 14,359,380 shares issued and outstanding,
actual; 200,000,000 shares authorized, 14,359,380
shares outstanding, pro forma; 200,000,000 shares
authorized, 41,906,289 shares issued and outstanding,
pro forma as adjusted and 42,360,834 shares issued and
outstanding, pro forma as further adjusted............ 10,478 10,478 155,699 160,349
Deferred stock compensation............................... (6,617) (6,617) (6,617) (6,617)
Accumulated deficit during the development stage.......... (19,056) (19,056) (27,472) (27,472)
---------- ----------- ----------- ----------------
Total stockholders' equity................................ 14,960 24,460 121,610 126,260
---------- ----------- ----------- ----------------
Total capitalization...................................... $ 25,653 $ 35,153 $ 126,223 $ 130,873
---------- ----------- ----------- ----------------
---------- ----------- ----------- ----------------
</TABLE>
The above table is based on shares outstanding as of June 30, 1999. This
table excludes, as of June 30, 1999:
- 2,512,857 shares of common stock issuable upon exercise of options
outstanding under our 1997 Stock Option Plan and 1998 Stock Option Plan at
a weighted average exercise price of $1.87 per share and 386,493 shares
reserved for future issuance under the plans; and
- 895,890 shares of common stock issuable upon exercise of outstanding
warrants, of which 755,890 shares at a weighted average exercise price of
$3.84 per share were outstanding at June 30, 1999.
23
<PAGE>
The pro forma as adjusted column in the above table also includes:
- 303,125 additional shares issuable to holders of the Series C preferred
stock on closing of this offering assuming an initial public offering
price of $11.00 per share and that the closing of the offering occurs on
September 30, 1999;
- 437,216 additional shares issuable to holders of the Series D preferred
stock on closing of this offering assuming an initial public offering
price of $11.00 per share and that the closing of the offering occurs on
September 30, 1999; and
- 24,787 additional shares issuable to holders of the Series E preferred
stock on closing of this offering assuming an initial public offering
price of $11.00 per share and that the closing of the offering occurs on
September 30, 1999.
- A dividend of $8,416,000 attributable to the issuance of additional
preferred stock noted above assuming an initial public offering price of
$11.00 per share and that the closing of the offering occurs on September
30, 1999.
See "Management--Incentive Stock Plans," beginning on page 58, for a
detailed description of our incentive stock plans; "Description of Capital
Stock," beginning on page 68, for a detailed description of our capital stock;
and note 3 of "Notes to Financial Statements," beginning on page F-12, for a
detailed description of our stockholders' equity.
24
<PAGE>
DILUTION
The pro forma net tangible book value of our common stock after giving
effect to our sale of 2,030,000 shares of Series E preferred stock in August
1999 with net proceeds of approximately $9.5 million, on June 30, 1999 was
approximately $30.5 million or $0.95 per share. Pro forma net tangible book
value per share represents the amount of our total tangible assets less our
total liabilities, divided by the number of outstanding shares of our common
stock on a pro forma basis after giving effect to the conversion of all
outstanding shares of our preferred stock into 17,781,781 shares of common stock
upon the closing of the offerings. Assuming our sale of 9,000,000 shares of
common stock in the underwritten offering and the sale of 454,545 shares in the
concurrent offering at an assumed initial public offering price of $11.00 per
share and our receipt of the estimated net proceeds from the offerings, after
deducting the estimated underwriting discount and our estimated offering
expenses, our pro forma net tangible book value at June 30, 1999 would have been
$126.3 million or $2.98 per share of common stock. This represents an immediate
increase of pro forma net tangible book value of $2.03 per share to existing
stockholders and an immediate dilution in pro forma net tangible book value of
$8.02 per share to new investors. In other words, we currently expect that new
investors will pay $11.00 per share for our common stock in the offering, which
is substantially greater than the $2.98 per share value, after the offering, of
our tangible assets after subtracting our liabilities. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.............................. $ 11.00
Pro forma net tangible book value per share as of June 30, 1999............ $ 0.95
Increase in pro forma net tangible book value per share attributable to new
investors................................................................ 2.03
---------
Pro forma net tangible book value per share after offering................... 2.98
---------
Dilution per share to new investors (including the investors in the
concurrent offering)....................................................... $ 8.02
---------
---------
</TABLE>
The following table sets forth, as of June 30, 1999, on the pro forma basis
described above, the differences between the number of shares of common stock
purchased from us, the total price paid and the average price per share paid by
existing stockholders and by the new investors in this offering at an assumed
initial public offering price of $11.00 per share (before deducting the
estimated underwriting discounts and commissions and estimated offering expenses
payable). The table below indicates that while investors in the offering will
contribute 68.1% of the total amount provided by investors to fund ZapMe! to
date, they will own 22.3% of ZapMe!.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- --------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............................. 32,906,289 77.7% $ 44,186,000 29.9% $ 1.34
New investors (including the investors in the
concurrent offering)............................ 9,454,545 22.3% 103,650,000 70.1% 10.96
------------ ----- -------------- ----- ------
Total......................................... 42,360,834 100.0% $ 147,836,000 100.0%
------------ ----- -------------- -----
------------ ----- -------------- -----
</TABLE>
If the underwriters exercise their over-allotment in full, the following
will occur:
- the percentage of shares of common stock held by existing stockholders
will decrease to approximately 75.3% of the total number of shares of our
common stock outstanding; and
- the number of shares held by new public investors will increase to
10,804,505, or approximately 24.7% of the total number of shares of our
common stock outstanding after this offering.
25
<PAGE>
The above computations are based on shares outstanding as of June 30, 1999.
They exclude, as of June 30, 1999:
- 2,512,857 shares of common stock issuable upon exercise of options
outstanding under our 1997 Stock Option Plan and 1998 Stock Option Plan at
a weighted average exercise price of $1.87 per share and 386,493 shares
reserved for future issuance under the plans; and
- 895,890 shares of common stock issuable upon exercise of outstanding
warrants, of which 755,890 shares at a weighted average exercise price of
$3.84 per share were outstanding at June 30, 1999.
The above computations include:
- 303,125 additional shares issuable to holders of the Series C preferred
stock on closing of this offering assuming an initial public offering
price of $11.00 per share and that the closing of the offering occurs on
September 30, 1999;
- 437,216 additional shares issuable to holders of the Series D preferred
stock on closing of this offering assuming an initial public offering
price of $11.00 per share and that the closing of this offering occurs on
September 30, 1999; and
- 24,787 additional shares issuable to holders of the Series E preferred
stock on closing of this offering assuming an initial public offering
price of $11.00 per share and that the closing of the offering occurs on
September 30, 1999.
26
<PAGE>
SELECTED FINANCIAL DATA
The statements of operations data for the period from June 25, 1997
(inception) through December 31, 1997 and for the year ended December 31, 1998,
and the balance sheet data at December 31, 1997 and December 31, 1998, are
derived from our financial statements which have been audited by Ernst & Young
LLP, independent auditors, and are included elsewhere in this prospectus. The
statement of operations data for the six month periods ended June 30, 1998 and
1999 and the balance sheet data at June 30, 1999, are derived from unaudited
financial statements included elsewhere in this prospectus. We have prepared
this unaudited information on the same basis as the audited financial statements
and have included all adjustments, consisting only of normal recurring
adjustments, that we consider necessary for a fair presentation of our financial
position and operating results for such periods. Historical results are not
necessarily indicative of future results and the results for interim periods are
not necessarily indicative of results to be expected for the entire year or for
any future period. When you read this selected financial data, it is important
that you also read the financial statements and related notes included in this
prospectus, as well as the section of this prospectus related to "Management's
Discussion and Analysis of Financial Condition and Results of Operations,
beginning on page 28."
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 25,
1997
(INCEPTION)
THROUGH YEAR ENDED SIX MONTHS ENDED
DECEMBER DECEMBER JUNE 30,
31, 31, --------------------
1997 1998 1998 1999
----------- ----------- --------- ---------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue.......................................... $ -- $ -- $ -- $ 147
Costs and expenses:
Cost of services............................... -- 135 8 1,247
Research and development....................... 231 1,140 429 1,034
Sales and marketing............................ 40 1,197 176 2,456
General and administrative..................... 299 1,458 415 1,975
Amortization of deferred stock compensation.... -- 1,065 -- 2,531
----------- ----------- --------- ---------
Total costs and expenses..................... 570 4,995 1,028 9,243
----------- ----------- --------- ---------
Loss from operations............................. (570) (4,995) (1,028) (9,096)
Interest income (expense), net................... (11) (36) (35) 29
----------- ----------- --------- ---------
Net loss......................................... (581) (5,081) (1,063) (9,067)
Accretion and dividend on redeemable convertible
preferred stock................................ -- (606) -- (3,771)
----------- ----------- --------- ---------
Net loss applicable to common stockholders....... $ (581) $ (5,637) $ (1,063) $ (12,838)
----------- ----------- --------- ---------
----------- ----------- --------- ---------
Net loss per share:
Basic and diluted.............................. $ (0.05) $ (0.48) $ (0.09) $ (0.95)
----------- ----------- --------- ---------
----------- ----------- --------- ---------
Pro forma basic and diluted (unaudited)........ $ (0.32) $ (0.36)
----------- ---------
----------- ---------
Shares used in calculation of net loss per share:
Basic and diluted.............................. 11,183 11,685 11,859 13,517
----------- ----------- --------- ---------
----------- ----------- --------- ---------
Pro forma basic and diluted (unaudited)........ 15,993 25,462
----------- ---------
----------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
JUNE 30,
1997 1998 1999
--------- --------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................................... $ 275 $ 815 $ 19,855
Working capital (deficit)....................................... (111) (1,013) 15,597
Total assets.................................................... 349 3,603 32,146
Capital lease obligations....................................... -- 387 6,705
Redeemable convertible preferred stock.......................... -- 3,352 6,080
Stockholders' equity (deficit).................................. (512) (2,123) 14,960
</TABLE>
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH OUR FINANCIAL
STATEMENTS AND RELATED NOTES AS WELL AS THE OTHER FINANCIAL INFORMATION IN THIS
PROSPECTUS. IN ADDITION TO HISTORICAL INFORMATION, THE FOLLOWING DISCUSSION
CONTAINS FORWARD-LOOKING STATEMENTS RELATING TO FUTURE EVENTS OR OUR FUTURE
FINANCIAL PERFORMANCE, WHICH INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD LOOKING
STATEMENTS AS A RESULT OF FACTORS SET FORTH UNDER "RISK FACTORS," "BUSINESS" AND
ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
ZapMe! is building a broadband interactive network that brings the latest
technology tools and educational resources to schools for free. For each school
participating in the ZapMe! network, we provide free PCs, software, installation
and support, as well as a free, "always on" connection to the Internet using a
satellite system. The ZapMe! network, which is designed primarily for students
aged 13-19, makes education more engaging and entertaining by providing a rich
media computer experience that is free and easy to use. We plan to extend the
ZapMe! network into the home in order to enhance a student's educational
experience and promote better communication among students, teachers and
parents.
We commenced operations in June 1997 and began offering sponsorships through
our proprietary network in December 1998. From inception through June 30, 1999,
we were in the development stage, and our activities primarily consisted of:
- marketing the ZapMe! network to school districts;
- entering into agreements with school districts for the placement of the
ZapMe! network in schools;
- developing our proprietary user interface and satellite multicasting
capabilities;
- raising capital;
- recruiting personnel;
- conducting research and development activities; and
- purchasing assets to support our operations.
Since December 1998, we have been:
- deploying our network in schools;
- developing our operations, technology and support capabilities;
- forming strategic alliance relationships; and
- continuing to invest in research and development.
In order to achieve our strategic plan, we intend to continue to invest
heavily in deploying our network, marketing and promotion, technology and
operations. We purchase the computer equipment we install in schools--including
PCs, monitors, servers and printers--on customary terms for sales made for
educational purposes from our partners, some of which are also sponsors.
As of July 31, 1999, there were more than 250 school districts, representing
over 6,000 K-12 schools, including more than 2,000 middle and high schools, that
have approved and signed a three-year contract with us that permits us to
install a ZapMe! lab at those districts' schools. As of
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July 31, 1999, we had installed ZapMe! labs in over 220 schools, which had an
average of more than 1,000 students, representing over 220,000 students, each of
whom has access to a free ZapMe! account upon request. In the Fall of the
1999-2000 school year, ZapMe! will expand current programs and incentives to
encourage network usage.
We have incurred net losses of approximately $14.7 million for the period of
inception through June 30, 1999. We expect to incur additional losses for the
foreseeable future due to the increased cost of sales and marketing, advertising
and promotion, expanded network features and research and development. We expect
that the size of these losses will fluctuate from quarter to quarter and that
these fluctuations may be substantial. In view of the rapidly evolving nature of
our business and our limited operating history, we believe that period-to-period
comparisons of our operating results are not necessarily meaningful and should
not be relied upon as an indication of future performance.
REVENUE. To date, ZapMe! has generated revenue primarily from content
sponsorship fees paid by strategic partners. Two sponsors, Toshiba and General
Electric, accounted for approximately 90% of our revenue in the six months ended
June 30, 1999. We intend to derive revenue from three primary activities:
sponsorship, e-commerce and network services and other. Sponsorship revenue,
which is expected to account for between 90-95% of revenues when we are fully
operational, includes content and public service announcement sponsorships,
banner advertising and full screen interactive ads, consists of fees charged for
messages delivered over our network. Revenue related to sponsorship of content
on our network is generally recognized ratably over the time periods that the
sponsorship is acknowledged unless such sponsorship is based on delivery of a
minimum number of impressions, in which case revenue is recognized as the
impressions are delivered. We expect to generate sponsorship revenue both at
school and at home. Advertising revenue is recognized in the period in which the
advertisement message is displayed on the network, provided that no material
obligations remain and collection of the related account receivable is
reasonably certain. E-commerce revenue, which is expected to account for between
3-6% of revenues when we are fully operational, consists of referral fees and
commissions on transactions facilitated through our network as well as referred
transactions. Revenue from e-commerce is recognized upon notification from the
contracting partner of the fact of the referral or sale upon which referral fees
or commissions is due. Network services and other revenue consist of revenue
from the distribution of content and products which is delivered through our
network, and from educational services delivered in the ZapMe! labs such as
teacher training, tutoring and other educational programs offered through a
strategic alliance with Sylvan Learning Systems. Network services and other
revenue is expected to account for between 2-4% of revenues when we are fully
operational and is recognized in the time period in which the underlying service
is delivered. Network services and other revenue also include revenue from our
five-year agreement with Sylvan which provides for a sharing of revenue derived
from the delivery of Sylvan programs in ZapMe! computer labs. This agreement
allows Sylvan to offer student tutoring, teacher training, and other programs in
the ZapMe! computer labs. For the calendar year 1999, Sylvan is committed to pay
ZapMe! minimum fees. Thereafter, fees will be based on a rate for installed
schools available for use by Sylvan. To date, no programs have been offered
under this arrangement, and additionally no material e-commerce or network
services have been delivered and no significant revenue has been recognized by
ZapMe!.
COST OF SERVICES. Cost of services consist primarily of depreciation on
network equipment, including computers placed in schools, allowances for the
cost of equipment replacement not covered by manufacturers' warranties, and the
cost of operating our satellite communications network. The costs associated
with this form of telecommunication include (1) the cost of land-based
equipment, or "earth segment," such as the satellite dish, hubs, send and
receive cards located inside the network servers and land-based phone service
and (2) the cost of the link to and from the satellite, or "space segment."
ZapMe! provides much of its earth segment to schools by purchasing satellite
dishes, hubs and send/receive cards for its network servers. ZapMe! purchases
space segment from GE Americom, a
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unit of General Electric Corporation, and from Spacenet, a wholly-owned
subsidiary of Gilat Satellite Networks, pursuant to fixed price agreements.
Commencing July 1999, Spacenet began to install and lease satellite dishes and
lease receive and transmit cards as well as provide space segment under a
long-term fixed-price per school contract. Cost of services varies directly with
the number of schools.
OPERATING EXPENSES. Our operating expenses consist primarily of sales and
marketing, research and development and general and administrative expenses.
Research and development expenses consist primarily of compensation and
consulting expenses associated with the development and refinement of the ZapMe!
user interface, the satellite network, content and quality assurance. To date,
we have not capitalized any software development costs under Statement of
Financial Accounting Standards ("SFAS") No. 86 because we believe that our
process for developing software is essentially completed concurrent with the
establishment of technological feasibility; as a result, all development costs
have been expensed as incurred. Sales and marketing expenses consist primarily
of salaries, commissions, travel expenses, advertising expenses, costs of
promotional programs such as ZapPoints, trade show expenses, seminars and costs
of marketing materials. General and administrative expenses consist primarily of
salaries and related costs for our executive, administrative, finance, legal and
information technology personnel, support services, facilities costs and
professional services fees.
AMORTIZATION OF DEFERRED STOCK COMPENSATION. We recorded deferred stock
compensation of approximately $6.0 million during the year ended December 31,
1998, and approximately $3.0 million during the six months ended June 30, 1999
as a result of stock options granted during 1998 and 1999 and shares of common
stock granted to an officer of ZapMe! at a price below the deemed fair market
value at the date of grant. We will record deferred stock compensation of
approximately $9.1 million as a result of stock options granted during the
quarter ended September 30, 1999. Amortization of deferred stock compensation of
approximately $1.1 million was recognized in 1998 and approximately $2.5 million
was recognized for the six months ended June 30, 1999. Deferred stock
compensation is amortized over the vesting period of the options, generally
three to four years, or the performance period for various warrants we granted
using a graded vesting method. As a result, amortization of deferred stock
compensation will adversely impact our operating results for the next four
years.
Including deferred compensation which will be recorded for option grants
made during the three months ended September 30, 1999, future amortization
expense is estimated to be approximately $3.7 million for the remaining six
months of 1999, and approximately $6.7 million, $2.9 million, $1.1 million and
$99,000 for 2000, 2001, 2002 and 2003, respectively.
INCOME TAXES. There was no provision for federal or state income taxes for
any period since inception due to our operating losses. At December 31, 1998, we
had net operating loss carryforwards for federal income tax purposes of
approximately $4.1 million which will expire beginning in fiscal year 2012 if
not utilized. Utilization of our net operating loss carryforwards may be subject
to a substantial annual limitation due to the ownership change limitations
provided by the Internal Revenue Code and similar state provisions. Such an
annual limitation could result in the expiration of the net operating loss
carryforwards before utilization. A valuation allowance has been established
and, accordingly, no benefit has been recognized for our net operating losses
and other deferred tax assets. The net valuation allowance increased by
approximately $1.6 million during the year ended December 31, 1998. We believe
that, based on a number of factors, the available objective evidence creates
sufficient uncertainty regarding the realizability of the deferred tax assets
such that a full valuation allowance has been recorded. These factors include
our history of net losses since inception and expected near-term future losses.
We will continue to assess the realizability of the deferred tax assets based on
actual and forecasted operating results. See note 4 of notes to financial
statements, beginning on page F-19.
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS. We recorded accretion and a
dividend on our redeemable convertible preferred stock of approximately $606,000
for the year ended December 31, 1998 and approximately $936,000 for the six
months ended June 30, 1999. For the six months ended
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June 30, 1999, we have also recorded approximately $1.0 million for accretion of
a liquidation preference for our convertible preferred stock and approximately
$1.8 million for accretion of a guaranteed initial public offering price for our
redeemable convertible preferred stock based upon an initial public offering on
September 30, 1999 at $11.00 per share. These preferred stockholders are
entitled to these amounts in the event of an initial public offering.
RESULTS OF OPERATIONS
Because (1) we were a development stage company through June 30, 1999, (2)
first earned revenue in the quarter ended March 31, 1999 and (3) have a short
operating history, we believe that year-over-year comparisons are less
meaningful than an analysis of recent quarterly operating results. Accordingly,
we are providing a discussion and analysis of our results of operations that is
focused on the year ended December 31, 1998 and the quarters ended March 31,
1999 and June 30, 1999.
REVENUE. Total revenue for the quarters ending March 31 and June 30, 1999
were $5,000 and $142,000, respectively. We began earning revenue in the quarter
ending March 31, 1999. Revenue is primarily attributed to content sponsorship of
our network. One sponsor, General Electric, accounted for substantially all of
our revenue in the quarter ended June 30, 1999.
COST OF SERVICES. Cost of services were $135,000, $212,000 and
approximately $1.0 million for the year ending December 31, 1998 and for the
quarters ending March 31 and June 30, 1999, respectively. The increase in the
level of expense was due primarily to depreciation associated with increased
levels of school network equipment which were placed in service. We expect cost
of services to increase in absolute dollars in future periods due to increasing
depreciation on network equipment and to additional costs for space segment
associated with the deployment of the ZapMe! network in additional schools.
RESEARCH AND DEVELOPMENT. Research and development expenses were
approximately $1.1 million, $472,000 and $562,000 for the year ending December
31, 1998 and for the quarters ending March 31 and June 30, 1999, respectively.
Approximately $75,000 of the $90,000 increase in the quarter ending June 30,
1999 over the quarter ending March 31, 1999 is attributable to labor and
temporary help. We believe that continued investment in research and development
will contribute to attaining our strategic objectives and, as a result, expect
research and development expenses to increase in absolute dollars in future
periods.
SALES AND MARKETING. Sales and marketing expenses were approximately $1.2
million, $864,000 and approximately $1.6 million for the year ending December
31, 1998 and for the quarters ending March 31 and June 30, 1999, respectively.
The increase in the level of expense was due primarily to compensation
associated with the increased number of sales and marketing personnel and
related overhead, and increased travel costs associated with our direct selling
efforts. We expect selling and marketing expenses to increase in absolute
dollars in future periods as we hire additional personnel, promote our home
client, and develop incentive programs to increase in-school and at home usage
of the ZapMe! network.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
approximately $1.5 million, $885,000 and approximately $1.1 million for the year
ending December 31, 1998 and for the quarters ending March 31 and June 30, 1999,
respectively. The increase in the level of expenses is due primarily to
increased personnel and related overhead necessary to support our increased
scale of operations. We expect general and administrative expenses to increase
in absolute dollars in future periods as we expand our management and staff,
incur additional costs related to expansion of our operations and continue to
incur the additional costs associated with being a publicly-traded company.
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Our revenue, operating expenses and operating results may vary significantly
from quarter to quarter. The fluctuations may be due to a number of factors,
many of which are beyond our control. These factors include:
- the rate of expansion of our network through deployment into additional
schools;
- the rate of usage of our network in schools and at home;
- our ability to generate and sustain significant levels of sponsorship
revenue;
- fluctuations in the use of our network and in demand for our products and
services related to the school calendar, including vacations and holidays;
- the burden of lease payment obligations;
- government action to regulate or otherwise restrict our access to schools;
- our ability to manage costs, including personnel costs; and
- costs relating to possible acquisitions and integration of technologies or
businesses.
Due to all of the foregoing factors, our quarterly revenue and operating
results are difficult to forecast, and we believe that period-to-period
comparisons of our operating results will not necessarily be meaningful and
should not be relied upon as an indication of future performance.
INCEPTION TO DECEMBER 31, 1997 AND YEAR ENDED DECEMBER 31, 1998
Because we were a development stage company during 1997 and the year ended
December 31, 1998, we generated no revenue for these periods. Costs and
operating expenses increased to approximately $4.1 million in 1998 from $570,000
in the period from June 25, 1997 through December 31, 1997 ("inception period").
During our inception period, we incurred primarily general and administrative
and development expenses as our primary focus was on developing the ZapMe!
network. Research and development expenses in 1998 totaled approximately $1.1
million, an increase of $909,000 from $231,000 in fiscal 1997, of which $820,000
was attributable to increased product development, network engineering,
satellite engineering and content department labor costs. In the year ended
December 31, 1998, sales and marketing expenses totaled approximately $1.2
million, compared to $40,000 for fiscal 1997. Approximately $511,000 of this
increase was due primarily to increased labor and temporary help. Additionally,
in 1998 we began to build our infrastructure and added finance, legal, business
development, information technology, executive management and administrative
personnel and related costs, which amounted to approximately $1.5 million for
fiscal 1998 compared to $299,000 for fiscal 1997. Sales and marketing expenses
were not significant in fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
Since inception through June 30, 1999, we used approximately $7.9 million of
cash for operating activities, resulting primarily from operating losses of
approximately $14.7 million. During this same period, we used approximately $3.7
million of cash for investing activities, consisting primarily of the purchase
of equipment.
We have financed our cash needs primarily through the private placement of
preferred stock and lease financings. Placements of preferred stock through June
30, 1999 provided net proceeds totaling approximately $30.2 million. At June 30,
1999, we had approximately $20.4 million in cash and cash equivalents and
short-term investments, including restricted cash of $560,000, which represents
an increase of approximately $19.6 million as compared to $815,000 at December
31, 1998. We currently have no significant capital commitments other than
obligations under capital equipment and facilities leases as well as commitments
under cancelable outstanding purchase orders.
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<PAGE>
Net cash used in operating activities was approximately $2.3 million and
$5.4 million in fiscal 1998 and for the six-month period ending June 30, 1999,
respectively. In each period, cash used by operating activities was primarily a
result of the net losses for such period.
Net cash used in investing activities was approximately $2.4 million and
$1.3 million in fiscal 1998 and for the six-month period ending June 30, 1999,
respectively. In each period, cash used by investing activities was primarily
for the acquisition of property and equipment.
Cash provided by financing activities was approximately $5.2 million and
$25.8 million in fiscal 1998 and for the six-month period ending June 30, 1999,
respectively. The primary source of cash provided by financing activities was
proceeds from the issuance of preferred stock and, to a lesser extent,
borrowings. In addition, in August 1999 we received net proceeds of
approximately $9.5 million from the issuance of preferred stock.
Capital leases incurred were approximately $390,000 and $6.8 million in
fiscal 1998 and for the six-month period ending June 30, 1999, respectively.
Lease financing was used primarily to acquire and install computer equipment in
schools.
In June 1999, the Company entered into an agreement whereby a minimum number
of school sites would be established and maintained for a fixed monthly fee for
a minimum of three years. In the event the Company fails to establish the
minimum number of sites within three months, an unordered minimum site fee would
be assessed per site until the site was installed. As of June 30, 1999, the
maximum obligation on installed sites is $3,978,000. In July 1999, the agreement
was amended and the fixed monthly fee on the minimum number of site was reduced,
which reduced the maximum obligation on installed sites to $3,330,000.
In August 1999, we issued 2,030,000 shares of our Series E preferred stock
at $5.00 per share, with gross proceeds of approximately $10,150,000. The $5.00
share price does not necessarily represent fair value of the preferred stock
issued. We will record approximately $12,000,000 as an increase to the Series E
preferred stock to reflect an estimated fair value of $11.00 per share.
Our deferred revenue balance includes deferred revenue attributable to
billings in advance of earnings on content sponsorship activities. We record an
account receivable and deferred revenue upon billing for sponsorships. We
recognize revenue ratably over the period the sponsorship is acknowledged on the
network.
Our agreements with school districts do not require that we incur capital
expenditures. However, we anticipate incurring substantial capital expenditures
in connection with our expansion of our school network. Subject to the
availability of cash or other capital financing arrangements, we expect that
capital expenditures for 1999 for school network equipment will be approximately
$50.0 million. We estimate that this level of expenditure will enable us to
install approximately 1,600 schools during 1999. Under our agreements with
school districts, as of July 31, 1999, we are permitted to install ZapMe! labs
in approximately 6,000 schools. Such expenditures are expected to be made
pursuant to cancelable purchase orders when made. Although we have no other
material commitments other than our capital equipment and facilities leases and
cancelable commitments to purchase school network equipment in the ordinary
course which aggregate approximately $3.8 million, we anticipate that we will
experience an increase in our capital expenditures and lease commitments
consistent with our anticipated growth in operations, infrastructure and
personnel. For more information on these commitments, please see note 5 of notes
to financial statements starting on page F-19. We currently anticipate that we
will continue to experience significant growth in our operating expenses for the
foreseeable future related to expansion of our network, including increasing
research and development spending, increasing our sales and marketing
operations, developing supporting business and technical infrastructures,
improving our operational and financial systems and broadening our user support
capabilities. Such operating expenses will be a material use of our cash
resources.
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We believe that our available cash resources and amounts available under
financing facilities will be sufficient to meet our expected working capital and
capital expenditure requirements for at least the next full operating cycle.
We may need to raise additional funds in order to support more rapid
expansion, develop new vertical markets, respond to competitive pressures,
acquire complementary businesses or technologies, or respond to unanticipated
developments. We may seek to raise additional funds through private or public
sales of securities, strategic financial and business relationships, bank debt,
lease financing, or otherwise. If additional funds are raised through the
issuance of equity securities, the percentage of ZapMe! owned by existing
stockholders will be reduced, stockholders may experience additional dilution,
and these equity securities may have rights, preferences, or privileges senior
to those of the holders of ZapMe!'s common stock. Additional financing may not
be available on acceptable terms, if at all. If adequate funds are not available
or are not available on acceptable terms, we may be unable to deploy or enhance
our network and Netspace, take advantage of future opportunities, or respond to
competitive pressures or unanticipated developments, which could severely harm
our business.
YEAR 2000 READINESS DISCLOSURE
Many currently installed computer systems and software products are coded to
accept or recognize only two digit entries in the date code field. These systems
and software products will need to accept four digit entries to distinguish 21st
century dates from 20th century dates. As a result, computer systems and
software used by many companies and governmental agencies may need to be
upgraded to comply with such Year 2000 requirements or risk system failure or
miscalculations causing disruptions of normal business activities.
OUR STATE OF READINESS
We are engaged in an ongoing assessment of the Year 2000 readiness of all
our relevant operating, financial and administrative systems, including the
hardware and software that support our information technology ("IT") and non-IT
systems. Our assessment plan consists of:
- quality assurance testing of our internally developed proprietary
software;
- contacting third-party vendors and licensors of material hardware,
software and services that are both directly and indirectly related to the
delivery of our network services to our users;
- contacting vendors of third-party systems;
- assessing repair and replacement requirements and implementing appropriate
procedures; and
- creating contingency plans in the event of Year 2000 failures.
We are currently reviewing our Year 2000 readiness and developing a plan for
verifying the proper operation of our internally developed software. We expect
to complete and execute our verification plan by October 1999. Although our Year
2000 readiness assessment will not be totally complete until October 1999, we
have by now received readiness assurances from nearly all of our vendors. Most
of the vendors have indicated that they are Year 2000 compliant. In the few
cases where a vendor has indicated that it is not Year 2000 compliant, we have
determined that any possible resulting problems are small and the costs of
remediation, if any, are small. In addition, the transition from year 1999 to
year 2000 was simulated for our material IT and non-IT systems to test our
system readiness. These simulations revealed no notable Year 2000 issues.
All of our third party hardware and software vendors for critical systems
have provided written statements to us or have posted them to their public web
sites, indicating that they are Year 2000 compliant. We read the assurances and
the documentation backing up those assurances that third parties have provided
regarding their Year 2000 compliance. We then evaluated the assurances and
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documentation against our experience and knowledge to determine the credibility
of the third party's assurances that it is Year 2000 compliant. If we determined
that the third party assurances were not adequate, which has to date not
occurred, then we would make additional requests for assurances and
documentation and do our own testing of the third party's product. Our review of
the internal systems of third parties with whom we have material relationships
is ongoing.
COSTS TO ADDRESS YEAR 2000 ISSUES
We do not separately account for Year 2000 related expenses but estimate
that our expenses incurred to date to address Year 2000 issues have not been
material and, although we have not completed our assessment of our Year 2000
readiness, we do not expect to incur expenses in excess of $100,000 in
connection with any required future remediation efforts. Such costs, if higher
than anticipated, could adversely impact our operating results.
RISKS ASSOCIATED WITH YEAR 2000 ISSUES
We are not currently aware of any Year 2000 compliance problems relating to
our network applications or our IT or non-IT systems that would have a material
adverse effect on our business, results of operations and financial condition,
notwithstanding efforts to detect and correct such problems. However:
- we may discover Year 2000 compliance problems in our network and other
software that will require substantial revisions or replacements;
- there can be no assurance that third-party hardware or software
incorporated into our material IT and material non-IT systems will not
need to be revised or replaced, which could be time consuming and
expensive; and
- the failure to adequately address Year 2000 compliance issues in our IT
and non-IT systems could result in claims of mismanagement,
misrepresentation or breach of contract and bring about litigation, which
could be costly to defend.
Any such worst-case scenario, if not quickly remedied, could result in lost
revenues, increased expenses and business interruptions, which could have a
material adverse effect on our business, results of operations and financial
condition.
In addition, we cannot guarantee that Internet access companies,
governmental agencies, utility companies, third-party service providers and
others not within our control will be Year 2000 compliant. The failure of such
entities to be Year 2000 compliant could result in a failure beyond our control,
such as a prolonged Internet, telecommunications or electrical failure, which
could prevent us from operating our network.
CONTINGENCY PLAN
Because our needs for hardware and software continually change, we are
engaged in an ongoing Year 2000 compliance assessment. We have not identified
any significant non-compliance issues with our products that have not already
been corrected. However, the results obtained from our ongoing effort will be
considered in determining the need for and the extent of any contingency plan
which, if required, will be implemented by October 31, 1999. The cost of
developing and implementing such a plan could be material.
The information set forth above and elsewhere in this prospectus relating to
Year 2000 issues constitute "Year 2000 Readiness Disclosures," as such term is
defined by the Year 2000 Information and Readiness Disclosure Act of 1998,
enacted October 19, 1998 (Public Law 105-271, 112 Stat. 2386).
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INTEREST RATE RISK
Our exposure to market risk for changes in interest rates relates primarily
to the increase or decrease in the amount of interest income we can earn on our
investment portfolio and on the increase or decrease in the amount of interest
expense we must pay with respect to our various outstanding debt instruments.
The risk associated with fluctuating interest expense is limited, however, to
the expense related to those debt instruments and credit facilities which are
tied to market rates. We do not use derivative financial instruments in our
investment portfolio. We ensure the safety and preservation of our invested
principal funds by limiting default risks, market risk and reinvestment risk. We
mitigate default risk by investing in safe and high-credit quality securities. A
hypothetical increase or decrease in market interest rates by 10% from the
market interest rates at June 30, 1999 would not cause the fair value of our
cash and cash equivalents or the interest expense paid with respect to our
outstanding debt instruments to change by a material amount. Declines in
interest rates over time will, however, reduce our interest income while
increases in interest rates over time will increase our interest expense.
RECENT ACCOUNTING PRONOUNCEMENTS
The FASB issued Statement 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. We adopted SFAS 131 in
the year ended December 31, 1998, and operate in one business segment which is
building a broadband interactive network that brings technology tools and
educational resources to schools at no cost.
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BUSINESS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE DISCUSSED IN
THIS PROSPECTUS. FACTORS THAT MAY CAUSE OR CONTRIBUTE TO SUCH A DIFFERENCE
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS," AS WELL AS
THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
ZapMe! is creating a broadband interactive network--featuring "always on"
satellite technology-- which brings the latest technology tools and educational
resources to schools for free. We believe that by providing free PCs, software,
installation, support and broadband connectivity to the Internet, we will help
ease the technology funding gap in schools, and provide students of all social
and economic backgrounds access to the technology and information that are
critical in today's knowledge-based economy.
Our turnkey technology solution provides several benefits to each school
that participates in the ZapMe! network. Each school typically receives 15
high-end, multimedia PCs with 17-inch monitors, a satellite-ready computer
server, a laser printer and broadband access to the Internet. In addition, we
offer a proprietary, easy-to-use interface--the ZapMe! Netspace--that provides
access to over 10,000 pre-selected and indexed third-party educational Internet
sites and other aggregated content and services as well as applications such as
Microsoft Word, Excel and Powerpoint. Features of the ZapMe! Netspace include
various educational and communication tools such as discussion boards, free
e-mail and an affinity marketing program that rewards students for using the
ZapMe! network.
The ZapMe! network makes education more engaging and entertaining by
providing a rich media computer experience and facilitating greater parental
involvement in schools by enabling electronic communication among parents and
teachers. In addition, the ZapMe! network provides students, teachers and
administrators access to Internet-based educational content, cost-effective
school e-commerce solutions and school fundraising opportunities. In connection
with many of these core activities, the ZapMe! network has established strategic
alliances with a wide range of companies, including Dell; Gilat Satellite
Networks and its subsidiary, Spacenet; Microsoft; New Sub Services; School
Specialty; Sylvan Learning Systems and Xerox to further enhance the educational
experience. In addition, we plan to enter into additional new strategic
alliances to enhance our technology, gain access to compelling educational
content, add new features and functionality, or generate sponsorship and
e-commerce revenues.
Funding for the development, installation and maintenance of the ZapMe!
network is provided by a combination of corporate sponsorships and e-commerce
relationships. We expect to derive additional revenue from partners and other
sources from after-school use of ZapMe! labs and participation in fundraising
activities. In particular, we will receive additional revenues from Sylvan,
which has committed to sharing a percentage of its profits resulting from joint
activities on the ZapMe! network. Participating sponsors have the opportunity to
underwrite public service messages, as well as corporate sponsorships
appropriate for ZapMe! network users, including students aged 13-19, teachers
and administrators.
As of July 31, 1999, there were more than 250 school districts, representing
over 6,000 K-12 schools, including more than 2,000 middle and high schools, that
have approved and signed a three-year contract with us that permits us to
install a ZapMe! lab at that school. These districts are located in over 40
states. As of July 31, 1999, we had installed ZapMe! labs in over 220 schools,
which had an average of more than 1,000 students, representing over 220,000
students, each of whom has access to a free ZapMe! account upon request. These
schools are located in over 33 states. In the Fall of the 1999-2000 school year,
ZapMe! will expand current programs and incentives to encourage network usage.
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MARKET OPPORTUNITY
NEED FOR TECHNOLOGY IN K-12 SCHOOLS
INCREASED IMPORTANCE OF TECHNOLOGY. Throughout the last decade, the U.S.
economy has undergone a fundamental shift, moving from a resource-based economy
to a knowledge-based economy. Although we estimate, based on industry sources,
that over $650 billion is currently spent each year on education and training in
the U.S., we believe that this spending falls short of what is necessary. We
believe that education and training are becoming more important, and that
knowledge is increasingly making the difference in how individuals and companies
perform economically. In addition, an understanding of the uses of technology is
now essential to achieve superior performance in a knowledge-based economy. In
order to respond to these demands, educators, parents and opinion leaders in the
U.S. are increasingly looking to technology, not only as a means of improving
the essential academic skills of students, but also as the basis for a set of
tools students must have to compete effectively. This has created an increased
demand for technology in schools.
TECHNOLOGY FUNDING GAP IN K-12 SCHOOLS. According to the National Center
for Education Statistics, during the 1998-1999 school year, there were over
110,000 K-12 schools in the U.S. These schools face inherent resource
constraints, including limited budgets and annual budget cycles which limit long
term investments. These constraints have, to date, prohibited adequate
investment in technology. We estimate, based on industry sources, that the cost
to achieve the five-to-one ratio of students-to-computers mandated by the
President of the United States and the U.S. Department of Education in their
national technology plan is estimated to be $110 billion over 10 years,
including initial investments and ongoing costs of implementation. We estimate,
based on industry sources, that to wire and equip 88,000 public schools with
computers will cost from $40 billion to $100 billion over the next five years,
assuming $180 to $450 is spent per student, over 44 million public school
students and per student expenditures by schools which have made effective use
of technology. Despite the significant expenditures necessary to improve
technology available in schools, we estimate, based on industry sources, that
only $5.4 billion was spent on technology, defined as hardware, software and
services, in public K-12 schools during the 1998-99 school year. Furthermore, we
believe, based on industry reports, that lack of technology funding is the
number one barrier to increased Internet usage in school. Based on these
statistics, we believe schools in the U.S. suffer a multi-billion dollar funding
gap for technology.
NEED FOR EDUCATION NETWORK. Most schools lack the infrastructure to allow
students, teachers and parents to communicate electronically. According to the
National Center for Education Statistics, there are approximately 53.1 million
students in grades K-12 and 3.2 million teachers who teach grades K-12. We
estimate, based on industry sources, that only 22.5% of schools have a network
capable of connecting the school to the home. We believe that a broadband
educational network focused on students aged 13-19 will facilitate the
integration of computers into the school's curriculum, improve academic
performance, and enhance the student-teacher-parent connection. Stand-alone PCs
are useful for preparing a document or doing individual research, but networked
PCs provide numerous advantages to students, teachers and parents, enabling
timely, effective communication, as well as helping students to collaborate on
group projects. Information and ideas can be shared with anyone connected to the
network.
THE INTERNET
GROWTH OF THE INTERNET. The Internet has emerged as a significant global
communications medium, enabling millions of people to share information and
conduct business electronically and providing advertisers and businesses with an
attractive means of marketing and selling their products and services. The
growth in the number of web users is expected to continue as Internet access
becomes more widely available, bandwidth increases and Internet content improves
and incorporates more multimedia
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capabilities. We estimate, based on industry sources, that the number of web
users worldwide will increase from approximately 142.2 million at the end of
1998 to approximately 502.4 million by the end of 2002, representing a compound
annual growth rate of 37%. We estimate, based on industry sources, that
worldwide e-commerce revenue on the Internet will increase from approximately
$50.4 billion at the end of 1998 to more than $1.3 trillion in 2003, based on a
projected 183 million buyers on the web and an average transaction size of
$7,216.
GROWTH OF ONLINE SPONSORSHIP. The Internet has become an attractive medium
for corporate sponsors, offering a level of flexibility, interactivity and
measurability not available in traditional media. The Internet enables corporate
sponsors to use demographics in delivering their messages to specific groups, as
well as to change their messages frequently in response to market factors,
current events and consumer feedback. Moreover, the Internet allows corporate
sponsors to specify an offering to each user in real-time and receive valuable
data on customer tastes, preferences and shopping and buying patterns. We
estimate, based on industry sources, that the amount of Internet advertising in
the U.S. will grow from approximately $2.1 billion in 1998 to $9.0 billion by
2002, a compound annual growth rate of 45%.
INCREASING VALUE OF DEFINED DEMOGRAPHIC AUDIENCE. Early Internet
sponsorship efforts were directed primarily at a broad audience by placing
corporate messages on the most frequently visited web sites. As the Internet has
matured, businesses have sought to improve the effectiveness of their corporate
sponsorship by directing their messages toward the Internet users they most want
to reach. By offering corporate sponsorship efforts to the most relevant users,
Internet-based corporate sponsors seek to improve their brand awareness and
response rates and reduce costs by eliminating spending that is not directed at
their intended audience.
STUDENTS' IMPORTANCE TO THE INTERNET AND IN THE ECONOMY. Extrapolating from
United States Census Bureau data, we estimate that there are more than 25
million individuals aged 13-19. Individuals in this age group are becoming
increasingly involved in the Internet. We estimate, based on industry sources,
that the number of people aged 13-19 who regularly access the Internet will rise
from 8.4 million in 1998 to 16.6 million by 2002. Their increased Internet
activity creates a significant opportunity for underwriting corporate
sponsorships and offering products and services online to students aged 13-19.
We estimate, based on industry sources, that this audience spent in excess of
$100 billion in 1998, based on over 25 million teens spending, on average, $84
per week. We estimate, based on industry sources, that teens will spend $1.2
billion on e-commerce alone by 2002.
THE ZAPME! SOLUTION
ZapMe! has designed a broadband interactive network, using "always on,"
bi-directional satellite technology, which brings the latest technology tools
and educational resources to schools. We believe that by providing free PCs and
broadband connectivity to the Internet, we will help to ease the technology
funding gap in schools, and provide students of all social and economic
backgrounds access to the technology and information that are critical in
today's knowledge-based economy. In addition, the ZapMe! network facilitates
greater parental involvement in schools by enabling electronic communication
among parents and teachers. Moreover, the ZapMe! network provides students,
teachers and administrators access to Internet-based educational content,
cost-effective school e-commerce solutions and school fundraising opportunities.
The ZapMe! network also provides corporate sponsors the opportunity to
underwrite public service messages and education content areas and services
appropriate for ZapMe! network users. Key elements of our approach are:
FREE BROADBAND INTERACTIVE NETWORK FOR SCHOOLS. We offer a turnkey
technology solution for schools by providing each participating school with
access to the ZapMe! network, including PCs and broadband connectivity to the
Internet, all at no cost to the school. A participating school typically
receives 15 high-end, multimedia PCs with 17-inch monitors, satellite
communications hardware, and a
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laser printer, as well as broadband access to the Internet and the ZapMe!
Netspace, our proprietary, easy-to-use interface that provides access to over
10,000 pre-selected, indexed educational sites and other aggregated content and
services. We also offer schools a single point of contact for free service,
including network implementation, maintenance, training and system upgrading.
HIGH-SPEED, "ALWAYS ON" SATELLITE DELIVERY. Our "always on" network
provides schools with a free broadband connection to the Internet using a
satellite system. In addition to providing high-speed Internet access, our
design enables us to download and store full motion video, other rich media
files, system upgrades and other data directly, quickly and efficiently onto
local school servers, where they can be accessed immediately and without the
delays typically associated with downloading large media and application files.
The "multicasting" capabilities inherent in satellite technology enable us to
simultaneously deliver these types of files to many different locations. As a
result, our costs of delivery are extremely low even while the speed at which we
can transmit these files is extremely high (more than 10 times the rates of the
fastest current forms of Internet access such as DSL and T-1 and T-3 access).
Because these files are accessed locally, and not over the Internet, we also
avoid delays associated with delivering media files using streaming network
architectures. We therefore can provide our users with high-speed access to
Internet content and new multimedia applications (such as video and high-quality
audio) and e-commerce applications.
ALTERNATIVE SOURCES OF SCHOOL FUNDING. The ZapMe! network provides schools
with a wide range of alternative sources for funding the acquisition of
technology and related equipment and services. In addition to providing schools
with free computing equipment and broadband Internet access, we offer or plan to
offer schools the following funding opportunities:
- Programs which enable safe, effective deployment of school fundraising
activities, such as magazine drives. For example, we are currently
planning to launch a network-based, Internet-delivered program for
fundraising activities with New Sub Services, the world's largest provider
of magazine subscriptions.
- Our ZapPoints program, which provides opportunities for schools to upgrade
technology, including PCs and document processing equipment, through the
accumulation of ZapPoints. Schools have the opportunity to purchase
products and equipment based upon ZapPoints, which measure a school's
cumulative usage and participation in ZapMe! programs. Xerox intends to
participate in the ZapPoints program.
We believe there are a wide variety of technology providers and educational
organizations which are interested in participating in these programs.
OPPORTUNITY FOR ONLINE SPONSORSHIP. We believe that ZapMe! appeals to
potential sponsors because it combines the following attributes:
- access to students aged 13-19 who, prior to the ZapMe! network, have been
difficult to reach during school hours or who may not otherwise have had
access to the Internet;
- "always on," rich-media, full-screen, full-motion, interactive display
that can be used to create more entertaining and engaging messages;
- delivery of messages that meet the individual preferences of users;
- ability to engage users, conduct online surveys, test product trials,
provide product feedback, and support product launches;
- access to a quarterly take-home CD-ROM that sponsors can use to explain
their programs or services; and
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- the opportunity to underwrite public service messages and education
content areas and services that serve the local community.
ATTRACTIVE FEATURES DRIVE NETWORK USAGE. We have designed the ZapMe!
Netspace to have attractive features, content and functionality, in order to
maintain and increase usage of the ZapMe! network. Features incorporated on the
ZapMe! Netspace include ZapMail, ZapPoints affinity marketing programs,
discussion boards, and a full suite of Microsoft software, including Word, Excel
and PowerPoint.
ZapMe! believes that this combination will lead to above industry average
sponsorship rates and more effective and engaging sponsorship models.
OUR STRATEGY
Our goal is to create the premier broadband educational network for students
aged 13-19, as well as for teachers, administrators and parents. We plan to
continue installing our network in schools, building brand recognition among
students, teachers and parents, and promoting increased use of our network both
in school and at home. Key elements of our strategy are as follows:
ACTIVELY DEPLOY OUR NETWORK AND GROW OUR INSTALLED BASE OF SCHOOLS AND
NUMBER OF USERS. We intend to capitalize on our early market entrance to deploy
our network, grow our installed base of schools and increase our number of
users. As of July 31, 1999, we had installed ZapMe! labs in over 220 schools.
Installation on this scale requires significant time and resources; therefore,
we believe our progress to date provides us a time-to-market advantage over
potential competitors. We have gained experience as we have deployed our
network, which we believe will streamline our further expansion. In addition, as
of July 31, 1999, there are more than 250 school districts, representing over
6,000 K-12 schools, including more than 2,000 middle and high schools, that have
approved and signed a three-year contract with us. We intend to capitalize on
our early mover advantage to gain significant market share.
PROMOTE REPEAT USAGE AND LOYALTY OF USERS. We believe that
broadband-delivered rich media networks, such as the ZapMe! network, have an
inherent potential for creating loyal users, particularly when combined with
free service offerings such as those we provide. As users invest time and energy
in ZapMe!'s services, they may become less inclined to switch to alternative
services. In particular, we believe that our ZapPoints affinity marketing
program will promote user loyalty by providing students incentives to
participate, as well as incentives for schools to encourage their students to
participate. We intend to promote repeat usage and user loyalty by maintaining
and improving our range of no cost services, expanding the breadth and depth of
our product offerings and remaining responsive to user trends and suggestions.
INCREASE FUNDING FROM SPONSORS. We believe that the ZapMe! network will
provide sponsors with an attractive means of offering their products and
services to schools, students, teachers, administrators and parents. We intend
to develop innovative sponsorship relationships with leading brand marketers
which support broad marketing objectives, including brand promotion, awareness,
product introductions and online research. We expect many of these sponsorship
arrangements will involve longer-term contracts and higher dollar values than
typical banner deals. We also intend to offer traditional banner advertising
options for sponsors. However, since the broadband interactive ZapMe! network is
a new and unproven advertising medium, advertisers that have traditionally
relied on other advertising media may be reluctant to purchase sponsorships on
the ZapMe! network or may face creative challenges in developing media for
sponsorships on the ZapMe! network. Potential sponsors may believe that online
advertising in general, and sponsorship on our network in particular, is less
effective than traditional advertising media for promoting their products and
services. Consequently, they may allocate little or none of their advertising
budget to sponsorships on the ZapMe! network. In addition, competition for
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Internet-based advertising revenue is intense and the amount of available
standard banner advertising space on the Internet is increasing at a significant
rate. These factors are causing Internet advertising rates to decline and we
expect that these rates may continue to decline in the future. While we have the
ability to deliver online advertising in a richer format than standard banner
advertising, we may still be subjected to this trend.
BUILD STRONG BRAND RECOGNITION. We believe that establishing and leveraging
the ZapMe! brand is important to our success. We have already benefited from
positive news stories and from word-of-mouth marketing. We intend to increase
our brand equity through the rapid introduction of the ZapMe! network into
schools throughout the country. We believe that the attractive features, content
and functionality of the ZapMe! Netspace will strengthen our brand and attract
new students, teachers and parents to become users.
LEVERAGE INSTALLED BASE OF SCHOOLS AND NUMBER OF USERS TO DRIVE USE AT
HOME. As our installed base of schools and number of users grow, we intend to
stimulate demand for, and use of, ZapMe! at home. As part of its agreement with
participating schools, ZapMe! intends to send home to each student a quarterly
CD-ROM that includes a home version of the ZapMe! Netspace. In order to
stimulate home use of ZapMe!, we also intend to offer communication and
entertainment features unique to the home version of the ZapMe! Netspace, as
well as our ZapPoints program. ZapMe! has no immediate plans to extend the
network into the home environment by satellite. ZapMe! instead is relying on
existing home Internet connectivity options, principally dial up, but also
through DSL, cable modems, and other connectivity options as they become
available.
PURSUE STRATEGIC ALLIANCES. We plan to increase usage of the network and
grow our revenues through strategic alliances that offer opportunities to
improve our technology, gain access to compelling content, add new features and
functionality or generate sponsorship or e-commerce revenues. ZapMe! also
intends to form alliances with other companies to leverage their brands, while
incorporating content that is consistent with our educational mission. We may
also expand our revenue opportunities through alliances with technology
providers, providers of educational goods and services, online service and
content providers, commerce providers and advertisers.
LEVERAGE OUR NETWORK TO CREATE ADDITIONAL REVENUE STREAMS. Our ZapMe!
network will enable us to create additional revenue streams through appropriate
after-school use of the labs and e-commerce. For example, our agreement with
Sylvan provides for Sylvan to use the ZapMe! labs outside of school hours for
educational programs and services and we share in the revenue generated from
those programs and services. Other opportunities to leverage our network include
an alliance to establish computer summer camps utilizing ZapMe! labs and
corporations using the labs after hours for training purposes. In addition, we
believe that by building a large base of users, we will be able to enter into
revenue sharing or other agreements with appropriate e-commerce partners
interested in serving students, teachers and parents in both the school market
and the home market.
THE ZAPME! NETWORK
The ZapMe! network offers significant benefits not only to schools, but also
to students, teachers, administrators, parents and sponsors.
WHAT ZAPME! OFFERS TO SCHOOLS. We offer a free turnkey technology solution
for schools by providing each school with a complete broadband interactive
network with the following components. We will offer the following in the Fall
of the 1999-2000 school year:
- Hardware. An eligible school typically receives 15 high-end, multimedia
PCs with 17-inch monitors, satellite communications hardware, and a laser
printer, as well as access to broadband Internet connectivity through the
ZapMe! Netspace, our proprietary, easy-to-use interface that
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provides access to over 10,000 Internet sites of third-party independent
content providers that we identify, review and index for easy reference
and other aggregated content and services;
- Broadband Connectivity. Our network incorporates broadband Internet
connectivity over a bi-directional satellite delivery system. This design
permits us to simultaneously multicast data, including full motion video
files, to schools. The speed afforded by broadband satellite-delivered
multicast data allows ZapMe! to provide our users fast access to
graphic-oriented Internet content and new bandwidth-intensive multimedia
applications;
- Software. The ZapMe! school network incorporates two categories of
software: the ZapMe! Netspace and third-party software that is accessed
directly through the ZapMe! Netspace. The ZapMe! Netspace is a
proprietary, easy-to-use interface that uses standard Web browser commands
and runs on top of Internet Explorer 4.0 and Windows NT. Microsoft Office
applications such as Word, Excel and PowerPoint are also accessed directly
through the ZapMe! Netspace; and
- Services. An eligible school typically also receives installation,
customer service and technical support, as well as teacher training.
- Installation. To enable rapid and reliable deployment, we have
agreements with third-parties to provide complete network installation
services. These agreements provide for site inspection, installation
and testing of both the satellite dish, which is typically installed on
the roof of the school, and the balance of the computer lab, which is
typically installed in a library or dedicated computer room. We believe
that these relationships with third-parties enable us to provide
high-quality, nationwide service, and to reach and sustain a much
higher deployment scale than if we were to undertake all installation
services ourselves. We currently rely on Gilat and Spacenet, and
Inacom, for the majority of our installation needs.
- Customer Service and Technical Support. We have developed a
comprehensive approach for managing all customer service and technical
support issues, intended to ensure that every interaction a user has
with ZapMe! is a positive experience. Participating schools, therefore,
are not required to have a dedicated network administrator.
Specifically, we have established a four-level escalation process,
which is balanced between a national call center partner and internal
ZapMe! technical support representatives. Level 1 and 2 are handled
through our national call center partner, while more complex problems
are routed to our own technical personnel. We believe that we have
developed customer support metrics which are directly correlated to the
customer satisfaction experience. We intend to manage both our national
call center partner and ourselves to achieve high standards for
customer support.
- Teacher Training. We intend to provide enabling training designed for
both teachers and administrators, including systems administration,
Internet fundamentals, and applications. This training will be
delivered through a variety of media, including broadcast, computer-
based, online and face-to-face channels.
WHAT ZAPME! RECEIVES FROM K-12 SCHOOLS. According to the National Center
for Education Statistics, during the 1998-1999 school year, there were over
110,000 K-12 schools in the U.S. Our initial focus is on middle and high
schools. In order to have a ZapMe! lab installed at a school, a school board
must approve and sign a standard three-year contract with us. This contract
commits each school that receives a ZapMe! lab to use each PC an average of four
hours per school day. Each school must also provide related items such as power,
a dedicated phone line, lab space and insurance for the equipment. The standard
contract also stipulates that each participating school provides us and our
partners with access to the ZapMe! lab during non-school hours. As part of its
agreement with participating schools, ZapMe! intends to send home to each
student a quarterly CD-ROM that includes a home version of the ZapMe! Netspace.
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WHAT ZAPME! OFFERS TO USERS. The ZapMe! network provides our users a rich
media computer experience that is easy to use and makes education more engaging
and entertaining. We believe that we have designed the ZapMe! Netspace with
attractive features, content and functionality, and that students and teachers
will use the ZapMe! network in school and at home. We expect the following
software features to be available by Fall of the 1999-2000 school year:
- ZapMail. All ZapMe! users can email students, friends, teachers, and
others with this standard feature. ZapMail is accessible through the
Internet, so students can also use ZapMail to take their schoolwork home
with them. Students can create documents at school and have access to them
at home, on vacation or wherever they can connect to the Internet.
- Message Boards. These message centers, which can be customized by class
or topic, allow students to collaborate with peers and teachers,
regardless of geographic location. Message boards are valuable tools for
asynchronous discussions and collaboration between students. Message
boards also enable teachers to build a stronger community, and are
vehicles for students to become more involved in extracurricular
activities.
- ZapSearch. This feature allows students to find what they want on the
ZapMe! network or the full Internet.
- Microsoft Office. Microsoft Office applications such as Word, Excel and
PowerPoint may be accessed directly through the ZapMe! Netspace.
- ZapPoints. ZapPoints is an incentive-based program much like a frequent
flyer program that rewards students for using the ZapMe! network. Students
that log in and use the ZapMe! network will earn ZapPoints that can be
redeemed for merchandise with our e-commerce partners. This "earn while
you learn" program of rewards can also be extended to academic and
athletic achievement, extracurricular activities, community fund raising
efforts, ZapMe! network administration, and for purchasing sponsor's
products and services. Schools receive matching ZapPoints for each of
their students, which are redeemable through ZapMe!'s e-commerce programs.
Dependent upon the underlying arrangement, we will record a charge to
revenue or to cost of services expense for ZapPoints awards based upon the
full dollar equivalent of points which have been awarded and which are
expected to be redeemed.
- My Bookmarks. Bookmarks are an option supplied with most browsers, but
the ZapMe! network allows the students' bookmarks to travel with them to
any computer on which the ZapMe! Netspace can be accessed. For example,
students may work at a different computer each time they enter the lab.
The bookmarks are delivered upon log in, and are stored on the ZapMe!
network, so no matter where the students log in, their favorite web sites
are easily accessible.
- My Tools. The ZapMe! network allows students to launch their favorite
software applications directly through the browser, not separately.
Students can toggle back and forth between a web site, a Word document and
their email. This allows for easier, quicker work and again provides them
the security of knowing that all of their stuff, including homework, is
just one click away.
WHAT ZAPME! OFFERS TO SPONSORS. We believe that ZapMe! offers an appealing
opportunity for sponsors because it provides the following:
- access to students aged 13-19 who, prior to the ZapMe! network, have been
difficult to reach during school hours or who may not otherwise have had
access to the Internet;
- our dynamic billboard is a fixed space on the PC screen that displays
sponsorship messages. The dynamic billboard is larger than typical banner
ads and is always on the left-hand side of the PC screen, regardless of
which applications are used or where a user navigates. The dynamic
billboard displays new sponsorship messages periodically, for example,
every 15 seconds. The
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ZapMe! network is designed to allow users to click on the dynamic
billboard and view the sponsor's message on a full-screen, rich media
interactive display, with full motion video and high quality audio.
- ability to deliver messages that meet the individual preferences of users;
- ability to interact with users, conduct online surveys, product trials,
online recruiting, provide product feedback and support product launches;
- access to a quarterly take-home CD-ROM that sponsors can use to explain
their programs or services; and
- opportunity to underwrite public service messages that serve the local
community.
STRATEGIC ALLIANCES
We plan to enter into strategic alliances in order to capitalize on our
infrastructure, improve our technology, gain access to compelling content, add
new features and functionality, and generate sponsorship and e-commerce
revenues. We may also expand our revenue opportunities through alliances with
technology providers, providers of educational goods and services, online
service and content providers, commerce providers and advertisers. ZapMe!'s
current strategic alliances include:
DELL COMPUTER CORPORATION. Dell has agreed to be a principal supplier of
hardware for our labs. ZapMe! is installing Dell equipment, including PCs,
monitors, and high-end servers in schools across the country. Dell has indicated
that it plans to participate in our e-commerce and ZapPoints programs. Dell has
also made an equity investment in ZapMe!.
GILAT SATELLITE NETWORKS. Gilat supplies our satellite uplink equipment and
satellite receiver cards for each school installation. Gilat's wholly-owned
subsidiary, Spacenet, provides us with our satellite space segment. Spacenet is
also our primary contractor for the network installation process. Gilat has also
made an equity investment in ZapMe!.
MICROSOFT. Through an agreement with Microsoft, ZapMe! will provide
Microsoft's Word, Excel and PowerPoint programs to the in-school users of our
network. Microsoft's operating system products are the backbone of our network.
NEW SUB SERVICES. We are currently planning to launch a network-based,
Internet-delivered program for safe, effective deployment of school fundraising
activities with New Sub Services, the world's largest provider of magazine
subscriptions.
SCHOOL SPECIALTY. ZapMe! and School Specialty, the largest supplier of
non-textbook education products to educators in the U.S., have teamed up to
offer e-commerce opportunities to schools, teachers and administrators. School
Specialty intends to offer a range of school supplies over the ZapMe! Netspace
for convenient ordering through the network.
SYLVAN LEARNING SYSTEMS. We have entered into an agreement with Sylvan
which permits Sylvan to offer educational programs and services in ZapMe! labs
when not in use. In exchange, Sylvan pays us a percentage of the net profit it
generates from those programs and services. Sylvan has also made an equity
investment in ZapMe!.
TOSHIBA. Toshiba is a sponsor of the ZapMe! network and a supplier of
hardware for our labs.
XEROX. Xerox has agreed to be a sponsor of our network and a principal
supplier of state-of-the-art printers for our labs. Xerox participates in our
ZapPoints program.
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SPONSORSHIP
We intend to fund the ZapMe! network through a combination of corporate
sponsorships and e-commerce relationships. Participating sponsors have the
opportunity to underwrite public service messages, as well as corporate
sponsorship appropriate for ZapMe! network users, including students aged 13-19,
teachers and administrators. Corporate sponsors scheduled for the Fall of the
1999-2000 school year include: Dell, General Electric, Johnson & Johnson,
Labtech, Mercury Records, New Sub Services, Proctor & Gamble, Sylvan, Toshiba,
the U.S. Navy and Xerox. This list of scheduled sponsors reflects the variety of
different industries which might sponsor the ZapMe! network. We believe that we
will receive proceeds of at least $10,000 from each of the listed sponsors in
the 1999-2000 school year; however, we cannot determine in advance the exact
amount of the sponsorship, and furthermore our contracts with these sponsors may
allow them to quickly terminate their sponsorship on our network. Please see
"Risk Factors--Our dependence on short-term sponsorship contracts exposes us to
greater pressure on our sponsorship prices and allows sponsors to quickly cease
their sponsorships," on page 8 for more information on risks posed by our
dependence on short term sponsorship contracts.
Our sponsorship arrangements often differ from traditional banner
advertising in that they are designed to achieve broad marketing objectives such
as brand promotion. We believe the dynamic nature of our network will allow us
to design sponsorships programs that cater to the specific goals of sponsors.
These goals include delivery of a rich, interactive media experience (including
full motion video with audio), impression frequency, ability to conduct online
market research, supporting new product launches, product feedback information,
online recruiting, new account openings, and fulfilling e-commerce transactions.
In addition, we intend to develop educationally-appropriate content to support
the marketing and e-commerce initiatives of sponsors. We believe that we will,
in a limited number of cases, enter into exclusive sponsorship arrangements in
key sponsor categories that may extend for a period of time. As a result of our
sponsorship strategy, we believe that ZapMe! will be able to command effective
sponsorship rates significantly above the industry average.
SALES AND MARKETING
As of July 31, 1999, ZapMe! had a direct sales organization consisting of
six sales professionals with an average of 11 years of experience, all of whom
were hired since February 28, 1999. We intend to hire additional qualified sales
professionals in the future. Our sales organization consults regularly with
sponsors on design and placement of advertising, provides customers with
advertising management analysis and focuses on providing a high level of
customer satisfaction. We generally seek to hire individuals who possess
significant experience in obtaining sponsorships and preexisting relationships
with potential sponsors in a variety of media. In addition to our sponsorship
sales organization, we have six internal and four dedicated external sales
professionals (including four at a telemarketing firm) focused on marketing to
school districts who are candidates for joining the ZapMe! network.
We employ a variety of methods to promote the ZapMe! brand and to increase
network usage by users, including the ZapPoints user rewards program, in-school
promotions such as technology incentive programs co-branded with partners, and
home CD-ROM co-marketing campaigns integrating student recreational interests
such as video games, music videos, movie trailers and fashion. In the Fall of
the 1999-2000 school year, ZapMe! will expand current programs and incentives to
encourage network usage. In addition, ZapMe! engages in an ongoing public
relations campaign which includes speaking engagements, conference participation
and press tour activities. Our marketing department, which consists of seven
professionals, works in conjunction with our creative services department.
INSTALLED SCHOOL BASE AND USERS
ZapMe! believes a large and active user base is critical to its success.
ZapMe! has launched an aggressive user-acquisition campaign, which includes
rapidly growing our installed base of schools and
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creating free services and support for our users. Registration is available to
all students, teachers and administrators in participating schools at no cost to
the students or school.
Recognizing the importance of student privacy, ZapMe! has designed its
registration process and created a policy to ensure the privacy of its users.
Under our privacy policy, we collect only non-personally identifying
information--including age, gender and location by zip code--from our student
users. We use collected information internally in order to make appropriate
materials available to our student users. Schools are solely responsible for
maintaining any personally identifying information about their student users. We
may in the future collect names and other personal information from users over
13 in conjunction with contests and other promotions, but will not distribute
this information externally. We provide only aggregated versions of
non-personally identifying information--such as what percentage of our users are
a particular age--to third parties.
ZapMe! also promotes the protection of students in their use of the network.
Students sign on and are known to ZapMe! only by the anonymous user names that
they choose. In addition, they pick a password to protect their accounts from
use by others. We also provide schools the ability, at their discretion, to
provide more or less access to the Internet. Schools can choose to allow access
only to our selected 10,000 educational sites, or to sites one or two clicks
from these sites. We plan to offer filtering software as well to help schools
gain even more flexibility and control over the Internet. Finally, ZapMe!
encourages schools to comply with all applicable requirements, including, for
example, the collection of acceptable use policies signed by the students and
their parents.
INFRASTRUCTURE AND TECHNOLOGY
The ZapMe! network incorporates "always on" broadband Internet connectivity
over a satellite delivery system, application servers located in our network
operations center, and a desktop interface and related applications. Our
satellite delivery system permits us to simultaneously multicast data, including
full motion video files, from our network operations center to each school
server in the ZapMe! network. We believe that this is an efficient way of
distributing files over a remote network in a school environment.
Our infrastructure is scalable, allowing us to quickly adjust to our rapidly
expanding user base. Currently, we license commercially available technology
whenever possible in lieu of dedicating our financial and human resources to
developing technology solutions. In particular, we purchase PCs, monitors and
servers primarily from Dell and Toshiba and printers primarily through Xerox. We
lease satellite equipment and transmission services from Gilat and Spacenet, its
wholly-owned subsidiary, under an agreement that runs until 2005. We license the
operating system for our web browser, as well as Word, Excel and PowerPoint,
from Microsoft under an agreement with no expiration date. We license the
technology that allows us to multicast content over our network via satellite
from Starburst under a perpetual license agreement. Finally, in order to serve
sponsor messages, we have purchased a perpetual license for AdServer technology
from NetGravity. We are in the process of implementing fail safe or redundant
systems to promote high system availability and ease of maintenance.
ZapMe! users access the Internet and ZapMe!-provided desktop applications
(which typically has been previously multi-casted to the school server) using
the ZapMe! Netspace. Users have access to the Internet, third-party applications
such as Microsoft Office, and ZapMe! features, including email, search and
bulletin boards. The ZapMe! Netspace also presents rich media sponsor messages
which are generated at the local school server, within the dynamic billboard
portion of the Netspace.
Our public web site, user registration database, email server, and system
backup functions are hosted at Frontier Global Center in California using a set
of NT and Unix software systems. Frontier Global Center is manned 24 hours per
day, seven days per week by systems administrators and network managers to
ensure the highest level of support. Critical data from the servers are
regularly archived off site by a third party service.
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COMPETITION
The market for the ZapMe! network is new and rapidly evolving, and we expect
competition in and around our market to intensify in the future. We are not
aware of any competitor that currently offers or is planning to offer a
broadband interactive network for schools at minimal or no cost. However, we
face competition from a number of companies which provide services and
functionality similar to portions of the ZapMe! network, market products and
services to a similar base of users, or both. For example:
- America Online provides both Internet access as well as their own content.
They also market to a user base similar to ours with their Kids Only
section that derives most of its revenue from advertising. America Online
has a large amount of high quality content, and a popular user interface.
In addition, America Online can leverage its log-in based network to
address the demographics of its user base.
- Channel One owns and operates an advertising-supported educational
television service for secondary school students in the U.S. It airs 12
minutes of news and current events each school day via satellite,
generating revenues from 2 minutes of advertising included in the program.
We may compete with Channel One for sponsors seeking to reach the same
audience.
- Hughes Electronics currently offers satellite-based broadband Internet
access to consumers, but does not provide their own content, nor do they
market to a user base similar to ours. However, they have recently entered
into a strategic alliance with America Online to promote America Online's
broadband services and content.
- Disney offers a wide variety of Internet content that markets to a user
base similar to ours. They own or have access to high quality content, and
have experience in marketing to a user base similar to ours.
We believe that our greatest potential competitive threat is posed not by a
single company, but a combination of one or more companies which each addresses
different parts of our business model. Many of our competitors have
significantly greater financial, technical, marketing and distribution resources
than we do. Our competitors may engage in more extensive research and
development, adopt more aggressive pricing policies and make more attractive
offers to existing and potential employees, partners, sponsors and e-commerce
merchants. Our competitors may develop services that are equal or superior to
ours or that achieve greater market acceptance. In addition, current and
potential competitors have established or may establish cooperative
relationships among themselves or with third parties to better address the needs
of sponsors and businesses engaged in e-commerce. As a result, it is possible
that new competitors may emerge and rapidly acquire significant market share.
Competition could reduce our revenues and otherwise harm our business. We
therefore believe that we must rapidly deploy our network in order to achieve a
leadership position relative to potential competitors or imitators. In addition,
we believe that our success in competing with other potential competitors or
imitators will depend on various factors, many of which are outside of our
control. These factors include:
- The quality of our network content;
- The ease of use of our user interface;
- The timing and market acceptance of new and enhanced services and
features; and
- The sales and marketing efforts by us and our competitors.
We believe that with respect to each of these factors, we compare favorably
to other companies addressing the educational market.
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ALTERNATIVE SOURCES OF COMPUTER EQUIPMENT AND INTERNET ACCESS
An immediate attraction of deploying our network is free access to computers
and the Internet. However, for a variety of reasons, schools may decide to use
other methods to acquire computers and Internet access. Aside from purchasing
the computers and Internet access from already existing budgets or from
donations from parents or other members of the community, some other methods of
acquiring computer equipment and Internet access include:
E-rate. The Education-rate initiative, commonly referred to as "E-rate," is
a government sponsored program under which schools can qualify for discounts on
a wide variety of networking products, telecommunications services and Internet
access. The discount ranges from 20%-90% depending upon whether the school is in
an urban or rural area and the economic status of the students. Passed as part
of the 1996 Telecommunications Act, the E-rate is an extension of the Universal
Service Fund, originally designed to make telephone service ubiquitous in the
United States. The FCC recently moved to fund the E-rate program at $2.25
billion for the period from July 1, 1999 to June 30, 2000, the maximum level
under its regulations. Schools may choose to utilize the E-rate and purchase
their computer and network equipment and Internet access themselves, rather than
using the ZapMe! network.
Free Computer Equipment and Internet Access Companies and Offerings. Various
companies have recently begun to offer a variety of low cost computer equipment
and Internet access, as well as packages of both. The free equipment and
Internet access has to date largely been tied to the user accepting additional
advertising or network services from the company providing the equipment or
Internet access. In addition, several companies have recently announced that
they will subsidize the cost of computer equipment for purchasers who agree to a
full price multi-year Internet access commitment. We believe that to date none
of these offerings has targeted the school or multiple PC lab markets. New
product offerings occur rapidly in our industry, however, and in the future
schools may choose to receive their computer equipment and Internet access from
these sources rather than use the ZapMe! network.
INTELLECTUAL PROPERTY
We seek to protect our intellectual property through a combination of U.S.
and international law regarding copyright, patents, trademarks and trade secrets
as well as confidentiality agreements with employees, consultants, contractors
and business partners. We currently have five patent applications on file with
the United States Patent and Trademark Office and are in the process of
preparing four additional patent applications and two continuations of our
existing applications. The proprietary technologies for which ZapMe! is pursuing
patents include those allowing ZapMe! to:
- correlate user's preferences and access privileges with a user name so
that the user's experience is consistent regardless of what computer he or
she uses;
- allow a user to keep track of and move between the windows he or she has
open more effectively by providing a window management system designed
specifically for Internet use;
- dynamically assign and change the ZapPoints applicable to particular
actions on the ZapMe! Netspace in order to encourage use of particular
features at different times;
- transmit sponsor messages and other content via satellite to local school
computers for distribution to the appropriate ZapMe! users;
- simultaneously monitor system usage across multiple ZapMe! computers for
diagnostic purposes;
- manage e-mail and other communications remotely; and
- multicast information efficiently over ZapMe!'s satellite network.
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In addition, we have applied to register ZapMe! and other trademarks in the
United States and in a number of foreign countries. We have given copyright
notice on our Netspace and many other copyrightable materials by affixing a
standard copyright notice in the appropriate places. ZapMe! controls access to
our trade secrets and proprietary information by entering into confidentiality
agreements with its employees, consultants, contractors and actual and potential
business partners. We currently own the Internet domain name "zapme.com," from
which we run our corporate web site.
GOVERNMENT REGULATION
We expect to generate a significant portion of our revenue from advertising
and e-commerce directed primarily at teens using ZapMe! labs in schools. This
business model may prove controversial and lead to action by the government or
private interests to restrict or stop our network. To date, some third parties
that oppose corporate advertising in schools, including sponsorships on the
ZapMe! network, have sought legislation to curb this practice. In particular,
California recently enacted a law that imposes additional procedural
requirements before ZapMe! or other entities may sign contracts with local
school boards. Similar or more restrictive legislation is possible in other
states and at the local and federal levels. Anti-school-advertising groups have
had some successes in the past seeking regulation and boycotts of other
companies that advertise in schools, such as Channel One. Restrictions on our
advertising or e-commerce would seriously harm our business. Moreover, any new
law or regulation pertaining to online media or advertising in schools, or the
application or interpretation of existing laws, could decrease the demand for
our service, increase our cost of doing business or otherwise have a negative
effect on our business.
The Internet is also the subject of an increasing number of laws and
regulations. These laws and regulations may relate to liability for information
retrieved from or transmitted over the Internet, online content regulation, user
privacy, taxation and the quality of products and services. In particular,
Congress has recently passed (and the President has signed into law):
- Child Online Protection Act of 1998. The Act makes it unlawful for anyone
to knowingly distribute material for commercial purposes over the Internet
to minors that is harmful to minors. It imposes additional restrictions
and obligations and establishes the Commission on Online Protection to
study and report to Congress on methods to help reduce access to harmful
information by minors.
- Children's Online Privacy Protection Act of 1998. The Act makes it
unlawful for an operator of a web site or online service directed to
children under 13 to collect, use or distribute personal information from
a child under 13 in a manner which violates regulations to be proscribed
by the FTC. The FTC is in the process of issuing final regulations, which
concern the scope of the Act's parental consent requirements.
- Protection of Children from Sexual Predators Act of 1998. This Act
mandates that electronic communication service providers report facts or
circumstances from which a violation of child pornography laws is
apparent.
- Digital Millennium Copyright Act of 1998. This Act establishes limited
liability for online copyright infringement by online service providers
for listing or linking to third-party web sites that include
copyright-infringing materials.
The courts have not yet interpreted these laws so their applicability and
reach, therefore, are not defined. One federal court has, however, upheld a
challenge to the constitutional validity of the Child Online Protection Act and
ordered a preliminary injunction against enforcement or prosecution under the
Act as of February 1, 1999. Nonetheless, these laws may impose significant
additional costs on our business, require us to change our operating methods, or
subject ZapMe! to additional liabilities. Moreover, the applicability to the
Internet of existing laws governing issues such as intellectual property
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ownership, copyright, defamation, obscenity and personal privacy is uncertain
and developing. ZapMe! may be subject to claims that our services violate such
laws. Any new legislation or regulation in the United States or abroad or the
application of existing laws and regulations to the Internet could damage our
business and cause the price of our common stock to decline.
The satellite industry is a highly regulated industry. In the United States,
operation and use of satellites requires licenses from the FCC. As a lessee of
satellite space, we could in the future be indirectly subject to new laws,
policies or regulations or changes in the interpretation or application of
existing laws, policies or regulations, any of which may modify the present
regulatory environment in the United States. While we believe that our satellite
access providers will be able to obtain all U.S. licenses and authorizations
necessary to operate effectively, they may not continue to be successful in
doing so. Our failure to indirectly obtain some or all necessary licenses or
approvals could seriously harm our business.
LEGAL PROCEEDINGS
On July 7, 1999, we filed a demand for arbitration with our former President
and Director, Frank J. Vigil, related to his employment at and departure from
ZapMe!. We assert that ZapMe! was induced by Mr. Vigil's fraudulent
representations to enter into an employment agreement with him. We seek the
rescission of the employment agreement, as well as the return of all benefits
received by Mr. Vigil under the agreement, and costs and fees associated with
the arbitration.
On July 26, 1999, Mr. Vigil filed a response to our demand and a
counterclaim. Mr. Vigil denied the allegations contained in our demand. Mr.
Vigil's counterclaim alleges breach of contract, breach of implied covenant of
good faith and fair dealing, fraud in the inducement of contract, intentional
misrepresentation, defamation, and violations of the California Labor Code, all
related to the circumstances of his employment at and departure from ZapMe!. Mr.
Vigil seeks various damages which are set forth in "Risk Factors--We are
currently in arbitration with one of our former officers," beginning on page 15.
Each party to the arbitration has asserted various defenses to the claims
and counterclaims. We cannot assure you that we will prevail in this
arbitration, and any decision against us could result in an obligation to pay
some or all of the damages Mr. Vigil has sought in his counterclaim. These
damages could be substantial. Notably, under the terms of his employment
agreement and related agreements, Mr. Vigil was permitted to purchase 1.35
million shares of common stock of ZapMe!. Some of those shares were subject to a
right of repurchase by ZapMe! at the time of Mr. Vigil's separation from ZapMe!.
Mr. Vigil may claim that, under the terms of his employment agreement, the
closing of this offering could result in the cancellation of the right of
repurchase and the full vesting of his stock. A decision against us with regard
to the validity of the employment contract and related agreements could
therefore result in the complete vesting of Mr. Vigil's stock.
EMPLOYEES
As of June 30, 1999, we had 88 employees. None of our employees is
represented by a labor union or is the subject of a collective bargaining
agreement. We have never experienced a work stoppage and believe that employee
relations are good.
ZapMe! believes that its future success will depend in part on its continued
ability to attract, hire and retain qualified personnel. Competition for such
personnel is intense, and we cannot guarantee that we will be able to identify,
attract and retain such personnel in the future.
FACILITIES
Our primary offices are located in approximately 12,000 square feet of
office space in San Ramon, California, under a lease expiring in August 2002. We
believe that our current facilities will not be adequate to sustain the
anticipated increase in headcount during the 1999 fiscal year, and we are
currently negotiating for additional office space in San Ramon.
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MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
The executive officers, key employees and directors of the Company, and
their ages as of June 30, 1999, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------------------------------- --------- -------------------------------------------------
<S> <C> <C>
Lance Mortensen......................................... 46 Chairman of the Board
Rick Inatome............................................ 46 Chief Executive Officer, President and Director
Robert A. Stoffregen.................................... 50 Chief Financial Officer
Don Kingsborough........................................ 52 Senior Vice President, Sales and Marketing
Bruce Bower............................................. 37 General Counsel, Vice President of Business
Development and Secretary
William S. Burwell...................................... 52 Chief Information Officer
Dave Lundberg........................................... 40 Chief Technical Officer
Robert Rudy............................................. 44 Vice President of Operations
Royce Johnson........................................... 50 Vice President of Vertical Markets
Darryl Deaton........................................... 51 Vice President and Director
Michael Arnouse(1)(2)................................... 43 Director
Douglas Becker(1)(2).................................... 33 Director
Tom Hitchner(2)......................................... 47 Director
Jack Kemp............................................... 64 Director
</TABLE>
- ------------------------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
MR. MORTENSEN is a founder of ZapMe! Corporation and has been our Chairman
since our inception. Mr. Mortensen began the planning and preliminary
organization of ZapMe! in 1996, and incorporated us in June 1997. Prior to
founding ZapMe!, Mr. Mortensen was Chief Executive Officer of Monterey Pasta
Company, a food service company, from January 1993 to October 1995. From 1981 to
1992 he was President of Morweg Construction Company, a California residential
construction company.
MR. INATOME, our Chief Executive Officer, President and one of our
directors, joined us in September 1999. From July 1993 to September 1999, Mr.
Inatome was Chairman of the Board of Inacom, a technology services firm. Mr.
Inatome currently serves on the Board of Directors of Sylvan Learning Systems,
Inc., RL Polk, and Atlantic Premium Brands.
MR. STOFFREGEN has been our Chief Financial Officer since January 1999.
Prior to joining us as an employee, Mr. Stoffregen was a consultant to the
company. From January 1998 to October 1998, he served as Vice President and
Chief Financial Officer of Radical Entertainment, a video game development
company. Prior to that, from June 1996 to January 1998, he was Executive Vice
President, Chief Financial Officer and Director of Corporate Development for the
California Culinary Academy, a culinary arts school. From May 1995 to May 1996,
he was providing financial consulting services. Mr. Stoffregen was Executive
Vice President and Chief Financial Officer of YES! Entertainment Corporation, a
children's product and entertainment company, from September 1994 to March 1995.
From August 1991 to September 1994, he was Senior Vice President and Chief
Financial Officer of The Sharper Image, a retailer of upscale gifts. Mr.
Stoffregen was a partner with Deloitte & Touche from 1985 through August 1991.
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MR. KINGSBOROUGH joined us in April 1999 as Senior Vice President, Sales and
Marketing. From July 1998 to April 1999, Mr. Kingsborough provided consulting
services. Mr. Kingsborough served as the Chief Executive Officer of YES!
Entertainment Corporation, a children's product and entertainment company, from
December 1992 to July 1998. YES! Entertainment Corporation filed a petition
pursuant to Chapter 11 of the Bankruptcy Code in February 1999. Mr. Kingsborough
serves on the Board of Directors of Game Trader, Inc., a wholesaler of new and
used video games and a publicly traded company.
MR. BOWER has been our General Counsel, Vice President of Business
Development and Secretary since November 1998. Prior to joining us, Mr. Bower
was a founder and principal of i-80 Ventures, an investment and consulting firm,
from November 1997 to November 1998. Mr. Bower was the principal of Bower
Consulting Group from April 1997 to November 1998. From March 1995 to March
1997, he served as Executive Vice President, Business Development and General
Counsel of YES! Entertainment Corporation, a children's product and
entertainment company. From November 1989 to March 1995, Mr. Bower was an
associate with Wilson Sonsini Goodrich & Rosati, a law firm.
MR. BURWELL has been our Chief Information Officer since September 1999.
Prior to joining us, Mr. Burwell worked for EDS, a computer services firm, from
1974 to September 1999 in numerous capacities, most recently as President of
Consumer Technology Services.
MR. LUNDBERG, our Chief Technical Officer, joined us in January 1999. Before
that, he was with Computer Curriculum Corporation, an educational software
development company, from June 1995 to January 1999, initially as Vice President
of Engineering, and then as Vice President of Internet Technology. From December
1992 to June 1995, Mr. Lundberg was Vice President of Engineering for Kalieda
Labs, a software development company.
MR. RUDY has been Vice President of Operations since March 1999. From March
1998 to March 1999, he was Vice President of Corporate Quality and Development
at Credence Systems Corporation, a semiconductor supplier. Mr. Rudy was Director
of Account Management and Technology Transfer at SEMATECH, a nonprofit research
and development consortium of U.S. semiconductor manufacturers, from November
1994 to March 1998.
MR. JOHNSON, our Vice President of Vertical Markets, has been with us since
September 1998. From April 1996 to September 1998, Mr. Johnson was Vice
President, Marketing and a Director of Millennia Software, a software company.
He was the owner and principal of Pioneer Business Consulting, a business and
financial consulting firm from October 1994 to April 1996. Mr. Johnson worked
from June 1976 to October 1994 for Intel Corporation, serving in a number of
positions, including Controller and Assistant General Manager, Microprocessor
Division.
MR. DEATON is a Vice President and has been one of our directors since
November 1997. One of our co-founders, he has been with us since our inception
in June 1997, and has headed various departments, including Content Development,
School Sales and Marketing and School Network Installation. From July 1994 until
June 1997, Mr. Deaton was the owner and principal of Darryl Deaton Real
Estate/Consulting.
MR. ARNOUSE has been one of our directors since October 1998. Mr. Arnouse
has spent the past 10 years as a business consultant and financier for private
and publicly traded companies. During that period, he had financed more than
fifty transactions totaling in excess of five hundred million dollars. Mr.
Arnouse co-founded Sky Trek International Airlines and served as Chairman of the
Board of Directors from January 1996 until June 1998 and continues to serve on
its board. Mr. Arnouse is currently employed as Chairman and President of
Wharton Capital Partners Ltd., a New York based investment banking and financial
consulting firm. Mr. Arnouse also serves as president of State Capital Market
Group Ltd., a privately owned investment and business consulting company.
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MR. BECKER has been one of our directors since April 1999. Mr. Becker has
been President and Co-Chief Executive Officer of Sylvan Learning Systems, Inc.,
one of our shareholders, since April 1993. From February 1991 until April 1993,
Mr. Becker was the Chief Executive Officer of the Sylvan Learning Center
Division of Sylvan. He has been a Director of Sylvan since December 1986. Mr.
Becker also serves as a director of Caliber Learning Network, Inc. and
Constellation Energy Group. Mr. Becker was elected to our board pursuant to the
terms of the Series D Preferred Stock Purchase Agreement.
MR. HITCHNER has been one of our directors since May 1999. Mr. Hitchner is a
General Partner of QuestMark Partners, L.P., where he has been since January
1999. From 1988 to November 1998, he was with BT Alex. Brown, serving in a
number of positions, including Managing Director and a founder and senior member
of the Private Equity Group. Mr. Hitchner served as the senior private equity
professional on 49 transactions while he was with the Private Equity Group of BT
Alex. Brown, in which $973 million was invested. Mr. Hitchner was elected to the
board pursuant to a voting agreement between QuestMark Partners, L.P., Lance
Mortensen, and ZapMe!, entered into in connection with the Series D preferred
stock financing.
MR. KEMP has been one of our directors since July 1999. Mr. Kemp has been
Co-Director of Empower America, a political policy organization, since 1993. Mr.
Kemp served as the Secretary of Housing and Urban Development from February 1989
until January 1992 and, before that, for 18 years as a member of the United
States House of Representatives. Mr. Kemp is also a director of Oracle
Corporation, American Bankers Insurance Group, Inc., Carson Products, Inc., a
manufacturer and marketer of personal care products, Everen Securities, Inc., a
securities firm, Proxicom, Inc., an internet services provider, Speedway
Motorsports, Inc., a promotor and sponsor of motorsports and The Sports
Authority, Inc., a sporting goods retailer. Mr. Kemp also sits on the
compensation committee of Everen Securities, Inc., and on the advisory board of
Thomas Weisel Partners, LLC, one of the underwriters of this offering.
BOARD COMMITTEES
The board of directors recently reconstituted the compensation and audit
committees. The compensation committee evaluates and approves the compensation
policies for the executive officers and administers our employee benefit plans.
The members of the compensation committee are Michael Arnouse and Douglas
Becker. The audit committee reviews the accounting practices and procedures, the
results and scope of the audit and recommends the appointment of the independent
auditors. The members of the audit committee are Michael Arnouse, Douglas Becker
and Tom Hitchner.
DIRECTOR COMPENSATION
We reimburse each member of our board of directors for out-of-pocket
expenses incurred in connection with attending board meetings. No member of our
board of directors currently receives any additional cash compensation.
In June 1999, Mr. Arnouse, Mr. Hitchner and Mr. Becker, as outside directors
of ZapMe!, were each granted options to purchase 20,000 shares of stock at an
exercise price of $4.00. These options were immediately exerciseable. In August
1999, Mr. Kemp, as an outside director of ZapMe!, was granted an option to
purchase 20,000 shares of stock at an exercise price of $5.00 per share. This
option was immediately exerciseable.
Our 1998 Plan provides that options will be granted to non-employee
directors pursuant to an automatic nondiscretionary grant formula. Each
non-employee director will be granted an option to purchase 7,500 shares of
common stock on the date of each annual meeting of the shareholders of ZapMe!.
Each option will be granted at the fair market value of the common stock on the
date of grant. Options granted to non-employee directors under the Director Plan
will be fully vested and
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exercisable on the date of grant. The options to be granted under the 1998 Plan
will be nonqualified stock options. Nonqualified stock options are stock options
which do not constitute "incentive stock options" within the meaning of Section
422 of the Internal Revenue Code. Currently, all directors other than Mr.
Mortensen and Mr. Deaton are eligible to participate in the 1998 Plan as
non-employee directors. Mr. Mortensen and Mr. Deaton are eligible to participate
in the 1998 Plan as employees. See "Incentive Stock Plans--1998 Stock Plan,"
beginning on page 58, for more information about director compensation.
DIRECTOR CONFLICTS OF INTEREST
There are no known potential conflicts of interest arising from certain of
our directors being affiliated with significant stockholders. Under the Delaware
General Corporation Law, each of our directors will owe a duty of loyalty to
ZapMe!. Furthermore, the interests of these Directors, who are stockholders'
themselves, are aligned with the interests of other stockholders of ZapMe!. If
nonetheless a conflict of interest were to arise (for example, in connection
with a transaction between ZapMe! and a party affiliated with one of our
directors), then such director would as appropriate recuse himself or herself
from any discussion and vote upon the approval of the transaction.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to June 1999, the compensation committee was composed of Messrs.
Arnouse and Mortensen, our Chairman of the Board. The committee is currently
composed of Messrs. Arnouse and Becker. No interlocking relationship exists
between the board of directors or compensation committee and the board of
directors or compensation committee of any other company, nor has any
interlocking relationship existed in the past.
Messrs. Arnouse and Mortensen, the members of the compensation committee
during the previous fiscal year, were involved in the following transactions
with ZapMe!:
On June 25, 1997, we issued and sold 10,000,000 shares of common stock to
Lance Mortensen, our Chief Executive Officer and Chairman of the Board, for an
aggregate purchase price of $50,000.
In August 1998, Mr. Mortensen exercised options to purchase 600,000 shares
of our common stock at an aggregate purchase price of approximately $10,000.
On August 1, 1997, October 17, 1997, December 22, 1997, January 22, 1998,
March 23, 1998, and June 9, 1998, we issued convertible promissory notes for an
aggregate amount of $900,000. All of the notes contained the same rights and
privileges. On August 5, 1998, the principal of the notes and interest which had
accrued converted into 9,097,671 shares of our Series A preferred stock. Michael
Arnouse, one of our directors, and his affiliates were holders of $800,000 of
these promissory notes, which, at a rate of 6.50% per annum, had accrued
approximately $23,000 in interest. This principal and accrued interest was
converted into 7,986,560 shares of Series A preferred stock. All of the Series A
preferred stock will convert into 9,097,671 shares of common stock upon the
consummation of this offering.
On May 7, 1998, we issued a convertible promissory note to Wharton Capital
Partners, L.P., an entity with which Mr. Arnouse, one of our directors, is
affiliated. The note's original amount of principal was $400,000, and the note
carried an 8.5% interest rate. In August 1998, the promissory note was converted
into 160,000 shares of Series B preferred stock and we paid approximately $8,000
in accrued interest. In February 1999, the shares were transferred to another
private investor.
In October 1997 and September 1998, Mr. Mortensen was granted options to
purchase 600,000 and 300,000 shares, respectively, at an exercise price of
$0.0165 per share and $1.10 per share, respectively, of our common stock. The
options vest at a rate of one-twelfth each month and one-third
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per year, respectively; however, on June 2, 1998, the vesting of Mr. Mortensen's
option to purchase 600,000 shares was accelerated, and these shares are now
fully vested.
On August 2, 1999, a majority of ZapMe!'s directors, excluding Lance
Mortensen, approved the issuance of an immediately exercisable non-statutory
option to purchase 300,000 shares of our common stock to Mr. Mortensen at an
exercise price of $5.00 per share. The shares are subject to a right of
repurchase in favor of ZapMe!, which will expire at a rate of one third on each
anniversary of the date of grant. ZapMe! has agreed to loan Mr. Mortensen, at
his request, the amount necessary to pay for the aggregate exercise price of the
option, which loan will be secured by the shares purchased on exercise of the
option. The interest rate of the loan will be 5.43%. This loan has not yet been
issued to Mr. Mortensen.
Between June 1997 and October 1997, we issued promissory notes to Mr.
Mortensen aggregating approximately $156,000 bearing an interest rate of 12.0%
per annum. In September 1998, the principal and approximately $11,000 in accrued
interest was paid.
We have paid Aquatic Innovations, Inc. approximately $10,000 and $130,000
for office equipment rental and other expenses incurred on behalf of ZapMe! in
1997 and 1998, respectively. Mr. Mortensen is the owner of Aquatic Innovations,
Inc.
In September 1998, we paid Wharton Capital Partners, L.P. $180,000 in
consulting fees in connection with the issuance of ZapMe!'s Series C preferred
stock. Mr. Arnouse is an affiliate of Wharton.
In January 1999, we issued a promissory note in the amount of $500,000 to
Mr. Arnouse bearing an interest rate of 12.0% per annum. The note and
approximately $12,000 of interest was paid in April 1999.
EXECUTIVE COMPENSATION
The following table sets forth summary information concerning the
compensation we paid for services rendered to us during 1998 by our chief
executive officer and our two most highly compensated executive officers who
were serving as executive officers at the end of 1998 and whose salaries were
more than $100,000 in 1998 and one individual who was not serving as an
executive officer at the end of 1998, but who was otherwise qualified to be
named in this table (the "named executive officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
-------------
ANNUAL COMPENSATION SECURITIES
----------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) OPTIONS (#)
- --------------------------------------------------------------------------- ---------- ----------- -------------
<S> <C> <C> <C>
Lance Mortensen, Chairman.................................................. 273,052 -- 300,000
Darryl Deaton, Vice President and Director................................. 145,013 -- 50,000
John Evleth, former Chief Financial Officer and Director(1)................ 137,607 -- 50,000
Joshua Marks, former Chief Operating Officer/Executive Producer(2)......... 120,000 -- 158,730
</TABLE>
- ------------------------
(1) Mr. Evleth resigned as Chief Financial Officer and Director in November
1998.
(2) Mr. Marks resigned as Chief Operating Officer/Executive Producer in January
1999.
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OPTION GRANTS IN FISCAL YEAR 1998
The following table provides information relating to stock options awarded
to each of the executive officers named in the summary compensation table during
the fiscal year ended December 31, 1998, including the potential realizable
value over the 10 year term of the options based on assumed rates of stock
appreciation of 5% and 10%, beginning with a base value equal to the fair market
value at the time of grant, which is equal to the exercise price, compounded
annually. These assumed rates of appreciation comply with the rules of the SEC
and do not represent our estimate of future stock prices. Actual gains, if any,
on stock option exercises will be dependent on the future performance of our
common stock. In 1998, we granted options and rights to acquire up to an
aggregate of 3,070,230 shares to employees, consultants, directors and other
persons having a business relationship with us under the 1997 and 1998 Stock
Option Plans and all at an exercise price equal to not less than the fair market
value of our common stock on the date of grant as determined in good faith by
the board of directors. Optionees may pay the exercise price by check, note,
delivery of already-owned shares of our common stock or any other instrument the
board will accept. Options granted under the 1997 and 1998 Stock Option Plans
generally vest at a rate of one-third per year. No stock appreciation rights
were granted to these individuals during such year.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------
PERCENT OF
TOTAL POTENTIAL REALIZED VALUE AT
NUMBER OF OPTIONS ASSUMED ANNUAL RATES OF
SECURITIES GRANTED TO EXERCISE STOCK PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES PRICE PER OPTIONS TERM (1)
OPTIONS IN FISCAL SHARE EXPIRATION ----------------------------
NAME GRANTED YEAR (%) ($) DATE 5% 10%
- ------------------------------------------- ----------- ------------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Lance Mortensen............................ 300,000 9.8 1.10 9/8/08 $ 5,045,352 $ 8,229,350
Darryl Deaton.............................. 50,000 1.6 1.00 9/8/08 845,892 1,376,558
John Evleth................................ 50,000(2) 1.6 1.00 9/8/08 845,892 1,376,558
Joshua Marks............................... 158,730(3) 5.2 0.09 1/6/08 2,829,813 4,514,466
</TABLE>
- ------------------------
(1) Based on the mid-point of the assumed initial public offering range.
(2) 50,000 shares returned to 1998 Stock Plan on November 23, 1998.
(3) 97,002 shares returned to 1997 Stock Plan on January 8, 1999.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information about the number and year-end
value of exercisable and unexercisable options held by the executive officers
named in the summary compensation table for the year ended December 31, 1998.
The "Value Realized" on shares acquired on exercise in the year ended December
31, 1998 is based on the difference between the deemed fair market value of the
common stock at December 31, 1998 ($2.00 per share) and the exercise price,
while the "Value of Unexercised In-the-Money Options at December 31, 1998" is
based on the difference between the initial public offering price and the
exercise price.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1998 DECEMBER 31, 1998
SHARES ACQUIRED VALUE -------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------- --------------- ------------ ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Lance Mortensen.......... 600,000 $ 1,190,100 -- 300,000 -- $ 2,970,000
Darryl Deaton............ 200,000 396,700 -- 50,000 -- 500,000
John Evleth.............. 200,000 396,000 -- -- -- --
Joshua Marks............. -- -- 57,319 101,411 $ 630,509 1,106,394
</TABLE>
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INCENTIVE STOCK PLANS
1997 EMPLOYEE STOCK OPTION PLAN.
Our 1997 Employee Stock Option Plan was adopted by our board of directors
and approved by our stockholders in October 1997. The 1997 Employee Stock Option
Plan provides for the granting to our employees of incentive stock options
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended, and for the granting to employees, directors and independent
contractors of nonstatutory stock options. Our board of directors and our
stockholders have authorized a total of 1,363,730 shares of common stock for
issuance pursuant to the 1997 Employee Stock Option Plan. As of June 30, 1999,
there were options to purchase 129,410 shares outstanding. No grants were made
under this plan after the adoption of the 1998 Stock Plan.
1998 STOCK PLAN.
The board of directors adopted the 1998 Plan and the stockholders initially
approved the 1998 Plan in June 1998. In connection with this offering, the board
of directors approved the amendment and restatement of the 1998 Plan in August
1999 and the stockholders approved the amendment and restatement in September
1999. The 1998 Plan provides for the grant of incentive stock options within the
meaning of Section 422 of the Internal Revenue Code to employees, and for the
grant of nonstatutory stock options and stock purchase rights to employees,
directors and consultants.
NUMBER OF SHARES OF COMMON STOCK AVAILABLE UNDER THE 1998 PLAN
As of June 30, 1999, a total of 4,036,270 shares of common stock were
reserved for issuance pursuant to the 1998 Plan, of which options to acquire
2,383,447 shares were issued and outstanding as of that date. As part of the
1999 amendment and restatement of the 1998 Plan, the board of directors approved
an increase of 1,500,000 shares reserved for issuance under the 1998 Plan. The
1998 Plan provides for annual increases in the number of shares available for
issuance thereunder, on the first day of each new fiscal year of the Company,
effective beginning with the Company's fiscal year 2000, equal to the lowest of
5% of the outstanding shares of common stock on the first day of the fiscal
year, 2 million shares or such amount as the board may determine.
ADMINISTRATION OF THE 1998 PLAN
The board of directors or a committee of the board (as applicable, the
administrator) administers the 1998 Plan. In the case of options intended to
qualify as "performance-based compensation" within the meaning of Section 162(m)
of the Code, the committee will consist of two or more "outside directors"
within the meaning of Section 162(m) of the Code. The administrator has the
power to determine the terms of the options or SPRs granted, including the
exercise price, the number of shares subject to each option or SPR, the
exercisability of the options and the form of consideration payable upon
exercise.
OPTIONS
The administrator determines the exercise price of nonstatutory stock
options granted under the 1998 Plan, but with respect to nonstatutory stock
options intended to qualify as "performance-based compensation" within the
meaning of Section 162(m) of the Code, the exercise price must at least be equal
to the fair market value of the common stock on the date of grant. The exercise
price of all incentive stock options granted under the 1998 Plan must be at
least equal to the fair market value of the common stock on the date of grant.
With respect to any participant who owns stock possessing more than 10% of the
voting power of all classes of ZapMe!'s outstanding capital stock, the exercise
price of any incentive stock option granted must equal at least 110% of the fair
market value on the
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grant date and the term of such incentive stock option must not exceed five
years. The term of all other options is determined by the administrator.
An optionee generally must exercise an option granted under the 1998 Plan at
the time set forth in the optionee's option agreement after termination of the
optionee's status as an employee, director or consultant of ZapMe!, or within 12
months after the optionee's termination by death or disability, but in no event
later than the expiration of the option's ten year term.
STOCK PURCHASE RIGHTS
The administrator determines the exercise price of SPRs granted under the
1998 Plan. In the case of SPRs, unless the administrator determines otherwise,
the restricted stock purchase agreement entered into in connection with the
exercise of the SPR shall grant ZapMe! a repurchase option that ZapMe! may
exercise upon the voluntary or involuntary termination of the purchaser's
service with ZapMe! for any reason (including death or disability). The purchase
price for shares ZapMe! repurchases pursuant to restricted stock purchase
agreements shall generally be the original price paid by the purchaser and may
be paid by cancellation of any indebtedness of the purchaser to ZapMe!. The
repurchase option shall lapse at a rate that the administrator determines.
OUTSIDE DIRECTOR OPTIONS
The 1998 Plan also provides for the automatic grant to each nonemployee
director of a nonstatutory stock option for 7,500 shares of common stock on the
date of each annual stockholder's meeting of ZapMe!. Each option shall have a
term of 10 years and the shares subject to these options shall be fully vested
and exercisable on the date of grant. The exercise price of each option shall be
100% of the fair market value per share of common stock on the date of grant.
TRANSFERABILITY OF OPTIONS AND SPRS
An optionee generally may not transfer options and SPRs granted under the
1998 Plan and only the optionee may exercise an option and SPR during his or her
lifetime.
AMENDMENT AND TERMINATION OF THE 1998 PLAN
Unless terminated sooner, the 1998 Plan will terminate automatically in
2008. In addition, the administrator has the authority to amend, suspend or
terminate the 1998 Plan, provided that no such action may affect any share of
common stock previously issued and sold or any option previously granted under
the 1998 Plan.
1999 EMPLOYEE STOCK PURCHASE PLAN
The board of directors adopted ZapMe!'s Purchase Plan in August 1999.
ZapMe!'s stockholders approved the Purchase Plan in September 1999.
NUMBER OF SHARES OF COMMON STOCK AVAILABLE UNDER THE PURCHASE PLAN
A total of 500,000 shares of common stock has been reserved for issuance
under the Purchase Plan. In addition, the Purchase Plan provides for automatic
annual increases in the number of shares available for issuance under the
Purchase Plan on the first day of each fiscal year, beginning with the Company's
fiscal year 2000, equal to the lowest of 2% of the outstanding shares of common
stock on the first day of the fiscal year, one million shares or such other
amount as may be determined by the board.
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ADMINISTRATION OF THE PURCHASE PLAN
The board of directors or a committee appointed by the board administers the
Purchase Plan. The board of directors or its committee has full and exclusive
authority to interpret the terms of the Purchase Plan and determine eligibility.
ELIGIBILITY TO PARTICIPATE
Employees are eligible to participate if they are customarily employed by
ZapMe! or any participating subsidiary for at least 20 hours per week and more
than five months in any calendar year. However, an employee may not be granted
an option to purchase stock under the Purchase Plan if such employee:
- immediately after grant owns stock possessing 5% or more of the total
combined voting power or value of all classes of the capital stock of
ZapMe!; or
- whose rights to purchase stock under all employee stock purchase plans of
ZapMe! accrues at a rate that exceeds $25,000 worth of stock for each
calendar year.
OFFERING PERIODS AND CONTRIBUTIONS
The Purchase Plan, which is intended to qualify under Section 423 of the
Internal Revenue Code, contains consecutive, 6-month offering periods. The
offering periods generally start on the first trading day on or after May 1 and
November 1 of each year, except for the first such offering period which will
commence on the first trading day on or after the effective date of this
offering and will end on the last trading day on or before November 1, 1999.
The Purchase Plan permits participants to purchase common stock through
payroll deductions of up to 10% of the participant's "compensation."
Compensation is defined as the participant's base straight time gross earnings
and commissions but excludes payments for overtime, shift premium payments,
incentive compensation, incentive payments, bonuses and other compensation. The
maximum number of shares a participant may purchase during a single offering
period is 5,000 shares.
PURCHASE OF SHARES
Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each offering period. The price of stock
purchased under the Purchase Plan is 85% of the lower of the fair market value
of the common stock at the beginning or end of the offering period. Participants
may end their participation at any time during an offering period, and they will
be paid their payroll deductions to date. Participation ends automatically upon
termination of employment with ZapMe!.
TRANSFERABILITY OF RIGHTS
A participant may not transfer rights granted under the Purchase Plan other
than by will, the laws of descent and distribution or as otherwise provided
under the Purchase Plan.
ADJUSTMENTS UPON MERGER OR ASSET SALE
The Purchase Plan provides that, in the event of a merger of ZapMe! with or
into another corporation or a sale of substantially all of ZapMe!'s assets, a
successor corporation may assume or substitute for each outstanding option. If
the successor corporation refuses to assume or substitute for the outstanding
options, the offering period then in progress will be shortened, and a new
exercise date will be set.
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AMENDMENT AND TERMINATION OF THE PURCHASE PLAN
The 1999 Purchase Plan will terminate in 2009. However, the board of
directors has the authority to amend or terminate the Purchase Plan, except
that, other than in connection with a dissolution, liquidation, merger or sale
of substantially all ZapMe!'s assets, no such action may adversely affect any
outstanding rights to purchase stock under the Purchase Plan.
401(k) PLAN
ZapMe! recently adopted a 401(k) plan which is scheduled to go into effect
in September 1999. ZapMe!'s 401(k) plan covers its eligible employees located in
the United States. The 401(k) plan is intended to qualify under Sections 401(a)
and 401(k) of the Internal Revenue Code. Consequently, contributions to the
401(k) plan by employees or by ZapMe!, and the investment earnings thereon, will
not be taxable to employees until withdrawn from the 401(k) plan. Further,
contributions by ZapMe!, if any, will be deductible by ZapMe! when made.
Employees may elect to contribute up to 15% of their current compensation to the
401(k) plan up to the statutorily prescribed annual limit, which was $10,000 in
1999.
ZapMe! does not currently intend to make any contributions to the 401(k)
plan. However, since this is a new plan participation in the plan by non-highly
compensated employees may be insufficient to meet statutory minimums. In such a
case, ZapMe! may be required to make contributions, and the ability of highly
compensated employees to participate may be limited.
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS
We have entered into agreements with some of our officers providing for
payments upon termination of their employment. Our agreement with Mr. Deaton
provides that he will receive a minimum compensation level of $10,000 per month,
paid through December 31, 1999 regardless of whether either he or ZapMe!
terminates his employment voluntarily or with cause. Our agreement with Mr.
Kingsborough provides that in the event that he terminates his employment for
good reason, or if ZapMe! terminates his employment without cause, he will
receive nine months of base salary, if the termination occurs prior to the first
anniversary of his employment at ZapMe!, or six months of base salary, if the
termination occurs prior to the third anniversary of his employment. Mr.
Kingsborough is also entitled to a pro rata portion of the cash bonus otherwise
payable to him under these circumstances. Our agreement with Mr. Rudy provides
that, in the event he terminates his employment for good reason, or if ZapMe!
terminates his employment without cause, he will receive six months of base
salary, six months of non-cash benefits, a pro rata share of the cash bonus
otherwise payable to him, and accelerated vesting of his options, to the lesser
of 30,000 shares or the balance of the unvested shares under Mr. Rudy's initial
grant of options. Our agreement with Mr. Inatome provides that, in the event
that ZapMe! terminates his employment without his consent and for a reason other
than cause, death, or disability, he will receive his then current base salary
for a period of one year, provided that he does not compete with ZapMe! during
that term.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS
Our bylaws provide that we will indemnify our directors and executive
officers and may indemnify our other officers, employees and other agents to the
fullest extent permitted by the General Corporations Law of the State of
Delaware, as amended. We are also empowered under our bylaws to enter into
indemnification agreements with our directors and officers and to purchase
insurance on behalf of any person whom we are required or permitted to
indemnify. We have entered into indemnification agreements with each of our
directors and executive officers and intend to obtain a policy of directors' and
officers' liability insurance that insures such persons against the cost of
defense, settlement or payment of a judgment in the absence of an intent to
deceive or defraud.
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We have entered into agreements with our directors and executive officers
regarding indemnification. Under these agreements we are required to indemnify
them against expenses, judgments, fines, settlements and other amounts actually
and reasonably incurred (including expenses of a derivative action) in
connection with an actual, or a threatened, proceeding if any of them may be
made a party because he or she is or was one of our directors or officers. We
are obligated to pay these amounts only if the officer or director acted in good
faith and in a manner that he or she reasonably believed to be in (or not
opposed to) our best interests. With respect to any criminal proceeding, we are
obligated to pay these amounts only if the officer or director had no reasonable
cause to believe his or her conduct was unlawful. The indemnification agreements
also set forth procedures that will apply in the event of a claim for
indemnification thereunder.
In addition, our amended and restated certificate of incorporation filed in
connection with this offering provides that the liability of our directors for
monetary damages shall be eliminated to the fullest extent permissible under the
General Corporation Law of the State of Delaware, as amended. This provision in
our amended and restated certificate of incorporation does not eliminate a
director's duty of care, and, in appropriate circumstances, equitable remedies
such as an injunction or other forms of non-monetary relief would remain
available. Each director will continue to be subject to liability for breach of
the director's duty of loyalty to us, for acts or omissions not in good faith or
involving intentional misconduct or knowing violations of law, for acts or
omissions that the director believes to be contrary to our best interests or our
stockholders, for any transaction from which the director derived an improper
personal benefit, for improper transactions between the director and us and for
improper distributions to stockholders and loans to directors and officers. This
provision also does not affect a director's responsibilities under any other
laws, such as the federal securities laws or state or federal environmental
laws.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons pursuant to
the foregoing provisions, or otherwise, we have been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
There is no pending litigation or proceeding involving any of our directors
or officers as to which indemnification is being sought, nor are we aware of any
pending or threatened litigation that may result in claims for indemnification
by any director or officer.
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CERTAIN TRANSACTIONS
EQUITY TRANSACTIONS
On September 3, 1997, we issued 1,486,984 shares of common stock to Darryl
Deaton, one of our directors and officers, and 371,746 shares of common stock to
John Evleth, a former officer and director, in lieu of wages owed.
In August 1998, Mr. Deaton and Mr. Evleth exercised options to purchase
200,000 and 200,000 shares of our common stock, respectively, at an aggregate
purchase price of approximately $3,000 and $3,000, respectively.
In January 1999, Joshua Marks, a former officer, exercised options to
purchase 57,319 shares of our common stock, for an aggregate purchase price of
approximately $5,000.
On December 3, 1998, March 31, 1999 and May 28, 1999, we issued and sold an
aggregate of 5,894,110 shares of our Series D preferred stock at a purchase
price of $5.00 per share, including:
- 2,026,070 shares to QuestMark Partners, L.P., a major shareholder and an
entity with which Thomas Hitchner, one of our directors, is affiliated;
- 600,000 shares to Sylvan Learning Systems, Inc., and 448,333 shares to
Sterling ZapMe LLC, entities with which Douglas Becker, one of our
directors, is affiliated;
- other private investors.
On August 4, 1999, we issued and sold an aggregate of 2,030,000 shares of
our Series E preferred stock at a purchase price of $5.00 per share, including:
- 2,000,000 shares to Dell Computer Corporation, a major shareholder; and
- 30,000 shares to another private investor.
Since inception, as part of the Company's normal review and determination of
compensation, we have granted the following options to officers:
- In October 1997 and September 1998, Mr. Evleth was granted options to
purchase 200,000 and 50,000 shares, respectively, at an exercise price of
$0.015 and $1.00 per share, respectively, of our common stock. Mr. Evleth
has exercised the option to purchase 200,000 shares, and the option to
purchase 50,000 shares has expired;
- In October 1997 and September 1998, Mr. Deaton was granted options to
purchase 200,000 and 50,000 shares, respectively, at an exercise price of
$0.0165 and $1.00 per share, respectively, of our common stock. Mr. Deaton
has exercised the option to purchase 200,000 shares, and the option to
purchase 50,000 shares vests at the rate of one-third per year;
- In January 1998, Mr. Marks was granted options to purchase 158,730 shares
of ZapMe!'s common stock at an exercise price of $0.09 per share. These
shares vested over 3 years, with one third vesting after one year and the
balance vesting monthly thereafter;
- In December 1998 and June 1999, Robert A. Stoffregen, one of our officers,
was granted options to purchase 110,000 and 40,000 shares, respectively,
at an exercise price of $1.50 and $4.00 per share, respectively, of our
common stock. These options vest at a rate of one-third per year;
- In January 1999, April 1999 and April 1999, Don Kingsborough, one of our
officers, was granted options to purchase 30,000, 120,000 and 180,000
shares, respectively, at an exercise price of $2.00, $2.50 and $2.50 per
share, respectively, of our common stock. These options vest at a rate of
one-third per year. The options to purchase 30,000 shares have expired;
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- In September 1999, Rick Inatome, one of our officers, was granted options
to purchase 1,000,000 shares of common stock at an exercise price of $5.00
per share. These options vest at a rate of one-fourth after one year and
1/48 per month thereafter;
- In November 1998 and June 1999, Bruce Bower, one of our officers, was
granted options to purchase 150,000 and 30,000 shares, respectively, at an
exercise price of $1.00 and $4.00 per share, respectively, of our common
stock. These options vest at a rate of one-third per year;
- In December 1998, April 1999 and June 1999, Dave Lundberg, one of our
officers, was granted options to purchase 40,000, 25,000 and 85,000
shares, respectively, at an exercise price of $1.50, $2.50 and $4.00 per
share, respectively, of our common stock. These options vest at a rate of
one-third per year;
- In April 1999, Robert Rudy, one of our officers, was granted options to
purchase 180,000 shares of our common stock at an exercise price of $2.50
per share. These options vest at a rate of one-third per year;
- In October 1998 and December 1998, Royce Johnson, one of our officers, was
granted options to purchase 60,000 and 20,000 shares, respectively, at an
exercise price of $1.00 and $1.50 per share, respectively, of our common
stock. The option for 60,000 shares vests one year after grant. The option
for 20,000 shares vests only if certain performance criteria are met; and
- In September 1999, William S. Burwell, one of our officers, was granted
options to purchase 175,000 shares of common stock at an exercise price of
$10.00 per share. These options vest at a rate of one-third per year.
We believe that the shares issued in the above described transactions were
sold at the then fair market value and that the terms of all the above described
transactions were no less favorable than we could have obtained from
unaffiliated third parties.
OTHER TRANSACTIONS
In March 1999, ZapMe! entered into a "Products and Services Agreement" with
Sylvan Learning Systems, Inc. The Agreement grants Sylvan an exclusive right to
deliver products and services on the ZapMe! systems in schools. The products and
services include student tutoring, information training services, test
preparation programs and other computer based tests. We will earn fees based
upon the number of eligible schools and the length of time eligible schools have
been operational. In particular, we will earn 35% of the net operating profit
derived each quarter from Sylvan products and services sold through our network.
This percentage will decrease with each $5 million in fees until it reaches 20%.
During 1999, we will earn a minimum of $250,000 in such fees, creditable against
future years to the extent earned fees do not equal this amount. In subsequent
years, the minimum will be calculated according to a formula based on the total
number of schools in the ZapMe! network and years the schools have been
installed. In addition, Sylvan is a charter sponsor of our network in an amount
of $500,000, which will increase by 20% per year assuming satisfactory
performance, at most favored party pricing at least 25% and 50% below standard
pricing in 1999 and 2000 respectively. This sponsorship amount is creditable
against fees payable to ZapMe! for sales of Sylvan's products and services
through our network. The initial term of the agreement will expire on December
31, 2003 with a five year renewal option subject to our earning minimum fees
from the agreement. Mr. Becker is an affiliate of Sylvan.
As consideration to enter into the agreement, Sylvan was issued a warrant
for 150,000 shares of ZapMe!'s common stock at $5.00 per share. The warrant is
exercisable in whole after Sylvan issues its release of audited financial
statements for the year ended December 31, 2003 and subject to ZapMe! earning a
minimum fee per eligible school during the year ended December 31, 2003.
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<PAGE>
ZapMe! purchases VSAT data communications equipment from Gilat Satellite
Networks, Ltd. and Spacenet Inc., its subsidiary. During June 1999, ZapMe! paid
approximately $1.8 million to Gilat and SpaceNet for equipment, consulting
services and software license fees. On June 11, 1999, ZapMe! and Spacenet
entered into an agreement whereby Spacenet will provide us with equipment,
installation and space segment for a fixed fee per school installment. ZapMe!
does not receive any preferential treatment with respect to the pricing terms
contained in this Agreement, which was negotiated at arms-length. Spacenet does
provide ZapMe! a monthly services credit for thirty-six months commencing on the
effective date of the Agreement. To the extent that monthly services fees are
less than the monthly credit ZapMe! receives, the difference may be applied to
Service fees for subsequent months.
Yoel Gat, a co-founder of Gilat Satellite Networks Ltd., was a director of
ZapMe! from June 1999 through October 1999. In connection with his resignation
from the ZapMe! Board of Directors on October 15, 1999, Mr. Gat has agreed not
to serve on our Board for the foreseeable future. Mr. Gat will retain observer
rights on the Board, which will give him the opportunity to participate in most
Board discussions. He will not, however, have a vote or the other rights of a
director.
Prior to entering into its agreement with Spacenet, ZapMe! previously had a
Satellite Services Agreement with GE American Communications, Inc., commonly
know as GE Americom. Under the terms of the Satellite Services Agreement, GE
Americom provided ZapMe!, on terms substantially similar to our agreement with
Spacenet, with a complete package of network services comparable to those
currently provided by Spacenet, including similar bandwidth service, space
segment and transmission services, network management, and maintenance.
In August 1999, ZapMe! entered into a "Dell Education Alliance Marketer
Agreement" with Dell Marketing L.P. Under the agreement, when we provide
computer equipment and Internet access at no charge to K-12 institutions that
are members of the ZapMe! network, we will be eligible to purchase these Dell
products at the then-current education list prices. The initial term of the
agreement will expire on August 3, 2000, subject to automatic renewal for
successive one-year terms under the same terms and conditions. Either party may
terminate the agreement at any time on at least thirty days' prior written
notice to the other.
Our agreement with Dell is similar in many respects to the "Equipment
Purchase and Service Agreement" between ZapMe! and Toshiba, an unaffiliated
party that also provides us with computer equipment. Under the terms of the
agreement with Toshiba, Toshiba provides computer hardware-- including PCs,
monitors and servers--to the company through the Company's leasing agents at the
best available educational price. The agreement is of infinite duration. As of
September 30, 1999, we had purchased or issued purchase orders for an aggregate
of approximately $10.5 million of equipment under this agreement.
For additional information, please see the sections entitled
"Management--Directors Compensation," beginning on page 54, and
"Management--Compensation Committee Interlocks and Insider Participation,"
beginning on page 55.
ZapMe! believes that all of the transactions set forth above were made on
terms no less favorable to ZapMe! than could have been otherwise obtained from
unaffiliated third parties. ZapMe! did not employ special procedures in
connection with all of the transactions set forth above, but rather relied upon
the business judgment and experience of its senior management to ensure that
these transactions were completed on terms equivalent to those which could have
been obtained in an arm's length transaction. All future transactions, including
loans, if any, between ZapMe! and its officers, directors and principal
stockholders and their affiliates and any transactions between ZapMe! and any
entity with which its officers, directors or 5% shareholders are affiliated will
be approved by a majority of the board of directors, including a majority of the
independent and disinterested outside directors of the board of directors and
will be on terms no less favorable to ZapMe! than could be obtained from
unaffiliated third parties.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding to the beneficial
ownership of our common stock as of August 31, 1999, and as adjusted to reflect
the sale of the shares of common stock offered in the offerings, by each person
or entity who is known by ZapMe! to own beneficially 5% or more of ZapMe!'s
outstanding common stock, each director of ZapMe!, each of the executive
officers and all directors and executive officers of ZapMe! as a group. The
address of all the beneficial owners, unless otherwise noted, is 3000 Executive
Parkway, San Ramon CA 94583. Except as otherwise indicated, and subject to
applicable community property laws, the persons named in the table have sole
voting and investment power with respect to all shares of common stock held by
them.
The percentage ownership in the table below is based on 33,455,660 shares of
common stock outstanding as of September 30, 1999 and 42,910,205 shares
immediately following the completion of the offerings (assuming no exercise of
the Underwriters' over-allotment option), together with applicable options
and/or warrants for such shareholder. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and
generally includes voting or investment power with respect to securities,
subject to community property laws, where applicable. Shares of common stock
subject to options or warrants that are presently exercisable or exercisable
within 60 days of the date of this prospectus are deemed to be beneficially
owned by the person holding such options for the purpose of computing the
percentage of ownership of such person but are not treated as outstanding for
the purpose of computing the percentage of any other person. To the extent that
any shares are issued upon exercise of options, warrants or other rights to
acquire our capital stock that are presently outstanding or granted in the
future or reserved for future issuance under our stock plans, there will be
further dilution to new public investors.
The number of shares includes 17,781,781 shares of common stock issuable
upon conversion of our convertible preferred stock upon consummation of this
offering. For purposes of this table, we have assumed that the preferred stock
converts to common stock at a ratio of one-to-one. The percentage of shares
outstanding after the offerings assumes the underwriter's over-allotment is not
exercised.
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<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY
OWNED AS A RESULT OF
OPTIONS PERCENTAGE OF SHARES
AND WARRANTS OUTSTANDING
NUMBER OF EXERCISABLE --------------------
SHARES WITHIN 60 DAYS OF THE BEFORE
BENEFICIALLY DATE OF THE AFTER THE
NAME OF BENEFICIAL OWNER OWNED THIS PROSPECTUS OFFERING OFFERING
- ------------------------------------ --------- ---------------------- --------- ---------
<S> <C> <C> <C> <C>
QuestMark Partners, L.P.(1)......... 2,026,070 20,000 6.1% 4.8%
Dell Computer Corporation(2)........ 2,000,000 -- 6.0 4.7
Mortensen Irrevocable Family
Trust(3).......................... 2,000,000 -- 6.0 4.7
MCA Irrevocable Family Trust(4)..... 2,000,000 -- 6.0 4.7
Marianne Schmitt Hellauer(5)........ 4,000,000 -- 12.0 9.3
Lance Mortensen(6).................. 10,900,000 100,000 32.8 25.6
Rick Inatome........................ 1,110,000 -- 3.3 2.6
Michael Arnouse(7).................. 7,976,560 20,000 23.9 18.6
Robert A. Stoffregen................ -- -- * *
Don Kingsborough.................... -- -- * *
Bruce Bower......................... -- 50,000 * *
William S. Burwell.................. -- -- * *
Dave Lundberg....................... -- 13,333 * *
Bob Rudy............................ -- -- * *
Royce Johnson....................... -- 64,000 * *
Darryl Deaton....................... 1,626,984 16,667 4.9 3.8
Douglas Becker(8)................... 652,887 170,000 2.4 1.9
Thomas Hitchner(9).................. 2,026,070 20,000 6.1 4.8
Jack Kemp........................... -- 20,000 * *
All executive officers and directors
as a group (15 persons)........... 24,292,501 474,000 73.0 57.1
</TABLE>
- ------------------------
* Less than 1%.
(1) One South Street, Suite 800, Baltimore, MD 21202.
(2) Dell Computer Corporation purchased 2,000,000 shares of Series E preferred
stock on August 4, 1999. Dell Computer Corporation owns these shares through
Dell USA L.P., an indirect wholly-owned subsidiary. One Dell Way, Round
Rock, TX 78682.
(3) Trust established for the benefit of Lance Mortensen, Marianne Schmitt
Hellauer, Trustee, 3712 Valerie Carol Ct., Ellicott City, MD 21042.
(4) Trust established for the benefit of Michael Arnouse, Marianne Schmitt
Hellauer, Trustee, 3712 Valerie Carol Ct., Ellicott City, MD 21042.
(5) Includes 2,000,000 shares held by Ms. Hellauer as trustee of the MCA
Irrevocable Family Trust and 2,000,000 shares held by Ms. Hellauer as
trustee of the Mortensen Family Trust. Ms. Hellauer disclaims beneficial
ownership of these shares.
(6) Includes 2,000,000 shares held by the Mortensen Irrevocable Family Trust, a
trust established for the benefit of Mr. Mortensen.
(7) Includes 2,000,000 shares held by the MCA Irrevocable Family Trust, a trust
established for the benefit of Mr. Arnouse, and 700,000 shares held by the
MC Investment Trust, a trust established for the benefit of Mr. Arnouse.
(8) Includes 600,000 shares and a warrant for 150,000 shares held by Sylvan
Learning Systems, Inc. Mr. Becker is the President and Co-Chief Executive
Officer of Sylvan Learning System, Inc., and disclaims beneficial ownership
of the shares and warrant held by Sylvan, except to the extent of his
pecuniary interest therein. Also includes 52,887 shares that represent Mr.
Becker's beneficial ownership interest in shares held by Sterling ZapMe LLC,
in which Mr. Becker has no voting or dispositive power.
(9) Includes 2,026,070 shares and options for 20,000 shares held by QuestMark
Partners, L.P., an entity with which Mr. Hitchner is affiliated. Mr.
Hitchner disclaims beneficial ownership of the shares held by QuestMark
Partners, L.P., except to the extent of his general partnership interest
therein.
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DESCRIPTION OF CAPITAL STOCK
The following description of our capital stock and the provisions of our
articles of incorporation and bylaws are only summaries and are qualified by
reference to our articles of incorporation and bylaws filed as exhibits to the
registration statement of which this prospectus is a part. Our authorized
capital stock consists of 50,000,000 shares of common stock, $.01 par value per
share, and 17,781,781 shares of preferred stock, $.01 par value per share. As of
September 30, 1999, the outstanding shares are set forth in the table below:
<TABLE>
<CAPTION>
NUMBER OF SHAREHOLDERS OF
OUTSTANDING SHARES RECORD
------------------ ---------------------------
<S> <C> <C>
Common Stock..................................... 15,673,879 35
Total Preferred Stock............................ 17,781,781 59
Series A....................................... 9,097,671 4
Series B....................................... 160,000 1
Series C....................................... 600,000 5
Series D....................................... 5,894,110 47
Series E....................................... 2,030,000 2
</TABLE>
Each of the shares of preferred stock outstanding prior to this offering
will automatically convert into common stock upon consummation of this offering.
COMMON STOCK
Holders of the common stock are entitled to receive, when and if declared by
the board of directors, dividends and other distributions in cash, stock or
property from our assets or funds legally available for those purposes subject
to any dividend preferences that may be attributable to preferred stock. Holders
of common stock are entitled to one vote for each share held of record on all
matters on which shareholders may vote. Holders of common stock are not entitled
to cumulative voting for the election of directors.
There are no preemptive, conversion, redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are fully
paid and non-assessable. In the event of our liquidation, dissolution or winding
up, holders of common stock are entitled to share ratably in the assets
available for distribution.
After this offering there will be 43,675,333 shares of common stock
outstanding. This number consists of 15,673,879 shares of common stock currently
outstanding, 9,454,545 shares to be issued in this offering and 18,546,909
shares issuable upon conversion of our preferred stock, assuming an initial
public offering price of $11.00 per share and that the closing of the offering
occurs on September 30, 1999.
PREFERRED STOCK
Before this offering, there were 17,781,781 shares of preferred stock
outstanding. Each of these shares will be converted into common stock upon
consummation of the offering. After this conversion, our board of directors,
without further action by the shareholders, is authorized to issue an aggregate
of 5,000,000 shares of preferred stock. Currently, we have no plans to issue a
new series of preferred stock. Our board of directors may, without shareholder
approval, issue preferred stock with dividend rates, redemption prices,
preferences on liquidation or dissolution, conversion rights, voting rights and
any other preferences, which rights and preferences could adversely affect the
voting power of the holders of common stock. Issuance of preferred stock could
make it harder for a third party to acquire, or could discourage or delay a
third party from acquiring, a majority of our outstanding stock.
The 17,781,781 shares of preferred stock currently outstanding have
preemptive rights.
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<PAGE>
RIGHTS OF PREFERRED STOCK HOLDERS
On August 27, 1998, we sold 600,000 shares of Series C preferred stock. On
December 3, 1998, February 1, 1999, March 31, 1999 and May 28, 1999 we sold an
aggregate of 5,894,110 shares of Series D preferred stock. On August 4, 1999 we
sold 2,030,000 shares of Series E preferred stock. Generally, the shares of
Series C, Series D and Series E preferred stock will convert to common stock on
a greater than one-to-one basis. In addition, rights granted to the holders of
the Series C and Series D preferred stock under our Certificate of Incorporation
may require us to issue additional shares of common stock.
STOCK DIVIDEND
The holders of our Series C, Series D and Series E preferred stock are
entitled to a per annum dividend equal to ten percent, fifteen percent and seven
and one-half percent, respectively, of the liquidation value of the preferred
stock, which value is initially set at $5 per share, the purchase price of the
stock. The dividend will be paid by increasing the liquidation value of the
preferred stock by the amount equal to the dividend obligation. Upon the closing
of the offering, the number of shares of common stock that the preferred stock
converts into equals the quotient obtained by dividing (1) the liquidation value
of the preferred stock then in effect by (2) the purchase price of the preferred
stock.
Assuming that the closing of the offering occurs on September 30, 1999, the
600,000 shares of Series C preferred stock outstanding will convert into 903,125
shares of our common stock, the 5,894,110 shares of Series D preferred stock
outstanding will convert into 6,331,326 shares of our common stock and the
2,030,000 shares of Series E preferred stock outstanding will convert into
2,054,787 shares of our common stock.
ADDITIONAL SHARES OF COMMON WHICH MUST BE ISSUED UPON CONVERSION
The holders of our Series C preferred stock and Series D preferred stock
will also be entitled to receive additional newly issued shares of common stock
upon the closing of this offering if the offering price does not exceed $15 per
share in the case of the Series C preferred stock and $10 per share in the case
of the Series D preferred stock.
The following table sets forth at several example offering prices, and
because the shares received as a stock dividend also have the right to receive
the additional shares, assuming that the closing of the offering occurs on
September 30, 1999, the approximate number of additional shares of common stock
that we will be obligated to issue to the holders of Series C or Series D
preferred stock:
<TABLE>
<CAPTION>
ADDITIONAL SHARES ADDITIONAL SHARES
TO SERIES C TO SERIES D
ASSUMED OFFERING PRICE PER SHARE HOLDERS HOLDERS
- ------------------------------------------------------ ----------------- ------------------
<S> <C> <C>
$10.00...................................... 393,348 437,216
11.00...................................... 303,125 437,216
12.00...................................... 277,865 437,216
13.00...................................... 164,183 437,216
14.00...................................... 109,578 437,216
15.00...................................... 62,292 437,216
</TABLE>
If such issuance of additional shares were to occur, current and prospective
stockholders would suffer additional dilution with a resulting proportionate
decrease in our earnings per share. This dilution could be substantial.
WARRANTS
As of September 30, 1999, giving effect to the conversion of all preferred
stock into common stock, we had outstanding warrants to purchase an aggregate of
848,390 shares of common stock, 698,390 of
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<PAGE>
which are immediately exercisable and 150,000 of which are exercisable for 30
days after Sylvan releases its audited financial statements for the year ended
December 31, 2003, if Sylvan achieves a specified milestone. Of these, warrants
to purchase 5,890 shares of preferred stock expire immediately prior to the
closing of this offering. The remaining warrants expire at various dates through
June 2004.
The following table sets forth warrants outstanding as of September 30,
1999:
<TABLE>
<CAPTION>
AVERAGE
NUMBER OF EXERCISE
DATE OF ISSUANCE TYPE WARRANTS PRICE EXPIRES
- ---------------------------- --------------------- ----------- ----------- ------------------
<S> <C> <C> <C> <C>
May 1998.................... Series B preferred 500,000 $ 3.25 May 2003
November 1998............... Series D preferred 5,500 $ 5.00 November 2005
February 1999............... Series D preferred 390 $ 5.00 February 2006
March 1999.................. Common 150,000 $ 5.00 April 2004
June 1999................... Series D preferred 100,000 $ 5.00 June 2004
</TABLE>
Some of the warrants have a net exercise provision under which the holder
may, in lieu of payment of the exercise price in cash, surrender the warrant and
receive a net amount of shares, based on the fair market value of our stock at
the time of the exercise of the warrant, after deducting the aggregate exercise
price.
The holders of warrants for Series B and Series D preferred shares have the
right to require us to include their securities in some future registration
statements we file under the Securities Act of 1933.
REGISTRATION RIGHTS
After the consummation of the offering, the holders of 9,449,238 shares of
common stock issuable upon conversion of the preferred stock will have
registration rights with respect to those securities, assuming an initial public
offering price of $11.00 per share and that the closing of the offering occurs
on September 30, 1999 (not including shares issuable upon exercise of warrants).
These rights are described in a shareholders agreement between us and the
holders of those securities. The agreement provides for registration upon the
demand of the holders of not less than 25% of the outstanding shares of Series C
and Series D preferred stock, upon the demand of the holders of not less than
50% of the outstanding Series C preferred stock, and upon the demand of
specified holders of Series D preferred stock. In addition, pursuant to that
agreement, the holders of our preferred stock and warrants for our preferred
stock are entitled to require us to include their securities in some future
registration statements we file under the Securities Act of 1933, referred to as
piggyback registration rights. The holders of those securities also are entitled
to require us to register their securities on a registration statement on Form
S-3 once we are eligible to use a Form S-3 in connection with registrations.
However, holders of these shares will be restricted from exercising these rights
until 180 days after the date of this prospectus. Registration of shares of
common stock by the exercise of these demand registration rights, piggyback
registration rights or S-3 registration rights under the Securities Act of 1933
would result in these shares becoming freely tradable without restriction under
the Securities Act of 1933 immediately upon the effectiveness of such
registration. Please see "Risk Factors--Substantial future sales of our common
stock in the public market could cause our stock price to fall," beginning on
page 18, and "Shares Eligible for Future Sale," beginning on page 73.
SHAREHOLDER ACTION; SPECIAL MEETING OF SHAREHOLDERS
The Delaware Certificate of Incorporation that will become effective
immediately prior to the effectiveness of this offering states that shareholders
may not take action by written consent, but only at duly called annual or
special meetings of shareholders. The Delaware Certificate of Incorporation also
provides that special meetings of shareholders may be called only by the
president, the chairman of the board of directors, by a majority of the board of
directors.
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ADVANCE NOTICE REQUIREMENTS FOR SHAREHOLDER PROPOSALS AND DIRECTOR NOMINATIONS
The bylaws provide that shareholders must provide timely notice in writing
to bring business before an annual meeting of shareholders or to nominate
candidates for election as directors at an annual meeting of shareholders. To be
timely notice for an annual meeting, a shareholder's notice must be delivered to
or mailed and received at our principal executive offices at least 120 days
before the first anniversary of the date our notice of annual meeting was
provided for the previous year's annual meeting of shareholders. If no annual
meeting of shareholders was held in the previous year or the date of the annual
meeting of shareholders has been changed to be more than 30 calendar days
earlier than or 30 calendar days after that anniversary, notice by the
shareholder, to be timely, must be received at least 90 days but no more than
120 days before the annual meeting of shareholders or the close of business on
the 10th day following the date on which notice of the date of the meeting is
given to shareholders or made public, whichever first occurs. To be timely
notice for a special meeting, a shareholder's notice must be delivered to us by
the close of business 10 days after notice of the meeting is given to
shareholders. The bylaws also specify requirements as to the form and content of
a shareholders' notice. These provisions may keep shareholders from bringing
matters before an annual meeting of shareholders or from making nominations for
directors at an annual meeting of shareholders.
AUTHORIZED BUT UNISSUED SHARES
The authorized but unissued shares of common stock and preferred stock are
available for future issuances without shareholder approval. These additional
shares may be used for a variety of corporate purposes, including future public
offerings to raise additional capital, corporate acquisitions and employee
benefit plans. The existence of authorized but unissued shares of common stock
and preferred stock could make it harder or discourage an attempt to obtain
control of us by a proxy contest, tender offer, merger or otherwise.
DELAWARE ANTI-TAKEOVER LAW AND CHARTER PROVISIONS
After our reincorporation in Delaware, we will be subject to Section 203 of
the Delaware General Corporation Law which generally prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years following the date that such stockholder
became an interested stockholder. Section 203 applies unless:
- prior to the date such stockholder became an interested stockholder, the
board of directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming
an interested stockholder;
- upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced; or
- on or after such date the stockholder became an interested stockholder,
the business combination is approved by the board of directors and
authorized at a meeting of stockholders by the affirmative vote of at
least 66 2/3% of the outstanding voting stock which is not owned by the
interested stockholder.
Provisions of our certificate of incorporation and Delaware law may delay,
defer or prevent a change in our control and may adversely affect the voting and
other rights of holders of common stock. In particular, our certificate of
incorporation provides for a classified board of directors and the inability of
stockholders to vote cumulatively for directors.
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<PAGE>
LIMITATION ON DIRECTORS' LIABILITY AND INDEMNIFICATION MATTERS
Our certificate of incorporation provides that, except to the extent
provided by Delaware law, our directors will not be personally liable to us or
our stockholders for monetary damages for any breach of fiduciary duty while
serving as directors. This provision also does not affect the directors'
responsibilities under Delaware corporate law or any other laws, such as the
Federal securities laws or state or Federal environmental laws. Insofar as the
indemnification for liabilities arising under the Securities Act may be
permitted to our directors or officers, we have been informed that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
We have entered into indemnity agreements to indemnify our executive
officers and directors in addition to the indemnification provided for in our
certificate of incorporation and bylaws. These agreements indemnify our
directors and executive officers for expenses, judgments and fines and amounts
paid in settlement, actually and reasonably incurred by any such person in any
action, suit or proceeding arising out of such person's services as a director
or executive officer on our behalf. We believe that these provisions and
agreements are necessary to attract and retain qualified directors and officers.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is BankBoston N.A.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock in the public market after
the offering could adversely affect the market price of our common stock and our
ability to raise equity capital in the future on terms favorable to us.
After the offerings, 43,675,333 shares of our common stock will be
outstanding, assuming an initial public offering price of $11.00 per share and
that the closing of the offering occurs on September 30, 1999 and that the
underwriters do not exercise the over-allotment option. Of these shares, all of
the 9,000,000 shares sold in the underwritten offering and the 454,545 shares
sold in the concurrent offering will be freely tradable without restriction or
further registration under the Securities Act, unless these shares are purchased
by "affiliates" as that term is defined in Rule 144 under the Securities Act.
The remaining shares of common stock held by existing shareholders are
"restricted securities" as that term is defined in Rule 144 under the Securities
Act. Restricted securities may be sold in the public market only if registered
or if they qualify for an exemption from registration under Rules 144 or 701
under the Securities Act, which rules are summarized below.
The following table shows approximately when the 34,220,788 shares of our
common stock that are not being sold in this offering but which will be
outstanding when this offering is complete will be eligible for sale in the
public market:
ELIGIBILITY OF RESTRICTED SHARES FOR SALE IN THE PUBLIC MARKET
<TABLE>
<CAPTION>
<S> <C>
180 days after the effective date............................................... 25,071,764
------------
</TABLE>
Resale of most of the restricted shares that will become available for sale
in the public market starting 180 days after the effective date will be limited
by volume and other resale restrictions under Rule 144 because the holders are
our affiliates.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year is entitled to sell, within any three-month
period, a number of shares that is not more than the greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately 423,608 shares immediately after this offering; or
- the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks before a notice of the sale
on Form 144 is filed.
Sales under Rule 144 must also comply with manner of sale provisions and
notice requirements and to the availability of current public information about
us.
RULE 144(k)
Under Rule 144(k), a person who has not been one of our affiliates at any
time during the 90 days before a sale, and who has beneficially owned the
restricted shares for at least two years, is entitled to sell the shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144.
RULE 701
In general, under Rule 701 of the Securities Act as currently in effect, any
of our employees, consultants or advisors who purchase shares from us under a
stock option plan or other written
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<PAGE>
agreement can resell those shares 90 days after the effective date of this
offering in reliance on Rule 144, but without complying with some of the
restrictions, including the holding period, contained in Rule 144.
LOCK-UP AGREEMENTS
Executive officers, directors and shareholders who will hold an aggregate of
34,021,088 shares of our common stock after this offering, assuming an initial
public offering price of $11.00 per share and that the closing of the offering
occurs on September 30, 1999, will sign or are subject to existing lock-up
agreements under which they will agree not to transfer or dispose of, directly
or indirectly, any shares of common stock or any securities convertible into or
exercisable or exchangeable for shares of common stock, for a period of 180 days
after the date of this prospectus. Transfers or dispositions can be made sooner
with the prior written consent of Merrill Lynch & Co.
REGISTRATION RIGHTS
Upon completion of this offering, assuming an initial public offering price
of $11.00 per share and that the closing of the offering occurs on September 30,
1999, the holders of 9,449,238 shares of our common stock will be entitled to
rights with respect to the registration of their shares under the Securities
Act. Please see "Description of Capital Stock--Registration Rights," beginning
on page 70, for a more detailed description of these registration rights. After
registration, these shares will become freely tradable without restriction under
the Securities Act. Any sales of securities by these shareholders could have a
material adverse effect on the trading price of our common stock.
STOCK OPTIONS
Immediately after this offering we intend to file a registration statement
under the Securities Act covering 4,899,350 shares of common stock reserved for
issuance under our stock option plans. Each year as the number of shares
reserved for issuance under our 1998 Stock Plan increases, we will file an
amendment to the registration statement covering the additional shares. As of
June 30, 1999, options to purchase 2,512,857 shares of common stock were issued
and outstanding. Of these options to purchase shares of common stock, 670,382
will be vested and exercisable within 60 days of the date of this offering. When
the lock-up agreements described above expire, these vested options will become
freely tradable. This registration statement is expected to be filed and become
effective as soon as practicable after the effective date of this offering.
Accordingly, shares registered under that registration statement will, subject
to vesting provisions and Rule 144 volume limitations applicable to our
affiliates, be available for sale in the open market immediately after the 180
day lock-up agreements expire.
74
<PAGE>
UNDERWRITING
GENERAL
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Deutsche Bank Securities
Inc., Thomas Weisel Partners LLC, and Wit Capital Corporation are acting as
representatives of each of the underwriters named below. Subject to the terms
and conditions stated in the Purchase Agreement among us and the underwriters,
we have agreed to sell to each of underwriters, and each of the underwriters,
severally and not jointly, has agreed to purchase from us the number of shares
of common stock stated opposite its name below.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...........................................................
Deutsche Bank Securities Inc.....................................................
Thomas Weisel Partners LLC.......................................................
Wit Capital Corporation..........................................................
----------
Total.................................................................. 9,000,000
----------
----------
</TABLE>
Subject to the terms and conditions stated in the Purchase Agreement, the
several underwriters have agreed to purchase all the shares of common stock
being sold pursuant to the Purchase Agreement if any shares of common stock are
purchased. Of the 9,000,000 shares for sale in this offering, we have offered
shares to Dell Computer Corporation, which has expressed an interest in
acquiring shares of our common stock. If this offer is accepted, the
underwriters will sell these shares to Dell at the initial public offering
price. In the event that Dell does not purchase any shares, or purchases fewer
shares than anticipated, the underwriters will purchase those shares not
purchased by Dell. Under the terms of the Purchase Agreement, the commitments of
the non-defaulting Underwriters may in some circumstances be increased or the
Purchase Agreement may be terminated.
ZapMe! will sell the 454,545 shares that may be issued to various Series D
shareholders associated with Gilat Satellite Networks directly pursuant to an
agreement to offer such shares to them. The sale to the Gilat individuals is
expected to be consummated simultaneously with the sale of the shares offered
hereby.
We have agreed to indemnify the several underwriters against some
liabilities, including some liabilities under the Securities Act, or to
contribute to payments the underwriters may be required to make in respect
thereof.
The underwriters offer the shares of common stock, subject to prior sale,
when as and if issued to and accepted by them, subject to approval of some legal
matters by counsel for the underwriters and some other conditions. The
Underwriters reserve the right to withdraw, cancel or modify such offer and to
reject order in whole or in part.
A prospectus in electronic format is being made available on a web site
maintained by Wit Capital. In addition, all dealers purchasing shares from Wit
Capital in this offering have agreed to make a prospectus in electronic format
available on web sites maintained by each of these dealers.
COMMISSIONS AND DISCOUNTS
The representatives have advised us that they propose initially to offer the
shares of common stock to the public at the public offering price stated on the
cover page of this prospectus, and to some dealers at such price less a
concession not in excess of $ per share. The underwriters may allow, and
such dealers may reallow, a discount not in excess of $ per share on sales
to some other dealers. After the initial public offering, the public offering
price, concession and discount may be changed.
75
<PAGE>
The following table shows the per share and total underwriting discounts
that we will pay to the underwriters. This information is presented assuming
either no exercise or full exercise by the underwriters of their over-allotment
options.
<TABLE>
<CAPTION>
WITHOUT
PER SHARE OPTION WITH OPTION
----------- --------- -----------
<S> <C> <C> <C>
Public offering price............................................. $ $ $
Underwriting discount............................................. $ $ $
Proceeds, before expenses, to ZapMe!.............................. $ $ $
</TABLE>
We will pay the expenses of the offering, estimated at $1,000,000.
OTHER COMPENSATION
Richard Gadbois, an affiliate of Merrill Lynch, purchased 30,000 shares of
our Series E preferred stock on August 4, 1999, for the same price and on the
same terms as the other purchasers of our Series E preferred stock. The shares
purchased by Mr. Gadbois have been deemed to be underwriters compensation
pursuant to Rule 2710 of the Conduct Rules of the National Association of
Securities Dealers, Inc.
RESERVED SHARES
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to twelve percent of the shares offered hereby to be
sold to people associated with us or our directors, officers or employees, such
as vendors, suppliers, existing stockholders and other persons that have
relationships with or are interested in us. Shares may also be reserved for our
directors, officers or employees. The number of shares of our common stock
available for sale to the general public will be reduced to the extent that
those persons purchase the reserved shares. Any reserved shares which are not
orally confirmed for purchase within one day of the pricing of this offering
will be offered by the underwriters to the general public on the same terms as
the other shares offered by this prospectus.
OVER-ALLOTMENT OPTION
We have granted to the underwriters an option exercisable for 30 days after
the date of this prospectus, to purchase up to an aggregate of an additional
1,350,000 shares of common stock at the public offering price stated on the
cover of this prospectus, less the underwriting discount. The underwriters may
exercise this option solely to cover over-allotments, if any, made on the sale
of the common stock offered hereby. To the extent that the underwriters exercise
this option, each underwriter will generally be obligated to purchase a number
of additional shares of common stock proportionate to such underwriter's initial
amount reflected to the table above.
NO SALES OF SIMILAR SECURITIES
We and our executive officers and directors have agreed, for a period of 180
days after the date of this prospectus not to directly or indirectly issue,
sell, or otherwise dispose of or transfer any shares of common stock or
securities convertible into or exchangeable or exercisable for common stock,
without the prior written consent of Merrill Lynch on behalf of the
underwriters, except for purchases and sales of stock in the open market, shares
purchased in our directed share program, or transfers to a family member or a
family trust, transfers of shares as a gift, or transfers to limited partners of
a partnership or shareholders of a corporation if such transferee agrees in
writing to be similarly restricted. See "Shares Eligible for Future Sale,"
beginning on page 73, for detailed information about our shares of common stock
that will be eligible for future sale.
76
<PAGE>
PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
Until the distribution of the common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters and
some selling group members to bid for and purchase the common stock. As an
exception to these rules, the representatives are permitted to engage in some
transactions that stabilize the price of the common stock. Such transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the common stock.
If the underwriters create a short position in the common stock in
connection with this offering, i.e., if they sell more shares of common stock
than are stated on the cover page of this prospectus, the representatives may
reduce that short position by purchasing common stock in the open market. The
representatives may also elect to reduce any short position by exercising all or
part of the over-allotment option described above.
Neither we nor any of the underwriters make any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of the representation that the representatives will
engage in such transactions or that such transactions, once commenced, will not
be discontinued without notice.
NEW UNDERWRITERS
Wit Capital, a member of the National Association of Securities Dealers,
Inc., will participate in this offering as one of the underwriters. The National
Association of Securities Dealers, Inc. approved the membership of Wit Capital
on September 4, 1997. Since that time, Wit Capital has acted as an underwriter
or co-manager in over 95 public offerings.
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since December
1998, Thomas Weisel Partners has been named as a lead or co-manager on 71 filed
public offerings of equity securities, of which 39 have been completed, and has
acted as a syndicate member in an additional 33 public offerings of equity
securities. Jack Kemp, one of our directors, sits on the Advisory Board of
Thomas Weisel Partners. Other than Mr. Kemp's affiliation, Thomas Weisel
Partners does not have any material relationship with us or any of our officers,
directors or other controlling persons, except with respect to its contractual
relationship with us pursuant to the underwriting agreement entered into in
connection with this offering.
OTHER RELATIONSHIPS
Some of the underwriters and their affiliates engage in transactions with,
and perform services for, our company in the ordinary course of business and
have engaged, and may in the future engage, in commercial banking and investment
banking transactions with our company, for which they have received or may
receive customary compensation.
LEGAL MATTERS
The validity of the common stock offered hereby is being passed upon by
Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Certain legal matters in connection with this offering will be
passed upon for the underwriters by Brobeck, Phleger & Harrison LLP, San
Francisco, California. As of the date of this prospectus, an investment
partnership composed of certain current and former members of and persons
associated with Wilson Sonsini Goodrich & Rosati, Professional Corporation, as
well as certain individual attorneys of this firm, beneficially own an aggregate
of 21,400 shares of ZapMe!'s Series D preferred stock, which, assuming an
initial public offering price of $11.00 per share and that the closing of the
offering occurs on September 30, 1999, will convert into approximately 22,987
shares of common stock.
77
<PAGE>
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements as of December 31, 1997 and 1998, and for the period June 25, 1997
(inception) through December 31, 1997 and for the year ended December 31, 1998,
as set forth in their report. We have included our financial statements in the
prospectus and elsewhere in the registration statement in reliance on Ernst &
Young LLP's report, given on their authority as experts in accounting and
auditing.
AVAILABLE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 with respect to the common stock offered by this
prospectus. This prospectus, which constitutes a part of the registration
statement, does not contain all of the information set forth in the registration
statement or the exhibits and schedules which are part of the registration
statement. For further information with respect to ZapMe! and its common stock,
see the registration statement and the exhibits and schedules thereto. Any
document ZapMe! files may be read and copied at the Commission's public
reference rooms in Washington, D.C., New York, New York and Chicago, Illinois.
Please call the Commission at 1-800-SEC-0330 for further information about the
public reference rooms. Our filings with the Commission are also available to
the public from the Commission's Web site at http://www.sec.gov.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act and,
accordingly, will file periodic reports, proxy statements and other information
with the Commission. Such periodic reports, proxy statements and other
information will be available for inspection and copying at the Commission's
public reference rooms, and the Web site of the Commission referred to above.
78
<PAGE>
ZAPME! CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors..................................... F-2
Balance Sheets........................................................................ F-3
Statements of Operations.............................................................. F-4
Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity
(Deficit)........................................................................... F-5
Statements of Cash Flows.............................................................. F-6
Notes to Financial Statements......................................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
ZapMe! Corporation
We have audited the accompanying balance sheets of ZapMe! Corporation (a
development stage company) as of December 31, 1997 and 1998, and the related
statements of operations, redeemable convertible preferred stock and
stockholders' equity (deficit) and cash flows for the period June 25, 1997
(inception) through December 31, 1997 and for the year ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ZapMe! Corporation (a
development stage company) at December 31, 1997 and 1998, and the results of its
operations and its cash flows for the period June 25, 1997 (inception) through
December 31, 1997 and for the year ended December 31, 1998 in conformity with
generally accepted accounting principles.
Walnut Creek, California
April 2, 1999,
except for Note 8, as to which the date is
October , 1999
- --------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon final computation
of the number of common shares which may be received by holders of Series C and
D preferred stock and computation of an additional dividend amount, if any, as
described in Note 3 to the financial statements, the effect on pro forma
weighted average shares as described in Note 1 to the financial statements, and
approval of the certificate of incorporation in the state of Delaware as
described in Note 8 to the financial statements.
/s/ ERNST & YOUNG LLP
Walnut Creek, California
October 14, 1999
F-2
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
EQUITY
DECEMBER 31, JUNE 30, JUNE 30,
1997 1998 1999 1999
--------- --------- ----------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................. $ 275 $ 815 $ 19,855
Restricted cash........................................................... -- -- 560
Accounts receivable....................................................... -- -- 14
Other receivables......................................................... -- 105 1,168
Notes receivable from stockholder......................................... -- 127 131
Prepaid expenses and other current assets................................. 13 45 362
--------- --------- -----------
Total current assets........................................................ 288 1,092 22,090
Equipment, net.............................................................. 43 2,471 9,781
Other assets................................................................ 18 40 275
--------- --------- -----------
Total assets................................................................ $ 349 $ 3,603 $ 32,146
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses..................................... $ 157 $ 1,541 $ 3,217
Accrued compensation and related expenses................................. 242 446 882
Deferred revenue.......................................................... -- -- 302
Current portion of capital lease obligations.............................. -- 118 2,092
--------- --------- -----------
Total current liabilities................................................... 399 2,105 6,493
Capital lease obligations................................................... -- 269 4,613
Notes payable to stockholders............................................... 462 -- --
--------- --------- -----------
Total liabilities........................................................... 861 2,374 11,106
Commitments
Redeemable convertible preferred stock, $0.01 par value, issuable in series:
Authorized shares--600,000 (none pro forma)
Issued and outstanding shares--600,000 in 1998, and 1999 and none pro
forma (liquidation preference at June 30, 1999--$4,542)................. -- 3,352 6,080 $ --
Stockholders' equity (deficit):
Convertible preferred stock, $0.01 par value:
Authorized shares--12,857,671 in 1998 and 16,357,671 in 1999 (including
600,000 shares designated as redeemable convertible preferred stock)
(5,000,000 pro forma)
Issued and outstanding shares--9,557,671 in 1998 and 15,151,781 in 1999,
and none pro forma (liquidation preference at June 30,
1999--$30,893)........................................................ -- 2,783 30,155 --
Common stock, $0.01 par value:
Authorized shares--50,000,000 (200,000,000 pro forma)
Issued and outstanding shares--11,858,730 in 1997, 14,208,730 in 1998,
14,359,380 in 1999, and 30,111,161 pro forma.......................... 69 5,212 10,478 46,713
Deferred stock compensation............................................... -- (4,900) (6,617) (6,617)
Accumulated deficit during the development stage.......................... (581) (6,218) (19,056) (19,056)
--------- --------- ----------- -------------
Total stockholders' equity (deficit)........................................ (512) (2,123) 14,960 $ 21,040
--------- --------- ----------- -------------
-------------
Total liabilities, redeemable convertible preferred stock and stockholders'
equity (deficit).......................................................... $ 349 $ 3,603 $ 32,146
--------- --------- -----------
--------- --------- -----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PERIOD FROM JUNE PERIOD FROM JUNE
25, 1997 SIX MONTHS ENDED JUNE 25, 1997
(INCEPTION) YEAR ENDED 30, (INCEPTION)
THROUGH DECEMBER DECEMBER 31, ------------------------ THROUGH JUNE 30,
31, 1997 1998 1998 1999 1999
------------------ ------------ ----------- ----------- ------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue................................. $ -- $ -- $ -- $ 147 $ 147
Costs and expenses:
Cost of services...................... -- 135 8 1,247 1,382
Research and development.............. 231 1,140 429 1,034 2,405
Sales and marketing................... 40 1,197 176 2,456 3,693
General and administrative............ 299 1,458 415 1,975 3,732
Amortization of deferred stock
compensation........................ -- 1,065 -- 2,531 3,596
------- ------------ ----------- ----------- --------
Total costs and expenses................ 570 4,995 1,028 9,243 14,808
------- ------------ ----------- ----------- --------
Loss from operations.................... (570) (4,995) (1,028) (9,096) (14,661)
Interest income (expense), net.......... (11) (36) (35) 29 (18)
------- ------------ ----------- ----------- --------
Net loss................................ (581) (5,031) (1,063) (9,067) (14,679)
Accretion and dividend on redeemable
convertible preferred stock........... -- (606) -- (3,771) (4,377)
------- ------------ ----------- ----------- --------
Net loss applicable to common
stockholders.......................... $ (581) $ (5,637) $ (1,063) $ (12,838) $ (19,056)
------- ------------ ----------- ----------- --------
------- ------------ ----------- ----------- --------
Net loss per share:
Basic and diluted..................... $ (0.05) $ (0.48) $ (0.09) $ (0.95)
------- ------------ ----------- -----------
------- ------------ ----------- -----------
Pro forma basic and diluted
(unaudited)......................... $ (0.32) $ (0.36)
------------ -----------
------------ -----------
Shares used in calculation of net loss
per share:
Basic and diluted..................... 11,183 11,685 11,859 13,517
------- ------------ ----------- -----------
------- ------------ ----------- -----------
Pro forma basic and diluted
(unaudited)......................... 15,993 25,462
------------ -----------
------------ -----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
STOCKHOLDERS' EQUITY (DEFICIT) (DEFICIT)
------------------------------------------------------ ---------------------------
REDEEMABLE ACCUMULATED
CONVERTIBLE CONVERTIBLE DEFICIT TOTAL
PREFERRED STOCK PREFERRED STOCK COMMON STOCK DEFERRED DURING THE STOCKHOLDERS'
--------------- ------------------- ------------------- STOCK DEVELOPMENT EQUITY
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT COMPENSATION STAGE (DEFICIT)
------- ------ ---------- ------- ---------- ------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock
to founders at $0.005
per share in June
1997.................... -- $ -- -- $ -- 10,000,000 $ 50 $ -- $ -- $ 50
Issuance of common stock
for services at $0.10
per share in September
1997.................... -- -- -- -- 1,858,730 19 -- -- 19
Net loss and comprehensive
loss.................... -- -- -- -- -- -- -- (581) (581)
------- ------ ---------- ------- ---------- ------- ------------ ----------- -------------
Balances at December 31,
1997...................... -- -- -- -- 11,858,730 69 -- (581) (512)
Issuance of Series A
preferred stock at $0.10
per share for conversion
of notes payable, net of
issuance cost of $11 in
August 1998............. -- -- 9,097,671 899 -- -- -- -- 899
Issuance of Series B
preferred stock at $2.50
per share for conversion
of notes payable, net of
issuance costs of $4 in
August 1998............. -- -- 160,000 396 -- -- -- -- 396
Issuance of Series C
redeemable convertible
preferred stock at $5.00
per share, net of
issuance costs of $254
in August 1998.......... 600,000 2,746 -- -- -- -- -- -- --
Issuance of Series D
preferred stock at $5.00
per share, net of
issuance costs of $12 in
December 1998........... -- -- 300,000 1,488 -- -- -- -- 1,488
Issuance of common stock
upon exercise of stock
options at prices
ranging from $0.015 to
$0.0165 per share....... -- -- -- -- 1,000,000 16 -- -- 16
Issuance of common stock
at $0.25 per share for
services for note
receivable in August
1998.................... -- -- -- -- 1,350,000 3,537 (3,375) -- 162
Deferred stock
compensation............ -- -- -- -- -- 2,590 (2,590) -- --
Amortization of deferred
stock compensation...... -- -- -- -- -- -- 1,065 -- 1,065
Accretion of redeemable
convertible preferred
stock................... -- 531 -- -- -- -- -- (531) (531)
Accrued Series C
dividends............... -- 75 -- -- -- -- -- (75) (75)
Net loss and comprehensive
loss.................... -- -- -- -- -- -- -- (5,031) (5,031)
------- ------ ---------- ------- ---------- ------- ------------ ----------- -------------
Balances at December 31,
1998...................... 600,000 3,352 9,557,671 2,783 14,208,730 6,212 (4,900) (6,218) (2,123)
Issuance of common stock
at prices ranging from
$0.02 to $0.25 per share
upon exercise of stock
options (unaudited)..... -- -- -- -- 150,650 18 -- -- 18
Issuance of Series D
preferred stock at $5.00
per share, net of
issuance costs of $1,811
in March 1999.
(unaudited)............. -- -- 5,554,110 25,960 -- -- -- -- 25,960
Issuance of Series D
preferred stock at $5.00
per share for conversion
of note payable in
February 1999.
(unaudited)............. -- -- 40,000 200 -- -- -- -- 200
Issuance of common stock
options to non-employees
in consideration for
services rendered
(unaudited)............. -- -- -- -- -- 262 (262) -- --
Warrants issued in
connection with lease
financing in March 1999.
(unaudited)............. -- -- -- 169 -- -- -- -- 169
Warrants issued in
connection with Products
and Services Agreement
in March 1999
(unaudited)............. -- -- -- -- -- 974 (974) -- --
Deferred stock
compensation
(unaudited)............. -- -- -- -- -- 3,012 (3,012) -- --
Amortization of deferred
stock compensation
(unaudited)............. -- -- -- -- -- -- 2,531 -- 2,531
Accretion of redeemable
convertible preferred
stock (unaudited)....... -- 780 -- -- -- -- -- (780) (780)
Accretion of guaranteed
return (unaudited)...... -- 1,792 -- -- -- -- -- (1,792) (1,792)
Accretion of Series D
dividends (unaudited)... -- -- -- 1043 -- -- -- (1043) (1043)
Accrued Series C dividends
(unaudited)............. -- 156 -- -- -- -- -- (156) (156)
Net loss and comprehensive
loss (unaudited)........ -- -- -- -- -- -- -- (9,067) (9,067)
------- ------ ---------- ------- ---------- ------- ------------ ----------- -------------
Balances at June 30, 1999
(unaudited)............... 600,000 $6,080 15,151,781 $30,155 14,359,380 $10,478 $(6,617) $(19,056) $14,960
------- ------ ---------- ------- ---------- ------- ------------ ----------- -------------
------- ------ ---------- ------- ---------- ------- ------------ ----------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 25, 1997 PERIOD FROM
(INCEPTION) SIX MONTHS ENDED JUNE JUNE 25, 1997
THROUGH YEAR ENDED 30, (INCEPTION)
DECEMBER 31, DECEMBER 31, ------------------------ THROUGH JUNE
1997 1998 1998 1999 30, 1999
--------------- ------------- ----------- ----------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss............................................... $ (581) $ (5,031) $ (1,063) $ (9,067) $ (14,098)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of deferred stock compensation.......... -- 1,065 -- 2,290 3,355
Depreciation and amortization........................ 10 205 27 770 985
Common stock issued for services..................... 19 -- -- 241 260
Changes in operating assets and liabilities:
Restricted cash.................................... -- -- -- (560) (560)
Accounts receivable................................ -- -- -- (14) (14)
Other receivables.................................. -- (105) -- (1,063) (1,168)
Prepaid expenses and other current assets.......... (13) (32) (36) (317) (362)
Other assets....................................... (18) (22) -- (75) (115)
Accounts payable and accrued expenses.............. 157 1,384 155 1,676 3,217
Accrued compensation and related expenses.......... 242 204 256 436 882
Deferred revenue................................... -- -- -- 302 302
----- ------------- ----------- ----------- -------------
Net cash used in operating activities.................. (184) (2,332) (661) (5,381) (7,897)
INVESTING ACTIVITIES
Purchase of equipment, net............................. (53) (2,243) (378) (1,303) (3,599)
Notes receivable from stockholder...................... -- (127) -- (4) (131)
----- ------------- ----------- ----------- -------------
Net cash used in investing activities.................. (53) (2,370) (378) (1,307) (3,730)
FINANCING ACTIVITIES
Proceeds from issuance of preferred stock, net......... -- 4,229 -- 25,960 30,189
Proceeds from issuance of common stock................. 50 178 -- 18 246
Proceeds from borrowings on notes payable.............. 462 1,000 1,026 700 2,162
Payments on notes payable.............................. -- (162) -- (500) (662)
Payments on lease obligations.......................... -- (3) -- (450) (453)
----- ------------- ----------- ----------- -------------
Net cash provided by financing activities.............. 512 5,242 1,026 25,728 31,482
----- ------------- ----------- ----------- -------------
Increase (decrease) in cash and cash equivalents....... 275 540 (13) 19,040 19,855
Cash and cash equivalents at beginning of period....... -- 275 275 815 --
----- ------------- ----------- ----------- -------------
Cash and cash equivalents at end of period............. $ 275 $ 815 $ 262 $ 19,855 $ 19,855
----- ------------- ----------- ----------- -------------
----- ------------- ----------- ----------- -------------
SUPPLEMENTAL DISCLOSURES:
Conversion of notes payable to stockholders to
preferred stock...................................... $ -- $ 1,300 $ -- $ 200 $ 1,500
----- ------------- ----------- ----------- -------------
----- ------------- ----------- ----------- -------------
Issuance of common stock for notes receivable.......... $ -- $ 162 $ -- $ -- $ 162
----- ------------- ----------- ----------- -------------
----- ------------- ----------- ----------- -------------
Accretion and dividends of redeemable preferred stock.. $ -- $ 606 $ -- $ 936 $ 1,542
----- ------------- ----------- ----------- -------------
----- ------------- ----------- ----------- -------------
Accretion of mandatory dividends and guaranteed return $ -- $ -- $ -- $ 2,835 $ 2,835
----- ------------- ----------- ----------- -------------
----- ------------- ----------- ----------- -------------
Capital lease obligations incurred..................... $ -- $ 390 $ -- $ 6,768 $ 7,158
----- ------------- ----------- ----------- -------------
----- ------------- ----------- ----------- -------------
Warrants issued in connection with lease financing..... $ -- $ -- $ -- $ 169 $ 169
----- ------------- ----------- ----------- -------------
----- ------------- ----------- ----------- -------------
Warrants issued in connection with Products & Services
Agreement............................................ $ 0 $ 0 $ 0 $ 974 $ 974
----- ------------- ----------- ----------- -------------
----- ------------- ----------- ----------- -------------
Cash paid for interest................................. $ -- $ 26 $ 10 $ 110 $ 136
----- ------------- ----------- ----------- -------------
----- ------------- ----------- ----------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AT JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE COMPANY
ZapMe! Corporation (the "Company") was incorporated, under the name
Satellite Online Solutions Corporation, on June 25, 1997 in California for the
purpose of building a broadband interactive network that brings technology tools
and educational resources to schools at no cost. The Company changed its name to
ZapMe! Corporation in October 1998. The Company is planning to generate revenue
from corporate sponsorships on its network. The Company is in the development
stage, devoting its efforts to developing products and raising capital.
The Company has incurred operating losses since inception during the
development stage. Its activities to date have been financed primarily through
private placements of equity securities, including preferred stock issuances of
$10 million in March 1999 and $16 million in May 1999. The Company may seek to
raise additional capital through the issuance of debt or equity securities.
However, there can be no assurance that additional funding will be available to
the Company on acceptable terms, if at all.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
INTERIM FINANCIAL INFORMATION
The interim financial information as of June 30, 1999 and for the six months
ended June 30, 1998 and 1999 is unaudited, but includes all adjustments,
consisting only of normal recurring adjustments, that the Company considers
necessary for a fair presentation of its financial position at such date and its
results of operations and cash flows for those periods. Operating results for
the six months ended June 30, 1999 are not necessarily indicative of results
that may be expected for any future periods.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of demand deposits and money market
accounts held with two financial institutions with insignificant interest rate
risk and original maturities of three months or less from the date of purchase.
EQUIPMENT
Equipment is stated at cost and depreciated using the straight-line method
over estimated useful lives of three to seven years.
DEPENDENCE ON THIRD PARTIES
The Company has relationships with three parties, one which installs the
Company's software on the computers, one which installs the Company's lab in
each school site and one which serves as the general contractor to oversee the
installation process. In addition, the Company relies on third parties
F-7
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
to provide the majority of support necessary to maintain the network and labs
once installed and are also dependent on transmissions from the satellite to
customer sites. The inability of any of these parties to fulfill their
obligations with the Company could negatively impact the Company's future
results.
SOFTWARE DEVELOPMENT COSTS
The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards Board ("SFAS") No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed,"
under which certain software development costs incurred subsequent to the
establishment of technological feasibility are capitalized and amortized over
the estimated lives of the related products. Technological feasibility is
established upon completion of a working model. To date, costs incurred
subsequent to the establishment of technological feasibility have not been
significant, and all software development costs have been charged to research
and development expense in the accompanying statements of operations.
REVENUE RECOGNITION
The Company earns revenue from sponsorship agreements, which include content
and public service announcement sponsorships, banner advertising and full screen
interactive ads, upon delivery of messages over the Company's network. Provided
that collectibility is probable, revenue is recognized ratably over the time
periods that the advertisement is delivered or sponsorship is acknowledged
unless such sponsorship is based on delivery of a minimum number of impressions,
in which case revenue is recognized as the impressions are delivered.
E-commerce revenue consists of referral fees and commissions on transactions
facilitated through the Company's network as well as referred transactions.
Revenue from e-commerce is recognized upon notification from the contracting
partner of the fact of the referral or sale upon which referral fees or
commissions is due. Network services and other revenue consist of revenue from
the distribution of content and products delivered through the Company's
network, and from educational services delivered in the ZapMe! labs such as
teacher training, tutoring and other educational programs offered through a
strategic alliance. Network services and other revenue is recognized in the time
period in which the underlying service is delivered. Network services and other
revenue also include revenue from the Company's five-year agreement with a
strategic partner which provides for a sharing of revenue derived from the
delivery of programs in ZapMe! computer labs. This agreement allows the
strategic partner to offer student tutoring, teacher training, and other
programs in the ZapMe! computer labs. For the calendar year 1999, the strategic
partner is committed to pay ZapMe! minimum fees. Thereafter, fees will be based
on a rate for installed schools available for use by the strategic partner. To
date, no programs have been offered under this arrangement, and additionally, no
e-commerce or network services have been delivered and no revenue has been
recognized by ZapMe!.
Deferred revenue consists of prepaid sponsorship fees.
F-8
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
AFFINITY PROGRAM
The Company has an affinity program designed to encourage ZapMe! users to
log onto the network and utilize various features of the Netspace and rewards
users with points which may be redeemed by connecting to participating
companies' websites through links inserted on the ZapMe! Netspace and selecting
items to purchase. The user will tender points and other consideration if
necessary to the e-commerce partner. For each purchase transacted by a user with
an e-commerce partner, the Company will earn a fee equal to a percentage of the
purchase. When the fee is earned from a transaction where points are tendered,
the Company will record the fee as a reduction to marketing expense. To the
extent the fee is earned on a transaction in which points are not tendered, the
fee will be recognized as revenue earned. The effect of fees earned through the
affinity program will be recorded in the statement of operations in the month in
which the purchase transaction occurs between the user and the e-commerce
partner.
At June 30 1999, the dollar equivalent of a ZapPoint was $0.001; however
management may change this amount in the future and would change the expense
amount as necessary. The Company determines the value of ZapPoints and records a
marketing expense equal to the full value of ZapPoints awarded to users each
month. The Company records no adjustment to this expense for estimated
forfeiture or breakage of ZapPoints. The timing of redemption of ZapPoints is
solely at the discretion of the user and is beyond the control of the Company.
ZapPoints expire if a user remains inactive for a period of nine months.
ZapPoints may not be redeemed for cash. ZapPoints are currently transferable to
immediate family members also logged in to the ZapMe! Netspace.
STOCK-BASED COMPENSATION
The Company accounts for employee stock options using the intrinsic value
method in accordance with Accounting Principles Board Opinion No. 25 and has
adopted the disclosure-only alternative of SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123").
The value of warrants, options or stock exchanged for services is expensed
over the period benefitted. The warrants and options are valued using the
Black-Scholes option pricing model. To calculate the expense, the Company uses
either the fair value of the consideration received or the fair value of the
equity instruments issued, whichever is more reliably measurable.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes," which requires the use of the liability method in
accounting for income taxes. Under this method, deferred tax assets and
liabilities are measured using enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
NET LOSS PER SHARE
Basic and diluted net loss per share information for all periods is
presented under the requirement of SFAS No. 128, "Earnings per Share." Basic
loss per share has been computed using net loss
F-9
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
applicable to common stockholders divided by the weighted-average number of
common shares outstanding during the period, less shares subject to repurchase,
and excludes stock options, warrants, and convertible securities. Such
securities have also been excluded from the computation of diluted net loss per
share as their inclusion would be antidilutive.
Pro forma net loss per share has been computed using net loss as adjusted
for accrued redeemable convertible preferred stock dividends divided by the
weighted-average number of shares outstanding and also gives effect, under
Securities and Exchange Commission guidance, to the conversion of preferred
shares not included above that will automatically convert upon completion of the
Company's initial offering, using the if-converted method. The conversion
assumes a one-for-one conversion of the preferred stock into common stock. Such
conversion is subject to adjustment based on the final pricing of the Company's
common stock in an initial public offering. Such accretion of convertible
preferred stock of $531,000 and $780,000 for the year ended December 31, 1998
and the six months ended June 30, 1999, respectively, is based upon the
mid-point of the range of the expected initial public offering price ($11 per
share) and is included in the pro forma net loss per share calculation. Such
accretion may be adjusted based on the final pricing of the Company's common
stock in an initial public offering.
F-10
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The calculation of historical and pro forma basic and diluted net loss per
share is as follows (in thousands, expect per share amounts):
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 25, 1997
(INCEPTION) SIX MONTHS ENDED JUNE
THROUGH YEAR ENDED 30,
DECEMBER 31, DECEMBER 31, ------------------------
1997 1998 1998 1999
------------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Historical:
Net loss................................................. $ (581) $ (5,031) $ (1,063) $ (9,067)
Accretion and dividend on redeemable convertible
preferred stock........................................ -- (606) -- (3,771)
------------- ------------ ----------- -----------
Net loss applicable to common stockholders............... $ (581) $ (5,637) $ (1,063) $ (12,838)
------------- ------------ ----------- -----------
------------- ------------ ----------- -----------
Weighted average shares of common stock outstanding...... 11,183 12,739 11,859 14,311
Less: weighted average shares subject to repurchase...... -- 1,054 -- 794
------------- ------------ ----------- -----------
Weighted average shares of common stock outstanding used
in computing basic and diluted net loss per share...... 11,183 11,685 11,859 13,517
------------- ------------ ----------- -----------
------------- ------------ ----------- -----------
Basic and diluted net loss per share..................... $ (0.05) $ (0.48) $ (0.09) $ (0.95)
------------- ------------ ----------- -----------
------------- ------------ ----------- -----------
Pro forma (Unaudited):
Net loss applicable to common stockholders (from
above)................................................. $ (5,637) $ (12,838)
Accretion on redeemable convertible preferred stock...... 531 780
------------ -----------
Pro forma net loss....................................... $ (5,106) $ (12,058)
------------ -----------
------------ -----------
Weighted average shares used in computing basic and
diluted net loss per share (from above)................ 11,685 13,517
Adjustment to reflect the effect of the assumed
conversion of preferred stock from the date of
issuance............................................... 4,308 11,945
------------ -----------
Weighted average shares used in computing pro forma basic
and diluted net loss per share......................... 15,993 25,462
------------ -----------
------------ -----------
Pro forma basic and diluted net loss per share........... $ (0.32) $ (0.47)
------------ -----------
------------ -----------
</TABLE>
If the Company had reported net income, the calculation of historical and
pro forma diluted earnings per share would have included approximately an
additional 86,000, 938,000, 979,000 and 1,258,000 common equivalent shares
related to the outstanding stock options and warrants not included above
(determined using the treasury stock method at the estimated fair value) for the
period from
F-11
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
June 25, 1997 (inception) through December 31, 1997, the year ended December 31,
1998, and for the six months ended June 30, 1998 and 1999, respectively.
EFFECT OF NEW ACCOUNTING STANDARDS
The FASB issued Statement 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 Company adopted
SFAS 131 in the year ended December 31, 1998, and operates in one business
segment which is building a broadband interactive network that brings technology
tools and educational resources to schools at no cost.
2. EQUIPMENT
Equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
-------------------- ---------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Computer and office equipment..................................... $ 43 $ 2,510 $ 10,397
Furniture and fixtures............................................ 10 176 362
--- --------- ---------
53 2,686 10,759
Less accumulated depreciation and amortization.................... (10) (215) (978)
--- --------- ---------
$ 43 $ 2,471 $ 9,781
--- --------- ---------
--- --------- ---------
</TABLE>
3. STOCKHOLDERS' EQUITY
PREFERRED STOCK
Preferred stock consists of the following by series:
<TABLE>
<CAPTION>
SHARES ISSUED AND OUTSTANDING
---------------------------------------
AUTHORIZED SHARES
-------------------------- DECEMBER 31,
DECEMBER 31, JUNE 30, ------------------------- JUNE 30,
SERIES 1998 1999 1997 1998 1999
- -------------------------------------------------- ------------ ------------ ----- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
A convertible..................................... 9,097,671 9,097,671 -- 9,097,671 9,097,671
B convertible..................................... 660,000 660,000 -- 160,000 160,000
C redeemable convertible.......................... 600,000 600,000 -- 600,000 600,000
D convertible..................................... 2,500,000 6,000,000 -- 300,000 5,894,110
------------ ------------ --- ------------ ------------
12,857,671 16,357,671 -- 10,157,671 15,751,781
------------ ------------ --- ------------ ------------
------------ ------------ --- ------------ ------------
</TABLE>
F-12
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 IS UNAUDITED)
3. STOCKHOLDERS' EQUITY (CONTINUED)
The holders of Series A, Series B and Series D convertible preferred stock
are entitled to dividends when and if they are declared by the Board of
Directors prior to and in preference to any dividend on common stock. No
dividend or distribution can be declared or paid on any shares of Series A, B or
D convertible preferred stock unless all accrued but unpaid dividends on the
Series C redeemable convertible preferred stock have been paid. The holders of
Series C redeemable convertible preferred stock are entitled to a mandatory
dividend payable quarterly at the rate of 10% per annum of the liquidation
preference. In the event the corporation does not pay a dividend in cash, the
preferred liquidation value of each such share is automatically increased by an
amount equal to the unpaid dividend amount. The holders of Series D convertible
preferred stock are entitled to a mandatory rate increase of 15% per annum of
the liquidation preference, compounded quarterly, which pursuant to the Amended
& Restated Articles of Incorporation began to accrue on March 10, 1999. In the
event of an initial public offering of the Company's common stock, the
liquidation value per share will be issued in shares of the Company's common
stock at a conversion price of $5.00 per share.
Each share of preferred stock is convertible, at the option of the holder,
into one share of the Company's common stock, subject to certain anti-dilution
provisions. Each share of preferred stock will be automatically converted into
common stock upon completion of an initial public offering of the Company's
common stock with proceeds to the Company of a minimum of $25,000,000 at a
minimum offering price of $8.00 per share of common stock. The holders of
preferred stock are entitled to the number of votes equal to the number of
shares of common stock into which their preferred stock is convertible.
The Series C redeemable convertible preferred stock is redeemable in the
event that the Company has not consummated a public offering or merger event on
or before August 27, 2000. The redemption price per share will equal twice the
preferred liquidation amount for each such share, together with accrued but
unpaid dividends on such shares. The carrying value of Series C redeemable
convertible preferred stock is being accreted to its redemption value by charges
to accumulated deficit during the development stage. In the event of any
liquidation, dissolution, or winding up of the Company, the holders of the
Series A, Series B, Series C and Series D preferred stock have a liquidation
preference of $0.10, $2.50, $5.00 and $5.00 per share, respectively, over
holders of common stock plus any declared but unpaid dividends. If the assets
and funds of the Company are insufficient to pay the aforesaid potential
amounts, the holders of Series C redeemable convertible preferred stock have
preference to the holders of Series A, Series B and Series D convertible
preferred stock.
The Series C and Series D convertible preferred stockholders are guaranteed
a minimum amount if the initial public offering range is below $15 and $10,
respectively. In the event of an initial public offering of the Company's common
stock with an offering price of less than $15.00 or $10.00 per share, as
adjusted for stock splits or reverse splits, each holder of Series C redeemable
convertible and Series D convertible preferred stock, respectively, will be
immediately issued or deemed to hold additional shares of Series C and Series D
preferred stock which is convertible into shares of common stock at the closing
of a public offering using a conversion price pursuant to a pre-determined
formula which will compensate the holders for the lower offering price.
F-13
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AT JUNE 30, 1999 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1999 IS UNAUDITED)
3. STOCKHOLDERS' EQUITY (CONTINUED)
If the offering price is $11.00 per share and the offering closes on
September 30, 1999, the Series C stockholders, Series D stockholders and Series
E stockholders would be entitled to receive approximately 303,125 shares,
437,216 shares and 24,787 shares, respectively. When such issuance of additional
shares of common stock occurs, current and prospective stockholders will suffer
additional dilution with a resulting increase in net loss applicable to common
stockholders of $8,416,000 which will also result in an increase in net loss per
share applicable to common stockholders.
If the offering price is $10 per share and the offering closes on September
30, 1999, the Series C stockholders and Series D stockholders would be entitled
to receive 393,348 shares and 437,216 shares, respectively. When such issuance
of additional shares of common stock occurs, current and prospective
stockholders will suffer additional dilution with a resulting increase in net
loss applicable to common stockholders of $8,306,000 which will also result in
an increase in net loss per share applicable to common stockholders.
BRIDGE FINANCINGS
Between August 1997 and June 1998, the Company issued notes payable with
aggregate principal totaling $900,000 and interest rates of 5.87% to 6.50% per
annum. The principal amount of these notes was converted into 9,097,671 shares
of Series A convertible preferred stock in August 1998.
In May 1998, the Company issued notes payable with aggregate principal
totaling $400,000 and an interest rate of 8.5% per annum together with warrants
to purchase 500,000 shares of Series B convertible preferred stock. The
principal amount of these notes was converted into 160,000 shares of Series B
convertible preferred stock in August 1998.
In February 1999, the Company issued a $200,000 note payable with an
interest rate of 10% per annum. The principal amount was converted into 40,000
shares of Series D preferred stock in April 1999.
STOCK PLANS
The Company has two stock plans which provide for the granting of stock
options or shares of common stock to employees, directors and consultants. Stock
options are exercisable immediately upon issuance (subject to vesting
requirements) and generally have a term of 10 years. The Company typically
reserves the right of first refusal to purchase all shares held by the
participant upon termination of employment. Unvested options are canceled upon
termination of employment. Fully vested shares may be repurchased by the Company
at the higher of the original purchase price or the fair market value of the
shares as determined by the Board of Directors. The vesting schedule is
determined by the Board of Directors at the time of issuance. Stock options
generally vest over a period of between three and four years. The repurchase
right for vested shares expires upon the completion of an initial public
offering of the Company's common stock. The Company has reserved 4,400,000
shares of common stock for issuance under the plans. In January 1999, the
Company reserved an additional 1,000,000 shares of common stock for issuance
under the Plan.
F-14
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. STOCKHOLDERS' EQUITY (CONTINUED)
A summary of activity under the Company's stock option plans is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------
WEIGHTED-
NUMBER OF AVERAGE EXERCISE
SHARES PRICE PER SHARE
---------- ----------------
<S> <C> <C>
Options granted................................................. 1,120,000 $0.02
---------- -----
Outstanding at December 31, 1997.................................. 1,120,000 0.02
Options granted................................................. 1,720,230 0.84
Options exercised............................................... (1,000,000) 0.02
Options canceled................................................ (91,000) 0.59
---------- -----
Outstanding at December 31, 1998.................................. 1,749,230 0.80
Options granted (unaudited)..................................... 1,192,946 2.94
Options exercised (unaudited)................................... (150,650) 0.12
Options canceled (unaudited).................................... (278,669) 0.55
---------- -----
Outstanding at June 30, 1999 (unaudited).......................... 2,512,857 $1.87
---------- -----
---------- -----
Vested and Exercisable at December 31, 1997....................... 166,666 $0.02
---------- -----
---------- -----
Vested and exercisable at December 31, 1998....................... 152,742 $0.42
---------- -----
---------- -----
Vested and exercisable at June 30, 1999 (unaudited)............... 167,773 $2.34
---------- -----
---------- -----
Outstanding shares of common stock that may be repurchased at
December 31, 1998............................................... 977,684
----------
----------
Outstanding shares of common stock that may be repurchased at June
30, 1999 (unaudited)............................................ 654,215
----------
----------
</TABLE>
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS VESTED AND
OPTIONS OUTSTANDING EXERCISABLE
------------------------------------------- --------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE REMAINING EXERCISE
NUMBER PRICE CONTRACTUAL LIFE NUMBER PRICE
EXERCISE PRICES OF SHARES PER SHARE (YEARS) OF SHARES PER SHARE
- ------------------ --------- ------------- ----------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
$0.02 - $0.275.... 699,730 $ 0.16 9.23 118,742 $ 0.11
$1.00 - $1.10..... 628,500 $ 1.05 9.74 -- --
$1.50............. 421,000 $ 1.50 9.95 34,000 $ 1.50
--------- -----------
1,749,230 152,742
--------- -----------
--------- -----------
</TABLE>
F-15
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information concerning outstanding and
exercisable options at June 30, 1999:
<TABLE>
<CAPTION>
OPTIONS VESTED AND
OPTIONS OUTSTANDING EXERCISABLE
------------------------------------------- --------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE REMAINING EXERCISE
NUMBER PRICE CONTRACTUAL LIFE NUMBER PRICE
EXERCISE PRICES OF SHARES PER SHARE (YEARS) OF SHARES PER SHARE
- ------------------ --------- ------------- ----------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
$0.02 - $0.275.... 326,411 $ 0.18 8.77 48,573 $ 0.19
$1.00 - $1.10..... 627,500 $ 1.05 9.28 -- --
$1.50 - $2.50..... 1,182,846 $ 2.14 9.67 39,200 $ 1.63
$3.00 - $4.00..... 376,100 $ 3.89 9.98 80,000 $ 4.00
--------- -----------
2,512,857 167,773
--------- -----------
--------- -----------
</TABLE>
DEFERRED COMPENSATION
During the year ended December 31, 1998, the Company also granted 1,350,000
shares of common stock to an officer of the Company (Note 6) under the 1998
Stock Plan at a price of $0.25 per share which was below the deemed fair market
value at the date of grant of $2.75 per share. As a result, the Company recorded
deferred compensation of $3,375,000 during the year ended December 31, 1998
representing the difference between the price paid per share and the deemed fair
value of the Company's common stock. These amounts are being amortized by
charges to operations over the vesting period of the stock of approximately four
years resulting in amortization of approximately $730,000 for the year ended
December 31, 1998 and $957,000 for the six months ended June 30, 1999. The
Company has the right to buy back the unvested portion of this common stock if
certain milestones are not met by the officer. If the Company elects to
repurchase the unvested portion, the Company will retire the stock using the
treasury method.
The Company recorded deferred stock compensation of approximately $2,590,000
during the year ended December 31, 1998 and $3,012,000 during the six months
ended June 30, 1999 representing the difference between the exercise price and
the deemed fair value of the Company's common stock on the grant date for
certain of the Company's stock options granted to employees. In the absence of a
public market for the Company's common stock, the deemed fair value was based on
the price per share of recent preferred stock financings, less a discount to
give effect to the superior rights of the preferred stock. These amounts are
being amortized by charges to operations over the vesting periods of the
individual stock options using a graded vesting method. Such amortization
amounted to approximately $335,000 for the year ended December 31, 1998 and
approximately $1,574,000 for the six months ended June 30, 1999.
Including deferred compensation which will be recorded for option grants
made during the three months ended September 30, 1999, future amortization is
estimated to be approximately $3,745,000 for the six months ended December 31,
1999 and approximately $6,683,000, $2,942,000, $1,085,000 and $99,000 for the
fiscal year 2000, 2001, 2002 and 2003, respectively.
F-16
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. STOCKHOLDERS' EQUITY (CONTINUED)
Future amortization expense is as follows (in thousands):
<TABLE>
<CAPTION>
AMOUNT
---------
<S> <C>
YEAR ENDED DECEMBER 31:
1999............................................................... $ 4,120
2000............................................................... 2,245
2001............................................................... 1,088
2002............................................................... 326
---------
$ 7,779
---------
---------
</TABLE>
In 1997 and 1998, the Company issued 1,858,730 and 1,350,000 shares,
respectively, of common stock to employees in exchange for services. The common
stock issued was recorded at the estimated fair value of the commmon stock at
the time the services were performed and the expense was recorded. The Company's
management believes that the value of the common stock issued approximates the
value of the services received.
PRO FORMA DISCLOSURES OF THE EFFECT OF STOCK-BASED COMPENSATION
Pro forma information regarding results of operations and net loss per share
is required by SFAS 123, which also requires that the information be determined
as if the Company had accounted for its employee stock options under the fair
value method of SFAS 123. The fair value for these options was estimated at the
date of grant using a Black-Scholes option valuation model with the following
weighted average assumptions: a risk-free interest rate of 5.5% for the period
from June 25, 1997 (inception) through December 31, 1997 and the year ended
December 31, 1998, no dividend yield or volatility factors of the expected
market price of the Company's common stock, and a weight-average expected life
of the option of three and one-half years.
The option valuation models were developed for use in estimating the fair
value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected life of the option. Because the
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Had compensation cost for the Company's stock-based compensation plans been
determined using the fair value at the grant dates for awards under those plans
calculated using the minimum value
F-17
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. STOCKHOLDERS' EQUITY (CONTINUED)
method of SFAS 123, the Company's net loss (in thousands) and pro forma basic
and diluted net loss per share would have been increased to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 25, 1997
(INCEPTION)
THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1998
------------- ------------
<S> <C> <C>
Net loss--pro forma.............................................. $ (584) $ (5,046)
------ ------------
------ ------------
Net loss per share--pro forma.................................... $ (0.05) $ (0.43)
------ ------------
------ ------------
</TABLE>
The weighted-average fair value of options granted for the period from
inception to December 31, 1997, the year ended December 31, 1998, and for the
six months ended June 30, 1999 was $0.01, $0.16, and $0.56, respectively.
The effect on pro forma net loss is not necessarily indicative of the effect
on pro forma net loss in future years, as future years will include the effects
of additional years of stock option grants.
SHARES RESERVED FOR FUTURE ISSUANCE
At December 31, 1998, the Company reserved shares of capital stock for
future issuance as follows:
<TABLE>
<CAPTION>
PREFERRED
COMMON STOCK STOCK
-------------- --------------
<S> <C> <C>
Convertible preferred stock, including effect of preferred
stock warrants............................................. 10,663,171 10,157,671
Warrants to purchase stock................................... -- 505,500
Stock options outstanding.................................... 1,749,230 --
Stock options and shares available for grant................. 300,770 --
-------------- --------------
12,713,171 10,663,171
-------------- --------------
-------------- --------------
</TABLE>
WARRANTS
The Company had the following warrants outstanding at June 30, 1999 to
purchase shares of stock:
<TABLE>
<CAPTION>
PREFERRED EXERCISE PRICE
NUMBER OF SHARES STOCK PER SHARE EXPIRATION OF WARRANTS
- ----------------- ---------- --------------- -------------------------------------------------------------------
<C> <C> <C> <S>
250,000 Series B $ 3.00 May 2003
250,000 Series B 3.50 May 2003
5,500 Series D 5.00 Earlier of November 2005 or close of an initial public offering
390 Series D 5.00 February 2007
100,000 Series D 5.00 June 2004
150,000 Common 5.00 December 2003
-------
755,890
-------
-------
</TABLE>
F-18
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES
Significant components of the Company's deferred tax assets are as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1998
--------- ---------
<S> <C> <C>
Net operating loss carryforwards........................................... $ 138 $ 1,633
Accrued compensation....................................................... 82 101
Other...................................................................... -- 118
--------- ---------
Total deferred tax assets.................................................. 220 1,852
Valuation allowance........................................................ (220) (1,852)
--------- ---------
Net deferred tax assets.................................................... $ -- $ --
--------- ---------
--------- ---------
</TABLE>
Realization of deferred tax assets is dependent upon future earnings, if
any, the timing and amount of which are uncertain. Accordingly, the net deferred
tax assets have been fully offset by a valuation allowance. The valuation
allowance increased by approximately $220,000 and $1,632,000 in the years ended
December 31, 1997 and 1998, respectively.
A reconciliation of income taxes at the statutory federal income tax rate to
net income taxes included in the accompanying statements of operations is as
follows:
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 25, 1997 (INCEPTION)
THROUGH YEAR ENDED DECEMBER SIX MONTHS ENDED
DECEMBER 31, 1997 31, 1998 JUNE 30, 1999
--------------------------- --------------------- ---------------------
<S> <C> <C> <C>
U.S. federal taxes (benefit) at statutory rate...... 34% 34% 34%
State............................................... 6% 6% 6%
Valuation allowance................................. (40)% (40)% (40)%
-- -- --
Total............................................... 0% 0% 0%
-- -- --
-- -- --
</TABLE>
At December 31, 1997 and 1998, the Company had net operating loss
carryforwards for federal income tax purposes of approximately $344,000 and
$4,082,000, respectively, which expire in tax years 2012 through 2018.
Utilization of the net operating losses may be subject to a substantial annual
limitation due to the ownership change limitations provided by the Internal
Revenue Code of 1986. The annual limitation may result in the expiration of net
operating losses before utilization.
5. COMMITMENTS AND CONTINGENCIES
The Company leases its office facility and certain office equipment under
non-cancelable lease agreements, which require the Company to pay a portion of
operating costs, including property taxes, insurance, and normal maintenance.
Rent expense amounted to approximately $41,000 and $206,000 for the period from
June 25, 1997 (inception) through December 31, 1997 and the year ended December
31, 1998, respectively.
Capital lease obligations represent the present value of future rental
payments under capital lease agreements for equipment. The original cost of the
equipment under capital leases is $390,000 at December 31, 1998 (none in 1997) .
The related amortization is included with depreciation expense. As
F-19
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
part of one of its capital lease agreements, the Company has issued warrants to
purchase 5,500 shares of Series D convertible preferred stock which are
outstanding at December 31, 1998.
Future minimum payments under capital and operating leases are as follows
(in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31: LEASES LEASES
- ------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
1999................................................................... $ 142 $ 244
2000................................................................... 149 244
2001................................................................... 146 240
2002................................................................... 1 156
----- -----
Total minimum lease payments............................................. 438 $ 884
-----
-----
Less amount representing interest........................................ (51)
-----
Present value of minimum lease payments.................................. 387
Less current portion of capital lease obligations........................ (118)
-----
$ 269
-----
-----
</TABLE>
As of June 30, 1999, the Company has obtained credit lines from a number of
lease finance companies for the purpose of acquiring computer and network
equipment in schools. In aggregate, the Company has entered into lease finance
agreements which allow for borrowings of up to approximately $20,145,000, bear
per annum interest rates from 10.5% to 18%, and have terms ranging from 24 to 36
months. In addition, the Company has issued a letter of credit to two companies
as security against the leases. As of June 30, 1999, the Company has drawn down
approximately $6,768,000 from these credit lines.
In June 1999, the Company entered into an agreement whereby a minimum number
of school sites would be established and maintained for a fixed monthly fee for
a minimum of three years. In the event the Company fails to establish the
minimum number of sites within three months, an unordered minimum site fee would
be assessed per site until the site was installed. As of June 30, 1999, the
maximum obligation on installed sites is $3,978,000. In July 1999, the agreement
was amended and the fixed monthly fee on the minimum number of site was reduced,
which reduced the maximum obligation on installed sites to $3,330,000.
Additionally, the Company will record an asset and related lease obligation for
all equipment for which ownership is transferred to the Company. As of June 30,
1999, no sites have been installed under the agreement.
The Company is a party to an arbitration and related counterclaim with a
former officer of the Company relating to this officer's employment with the
Company. Management believes the Company is adequately covered by insurance, or
that the ultimate liability, if any, would not have a materially adverse effect
on the Company's results of operations or financial position. However, depending
on the amount and timing, an unfavorable resolution of these matters could
materially affect the Company's future results of operations or cash flows in a
particular period.
F-20
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. NOTES RECEIVABLE FROM STOCKHOLDER
During the year ended December 31, 1998, the Company loaned an officer
$125,000 in exchange for a promissory note. The unsecured note bears interest at
5.35% per annum, with interest and principal due December 31, 1999.
7. RELATED PARTY TRANSACTIONS
An officer of the Company owns other businesses which engage in financing
transactions with the Company. Amounts paid to these related entities were
approximately $12,000 and $163,000 for the period from June 25, 1997 (inception)
through December 31, 1997 and during the year ended December 31, 1998,
respectively.
Between June and October 1997, the Company issued promissory notes to an
officer of the Company aggregating approximately $156,000, which bore interest
at 12.0% per annum and was repaid, along with accrued interest, in September
1998.
In March 1999, the Company entered into an agreement with a stockholder in
which the Company has granted the stockholder an exclusive right to deliver
certain products and services on the Company's systems in schools. The Company
will earn fees based upon the number of eligible schools and the length of time
eligible schools have been operational. The initial term of the agreement will
expire on December 31, 2003 with a five year renewal option subject to the
Company earning certain minimum fees from the agreement. As consideration for
the agreement, the Company issued the stockholder a warrant to purchase 150,000
shares of the Company's common stock at $5.00 per share. The warrant is
exercisable in whole only if the Company earns a minimum fee per eligible school
during the year ended December 31, 2003. The Company recorded deferred stock
compensation of approximately $974,000 during the six months ended June 30,
1999. This amount was computed using the Black-Scholes option valuation model;
it will be remeasured at each measurement date, and the related amortization
will be charged to operations over the term of the related agreement. The
assumptions used to compute the value of the warrant at June 30, 1999 under
Black-Scholes are as follows: expected volatility, 0.7; expected life, 4.5
years; exercise price, $5.00; stock price at measurement date, $9.00; expected
dividend yield, 0%; and risk-free interest rate, 6.0%.
The Company purchases certain data communications equipment from one of its
stockholders. Through June 30, 1999, the Company has paid approximately $1.8
million to the stockholder for equipment, consulting services, and software
license fees.
In September 1998, the Company paid a stockholder $180,000 in consulting
fees in connection with the issuance of Series C preferred stock.
In January 1999, the Company issued a promissory note in the amount of
$500,000 to a member of the Company's board of directors, bearing an interest
rate of 12.0% per annum. The note and approximately $12,000 of interest was paid
in April 1999.
In August 1999, a majority of ZapMe!'s directors, approved the issuance of
an immediately exercisable non-statutory option to purchase 300,000 shares of
the Company's common stock to an officer of the Company at an exercise price of
$5.00 per share. The shares are subject to a right of repurchase in favor of
ZapMe!, which will expire at a rate of one third on each anniversary of the date
of grant. ZapMe! has agreed to loan the officer, at his request, the amount
necessary to pay for the
F-21
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. RELATED PARTY TRANSACTIONS (CONTINUED)
aggregate exercise price of the option, which loan will be secured by the shares
purchased on exercise of the option.
8. SUBSEQUENT EVENTS
PROPOSED PUBLIC OFFERING OF COMMON STOCK
In August 1999, the Board of Directors authorized the Company to proceed
with an initial public offering of its common stock. If the offering is
consummated as presently anticipated, all of the outstanding preferred stock
will automatically convert into common stock. The unaudited pro forma
stockholders' equity at June 30, 1999 gives effect to the conversion of all
outstanding shares of convertible preferred stock at that date into 15,751,781
shares of common stock upon the completion of the offering.
REINCORPORATION
In connection with the Company's reincorporation in the state of Delaware,
the Board of Directors authorized an increase in the number of authorized shares
of common stock to 200,000,000 and an increase in the number of authorized
shares of preferred stock to 23,357,671 shares, subject to stockholder approval.
Effective immediately prior to the closing of the initial public offering of its
common stock, the Board of Directors authorized, subject to stockholder
approval, a decrease in the number of authorized shares of preferred stock to
5,000,000.
OPTION PLAN
In August 1999, the Company's Board of Directors approved, subject to
stockholder approval, the amended and restated 1998 Stock Plan. The plan allows
for the addition of 1,500,000 shares of common stock to be offered under the
plan as well as an annual increase commencing January 1, 2000 equal to the
lowest of 2,000,000, 5% of the outstanding shares of the Company's common stock
on the first day of the fiscal year, or such other amount as determined by the
Board of Directors.
1999 EMPLOYEE STOCK PURCHASE PLAN
The Company's 1999 Employee Stock Purchase Plan was adopted by the Board of
Directors in August 1999 to be effective upon the completion of the Company's
initial public offering of its common stock, subject to stockholders' approval.
The Company has reserved a total of 500,000 shares of common stock for issuance
under this plan. Eligible employees may purchase common stock at 15% of the
lesser of the fair market value of the Company's common stock on the first day
of the applicable six-month offering period at the date of purchase. In
addition, the plan provides for automatic annual increases in the number of
shares available for issuance on the first day of each fiscal year equal to the
lowest of 1,000,000, 2% of the outstanding shares of the Company's common stock
on the first day of the fiscal year, or such other amount as determined by the
Board of Directors.
SERIES E PREFERRED STOCK
In August 1999, the Board of Directors authorized 2,030,000 shares of Series
E preferred stock. The holders of Series E preferred stock are entitled to
dividends when and if they are declared by the
F-22
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. SUBSEQUENT EVENTS (CONTINUED)
Board of Directors prior to and in preference to any dividend or common stock.
In the event of any liquidation, dissolution, or winding up of the Company, the
holders of the Series E preferred stock have a liquidation preference of $5.00
over holders of common stock plus any declared but unpaid dividends. The holders
of Series E preferred stock are entitled to a mandatory rate increase of 7.5%
per annum of the liquidation preference, compounded quarterly. In the event of
an initial public offering of the Company's common stock, the liquidation value
per share will be issued in shares of common stock at a conversion price of
$5.00. In August 1999, the Company issued 2,030,000 shares of Series E preferred
stock, with gross proceeds to the Company of approximately $10,150,000.
The $5.00 per share price of Series E preferred stock does not necessarily
represent the fair value of the preferred stock issued. In August 1999, the
Company will record an increase to the net loss available to common shareholders
of approximately $12,200,000, which represents the difference between the $5.00
per share purchase price and the deemed fair value of $11.00 per share.
WARRANTS
The Company has agreed to issue warrants to a number of lease financing
companies. As of June 30, 1999, the Company is obligated to issue warrants for
100,000 shares of Series D convertible preferred stock and 140,000 shares of
common stock, of which 100,000 was issued subsequent to June 30, 1999. The value
of the warrants, if any, will be determined by management at the issuance date.
STOCK OPTIONS
In July, August and September 1999, the Company has granted stock options
and stock purchase rights as follows:
<TABLE>
<CAPTION>
SHARES EXERCISE DEEMED FAIR DEFERRED
RECIPIENT GRANT DATE GRANTED PRICE VALUE COMPENSATION VESTING PERIOD
- -------------------------------- -------------- --------- ----------- ------------- ------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Beverly Weinstein (non-employee) July 1999 6,800 4.00 10.00 $ 43,400 Vests upon grant
Kemp, Jack (director) July 1999 20,000 4.00 10.00 120,000 Vests upon grant
Employees July 1999 43,600 4.00 10.00 261,600 3-year vesting, 1/3
each anniversary
Lance Mortensen (Chairman) August 1999 300,000 5.00 11.00 1,800,000 3-year vesting,1/3
each anniversary
Employees August 1999 31,050 5.00 11.00 186,300 3-year vesting, 1/3
each anniversary
Delcom Marketing September 1999 10,000 5.00 11.00 60,000 Performance-based,
expires 12/31/1999
Employees September 1999 79,100 5.00 11.00 474,600 3-year vesting, 1/3
each anniversary
Rick Inatome (CEO) September 1999 1,000,000 5.00 11.00 6,000,000 4-year vesting, 25%
on first year,
monthly thereafter
W Scott Burwell September 1999 175,000 10.00 11.00 175,000 3-year vesting, 1/3
each anniversary
--------- -------------
Total 1,665,550 $ 9,120,900
--------- -------------
--------- -------------
</TABLE>
F-23
<PAGE>
ZAPME! CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. SUBSEQUENT EVENTS (CONTINUED)
Delcom Marketing may exercise the stock option only if it delivers a minimum
number of signed subscription agreements with school districts to permit
installation of ZapMe! computer labs. The assumptions used to compute the value
of the stock option under Black-Scholes at September 30, 1999 are as follows:
expected volatility, 0.7; expected life, 3 months; exercise price, $5.00; stock
price at measurement date, $11.00; expected dividend yield, 0%; and risk-free
interest rate, 6.0%.
EMPLOYMENT AGREEMENT
In September 1999, the Company hired a new chief executive officer. As part
of the officer's employment agreement the Company granted a non-statutory option
to purchase one million shares of the company's common stock at an exercise
price of $5.00 per share. The shares are subject to a right of repurchase in
favor of ZapMe!, which will expire at a rate of twenty-five percent on the first
anniversary of the grant date and one forty-eighth of the shares at the end of
each month thereafter. The Company will be required to record deferred
compensation during the three months ending September 30, 1999 representing the
difference between the price paid and the deemed fair value of the Company's
common stock. This amount will amortized by charges to operations over the
vesting period of the stock. The Company has also agreed to loan the amount
necessary to pay for the aggregate purchase price of the option, which will be
secured by a full recourse promissory note. The promissory note has a term of
four years and bears an interest rate of 5.96%.
CONCURRENT OFFERING
Concurrently with the proposed initial public offering of Company's common
stock, the Company is offering directly to various shareholders associated with
Gilat Satellite Networks, at the initial public offering price minus the
underwriting discount and commissions, an aggregate of 454,545 shares of the
Company's common stock. Although these individuals have indicated an intention
to purchase the shares in the concurrent offering, they are under no obligation
to do so. The sale of the shares to an individual in the concurrent offering is
not dependent on the sale of shares to others, and the Company might not sell
any shares in the concurrent offering. The shares are not issued in connection
with any services or supply arrangement between the Company and Gilat or its
affiliates. If the individuals do not purchase their full allotment of the
shares in the concurrent offering, the Company will not sell any of the
remainder of those allotted shares. The Company will record an increase to the
net loss available to common stockholders representing the value of the
underwriting discount and commissions for the shares that are sold, if any, in
this concurrent offering.
F-24
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THROUGH AND INCLUDING , 1999, (THE 25(TH) DAY AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THESE SECURITIES, WHETHER OR
NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
9,000,000 SHARES
[ZAPME! LOGO]
COMMON STOCK
-------------------
P R O S P E C T U S
-------------------
MERRILL LYNCH & CO.
DEUTSCHE BANC ALEX. BROWN
THOMAS WEISEL PARTNERS LLC
WIT CAPITAL CORPORATION
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
The information contained in this prospectus is not complete and may be changed.
We may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any jurisdiction where the offer or sale is not permitted.
<PAGE>
SUBJECT TO COMPLETION. DATED OCTOBER 18, 1999
454,545 SHARES
[ZAPME! LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
This prospectus relates to the offering of 454,545 shares of common stock
directly to various Series D stockholders associated with Gilat Satellite
Networks. Concurrently with this offering, we are offering 9,000,000 shares of
common stock in an underwritten public offering.
Prior to this offering, there has been no public market for the common
stock. The price per share of the common stock offered hereby will be the price
per share of the shares offered in the underwritten public offering, less the
underwriting discount and commissions. It is currently estimated that the
underwritten public offering price per share will be between $10.00 and $12.00.
The common stock has been approved for quotation on the Nasdaq National Market
under the symbol "IZAP."
SEE "RISK FACTORS" BEGINNING ON PAGE 5 TO READ ABOUT FACTORS YOU SHOULD
CONSIDER BEFORE BUYING SHARES OF THE COMMON STOCK.
-------------------
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
-------------------
The date of this prospectus is , 1999.
<PAGE>
PLAN OF DISTRIBUTION
This prospectus relates to an aggregate of 454,545 shares of common stock
which are being offered directly to various Series D stockholders associated
with Gilat Satellite Networks. The price at which the shares are being offered
to the employees and affiliates of Gilat is the public offering price minus the
underwriters' discount and commissions. Concurrently with this offering, we are
offering 9,000,000 shares of common stock to the public in an underwritten
offering.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THROUGH AND INCLUDING , 1999, (THE 25(TH) DAY AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THESE SECURITIES, WHETHER OR
NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
454,545 SHARES
ZAPME! CORPORATION
COMMON STOCK
--------------
[ZAPME! LOGO]
--------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts, commissions and certain accountable expenses, payable by
the Registrant in connection with the sale of Common Stock being registered. All
amounts are estimates except the SEC registration fee, the NASD filing fee and
the Nasdaq National Market Initial Listing Fee.
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 35,938
NASD Filing Fee............................................. 13,428
Nasdaq National Market Listing Application Fee.............. 95,000
Printing Fees and Expenses.................................. 150,000
Legal Fees and Expenses..................................... 250,000
Accounting Fees and Expenses................................ 250,000
Blue Sky Fees and Expenses.................................. 5,000
Transfer Agent and Registrar Fees........................... 15,000
Miscellaneous............................................... 185,634
----------
Total..................................................... $1,000,000
----------
----------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our bylaws provide that we will indemnify our directors and executive
officers and may indemnify our other officers, employees and other agents to the
fullest extent permitted by the General Corporations Law of the State of
Delaware, as amended. We are also empowered under our bylaws to enter into
indemnification agreements with our directors and officers and to purchase
insurance on behalf of any person whom we are required or permitted to
indemnify. We have entered into indemnification agreements with each of our
directors and executive officers and intend to obtain a policy of directors' and
officers' liability insurance that insures such persons against the cost of
defense, settlement or payment of a judgment under certain circumstances.
We have entered into agreements with our directors and executive officers
regarding indemnification. Under these agreements we are required to indemnify
them against expenses, judgments, fines, settlements and other amounts actually
and reasonably incurred (including expenses of a derivative action) in
connection with an actual, or a threatened, proceeding if any of them may be
made a party because he or she is or was one of our directors or officers. We
are obligated to pay these amounts only if the officer or director acted in good
faith and in a manner that he or she reasonably believed to be in (or not
opposed to) our best interests. With respect to any criminal proceeding, we are
obligated to pay these amounts only if the officer or director had no reasonable
cause to believe his or her conduct was unlawful. The indemnification agreements
also set forth procedures that will apply in the event of a claim for
indemnification thereunder.
In addition, our amended and restated certificate of incorporation filed in
connection with this offering provides that the liability of our directors for
monetary damages shall be eliminated to the fullest extent permissible under the
General Corporation Law of the State of Delaware, as amended. This provision in
our amended and restated certificate of incorporation does not eliminate a
director's duty of care, and, in appropriate circumstances, equitable remedies
such as an injunction or other forms of non-monetary relief would remain
available. Each director will continue to be subject to liability for breach of
the director's duty of loyalty to us, for acts or omissions not in good faith or
involving intentional misconduct or knowing violations of law, for acts or
omissions that the director believes to be contrary to our best interests or our
stockholders, for any transaction from which the
II-1
<PAGE>
director derived an improper personal benefit, for improper transactions between
the director and us and for improper distributions to stockholders and loans to
directors and officers. This provision also does not affect a director's
responsibilities under any other laws, such as the federal securities laws or
state or federal environmental laws.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons pursuant to
the foregoing provisions, or otherwise, we have been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
There is no pending litigation or proceeding involving any of our directors
or officers as to which indemnification is being sought, nor are we aware of any
pending or threatened litigation that may result in claims for indemnification
by any director or officer.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since June 1997 (inception), we issued and sold the following unregistered
securities:
1. On June 25, 1997 we issued and sold an aggregate of 5,000,000
shares of common stock to Lance Mortensen for an aggregate purchase
price of $50,000. On September 3, 1997, we issued 743,492 shares of
common stock to Darryl Deaton and 185,873 shares of common stock to
John Evleth, each in lieu of wages owed. On June 1, 1998 these
shares were split two-for-one pursuant to a stock dividend.
2. On August 1, 1997, October 17, 1997, December 22, 1997, January 22,
1998, March 23, 1998 and June 9, 1998, we issued convertible
promissory notes to certain investors for an aggregate amount of
$900,000. On August 5, 1998, the principal of the notes and the
interest which had accrued converted into 9,097,671 shares of our
Series A preferred stock.
3. On May 7, 1998 we issued a warrant to Wharton Capital Partners,
Ltd. to purchase up to 500,000 shares of our Series B preferred
stock, 250,000 of which at an exercise price of $3.00 per share and
250,000 of which at an exercise price of $3.50 per share.
4. On August 5, 1998, we issued and sold 160,000 shares of our Series
B preferred stock to certain investors for an aggregate purchase
price of $400,000.
5. On August 27, 1998, we issued and sold 600,000 shares of our Series
C preferred stock to certain investors for an aggregate purchase
price of $3,000,000.
6. On December 3, 1998, February 1, 1999, March 31, 1999 and May 28,
1999, we issued and sold an aggregate of 5,894,110 shares of our
Series D preferred stock to certain investors for an aggregate
purchase price of $29,470,550.
7. On November 30, 1998 and March 9, 1999, in connection with the
execution of an equipment financing agreement, we issued warrants
to FirstCorp to purchase up to an aggregate of 5,890 shares of
Series D preferred stock at an exercise price of $5.00 per share.
8. On March 9, 1999, we issued a warrant to Sylvan Learning Systems,
Inc., a corporate partner, to purchase up to 150,000 shares of
common stock at an exercise price of $5.00 per share.
9. On August 4, 1999, we issued and sold an aggregate of 2,030,000
shares of our Series E preferred stock to certain investors for an
aggregate purchase price of $10,150,000.
II-2
<PAGE>
10. From October 15, 1997 to June 30, 1999 we granted options and
rights under our 1997 Stock Option Plan and 1998 Stock Plan to
purchase an aggregate of 5,383,176 shares of our common stock at
exercise prices ranging from $0.015 to $4.00 to employees,
directors and consultants.
11. From August 6, 1998 through June 30, 1999 an aggregate of 2,500,650
shares of common stock were issued pursuant to option and right
exercises at exercise prices ranging from $0.015 to $0.25 to
employees, directors and consultants.
The sales of the above securities were deemed to be exempt from registration
under the Securities Act in reliance on Section 4(2) of the Securities Act, or
Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b)
of the Securities Act as transactions by an issuer not involving a public
offering or transactions pursuant to compensatory benefit plans and contracts
relating to compensation as provided under such Rule 701. The recipients of
securities in each such transaction represented their intention to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the share
certificates and warrants issued in such transactions. All recipients had
adequate access, through their relationships with the Company, to information
about the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -----------
<C> <S>
1.1 Form of Purchase Agreement.
2.1(*) Agreement and Plan of Merger dated , 1999 of ZapMe! Delaware Corporation,
a Delaware corporation, and ZapMe! Corporation, a California corporation.
3.1(*) Amended and Restated Articles of Incorporation effective prior to
reincorporation of the Company in Delaware.
3.2(*) Bylaws effective prior to reincorporation of the Company in Delaware.
3.3(*) Form of Amended and Restated Certificate of Incorporation to be filed and become
effective prior to effectiveness of this Registration Statement.
3.4 Form of Bylaws to become effective prior to effectiveness of this Registration
Statement.
3.5(*) Form of Second Amended and Restated Certificate of Incorporation to be filed and
become effective upon the closing of this offering.
4.1 Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5.
4.2 Specimen Stock Certificate of Registrant.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation, with
respect to the securities being issued.
10.1 Fourth Amended and Restated Investors' Rights Agreement.
10.2(*) ZapMe! Corporation f.k.a. Satellite Online Solutions Corporation, 1997 Employee
Stock Option Plan and form of Agreement.
10.3 ZapMe! Corporation 1998 Stock Plan, as amended and restated August 2, 1999, and
forms of Agreement.
10.4(*) ZapMe! Corporation 1999 Employee Stock Purchase Plan and form of Agreement.
10.5(*) Common Stock Purchase Agreement dated September 1, 1997 by and between the
Company and John Evleth.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -----------
<C> <S>
10.6(*) Common Stock Purchase Agreement dated September 1, 1997 by and between the
Company and Darryl Deaton.
10.7(*) Employment Agreement dated June 1, 1997 by and between the Company and Darryl N.
Deaton.
10.8(*) Employment Offer Letter dated March 24, 1999 between the Company and Robert J.
Rudy.
10.9(*) Employment Offer Letter dated April 7, 1999 between the Company and Donald D.
Kingsborough.
10.10(*) Settlement Agreement and Mutual Release dated January 29, 1999 between the
Company and Joshua K. Marks.
10.11(*) Warrant Agreement between the Company and FirstCorp, dated as of November 30,
1998.
10.12(*) Warrant Agreement between the Company and Sylvan Learning Systems dated as of
March 3, 1999.
10.13(*) Warrant Agreement between the Company and FirstCorp, dated as of February 23,
1999.
10.14(*) Warrant Agreement between the Company and Barry R. Minsky, dated as of May 7,
1998.
10.15(*) Office Lease between the Company and Alexander Properties Company, dated August
6, 1997, and Addendums dated August 7, 1998, September 15, 1998, October 14,
1998, October 22, 1998 and April 16, 1999.
10.16(*) Form of School Subscription Agreement.
10.17(*) Form of Indemnification Agreement entered into between the Registrant and its
directors and officers.
+10.18 Letter Services Agreement between the Company and Spacenet, Inc., dated February
10, 1999, Service Agreement dated June 11, 1999 and Amendment No. 1 to
Services Agreement dated July 19, 1999.
10.19 Products and Services Agreement between the Company and Sylvan Learning Systems,
Inc., dated March 3, 1999.
+10.20(*) Letter of Understanding between the Company and Microsoft Corporation, dated
November 13, 1998.
+10.21(*) Marketing Agreement between the Company and New Sub Services, dated August 3,
1999.
+10.22(*) Memorandum of Understanding between the Company and School Specialty, Inc.
10.23(*) Advertising Pilot Agreement between the Company and Xerox Channels Group, dated
June 30, 1999.
10.24(*) Voting Agreement among the Company, Lance Mortensen and QuestMark Partners,
L.P., dated May 28, 1999.
21.1(*) Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation (included
in Exhibit 5.1).
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -----------
<C> <S>
24.1(*) Power of Attorney.
27.1(*) Financial Data Schedule.
</TABLE>
- ------------------------
+ Confidential treatment has been requested with respect to certain portions
of this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.
(*) Previously filed.
(b) Financial Statement Schedules
Schedules have been omitted because the information required to be set forth
therein is not applicable or is shown in the financial statements or notes
thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions referenced in Item 14 of this Registration
Statement or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act, and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer, or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered hereunder,
the Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement (i) to include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) to
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereto which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement; and (iii) to include
any material information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change to such
information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement on Form S-1 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of San
Ramon, State of California, on the 19th day of October, 1999.
<TABLE>
<S> <C> <C>
ZAPME! CORPORATION
By /s/ LANCE MORTENSEN
-----------------------------------------
Name: Lance Mortensen
Title: CHAIRMAN
</TABLE>
POWER OF ATTORNEY
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON OCTOBER 19,
1999 IN THE CAPACITIES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ --------------------------
<C> <S>
/s/ LANCE MORTENSEN
- ------------------------------ Chairman and Director
Lance Mortensen
/s/ RICK INATOME
- ------------------------------ Chief Executive Officer,
Rick Inatome President and Director
Chief Financial Officer
/s/ ROBERT STOFFREGEN and Assistant Secretary
- ------------------------------ (Principal accounting
Robert Stoffregen and financial officer)
/s/ DARRYL DEATON
- ------------------------------ Vice President and
Darryl Deaton Director
/s/ MICHAEL ARNOUSE
- ------------------------------ Director
Michael Arnouse
/s/ DOUGLAS BECKER
- ------------------------------ Director
Douglas Becker
/s/ THOMAS HITCHNER
- ------------------------------ Director
Thomas Hitchner
/s/ JACK KEMP
- ------------------------------ Director
Jack Kemp
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER
--------
<C> <S>
1.1 Form of Purchase Agreement.
2.1(*) Agreement and Plan of Merger dated , 1999 of ZapMe! Delaware Corporation, a Delaware corporation, and
ZapMe! Corporation, a California corporation.
3.1(*) Amended and Restated Articles of Incorporation effective prior to reincorporation of the Company in Delaware.
3.2(*) Bylaws effective prior to reincorporation of the Company in Delaware.
3.3(*) Form of Amended and Restated Certificate of Incorporation to be filed and become effective prior to
effectiveness of this Registration Statement.
3.4 Form of Bylaws to become effective prior to effectiveness of this Registration Statement.
3.5(*) Form of Second Amended and Restated Certificate of Incorporation to be filed and become effective upon the
closing of this offering.
4.1(*) Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4 and 3.5.
4.2 Specimen Stock Certificate of Registrant.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation, with respect to the securities being
issued.
10.1 Fourth Amended and Restated Investors' Rights Agreement.
10.2(*) ZapMe! Corporation f.k.a. Satellite Online Solutions Corporation, 1997 Employee Stock Option Plan and form of
Agreement.
10.3 ZapMe! Corporation 1998 Stock Plan, as amended and restated August 2, 1999, and forms of Agreement.
10.4(*) ZapMe! Corporation 1999 Employee Stock Purchase Plan and form of Agreement.
10.5(*) Common Stock Purchase Agreement dated September 1, 1997 by and between the Company and John Evleth.
10.6(*) Common Stock Purchase Agreement dated September 1, 1997 by and between the Company and Darryl Deaton.
10.7(*) Employment Agreement dated June 1, 1997 by and between the Company and Darryl N. Deaton.
10.8(*) Employment Offer Letter dated March 24, 1999 between the Company and Robert J. Rudy.
10.9(*) Employment Offer Letter dated April 7, 1999 between the Company and Donald D. Kingsborough.
10.10(*) Settlement Agreement and Mutual Release dated January 29, 1999 between the Company and Joshua K. Marks.
10.11(*) Warrant Agreement between the Company and FirstCorp, dated as of November 30, 1998.
10.12(*) Warrant Agreement between the Company and Sylvan Learning Systems dated as of March 3, 1999.
10.13(*) Warrant Agreement between the Company and FirstCorp, dated as of February 23, 1999.
10.14(*) Warrant Agreement between the Company and Barry R. Minsky, dated as of May 7, 1998.
10.15(*) Office Lease between the Company and Alexander Properties Company, dated August 6, 1997, and Addendums dated
August 7, 1998, September 15, 1998, October 14, 1998, October 22, 1998 and April 16, 1999.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER
--------
<C> <S>
10.16(*) Form of School Subscription Agreement.
10.17(*) Form of Indemnification Agreement entered into between the Registrant and its directors and officers.
+10.18 Letter Services Agreement between the Company and Spacenet, Inc., dated February 10, 1999, Service Agreement
dated June 11, 1999 and Amendment No. 1 to Services Agreement dated July 19, 1999.
10.19 Products and Services Agreement between the Company and Sylvan Learning Systems, Inc., dated March 3, 1999.
+10.20(*) Letter of Understanding between the Company and Microsoft Corporation, dated November 13, 1998.
+10.21(*) Marketing Agreement between the Company and New Sub Services, dated August 3, 1999.
+10.22(*) Memorandum of Understanding between the Company and School Specialty, Inc.
10.23(*) Advertising Pilot Agreement between the Company and Xerox Channels Group, dated June 30, 1999.
10.24(*) Voting Agreement among the Company, Lance Mortensen and QuestMark Partners, L.P., dated May 28, 1999.
21.1(*) Subsidiaries of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation (included in Exhibit 5.1).
24.1(*) Power of Attorney.
27.1(*) Financial Data Schedule.
</TABLE>
- ------------------------
+ Confidential treatment has been requested with respect to certain portions
of this exhibit. Omitted portions have been filed separately with the
Securities and Exchange Commission.
(*) Previously filed.
<PAGE>
Exhibit 1.1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ZAPME! CORPORATION
(a Delaware corporation)
9,000,000 Shares of Common Stock
PURCHASE AGREEMENT
Dated: October ___, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
PAGE
<S> <C> <C>
SECTION 1. Representations and Warranties.........................................................................3
(A) REPRESENTATIONS AND WARRANTIES BY THE COMPANY.....................................................3
(i) Independent Accountants.................................................................4
(ii) Financial Statements....................................................................4
(iii) No Material Adverse Change in Business..................................................4
(iv) Good Standing of the Company............................................................4
(v) Good Standing of Subsidiaries...........................................................5
(vi) Capitalization..........................................................................5
(vii) Authorization of Agreement..............................................................5
(viii) Authorization and Description of Securities.............................................5
(ix) Absence of Defaults and Conflicts.......................................................5
(x) Absence of Labor Dispute................................................................6
(xi) Absence of Proceedings..................................................................6
(xii) Accuracy of Exhibits....................................................................6
(xiii) Possession of Intellectual Property.....................................................7
(xiv) Absence of Further Requirements.........................................................7
(xv) Possession of Licenses and Permits......................................................7
(xvi) Title to Property.......................................................................7
(xvii) Compliance with Cuba Act................................................................8
(xviii) Investment Company Act..................................................................8
(xix) Environmental Laws......................................................................8
(xx) Registration Rights.....................................................................8
(xxi) Year 2000 Compliance....................................................................9
(xxii) Absence of Improper Activities..........................................................9
(xxiii) Lock-Up Agreements.....................................................................10
(B) OFFICER'S CERTIFICATES...........................................................................10
SECTION 2. Sale and Delivery to Underwriters; Closing............................................................10
(A) INITIAL SECURITIES...............................................................................10
(B) OPTION SECURITIES................................................................................10
(C) PAYMENT..........................................................................................11
(D) DENOMINATIONS; REGISTRATION......................................................................11
SECTION 3. Covenants of the Company..............................................................................11
(A) COMPLIANCE WITH SECURITIES REGULATIONS AND COMMISSION REQUESTS...................................11
(B) FILING OF AMENDMENTS.............................................................................12
(C) DELIVERY OF REGISTRATION STATEMENTS..............................................................12
(D) DELIVERY OF PROSPECTUSES.........................................................................12
(E) CONTINUED COMPLIANCE WITH SECURITIES LAWS........................................................12
(F) BLUE SKY QUALIFICATIONS..........................................................................13
(G) RULE 158.........................................................................................13
(H) USE OF PROCEEDS..................................................................................13
(I) LISTING..........................................................................................13
(J) RESTRICTION ON SALE OF SECURITIES................................................................13
i.
<PAGE>
(K) REPORTING REQUIREMENTS...........................................................................14
(L) COMPLIANCE WITH NASD RULES.......................................................................14
SECTION 4. Payment of Expenses...................................................................................14
(A) EXPENSES.........................................................................................14
(B) TERMINATION OF AGREEMENT.........................................................................15
SECTION 5. Conditions of Underwriters' Obligations...............................................................15
(A) EFFECTIVENESS OF REGISTRATION STATEMENT..........................................................15
(B) OPINION OF COUNSEL FOR COMPANY...................................................................15
(C) OPINION OF COUNSEL FOR UNDERWRITERS..............................................................16
(D) OPINION OF COUNSEL FOR COMPANY...................................................................16
(E) OFFICERS' CERTIFICATE............................................................................16
(F) ACCOUNTANT'S COMFORT LETTER......................................................................16
(G) BRING-DOWN COMFORT LETTER........................................................................17
(H) APPROVAL OF LISTING..............................................................................17
(I) NO OBJECTION.....................................................................................17
(J) LOCK-UP AGREEMENTS...............................................................................17
(K) ELECTRONIC PROSPECTUS............................................................................17
(L) CONDITIONS TO PURCHASE OF OPTION SECURITIES......................................................17
(i) Officers' Certificate..................................................................18
(ii) Opinion of Counsel for Company.........................................................18
(iii) Opinion of Counsel for Underwriters....................................................18
(iv) Bring-down Comfort Letter..............................................................18
(M) ADDITIONAL DOCUMENTS.............................................................................18
(N) TERMINATION OF AGREEMENT.........................................................................18
SECTION 6. Indemnification.......................................................................................19
(A) INDEMNIFICATION OF UNDERWRITERS..................................................................19
(B) INDEMNIFICATION OF COMPANY, DIRECTORS AND OFFICERS...............................................20
(C) ACTIONS AGAINST PARTIES; NOTIFICATION............................................................20
(D) SETTLEMENT WITHOUT CONSENT IF FAILURE TO REIMBURSE...............................................21
(E) INDEMNIFICATION FOR RESERVED SECURITIES..........................................................21
SECTION 7. Contribution..........................................................................................21
SECTION 8. Representations, Warranties and Agreements to Survive Delivery........................................22
SECTION 9. Termination of Agreement..............................................................................22
(A) TERMINATION; GENERAL.............................................................................22
(B) LIABILITIES......................................................................................23
SECTION 10. Default by One or More of the Underwriters...........................................................23
SECTION 11. Notices..............................................................................................24
SECTION 12. Parties..............................................................................................24
ii.
<PAGE>
SECTION 13. GOVERNING LAW AND TIME...............................................................................24
SECTION 14. Effect of Headings...................................................................................24
SCHEDULES
Schedule A - List of Underwriters.........................................................Sch A-1
Schedule B - Pricing Information..........................................................Sch B-1
Schedule C - List of Persons subject to Lock-up...........................................Sch C-1
EXHIBITS
Exhibit A- Form of Opinion of Company's Counsel..............................................A-1
Exhibit B- Form of Lock-up Letter............................................................B-1
Exhibit C- Form of Opinion of Company's Patent Counsel.......................................C-1
</TABLE>
iii.
<PAGE>
Draft of 10/12/99
ZAPME! CORPORATION
(a Delaware Corporation)
9,000,000 Shares of Common Stock
(Par Value $.01 Per Share)
PURCHASE AGREEMENT
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Deutsche Bank Alex. Brown
Thomas Weisel Partners LLC
Wit Capital Corporation
as Representative(s) of the several Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
ZapMe! Corporation, a Delaware corporation (the "Company"), confirms
its agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch") and each of the other Underwriters named in
Schedule A hereto (collectively, the "Underwriters", which term shall also
include any underwriter substituted as hereinafter provided in Section 10
hereof), for whom Merrill Lynch, Deutsche Bank Alex. Brown, Thomas Weisel
Partners LLC, and Wit Capital Corporation, are acting as representative(s) (in
such capacity, the "Representative(s)"), with respect to the issue and sale by
the Company and the purchase by the Underwriters, acting severally and not
jointly, of the respective numbers of shares of Common Stock, par value $.01 per
share, of the Company ("Common Stock") set forth in said Schedule A, and with
respect to the grant by the Company to the Underwriters, acting severally and
not jointly, of the option described in Section 2(b) hereof to purchase all or
any part of 1,350,000 additional shares of Common Stock to cover
over-allotments, if any. The aforesaid 9,000,000 shares of Common Stock (the
"Initial Securities") to be purchased by the Underwriters and all or any part of
the 1,350,000 shares of Common Stock subject to the option described in Section
2(b) hereof (the "Option Securities") are hereinafter called, collectively, the
"Securities".
The Company understands that the Underwriters propose to make a public
offering of the Securities as soon as the Representative(s) deem(s) advisable
after this Agreement has been executed and delivered.
<PAGE>
The Company and the Underwriters agree that up to 1,080,000 shares of the
Securities to be purchased by the Underwriters (the "Reserved Securities") shall
be reserved for sale by the Underwriters to certain eligible employees and
persons having business relationships with the Company, as part of the
distribution of the Securities by the Underwriters, subject to the terms of this
Agreement, the applicable rules, regulations and interpretations of the National
Association of Securities Dealers, Inc. and all other applicable laws, rules and
regulations. To the extent that such Reserved Securities are not orally
confirmed for purchase by such eligible employees and persons having business
relationships with the Company by the end of the first business day after the
date of this Agreement, such Reserved Securities may be offered to the public as
part of the public offering contemplated hereby.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-84557) covering the
registration of the Securities under the Securities Act of 1933, as amended (the
"1933 Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this Agreement, the Company will either
(i) prepare and file a prospectus in accordance with the provisions of Rule 430A
("Rule 430A") of the rules and regulations of the Commission under the 1933 Act
(the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of
the 1933 Act Regulations or (ii) if the Company has elected to rely upon Rule
434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a
"Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). The
information included in such prospectus or in such Term Sheet, as the case may
be, that was omitted from such registration statement at the time it became
effective but that is deemed to be part of such registration statement at the
time it became effective (a) pursuant to paragraph (b) of Rule 430A is referred
to as "Rule 430A Information" or (b) pursuant to paragraph (d) of Rule 434 is
referred to as "Rule 434 Information." Each prospectus (including the electronic
prospectus prepared and delivered pursuant to Section 5(k) hereof) used before
such registration statement became effective, and any prospectus (including the
electronic prospectus prepared and delivered pursuant to Section 5(k) hereof)
that omitted, as applicable, the Rule 430A Information or the Rule 434
Information, that was used after such effectiveness and prior to the execution
and delivery of this Agreement, is herein called a "preliminary prospectus."
Such registration statement, including the exhibits thereto and schedules
thereto at the time it became effective and including the Rule 430A Information
and the Rule 434 Information, as applicable, is herein called the "Registration
Statement." Any registration statement filed pursuant to Rule 462(b) of the 1933
Act Regulations is herein referred to as the "Rule 462(b) Registration
Statement," and after such filing the term "Registration Statement" shall
include the Rule 462(b) Registration Statement. The final prospectus in the form
first furnished to the Underwriters for use in connection with the offering of
the Securities is herein called the "Prospectus." If Rule 434 is relied on, the
term "Prospectus" shall refer to the preliminary prospectus dated September 28,
1999 together with the Term Sheet and all references in this Agreement to the
date of the Prospectus shall mean the date of the Term Sheet. For purposes of
this Agreement, all references to the Registration Statement, any preliminary
prospectus, the Prospectus or any Term Sheet or any amendment or supplement to
any of the foregoing shall be deemed to include the copy filed with the
Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval
system ("EDGAR").
2.
<PAGE>
SECTION 1. REPRESENTATIONS AND WARRANTIES.
(a) REPRESENTATIONS AND WARRANTIES BY THE COMPANY. The Company
represents and warrants to each Underwriter as of the date hereof, as of the
Closing Time referred to in Section 2(c) hereof, and as of each Date of
Delivery (if any) referred to in Section 2(b) hereof, and agrees with each
Underwriter, as follows:
(i) COMPLIANCE WITH REGISTRATION REQUIREMENTS. Each of
the Registration Statement and any Rule 462(b) Registration
Statement has become effective under the 1933 Act and no stop order
suspending the effectiveness of the Registration Statement or any
Rule 462(b) Registration Statement has been issued under the 1933
Act and no proceedings for that purpose have been instituted or are
pending or, to the knowledge of the Company, are contemplated by the
Commission, and any request on the part of the Commission for
additional information has been complied with.
At the respective times the Registration Statement, any Rule
462(b) Registration Statement and any post-effective amendments thereto
became effective and at the Closing Time (and, if any Option Securities
are purchased, at the Date of Delivery), the Registration Statement,
the Rule 462(b) Registration Statement and any amendments and
supplements thereto complied and will comply in all material respects
with the requirements of the 1933 Act and the 1933 Act Regulations and
did not and will not contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and the
Prospectus, any preliminary prospectus (including, without limitation,
the "electronic prospectus" delivered pursuant to Section 5(k) hereof)
and any supplement thereto or prospectus wrapper prepared in connection
therewith, at their respective times of issuance and at the Closing
Time, complied and will comply in all material respects with any
applicable laws or regulations of foreign jurisdictions in which the
Prospectus and such preliminary prospectus, as amended or supplemented,
if applicable, are distributed in connection with the offer and sale of
Reserved Securities. Neither the Prospectus (including, without
limitation, the "electronic prospectus" delivered pursuant to Section
5(k) hereof) nor any amendments or supplements thereto (including any
prospectus wrapper), at the time the Prospectus or any such amendment
or supplement was issued and at the Closing Time (and, if any Option
Securities are purchased, at the Date of Delivery), included or will
include an untrue statement of a material fact or omitted or will omit
to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading. If Rule 434 is used, the Company will comply with the
requirements of Rule 434 and the Prospectus shall not be "materially
different", as such term is used in Rule 434, from the prospectus
included in the Registration Statement at the time it became effective.
The representations and warranties in this subsection shall not apply
to statements in or omissions from the Registration Statement or
Prospectus made in reliance upon and in conformity with information
furnished to the Company in writing by any Underwriter through Merrill
Lynch expressly for use in the Registration Statement or Prospectus.
Each preliminary prospectus (including, without limitation,
the "electronic prospectus" delivered pursuant to Section 5(k) hereof)
and the prospectus filed as part of
3.
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the Registration Statement as originally filed or as part of any
amendment thereto, or filed pursuant to Rule 424 under the 1933
Act, complied when so filed in all material respects with the 1933
Act Regulations and each preliminary prospectus including, without
limitation, the "electronic prospectus" delivered pursuant to
Section 5(k) hereof and the Prospectus delivered to the Underwriters
for use in connection with this offering was identical to the
electronically transmitted copies thereof filed with the Commission
pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(ii) INDEPENDENT ACCOUNTANTS. The accountants who
certified the financial statements and supporting schedules included
in the Registration Statement are independent public accountants as
required by the 1933 Act and the 1933 Act Regulations.
(iii) FINANCIAL STATEMENTS. The financial statements
included in the Registration Statement and the Prospectus, together
with the related schedules and notes, present fairly the financial
position of the Company and its consolidated subsidiaries at the
dates indicated and the statement of operations, stockholders'
equity and cash flows of the Company and its consolidated
subsidiaries for the periods specified; said financial statements
have been prepared in conformity with generally accepted accounting
principles ("GAAP") applied on a consistent basis throughout the
periods involved. The supporting schedules included in the
Registration Statement present fairly in accordance with GAAP the
information required to be stated therein. The selected financial
data and the summary financial information included in the
Prospectus present fairly the information shown therein and have
been compiled on a basis consistent with that of the audited
financial statements included in the Registration Statement.
(iv) NO MATERIAL ADVERSE CHANGE IN BUSINESS. Since the
respective dates as of which information is given in the
Registration Statement and the Prospectus, except as otherwise
stated therein, (A) there has been no material adverse change in the
condition, financial or otherwise, or in the earnings, business
affairs or business prospects of the Company and its subsidiaries
considered as one enterprise, whether or not arising in the ordinary
course of business (a "Material Adverse Effect"), (B) there have
been no transactions entered into by the Company or any of its
subsidiaries, other than those in the ordinary course of business,
which are material with respect to the Company and its subsidiaries
considered as one enterprise, and (C) there has been no dividend or
distribution of any kind declared, paid or made by the Company on
any class of its capital stock.
(v) GOOD STANDING OF THE COMPANY. The Company has been
duly organized and is validly existing as a corporation in good
standing under the laws of the state of Delaware and has corporate
power and authority to own, lease and operate its properties and to
conduct its business as described in the Prospectus and to enter
into and perform its obligations under this Agreement; and the
Company is duly qualified as a foreign corporation to transact
business and is in good standing in each other jurisdiction in which
such qualification is required, whether by reason of the ownership
or leasing of property or the conduct of business, except where the
failure so to qualify or to be in good standing would not result in
a Material Adverse Effect.
4.
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(vi) GOOD STANDING OF SUBSIDIARIES. R*STAR (the
"Subsidiary") has been duly organized and is validly existing as a
corporation in good standing under the laws of the jurisdiction of
its incorporation, has corporate power and authority to own, lease
and operate its properties and to conduct its business as described
in the Prospectus and is duly qualified as a foreign corporation to
transact business and is in good standing in each jurisdiction in
which such qualification is required, whether by reason of the
ownership or leasing of property or the conduct of business, except
where the failure so to qualify or to be in good standing would not
result in a Material Adverse Effect; except as otherwise disclosed
in the Registration Statement, all of the issued and outstanding
capital stock of each such Subsidiary has been duly authorized and
validly issued, is fully paid and non-assessable and is owned by the
Company, directly or through subsidiaries, free and clear of any
security interest, mortgage, pledge, lien, encumbrance, claim or
equity; none of the outstanding shares of capital stock of any
Subsidiary was issued in violation of the preemptive or similar
rights of any securityholder of such Subsidiary. The only
subsidiaries of the Company are the subsidiaries listed on Exhibit
21 to the Registration Statement.
(vii) CAPITALIZATION. The authorized, issued and
outstanding capital stock of the Company is as set forth in the
Prospectus in the column entitled "Actual" under the caption
"Capitalization" (except for subsequent issuances, if any, pursuant
to this Agreement, pursuant to reservations, agreements or employee
benefit plans referred to in the Prospectus or pursuant to the
exercise of convertible securities or options referred to in the
Prospectus). The shares of issued and outstanding capital stock of
the Company have been duly authorized and validly issued and are
fully paid and non-assessable; and none of the outstanding shares of
capital stock of the Company was issued in violation of the
preemptive or other similar rights of any securityholder of the
Company.
(viii) AUTHORIZATION OF AGREEMENT. This Agreement has
been duly authorized, executed and delivered by the Company.
(ix) AUTHORIZATION AND DESCRIPTION OF SECURITIES. The
Securities have been duly authorized for issuance and sale to the
Underwriters pursuant to this Agreement and, when issued and
delivered by the Company pursuant to this Agreement against payment
of the consideration set forth herein, will be validly issued and
fully paid and non-assessable; the Common Stock conforms to all
statements relating thereto contained in the Prospectus and such
description conforms to the rights set forth in the instruments
defining the same; no holder of the Securities will be subject to
personal liability by reason of being such a holder; and the
issuance of the Securities is not subject to the preemptive or other
similar rights of any securityholder of the Company.
(x) ABSENCE OF DEFAULTS AND CONFLICTS. Neither the
Company nor any of its subsidiaries is in violation of its charter
or by-laws or in default in the performance or observance of any
obligation, agreement, covenant or condition contained in any
contract, indenture, mortgage, deed of trust, loan or credit
agreement, note, lease or other agreement or instrument to which the
Company or any of its subsidiaries is a party or by which it or any
of them may be bound, or to which any of the property or assets of
the Company or any subsidiary is subject (collectively, "Agreements
and Instruments")
5.
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except for such defaults that would not result in a Material Adverse
Effect; and the execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated herein and in
the Registration Statement (including the issuance and sale of the
Securities and the use of the proceeds from the sale of the Securities
as described in the Prospectus under the caption "Use of Proceeds")
and compliance by the Company with its obligations hereunder have been
duly authorized by all necessary corporate action and do not and will
not, whether with or without the giving of notice or passage of time
or both, conflict with or constitute a breach of, or default or
Repayment Event (as defined below) under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or
assets of the Company or any subsidiary pursuant to, the Agreements and
Instruments (except for such conflicts, breaches or defaults or liens,
charges or encumbrances that would not result in a Material Adverse
Effect), nor will such action result in any violation of the provisions
of the charter or by-laws of the Company or any subsidiary or any
applicable law, statute, rule, regulation, judgment, order, writ or
decree of any government, government instrumentality or court, domestic
or foreign, having jurisdiction over the Company or any subsidiary or
any of their assets, properties or operations. As used herein, a
"Repayment Event" means any event or condition which gives the holder
of any note, debenture or other evidence of indebtedness (or any
person acting on such holder's behalf) the right to require the
repurchase, redemption or repayment of all or a portion of such
indebtedness by the Company or any subsidiary.
(xi) ABSENCE OF LABOR DISPUTE. No labor dispute with
the employees of the Company or any subsidiary exists or, to the
knowledge of the Company,is imminent, and the Company is not aware
of any existing or imminent labor disturbance by the employees of
any of its or any subsidiary's principal suppliers, manufacturers,
customers or contractors, which, in either case, may reasonably be
expected to result in a Material Adverse Effect.
(xii) ABSENCE OF PROCEEDINGS. There is no action, suit,
proceeding, inquiry or investigation before or brought by any court
or governmental agency or body, domestic or foreign, now pending,
or, to the knowledge of the Company, threatened, against or
affecting the Company or any subsidiary, which is required to be
disclosed in the Registration Statement (other than as disclosed
therein), or which might reasonably be expected to result in a
Material Adverse Effect, or which might reasonably be expected to
materially and adversely affect the properties or assets thereof or
the consummation of the transactions contemplated in this Agreement
or the performance by the Company of its obligations hereunder; the
aggregate of all pending legal or governmental proceedings to which
the Company or any subsidiary is a party or of which any of their
respective property or assets is the subject which are not described
in the Registration Statement, including ordinary routine litigation
incidental to the business, could not reasonably be expected to
result in a Material Adverse Effect.
(xiii) ACCURACY OF EXHIBITS. There are no contracts or
documents which are required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits thereto which
have not been so described and filed as required.
6.
<PAGE>
(xiv) POSSESSION OF INTELLECTUAL PROPERTY. The Company
and its subsidiaries own or possess, or can acquire on reasonable
terms, adequate patents, patent rights, licenses, inventions,
copyrights, know-how (including trade secrets and other unpatented
and/or unpatentable proprietary or confidential information, systems
or procedures), trademarks, service marks, trade names or other
intellectual property (collectively, "Intellectual Property")
necessary to carry on the business now operated by them, and neither
the Company nor any of its subsidiaries has received any notice or
is otherwise aware of any infringement of or conflict with asserted
rights of others with respect to any Intellectual Property or of any
facts or circumstances which would render any Intellectual Property
invalid or inadequate to protect the interest of the Company or any
of its subsidiaries therein, and which infringement or conflict (if
the subject of any unfavorable decision, ruling or finding) or
invalidity or inadequacy, singly or in the aggregate, would result
in a Material Adverse Effect.
(xv) ABSENCE OF FURTHER REQUIREMENTS. No filing with,
or authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or
agency is necessary or required for the performance by the Company
of its obligations hereunder, in connection with the offering,
issuance or sale of the Securities hereunder or the consummation of
the transactions contemplated by this Agreement, except (i) such as
have been already obtained or as may be required under the 1933 Act
or the 1933 Act Regulations or state securities laws, (ii) such as
have been obtained under the laws and regulations of jurisdictions
outside the United States in which the Reserved Securities are
offered and (iii) such as may be required by the rules and
regulations of the NASD.
(xvi) POSSESSION OF LICENSES AND PERMITS. The Company
and its subsidiaries possess such permits, licenses, approvals,
consents and other authorizations (collectively, "Governmental
Licenses") issued by the appropriate federal, state, local or
foreign regulatory agencies or bodies necessary to conduct the
business now operated by them; the Company and its subsidiaries are
in compliance with the terms and conditions of all such Governmental
Licenses, except where the failure so to comply would not, singly or
in the aggregate, have a Material Adverse Effect; all of the
Governmental Licenses are valid and in full force and effect, except
when the invalidity of such Governmental Licenses or the failure of
such Governmental Licenses to be in full force and effect would not
have a Material Adverse Effect; and neither the Company nor any of
its subsidiaries has received any notice of proceedings relating to
the revocation or modification of any such Governmental Licenses
which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would result in a Material Adverse
Effect.
(xvii) TITLE TO PROPERTY. The Company and its
subsidiaries have good and marketable title to all real property
owned by the Company and its subsidiaries and good title to all
other properties owned by them, in each case, free and clear of all
mortgages, pledges, liens, security interests, claims, restrictions
or encumbrances of any kind except such as (a) are described in the
Prospectus or (b) do not, singly or in the aggregate, materially
affect the value of such property and do not interfere with the use
made and proposed to be made of such property by the Company or any
of its subsidiaries; and all of the leases and subleases material to
the business of the Company and its subsidiaries,
7.
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considered as one enterprise, and under which the Company or any of its
subsidiaries holds properties described in the Prospectus, are in full
force and effect, and neither the Company nor any subsidiary has any
notice of any material claim of any sort that has been asserted by
anyone adverse to the rights of the Company or any subsidiary under any
of the leases or subleases mentioned above, or affecting or questioning
the rights of the Company or such subsidiary to the continued
possession of the leased or subleased premises under any such lease or
sublease.
(xviii) COMPLIANCE WITH CUBA ACT. The Company has complied
with, and is and will be in compliance with, the provisions of that
certain Florida act relating to disclosure of doing business with
Cuba, codified as Section 517.075 of the Florida statutes, and the
rules and regulations thereunder (collectively, the "Cuba Act") or
is exempt therefrom.
(xix) INVESTMENT COMPANY ACT. The Company is not, and
upon the issuance and sale of the Securities as herein contemplated
and the application of the net proceeds therefrom as described in
the Prospectus will not be, an "investment company" or an entity
"controlled" by an "investment company" as such terms are defined in
the Investment Company Act of 1940, as amended (the "1940 Act").
(xx) ENVIRONMENTAL LAWS. Except as described in the
Registration Statement and except as would not, singly or in the
aggregate, result in a Material Adverse Effect, (A) neither the
Company nor any of its subsidiaries is in violation of any federal,
state, local or foreign statute, law, rule, regulation, ordinance,
code, policy or rule of common law or any judicial or administrative
interpretation thereof, including any judicial or administrative
order, consent, decree or judgment, relating to pollution or
protection of human health, the environment (including, without
limitation, ambient air, surface water, groundwater, land surface or
subsurface strata) or wildlife, including, without limitation, laws
and regulations relating to the release or threatened release of
chemicals, pollutants, contaminants, wastes, toxic substances,
hazardous substances, petroleum or petroleum products (collectively,
"Hazardous Materials") or to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or
handling of Hazardous Materials (collectively, "Environmental
Laws"), (B) the Company and its subsidiaries have all permits,
authorizations and approvals required under any applicable
Environmental Laws and are each in compliance with their
requirements, (C) there are no pending or threatened administrative,
regulatory or judicial actions, suits, demands, demand letters,
claims, liens, notices of noncompliance or violation, investigation
or proceedings relating to any Environmental Law against the Company
or any of its subsidiaries and (D) there are no events or
circumstances that might reasonably be expected to form the basis of
an order for clean-up or remediation, or an action, suit or
proceeding by any private party or governmental body or agency,
against or affecting the Company or any of its subsidiaries relating
to Hazardous Materials or any Environmental Laws.
(xxi) REGISTRATION RIGHTS. There are no persons with
registration rights or other similar rights to have any securities
registered pursuant to the Registration Statement or otherwise
registered by the Company under the 1933 Act that have not been
waived.
8.
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(xxii) YEAR 2000 COMPLIANCE. There are no issues related
to the Company's, or subsidiaries', preparedness for the Year 2000
that (i) are of a character required to be described or referred to
in the Registration Statement or by the Securities Act which have
not been accurately described in the Registration Statement or
Prospectus or (ii) except as disclosed in the Prospectus or the
Registration Statement, might reasonably be expected to result in a
Material Adverse Effect. Except as disclosed in the Prospectus or
the Registration Statement, all internal computer systems and, to
the best of the Company's knowledge, each Constituent Component (as
defined below) of those systems and all computer-related products
and each Constituent Component (as defined below) of those products
of the Company and its subsidiary fully comply with Year 2000
Qualification Requirements. "Year 2000 Qualifications Requirements"
means that the internal computer systems and each Constituent
Component (as defined below) of those systems and all
computer-related products and each Constituent Component (as defined
below) of those products of the Company and its subsidiaries (i)
have been reviewed to confirm that they store, process (including
sorting and performing mathematical operations, calculations and
computations), input and output data containing date and information
correctly regardless of whether the date contains dates and times
before, on or after January 1, 2000, (ii) have been designated to
ensure date and time entry recognition and calculations, and date
data interface values that reflect the century, (iii) accurately
manage and manipulate data involving dates and times, including
single century formulas and multi-century formulas, and will not
cause an abnormal ending scenario within the application or generate
incorrect values or invalid results involving such dates, (iv)
accurately process any date rollover, and (v) accept and respond to
two-digit year date input in a manner that resolves any ambiguities
as to the century. "Constituent Component" means all software
(including operating systems, programs, packages and utilities),
firmware, hardware, networking components, and peripherals provided
as part of the configuration. Except as disclosed in the Prospectus
and the Registration Statement, the Company has inquired of material
vendors as to their preparedness for the Year 2000. The Company has
disclosed in the Registration Statement or Prospectus to the extent
required by the Securities Act, any issues regarding or associated
with any Year 2000 Qualification Requirements that might reasonably
be expected to result in a Material Adverse Effect.
(xxiii) ABSENCE OF IMPROPER ACTIVITIES. Neither the
Company nor its subsidiaries has any knowledge that any of the
activities or types of conduct enumerated below have been or may
have been engaged in, either directly or indirectly, at any time
since the founding of the Company: (a) are bribes or kickbacks to
government officials or their relatives, or any other payments to
such persons, whether or not legal, to obtain or retain business or
to receive favorable treatment with regard to business; (b) any
bribes or kickbacks to persons other than government officials, or
to relatives of such persons, or any other payments to such persons
or their relatives, whether or not legal, to obtain or retain
business or to receive favorable treatment with regard to business;
(c) any contributions, whether or not legal, made to any political
party, political candidate or holder of governmental office; (d) any
bank accounts, funds or pools of funds created or maintained without
being reflected on the corporate books of account, or as to which
the receipts and disbursements therefrom have not been reflected on
such books; (e) any receipts or disbursements, the actual nature of
which has been "disguised" or
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intentionally misrecorded on the corporate books of account of the
Company or its subsidiary; (f) any fees paid to consultants or
commercial agents that exceeded the reasonable value of the services
purported to have been rendered; or (g) any payments or reimbursements
made to personnel of the Company or its subsidiary for the purposes of
enabling them to expend time or to make contributions or payments of
the kind or for the purpose referred to in subparts (a)-(f) above.
(xxiv) LOCK-UP AGREEMENTS. Each officer and director of
the company and each beneficial owner of one or more percent of the
outstanding issued share capital of the Company has agreed to sign
an agreement substantially in the form attached hereto as EXHIBIT B
(the "Lock-up Agreements"). The Company has provided to counsel for
the Underwriters true, accurate and complete copies of all of the
Lock-up Agreements presently in effect or effected hereby. The
Company hereby represents and warrants that it will not release any
of its officers, directors or other stockholders from any Lock-up
Agreements currently existing or hereafter effected without the
prior written consent of Merrill Lynch.
(b) OFFICER'S CERTIFICATES. Any certificate signed by any officer of
the Company or any of its subsidiaries delivered to the Representative(s) or
to counsel for the Underwriters shall be deemed a representation and warranty
by the Company to each Underwriter as to the matters covered thereby.
SECTION 2. SALE AND DELIVERY TO UNDERWRITERS; CLOSING.
(a) INITIAL SECURITIES. On the basis of the representations and
warranties herein contained and subject to the terms and conditions herein
set forth, the Company agrees to sell to each Underwriter, severally and not
jointly, and each Underwriter, severally and not jointly, agrees to purchase
from the Company, at the price per share set forth in Schedule B, the number
of Initial Securities set forth in Schedule A opposite the name of such
Underwriter, plus any additional number of Initial Securities which such
Underwriter may become obligated to purchase pursuant to the provisions of
Section 10 hereof.
(b) OPTION SECURITIES. In addition, on the basis of the representations
and warranties herein contained and subject to the terms and conditions herein
set forth, the Company hereby grants an option to the Underwriters, severally
and not jointly, to purchase up to an additional [__] shares of Common Stock at
the price per share set forth in Schedule B, less an amount per share equal to
any dividends or distributions declared by the Company and payable on the
Initial Securities but not payable on the Option Securities. The option hereby
granted will expire 30 days after the date hereof and may be exercised in whole
or in part from time to time only for the purpose of covering over-allotments
which may be made in connection with the offering and distribution of the
Initial Securities upon notice by the Representative(s) to the Company setting
forth the number of Option Securities as to which the several Underwriters are
then exercising the option and the time and date of payment and delivery for
such Option Securities. Any such time and date of delivery (a "Date of
Delivery") shall be determined by the Representative(s), but shall not be later
than seven full business days after the exercise of said option, nor in any
event prior to the Closing Time, as hereinafter defined. If the option is
exercised as to all or any portion of the Option Securities, each of the
Underwriters, acting severally and not jointly, will
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purchase that proportion of the total number of Option Securities then being
purchased which the number of Initial Securities set forth in Schedule A
opposite the name of such Underwriter bears to the total number of Initial
Securities, subject in each case to such adjustments as the Representative(s)
in their discretion shall make to eliminate any sales or purchases of
fractional shares.
(c) PAYMENT. Payment of the purchase price for, and delivery of certificates
for, the Initial Securities shall be made at the offices of Wilson Sonsini
Goodrich & Rosati, or at such other place as shall be agreed upon by the
Representative(s) and the Company, at 7:00 A.M. (California time) on the third
(fourth, if the pricing occurs after 4:30 P.M. (Eastern time) on any given day)
business day after the date hereof (unless postponed in accordance with the
provisions of Section 10), or such other time not later than ten business days
after such date as shall be agreed upon by the Representative(s) and the Company
(such time and date of payment and delivery being herein called "Closing Time").
In addition, in the event that any or all of the Option Securities are
purchased by the Underwriters, payment of the purchase price for, and
delivery of certificates for, such Option Securities shall be made at the
above-mentioned offices, or at such other place as shall be agreed upon by
the Representative(s) and the Company, on each Date of Delivery as specified
in the notice from the Representative(s) to the Company.
Payment shall be made to the Company by wire transfer of immediately
available funds to a bank account designated by the Company, against delivery
to the Representative(s) for the respective accounts of the Underwriters of
certificates for the Securities to be purchased by them. It is understood
that each Underwriter has authorized the Representative(s), for its account,
to accept delivery of, receipt for, and make payment of the purchase price
for, the Initial Securities and the Option Securities, if any, which it has
agreed to purchase. Merrill Lynch, individually and not as representative of
the Underwriters, may (but shall not be obligated to) make payment of the
purchase price for the Initial Securities or the Option Securities, if any,
to be purchased by any Underwriter whose funds have not been received by the
Closing Time or the relevant Date of Delivery, as the case may be, but such
payment shall not relieve such Underwriter from its obligations hereunder.
(d) DENOMINATIONS; REGISTRATION. Certificates for the Initial Securities
and the Option Securities, if any, shall be in such denominations and
registered in such names as the Representative(s) may request in writing at
least one full business day before the Closing Time or the relevant Date of
Delivery, as the case may be. The certificates for the Initial Securities and
the Option Securities, if any, will be made available for examination and
packaging by the Representative(s) in The City of New York not later than
10:00 A.M. (Eastern time) on the business day prior to the Closing Time or
the relevant Date of Delivery, as the case may be.
SECTION 3. COVENANTS OF THE COMPANY. The Company covenants with each
Underwriter as follows:
(a) COMPLIANCE WITH SECURITIES REGULATIONS AND COMMISSION REQUESTS. The
Company, subject to Section 3(b), will comply with the requirements of Rule
430A or Rule 434, as applicable, and will notify the Representative(s)
immediately, and confirm the notice in
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writing, (i) when any post-effective amendment to the Registration Statement
shall become effective, or any supplement to the Prospectus or any amended
Prospectus shall have been filed, (ii) of the receipt of any comments from
the Commission, (iii) of any request by the Commission for any amendment to
the Registration Statement or any amendment or supplement to the Prospectus
or for additional information, and (iv) of the issuance by the Commission of
any stop order suspending the effectiveness of the Registration Statement or
of any order preventing or suspending the use of any preliminary prospectus,
or of the suspension of the qualification of the Securities for offering or
sale in any jurisdiction, or of the initiation or threatening of any
proceedings for any of such purposes. The Company will promptly effect the
filings necessary pursuant to Rule 424(b) and will take such steps as it
deems necessary to ascertain promptly whether the form of prospectus
transmitted for filing under Rule 424(b) was received for filing by the
Commission and, in the event that it was not, it will promptly file such
prospectus. The Company will make every reasonable effort to prevent the
issuance of any stop order and, if any stop order is issued, to obtain the
lifting thereof at the earliest possible moment.
(b) FILING OF AMENDMENTS. The Company will give the Representative(s)
notice of its intention to file or prepare any amendment to the Registration
Statement (including any filing under Rule 462(b)), any Term Sheet or any
amendment, supplement or revision to either the prospectus included in the
Registration Statement at the time it became effective or to the Prospectus
will furnish the Representative(s) with copies of any such documents a
reasonable amount of time prior to such proposed filing or use, as the case
may be, and will not file or use any such document to which the
Representative(s) or counsel for the Underwriters shall object.
(c) DELIVERY OF REGISTRATION STATEMENTS. The Company has furnished or
will deliver to the Representative(s) and counsel for the Underwriters,
without charge, signed copies of the Registration Statement as originally
filed and of each amendment thereto (including exhibits filed therewith or
incorporated by reference therein) and signed copies of all consents and
certificates of experts, and will also deliver to the Representative(s),
without charge, a conformed copy of the Registration Statement as originally
filed and of each amendment thereto (without exhibits) for each of the
Underwriters. The copies of the Registration Statement and each amendment
thereto furnished to the Underwriters will be identical to the electronically
transmitted copies thereof filed with the Commission pursuant to EDGAR,
except to the extent permitted by Regulation S-T.
(d) DELIVERY OF PROSPECTUSES. The Company has delivered to each
Underwriter, without charge, as many copies of each preliminary prospectus as
such Underwriter reasonably requested, and the Company hereby consents to the
use of such copies for purposes permitted by the 1933 Act. The Company will
furnish to each Underwriter, without charge, during the period when the
Prospectus is required to be delivered under the 1933 Act or the Securities
Exchange Act of 1934 (the "1934 Act"), such number of copies of the
Prospectus (as amended or supplemented) as such Underwriter may reasonably
request. The Prospectus and any amendments or supplements thereto furnished
to the Underwriters will be identical to the electronically transmitted
copies thereof filed with the Commission pursuant to EDGAR, except to the
extent permitted by Regulation S-T.
(e) CONTINUED COMPLIANCE WITH SECURITIES LAWS. The Company will comply
with the 1933 Act and the 1933 Act Regulations so as to permit the completion
of the distribution of the
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Securities as contemplated in this Agreement and in the Prospectus. If at any
time when a prospectus is required by the 1933 Act to be delivered in
connection with sales of the Securities, any event shall occur or condition
shall exist as a result of which it is necessary, in the opinion of counsel
for the Underwriters or for the Company, to amend the Registration Statement
or amend or supplement the Prospectus in order that the Prospectus will not
include any untrue statements of a material fact or omit to state a material
fact necessary in order to make the statements therein not misleading in the
light of the circumstances existing at the time it is delivered to a
purchaser, or if it shall be necessary, in the opinion of such counsel, at
any such time to amend the Registration Statement or amend or supplement the
Prospectus in order to comply with the requirements of the 1933 Act or the
1933 Act Regulations, the Company will promptly prepare and file with the
Commission, subject to Section 3(b), such amendment or supplement as may be
necessary to correct such statement or omission or to make the Registration
Statement or the Prospectus comply with such requirements, and the Company
will furnish to the Underwriters such number of copies of such amendment or
supplement as the Underwriters may reasonably request.
(f) BLUE SKY QUALIFICATIONS. The Company will use its best efforts, in
cooperation with the Underwriters, to qualify the Securities for offering and
sale under the applicable securities laws of such states and other
jurisdictions (domestic or foreign) as the Representative(s) may designate
and to maintain such qualifications in effect for a period of not less than
one year from the later of the effective date of the Registration Statement
and any Rule 462(b) Registration Statement; provided, however, that the
Company shall not be obligated to file any general consent to service of
process or to qualify as a foreign corporation or as a dealer in securities
in any jurisdiction in which it is not so qualified or to subject itself to
taxation in respect of doing business in any jurisdiction in which it is not
otherwise so subject. In each jurisdiction in which the Securities have been
so qualified, the Company will file such statements and reports as may be
required by the laws of such jurisdiction to continue such qualification in
effect for a period of not less than one year from the effective date of the
Registration Statement and any Rule 462(b) Registration Statement.
(g) RULE 158. The Company will timely file such reports pursuant to the
1934 Act as are necessary in order to make generally available to its
securityholders as soon as practicable an earnings statement for the purposes
of, and to provide the benefits contemplated by, the last paragraph of
Section 11(a) of the 1933 Act.
(h) USE OF PROCEEDS. The Company will use the net proceeds received by
it from the sale of the Securities in the manner specified in the Prospectus
under "Use of Proceeds", subject to the qualifications set forth therein.
(i) LISTING. The Company will use its best efforts to effect and
maintain the quotation of the Securities on the Nasdaq National Market and
will file with the Nasdaq National Market all documents and notices required
by the Nasdaq National Market of companies that have securities that are
traded in the over-the-counter market and quotations for which are reported
by the Nasdaq National Market.
(j) RESTRICTION ON SALE OF SECURITIES. During a period of 180 days from
the date of the Prospectus, the Company will not, without the prior written
consent of Merrill Lynch, (i) directly
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or indirectly, offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase or otherwise transfer or dispose of any
share of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or file any registration statement under the
1933 Act with respect to any of the foregoing or (ii) enter into any swap or
any other agreement or any transaction that transfers, in whole or in part,
directly or indirectly, the economic consequence of ownership of the Common
Stock, whether any such swap or transaction described in clause (i) or (ii)
above is to be settled by delivery of Common Stock or such other securities,
in cash or otherwise. The foregoing sentence shall not apply to (A) the
Securities to be sold hereunder or (B) options to purchase Common Stock
granted pursuant to existing employee benefit plans of the Company referred
to in the Prospectus (C) any shares of Common Stock issued pursuant to any
non-employee director stock plan or dividend reinvestment plan or (D) any
shares of Common Stock or warrants or options to purchase Common Stock issued
or granted in connection with one or more strategic alliances or equipment
lease transactions that are consistent with the Company's strategy and
approved by its Board of Directors.
(k) REPORTING REQUIREMENTS. The Company, during the period when the
Prospectus is required to be delivered under the 1933 Act or the 1934 Act,
will file all documents required to be filed with the Commission pursuant to
the 1934 Act within the time periods required by the 1934 Act and the rules
and regulations of the Commission thereunder.
(l) COMPLIANCE WITH NASD RULES. The Company hereby agrees that it will
ensure that the Reserved Securities will be restricted as required by the
National Association of Securities Dealers, Inc. (the "NASD") or the NASD
rules from sale, transfer, assignment, pledge or hypothecation for a period
of three months following the date of this Agreement. The Underwriters will
notify the Company as to which persons will need to be so restricted. At the
request of the Underwriters, the Company will direct the transfer agent to
place a stop transfer restriction upon such securities for such period of
time. Should the Company release, or seek to release, from such restrictions
any of the Reserved Securities, the Company agrees to reimburse the
Underwriters for any reasonable expenses (including, without limitation,
legal expenses) they incur in connection with such release.
SECTION 4. PAYMENT OF EXPENSES.
(a) EXPENSES. The Company will pay all expenses incident to the
performance of its obligations under this Agreement, including (i) the
preparation, printing and filing of the Registration Statement (including
financial statements and exhibits) as originally filed and of each amendment
thereto, (ii) the preparation, printing and delivery to the Underwriters of
this Agreement, any Agreement among Underwriters and such other documents as
may be required in connection with the offering, purchase, sale, issuance or
delivery of the Securities, (iii) the preparation, issuance and delivery of
the certificates for the Securities to the Underwriters, including any stock
or other transfer taxes and any stamp or other duties payable upon the sale,
issuance or delivery of the Securities to the Underwriters, (iv) the fees and
disbursements of the Company's counsel, accountants and other advisors, (v)
the qualification of the Securities under securities laws in accordance with
the provisions of Section 3(f) hereof, including filing fees and the
reasonable fees and disbursements of counsel for the Underwriters in
connection therewith and in connection with the preparation of the Blue Sky
Survey and any supplement thereto,
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(vi) the printing and delivery to the Underwriters of copies of each
preliminary prospectus, any Term Sheets and of the Prospectus and any
amendments or supplements thereto, (vii) the preparation, printing and
delivery to the Underwriters of copies of the Blue Sky Survey and any
supplement thereto, (viii) the fees and expenses of any transfer agent or
registrar for the Securities, (ix) the filing fees incident to, and the
reasonable fees and disbursements of counsel to the Underwriters in
connection with, the review by the National Association of Securities
Dealers, Inc. (the "NASD") of the terms of the sale of the Securities (x) the
fees and expenses incurred in connection with the inclusion of the Securities
in the Nasdaq National Market and (xi) all reasonable costs and expenses of
the Underwriters, including the fees and disbursements of counsel for the
Underwriters, in connection with matters related to the Reserved Securities
which are designated by the Company for sale to employees and others having a
business relationship with the Company.
(b) TERMINATION OF AGREEMENT. If this Agreement is terminated by the
Representative(s) in accordance with the provisions of Section 5 or Section
9(a)(i) hereof, the Company shall reimburse the Underwriters for all of their
reasonable out-of-pocket expenses, including the reasonable fees and
disbursements of counsel for the Underwriters.
SECTION 5. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of
the several Underwriters hereunder are subject to the accuracy of the
representations and warranties of the Company contained in Section 1 hereof
or in certificates of any officer of the Company or any subsidiary of the
Company delivered pursuant to the provisions hereof, to the performance by
the Company of its covenants and other obligations hereunder, and to the
following further conditions:
(a) EFFECTIVENESS OF REGISTRATION STATEMENT. The Registration Statement,
including any Rule 462(b) Registration Statement, has become effective and at
Closing Time no stop order suspending the effectiveness of the Registration
Statement shall have been issued under the 1933 Act or proceedings therefor
initiated or threatened by the Commission, and any request on the part of the
Commission for additional information shall have been complied with to the
reasonable satisfaction of counsel to the Underwriters. A prospectus
containing the Rule 430A Information shall have been filed with the
Commission in accordance with Rule 424(b) (or a post-effective amendment
providing such information shall have been filed and declared effective in
accordance with the requirements of Rule 430A) or, if the Company has elected
to rely upon Rule 434, a Term Sheet shall have been filed with the Commission
in accordance with Rule 424(b).
(b) OPINION OF COUNSEL FOR COMPANY. At Closing Time, the
Representative(s) shall have received the favorable opinion, dated as of
Closing Time, of Wilson Sonsini Goodrich & Rosati, Professional Corporation,
counsel for the Company, in form and substance satisfactory to counsel for
the Underwriters, together with signed or reproduced copies of such letter
for each of the other Underwriters to the effect set forth in Exhibit A
hereto and to such further effect as counsel to the Underwriters may
reasonably request. In giving such opinion such counsel may rely, as to all
matters governed by the laws of jurisdictions other than the law of the State
of California, the federal law of the United States and the General
Corporation Law of the State of Delaware, upon the opinions of counsel
satisfactory to the Representatives. Such counsel may also stated that,
insofar as such opinion involves factual matters, they have relied, to the
extent
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they deem proper, upon certificates of officers of the Company and its
subsidiaries and certificates of public officials.
(c) OPINION OF COUNSEL FOR UNDERWRITERS. At Closing Time, the
Representative(s) shall have received the favorable opinion, dated as of
Closing Time, of Brobeck Phleger & Harrison LLP, counsel for the
Underwriters, together with signed or reproduced copies of such letter for
each of the other Underwriters with respect to the matters set forth in
clauses (i), (ii), (v), (vi) (solely as to preemptive or other similar rights
arising by operation of law or under the charter or by-laws of the Company),
(viii) through (x), inclusive, (xii), (xiv) (solely as to the information in
the Prospectus under "Description of Capital Stock--Common Stock") and the
penultimate paragraph of Exhibit A hereto. In giving such opinion such
counsel may rely, as to all matters governed by the laws of jurisdictions
other than the law of the State of New York and the federal law of the United
States and the General Corporation Law of the State of Delaware, upon the
opinions of counsel satisfactory to the Representative(s). Such counsel may
also state that, insofar as such opinion involves factual matters, they have
relied, to the extent they deem proper, upon certificates of officers of the
Company and its subsidiaries and certificates of public officials.
(d) OPINION OF COUNSEL FOR COMPANY. At Closing Time, the
Representative(s) shall have received the favorable opinion, dated as of
Closing Time, of ____________________, special counsel for the Company, in
form and substance satisfactory to counsel for the Underwriters, together
with signed or reproduced copies of such letter for each of the other
Underwriters to the effect set forth in Exhibit B hereto and to such further
effect as counsel to the Underwriters may reasonably request.
(e) OFFICERS' CERTIFICATE. At Closing Time, there shall not have been,
since the date hereof or since the respective dates as of which information
is given in the Prospectus, any material adverse change in the condition,
financial or otherwise, or in the earnings, business affairs or business
prospects of the Company and its subsidiaries considered as one enterprise,
whether or not arising in the ordinary course of business, and the
Representative(s) shall have received a certificate of the President or a
Vice President of the Company and of the chief financial or chief accounting
officer of the Company, dated as of Closing Time, to the effect that (i)
there has been no such material adverse change, (ii) the representations and
warranties in Section 1 hereof are true and correct with the same force and
effect as though expressly made at and as of Closing Time, (iii) the Company
has complied with all agreements and satisfied all conditions on its part to
be performed or satisfied at or prior to Closing Time, and (iv) no stop order
suspending the effectiveness of the Registration Statement has been issued
and no proceedings for that purpose have been instituted or are pending or
are contemplated by the Commission.
(f) ACCOUNTANT'S COMFORT LETTER. At the time of the execution of this
Agreement, the Representative(s) shall have received from Ernst & Young LLP a
letter dated such date, in form and substance satisfactory to the
Representative(s), together with signed or reproduced copies of such letter
for each of the other Underwriters containing statements and information of
the type ordinarily included in accountants' "comfort letters" to
underwriters with respect to the financial statements and certain financial
information contained in the Registration Statement and the Prospectus.
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(g) BRING-DOWN COMFORT LETTER. At Closing Time, the Representative(s)
shall have received from Ernst & Young LLP a letter, dated as of Closing
Time, to the effect that they reaffirm the statements made in the letter
furnished pursuant to subsection (e) of this Section, except that the
specified date referred to shall be a date not more than three business days
prior to Closing Time.
(h) APPROVAL OF LISTING. At Closing Time, the Securities shall have been
approved for inclusion in the Nasdaq National Market, subject only to
official notice of issuance.
(i) NO OBJECTION. The NASD has confirmed that it has not raised any
objection with respect to the fairness and reasonableness of the underwriting
terms and arrangements.
(j) LOCK-UP AGREEMENTS. At the date of this Agreement, the
Representative(s) shall have received an agreement substantially in the form
of Exhibit B hereto signed by the persons listed on Schedule C hereto.
(k) ELECTRONIC PROSPECTUS. The Company shall cause to be prepared and
delivered, at its expense, within one business day from the effective date of
this Agreement, to the Representatives an "electronic prospectus" to be used
by the Underwriters in connection with the offering and sale of the
Securities. As used herein, the term "electronic prospectus" means a form of
prospectus, and any amendment or supplement thereto, that meets each of the
following conditions: (i) it shall be encoded in an electronic format
satisfactory to the Representatives, that may be transmitted electronically
by the Representatives to offerees and purchasers of the Securities for at
least the prospectus delivery period; (ii) it shall disclose the same
information as the prospectus filed pursuant to EDGAR, except to the extent
that graphic and image material cannot be disseminated electronically, in
which case such graphic and image material shall be replaced in the
electronic Prospectus with a fair and accurate narrative description or
tubular representation of such material, as appropriate; and (iii) it shall
be in or convertible into a paper format or an electronic format,
satisfactory to the Representatives, that will allow investors to store and
have continuously ready access to the prospectus at any future time, without
charge to investors (other than any fee charged for subscription to the
system as a whole and for one-line time). Such electronic prospectus may
consist of a Rule 434 preliminary prospectus, together with the applicable
term sheet, provided that it otherwise satisfies the format and conditions
described in the immediately preceding sentence. The Company hereby confirms
that it has included or will include in the prospectus filed pursuant to
EDGAR or otherwise with the Commission and in the Registration Statement at
the time it was declared effective an undertaking that, upon receipt of a
request by an investor or his or her representative within the prospectus
delivery period, the Company shall transmit or cause to be transmitted
promptly, without charge, a paper copy of the prospectus.
(l) CONDITIONS TO PURCHASE OF OPTION SECURITIES. In the event that the
Underwriters exercise their option provided in Section 2(b) hereof to
purchase all or any portion of the Option Securities, the representations and
warranties of the Company contained herein and the statements in any
certificates furnished by the Company or any subsidiary of the Company
hereunder shall be true and correct as of each Date of Delivery and, at the
relevant Date of Delivery, the Representative(s) shall have received:
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(i) OFFICERS' CERTIFICATE. A certificate, dated such Date of
Delivery, of the President or a Vice President of the Company and of the
chief financial or chief accounting officer of the Company confirming that
the certificate delivered at the Closing Time pursuant to Section 5(e)
hereof remains true and correct as of such Date of Delivery.
(ii) OPINION OF COUNSEL FOR COMPANY. The favorable opinion of Wilson
Sonsini Goodrich & Rosati, Professional Corporation, counsel for the
Company, together with the favorable opinion of __________, special counsel
for the Company, each in form and substance satisfactory to counsel for the
Underwriters, dated such Date of Delivery, relating to the Option
Securities to be purchased on such Date of Delivery and otherwise to the
same effect as the opinion required by Section 5(b) hereof.
(iii) OPINION OF COUNSEL FOR UNDERWRITERS. The favorable opinion of
Brobeck,Phleger & Harrison LLP, counsel for the Underwriters, dated such
Date of Delivery, relating to the Option Securities to be purchased on
such Date of Delivery and otherwise to the same effect as the
opinion required by Section 5(c) hereof.
(iv) BRING-DOWN COMFORT LETTER. A letter from Ernst & Young LLP, in
form and substance satisfactory to the Representative(s) and dated such
Date of Delivery, substantially in the same form and substance as the
letter furnished to the Representative(s) pursuant to Section 5(g) hereof,
except that the "specified date" in the letter furnished pursuant to
this paragraph shall be a date not more than five days prior to such
Date of Delivery.
(m) ADDITIONAL DOCUMENTS. At Closing Time and at each Date of Delivery,
counsel for the Underwriters shall have been furnished with such documents
and opinions as they may require for the purpose of enabling them to pass
upon the issuance and sale of the Securities as herein contemplated, or in
order to evidence the accuracy of any of the representations or warranties,
or the fulfillment of any of the conditions, herein contained; and all
proceedings taken by the Company in connection with the issuance and sale of
the Securities as herein contemplated shall be satisfactory in form and
substance to the Representative(s) and counsel for the Underwriters.
(n) TERMINATION OF AGREEMENT. If any condition specified in this Section
shall not have been fulfilled when and as required to be fulfilled, this
Agreement, or, in the case of any condition to the purchase of Option
Securities, on a Date of Delivery which is after the Closing Time, the
obligations of the several Underwriters to purchase the relevant Option
Securities, may be terminated by the Representative(s) by notice to the
Company at any time at or prior to Closing Time or such Date of Delivery,
as the case may be, and such termination shall be without liability of
any party to any other party except as provided in Section 4 and except
that Sections 1, 6, 7 and 8 shall survive any such termination and
remain in full force and effect.
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SECTION 6. INDEMNIFICATION.
(a) INDEMNIFICATION OF UNDERWRITERS. The Company agrees to indemnify and
hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of any untrue statement or
alleged untrue statement of a material fact contained in the
Registration Statement (or any amendment thereto), including the Rule
430A Information and the Rule 434 Information, if applicable, or the
omission or alleged omission therefrom of a material fact required to
be stated therein or necessary to make the statements therein not
misleading or arising out of any untrue statement or alleged untrue
statement of a material fact included in any preliminary prospectus or
the Prospectus (or any amendment or supplement thereto), or the
omission or alleged omission therefrom of a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of (A) the violation of
any applicable laws or regulations of foreign jurisdictions where
Reserved Securities have been offered and (B) any untrue statement or
alleged untrue statement of a material fact included in the supplement
or prospectus wrapper material distributed in foreign jurisdiction in
connection with the reservation and sale of the Reserved Securities to
eligible employees and persons having business relationships with the
Company or the omission or alleged omission therefrom of a material
fact necessary to make the statements therein, when considered in
conjunction with the Prospectus or preliminary prospectus, not
misleading;
(iii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate amount
paid in settlement of any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or threatened,
or of any claim whatsoever based upon any such untrue statement or
omission, or any such alleged untrue statement or omission or in
connection with any violation of the nature referred to in Section
6(a)(ii)(A) hereof; provided that (subject to Section 6(d) below) any
such settlement is effected with the written consent of the Company;
and
(iv) against any and all expense whatsoever, as incurred
(including the fees and disbursements of counsel chosen by Merrill
Lynch), reasonably incurred in investigating, preparing or defending
against any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim
whatsoever based upon any such untrue statement or omission, or any
such alleged untrue statement or omission or in connection with any
violation of the nature referred to in Section 6(a)(ii)(A) hereof, to
the extent that any such expense is not paid under (i), (ii) or (iii)
above;
PROVIDED, HOWEVER, that this indemnity agreement shall not
apply to any loss, liability, claim, damage or expense to the extent
arising out of any untrue statement or
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omission or alleged untrue statement or omission made in reliance upon
and in conformity with written information furnished to the Company by
any Underwriter through Merrill Lynch expressly for use in the
Registration Statement (or any amendment thereto), including the Rule
430A Information and the Rule 434 Information, if applicable, or any
preliminary prospectus or the Prospectus (or any amendment or
supplement thereto). [INSERT]
(b) INDEMNIFICATION OF COMPANY, DIRECTORS AND OFFICERS. Each
Underwriter severally agrees to indemnify and hold harmless the Company, its
directors, each of its officers who signed the Registration Statement, and
each person, if any, who controls the Company within the meaning of Section
15 of the 1933 Act or Section 20 of the 1934 Act against any and all loss,
liability, claim, damage and expense described in the indemnity contained in
subsection (a) of this Section, as incurred, but only with respect to untrue
statements or omissions, or alleged untrue statements or omissions, made in
the Registration Statement (or any amendment thereto), including the Rule
430A Information and the Rule 434 Information, if applicable, or any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto) in reliance upon and in conformity with written information
furnished to the Company by such Underwriter through Merrill Lynch expressly
for use in the Registration Statement (or any amendment thereto) or such
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto).
(c) ACTIONS AGAINST PARTIES; NOTIFICATION. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party
of any action commenced against it in respect of which indemnity may be
sought hereunder, but the failure to so notify an indemnifying party shall
not relieve such indemnifying party from any liability hereunder to the
extent it is not materially prejudiced as a result thereof and in any event
shall not relieve it from any liability which it may have otherwise than on
account of this indemnity agreement. In the case of parties indemnified
pursuant to Section 6(a) above, counsel to the indemnified parties shall be
selected by Merrill Lynch, and, in the case of parties indemnified pursuant
to Section 6(b) above, counsel to the indemnified parties shall be selected
by the Company. An indemnifying party may participate at its own expense in
the defense of any such action; provided, however, that counsel to the
indemnifying party shall not (except with the consent of the indemnified
party) also be counsel to the indemnified party. In no event shall the
indemnifying parties be liable for fees and expenses of more than one counsel
(in addition to any local counsel) separate from their own counsel for all
indemnified parties in connection with any one action or separate but similar
or related actions in the same jurisdiction arising out of the same general
allegations or circumstances. No indemnifying party shall, without the prior
written consent of the indemnified parties, settle or compromise or consent
to the entry of any judgment with respect to any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever in respect of which indemnification or
contribution could be sought under this Section 6 or Section 7 hereof
(whether or not the indemnified parties are actual or potential parties
thereto), unless such settlement, compromise or consent (i) includes an
unconditional release of each indemnified party from all liability arising
out of such litigation, investigation, proceeding or claim and (ii) does not
include a statement as to or an admission of fault, culpability or a failure
to act by or on behalf of any indemnified party.
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(d) SETTLEMENT WITHOUT CONSENT IF FAILURE TO REIMBURSE. If at any time
an indemnified party shall have requested an indemnifying party to reimburse
the indemnified party for fees and expenses of counsel, such indemnifying
party agrees that it shall be liable for any settlement of the nature
contemplated by Section 6(a)(1)(iii) effected without its written consent if
(i) such settlement is entered into more than 45 days after receipt by such
indemnifying party of the aforesaid request, (ii) such indemnifying party
shall have received notice of the terms of such settlement at least 30 days
prior to such settlement being entered into and (iii) such indemnifying party
shall not have reimbursed such indemnified party in accordance with such
request prior to the date of such settlement.
(e) INDEMNIFICATION FOR RESERVED SECURITIES. In connection with the
offer and sale of the Reserved Securities, the Company agrees, promptly upon
a request in writing, to indemnify and hold harmless the Underwriters from
and against any and all losses, liabilities, claims, damages and expenses
incurred by them as a result of the failure of eligible employees and persons
having business relationships with the Company to pay for and accept delivery
of Reserved Securities which, by the end of the first business day following
the date of this Agreement, were subject to a properly confirmed agreement to
purchase.
SECTION 7. CONTRIBUTION. If the indemnification provided for in Section
6 hereof is for any reason unavailable to or insufficient to hold harmless an
indemnified party in respect of any losses, liabilities, claims, damages or
expenses referred to therein, then each indemnifying party shall contribute
to the aggregate amount of such losses, liabilities, claims, damages and
expenses incurred by such indemnified party, as incurred, (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the Underwriters on the other hand from the
offering of the Securities pursuant to this Agreement or (ii) if the
allocation provided by clause (i) is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company on
the one hand and of the Underwriters on the other hand in connection with the
statements or omissions, or in connection with any violation of the nature
referred to in Section 6(a)(ii)(A) hereof.
The relative benefits received by the Company on the one hand and the
Underwriters on the other hand in connection with the offering of the Securities
pursuant to this Agreement shall be deemed to be in the same respective
proportions as the total net proceeds from the offering of the Securities
pursuant to this Agreement (before deducting expenses) received by the Company
and the total underwriting discount received by the Underwriters, in each case
as set forth on the cover of the Prospectus, or, if Rule 434 is used, the
corresponding location on the Term Sheet, bear to the aggregate initial public
offering price of the Securities as set forth on such cover.
The relative fault of the Company on the one hand and the Underwriters
on the other hand shall be determined by reference to, among other things,
whether any such untrue or alleged untrue statement of a material fact or
omission or alleged omission to state a material fact relates to information
supplied by the Company or by the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission or any violation of the nature referred to in Section
6(a)(ii)(A) hereof.
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The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 7. The aggregate
amount of losses, liabilities, claims, damages and expenses incurred by an
indemnified party and referred to above in this Section 7 shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no Underwriter shall
be required to contribute any amount in excess of the amount by which the total
price at which the Securities underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of any such untrue or
alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls an
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act shall have the same rights to contribution as such Underwriter, and
each director of the Company, each officer of the Company who signed the
Registration Statement, and each person, if any, who controls the Company within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall
have the same rights to contribution as the Company. The Underwriters'
respective obligations to contribute pursuant to this Section 7 are several in
proportion to the number of Initial Securities set forth opposite their
respective names in Schedule A hereto and not joint.
SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE
DELIVERY. All representations, warranties and agreements contained in this
Agreement or in certificates of officers of the Company or any of its
subsidiaries submitted pursuant hereto, shall remain operative and in full
force and effect, regardless of any investigation made by or on behalf of any
Underwriter or controlling person, or by or on behalf of the Company, and
shall survive delivery of the Securities to the Underwriters.
SECTION 9. TERMINATION OF AGREEMENT.
(a) TERMINATION; GENERAL. The Representative(s) may terminate this
Agreement, by notice to the Company, at any time at or prior to Closing Time
(i) if there has been, since the time of execution of this Agreement or since
the respective dates as of which information is given in the Prospectus, any
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise, whether or not arising in the
ordinary course of business, or (ii) if there has occurred any material
adverse change in the financial markets in the United States or the
international financial markets, any outbreak of hostilities or escalation
thereof or other
22.
<PAGE>
calamity or crisis or any change or development involving a prospective
change in national or international political, financial or economic
conditions, in each case the effect of which is such as to make it, in the
judgment of the Representative(s), impracticable to market the Securities or
to enforce contracts for the sale of the Securities, or (iii) if trading in
any securities of the Company has been suspended or materially limited by the
Commission or the Nasdaq National Market, or if trading generally on the
American Stock Exchange or the New York Stock Exchange or in the Nasdaq
National Market has been suspended or materially limited, or minimum or
maximum prices for trading have been fixed, or maximum ranges for prices have
been required, by any of said exchanges or by such system or by order of the
Commission, the National Association of Securities Dealers, Inc. or any other
governmental authority, or (iv) if a banking moratorium has been declared by
either Federal or New York authorities.
(b) LIABILITIES. If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any
other party except as provided in Section 4 hereof, and provided further that
Sections 1, 6, 7 and 8 shall survive such termination and remain in full
force and effect.
SECTION 10. DEFAULT BY ONE OR MORE OF THE UNDERWRITERS. If one or
more of the Underwriters shall fail at Closing Time or a Date of Delivery to
purchase the Securities which it or they are obligated to purchase under this
Agreement (the "Defaulted Securities"), the Representative(s) shall have the
right, within 24 hours thereafter, to make arrangements for one or more of
the non-defaulting Underwriters, or any other underwriters, to purchase all,
but not less than all, of the Defaulted Securities in such amounts as may be
agreed upon and upon the terms herein set forth; if, however, the
Representative(s) shall not have completed such arrangements within such
24-hour period, then:
(a) if the number of Defaulted Securities does not exceed 10%
of the number of Securities to be purchased on such date, each of the
non-defaulting Underwriters shall be obligated, severally and not
jointly, to purchase the full amount thereof in the proportions that
their respective underwriting obligations hereunder bear to the
underwriting obligations of all non-defaulting Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the
number of Securities to be purchased on such date, this Agreement or,
with respect to any Date of Delivery which occurs after the Closing
Time, the obligation of the Underwriters to purchase and of the Company
to sell the Option Securities to be purchased and sold on such Date of
Delivery shall terminate without liability on the part of any
non-defaulting Underwriter.
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of its default.
In the event of any such default which does not result in a termination
of this Agreement or, in the case of a Date of Delivery which is after the
Closing Time, which does not result in a termination of the obligation of the
Underwriters to purchase and the Company to sell the relevant Option Securities,
as the case may be, either the Representative(s) or the Company shall have the
right to postpone the Closing Time or the relevant Date of Delivery, as the case
may be,
23.
<PAGE>
for a period not exceeding seven days in order to effect any required changes
in the Registration Statement or Prospectus or in any other documents or
arrangements. As used herein, the term "Underwriter" includes any person
substituted for an Underwriter under this Section 10.
SECTION 11. NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
Underwriters shall be directed to the Representative(s) at 101 California
Street, Suite 1420, San Francisco California 94111 / 10900 Wilshire
Boulevard, Suite 900, Los Angeles, California 90024, attention of
_______________; and notices to the Company shall be directed to it at 3000
Executive Parkway, San Ramon, CA 94583, attention of Bruce Bower, General
Counsel and Vice President of Business Development.
SECTION 12. PARTIES. This Agreement shall each inure to the benefit
of and be binding upon the Underwriters and the Company and their respective
successors. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any person, firm or corporation, other than the
Underwriters and the Company and their respective successors and the
controlling persons and officers and directors referred to in Sections 6 and
7 and their heirs and legal representatives, any legal or equitable right,
remedy or claim under or in respect of this Agreement or any provision herein
contained. This Agreement and all conditions and provisions hereof are
intended to be for the sole and exclusive benefit of the Underwriters and the
Company and their respective successors, and said controlling persons and
officers and directors and their heirs and legal representatives, and for the
benefit of no other person, firm or corporation. No purchaser of Securities
from any Underwriter shall be deemed to be a successor by reason merely of
such purchase.
SECTION 13. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. EXCEPT
AS OTHERWISE SET FORTH HEREIN, SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY
TIME.
SECTION 14. EFFECT OF HEADINGS. The Article and Section headings
herein and the Table of Contents are for convenience only and shall not
affect the construction hereof.
24.
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof, whereupon
this instrument, along with all counterparts, will become a binding agreement
between the Underwriters and the Company in accordance with its terms.
Very truly yours,
ZapMe! Corporation
By
-----------------------------
Title:
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
Deutsche Bank Alex. Brown,
Thomas Weisel Partners LLC,
Wit Capital Corporation
By: MERRILL LYNCH, PIERCE, FENNER &
SMITH INCORPORATED
By
--------------------------------------------------
Authorized Signatory
For themselves and as Representative(s) of the other Underwriters named
in Schedule A hereto.
25.
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF
NAME OF UNDERWRITER INITIAL SECURITIES
------------------- ------------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith Incorporated.........................
Deutsche Bank Alex. Brown
Thomas Weisel Partners LLC
Wit Capital Corporation
...........................................................................
------------------
Total...................................................................... ___
------------------
------------------
</TABLE>
Sch A - 1
<PAGE>
SCHEDULE B
ZapMe! Corporation
9,000,000 Shares of Common Stock
(Par Value $0.01 Per Share)
1. The initial public offering price per share for the
Securities, determined as provided in said Section 2, shall be $____.
2. The purchase price per share for the Securities to be paid
by the several Underwriters shall be $____, being an amount equal to
the initial public offering price set forth above less $____ per share;
provided that the purchase price per share for any Option Securities
purchased upon the exercise of the over-allotment option described in
Section 2(b) shall be reduced by an amount per share equal to any
dividends or distributions declared by the Company and payable on the
Initial Securities but not payable on the Option Securities.
Sch B - 1
<PAGE>
[SCHEDULE C]
[List of persons and entities
subject to lock-up]
Sch C - 1
<PAGE>
Exhibit A
FORM OF OPINION OF COMPANY'S COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)
(i) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the state of Delaware.
(ii) The Company has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus and to enter into and perform its obligations under the Purchase
Agreement.
(iii) The Company is duly qualified as a foreign corporation to transact
business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing of
property or the conduct of business, except where the failure so to qualify
or to be in good standing would not result in a Material Adverse Effect.
(iv) The authorized, issued and outstanding capital stock of the
Company is as set forth in the Prospectus in the column entitled "Actual"
under the caption "Capitalization" (except for subsequent issuances, if any,
pursuant to the Purchase Agreement or pursuant to reservations, agreements or
employee benefit plans referred to in the Prospectus or pursuant to the
exercise of convertible securities or options referred to in the Prospectus);
the shares of issued and outstanding capital stock of the Company have been
duly authorized and validly issued and are fully paid and non-assessable; and
none of the outstanding shares of capital stock of the Company was issued in
violation of the preemptive or other similar rights of any securityholder of
the Company.
(v) The Securities have been duly authorized for issuance and sale to
the Underwriters pursuant to the Purchase Agreement and, when issued and
delivered by the Company pursuant to the Purchase Agreement against payment
of the consideration set forth in the Purchase Agreement, will be validly
issued and fully paid and non-assessable and no holder of the Securities is
or will be subject to personal liability by reason of being such a holder.
(vi) The issuance of the Securities is not subject to preemptive or
other similar rights of any securityholder of the Company.
(vii) Each Subsidiary has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the jurisdiction of its
incorporation, has corporate power and authority to own, lease and operate
its properties and to conduct its business as described in the Prospectus and
is duly qualified as a foreign corporation to transact business and is in
good standing in each jurisdiction in which such qualification is required,
whether by reason of the ownership or leasing of property or the conduct of
business, except where the failure so to qualify or to be in good standing
would not result in a Material Adverse Effect; except as otherwise disclosed
in the Registration Statement, all of the issued and outstanding capital
stock of each Subsidiary has been duly authorized and validly issued, is
fully paid and non-assessable and, to the best of our knowledge, is owned by
the Company, directly or through subsidiaries, free and clear of any security
interest, mortgage, pledge, lien, encumbrance, claim or equity;
A - 1
<PAGE>
none of the outstanding shares of capital stock of any Subsidiary was issued
in violation of the preemptive or similar rights of any securityholder of
such Subsidiary.
(viii) The Purchase Agreement has been duly authorized, executed and
delivered by the Company.
(ix) The Registration Statement, including any Rule 462(b)
Registration Statement, has been declared effective under the 1933 Act; any
required filing of the Prospectus pursuant to Rule 424(b) has been made in
the manner and within the time period required by Rule 424(b); and, to the
best of our knowledge, no stop order suspending the effectiveness of the
Registration Statement or any Rule 462(b) Registration Statement has been
issued under the 1933 Act and no proceedings for that purpose have been
instituted or are pending or threatened by the Commission.
(x) The Registration Statement, including any Rule 462(b)
Registration Statement, the Rule 430A Information and the Rule 434
Information, as applicable, the Prospectus and each amendment or supplement
to the Registration Statement and Prospectus as of their respective effective
or issue dates (other than the financial statements and supporting schedules
included therein or omitted therefrom, as to which we need express no
opinion) complied as to form in all material respects with the requirements
of the 1933 Act and the 1933 Act Regulations.
(xi) If Rule 434 has been relied upon, the Prospectus was not
"materially different," as such term is used in Rule 434, from the prospectus
included in the Registration Statement at the time it became effective.
(xii) The form of certificate used to evidence the Common Stock
complies in all material respects with all applicable statutory requirements,
with any applicable requirements of the charter and by-laws of the Company
and the requirements of the Nasdaq National Market.
(xiii) To the best of our knowledge, there is not pending or threatened
any action, suit, proceeding, inquiry or investigation, to which the Company
or any subsidiary is a party, or to which the property of the Company or any
subsidiary is subject, before or brought by any court or governmental agency
or body, domestic or foreign, which might reasonably be expected to result in
a Material Adverse Effect, or which might reasonably be expected to
materially and adversely affect the properties or assets thereof or the
consummation of the transactions contemplated in the Purchase Agreement or
the performance by the Company of its obligations thereunder.
(xiv) The information in the Prospectus under "Description of Capital
Stock--Common Stock", "Business--Facilities", "Business--Government
Regulations", "Business--Litigation", "Description of Capital Stock", and
"__________________" and in the Registration Statement under Item 14, to the
extent that it constitutes matters of law, summaries of legal matters, the
Company's charter and bylaws or legal proceedings, or legal conclusions, has
been reviewed by us and is correct in all material respects.
(xv) To the best of our knowledge, there are no statutes or regulations
that are required to be described in the Prospectus that are not described as
required.
A - 2
<PAGE>
(xvi) All descriptions in the Registration Statement of contracts and
other documents to which the Company or its subsidiaries are a party are
accurate in all material respects; to the best of our knowledge, there are no
franchises, contracts, indentures, mortgages, loan agreements, notes, leases
or other instruments required to be described or referred to in the
Registration Statement or to be filed as exhibits thereto other than those
described or referred to therein or filed or incorporated by reference as
exhibits thereto, and the descriptions thereof or references thereto are
correct in all material respects.
(xvii) To the best of our knowledge, neither the Company nor any
subsidiary is in violation of its charter or by-laws and no default by the
Company or any subsidiary exists in the due performance or observance of any
material obligation, agreement, covenant or condition contained in any
contract, indenture, mortgage, loan agreement, note, lease or other agreement
or instrument that is described or referred to in the Registration Statement
or the Prospectus or filed or incorporated by reference as an exhibit to the
Registration Statement.
(xviii) No filing with, or authorization, approval, consent, license,
order, registration, qualification or decree of, any court or governmental
authority or agency, domestic or foreign (other than under the 1933 Act and
the 1933 Act Regulations, which have been obtained, or as may be required
under the securities or blue sky laws of the various states, as to which we
need express no opinion) is necessary or required in connection with the due
authorization, execution and delivery of the Purchase Agreement or for the
offering, issuance or sale of the Securities.
(xix) The execution, delivery and performance of the Purchase Agreement
and the consummation of the transactions contemplated in the Purchase
Agreement and in the Registration Statement (including the issuance and sale
of the Securities and the use of the proceeds from the sale of the Securities
as described in the Prospectus under the caption "Use Of Proceeds") and
compliance by the Company with its obligations under the Purchase Agreement
do not and will not, whether with or without the giving of notice or lapse of
time or both, conflict with or constitute a breach of, or default or
Repayment Event (as defined in Section 1(a)(x) of the Purchase Agreement)
under or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company or any subsidiary
pursuant to any contract, indenture, mortgage, deed of trust, loan or credit
agreement, note, lease or any other agreement or instrument, known to us, to
which the Company or any subsidiary is a party or by which it or any of them
may be bound, or to which any of the property or assets of the Company or any
subsidiary is subject (except for such conflicts, breaches or defaults or
liens, charges or encumbrances that would not have a Material Adverse
Effect), nor will such action result in any violation of the provisions of
the charter or by-laws of the Company or any subsidiary, or any applicable
law, statute, rule, regulation, judgment, order, writ or decree, known to us,
of any government, government instrumentality or court, domestic or foreign,
having jurisdiction over the Company or any subsidiary or any of their
respective properties, assets or operations.
(xx) To the best of our knowledge, there are no persons with
registration rights or other similar rights to have any securities registered
pursuant to the Registration Statement or otherwise registered by the Company
under the 1933 Act.
(xxi) The Company is not an "investment company" or an entity
"controlled" by an "investment company," as such terms are defined in the
1940 Act.
A - 3
<PAGE>
(xxii) The Rights under the Company's Shareholder Rights Plan to which
holders of the Securities will be entitled have been duly authorized and
validly issued.
Nothing has come to our attention that would lead us to believe that the
Registration Statement or any amendment thereto, including the Rule 430A
Information and Rule 434 Information (if applicable), (except for financial
statements and schedules and other financial data included therein or omitted
therefrom, as to which we need make no statement), at the time such
Registration Statement or any such amendment became effective, contained an
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading or that the Prospectus or any amendment or supplement thereto
(except for financial statements and schedules and other financial data
included therein or omitted therefrom, as to which we need make no
statement), at the time the Prospectus was issued, at the time any such
amended or supplemented prospectus was issued or at the Closing Time,
included or includes an untrue statement of a material fact or omitted or
omits to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
In rendering such opinion, such counsel may rely as to matters of fact (but
not as to legal conclusions), to the extent they deem proper, on certificates
of responsible officers of the Company and public officials. Such opinion
shall not state that it is to be governed or qualified by, or that it is
otherwise subject to, any treatise, written policy or other document relating
to legal opinions, including, without limitation, the Legal Opinion Accord of
the ABA Section of Business Law (1991).
A - 4
<PAGE>
[FORM OF OPINION OF SPECIAL COUNSEL TO THE COMPANY
TO BE DELIVERED PURSUANT TO SECTION 5(d)]
Exhibit B
B - 1
<PAGE>
Exhibit C
August ___, 1999
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Deutsche Bank Alex. Brown
Thomas Weisel Partners LLC
Wit Capital Corporation
as Representative(s) of the several Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Re: PROPOSED PUBLIC OFFERING BY ZAPME! CORPORATION
Dear Sirs:
The undersigned, a stockholder and/or an officer and/or director] of
ZapMe! Corporation, a Delaware corporation (the "Company"), understands that
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") Deutsche Bank Alex. Brown, Thomas Weisel Partners LLC and Wit
Capital Corporation propose(s) to enter into a Purchase Agreement (the "Purchase
Agreement") with the Company providing for the public offering of shares (the
"Securities") of the Company's common stock, par value $[__] per share (the
"Common Stock"). In recognition of the benefit that such an offering will confer
upon the undersigned as a stockholder and/or an officer and/or director of the
Company, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the undersigned agrees with each
underwriter to be named in the Purchase Agreement that, during a period of 180
days from the date of the Purchase Agreement, the undersigned will not, without
the prior written consent of Merrill Lynch, directly or indirectly, (i) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant for
the sale of, or otherwise dispose of or transfer any shares of the Company's
Common Stock or any securities convertible into or exchangeable or exercisable
for Common Stock, whether now owned or hereafter acquired by the undersigned or
with respect to which the undersigned has or hereafter acquires the power of
disposition, or file any registration statement under the Securities Act of
1933, as amended, with respect to any of the foregoing or (ii) enter into any
swap or any other agreement or any transaction that transfers, in whole or in
part, directly or indirectly, the economic consequence of
C - 1
<PAGE>
ownership of the Common Stock, whether any such swap or transaction is to be
settled by delivery of Common Stock or other securities, in cash or otherwise.
Very truly yours,
Signature:
-------------------------------
Print Name:
-----------------------------
C - 2
<PAGE>
Exhibit 4.2
- --------------------------------------------------------------------------------
COMMON STOCK [ZAPME! LOGO] COMMON STOCK
NUMBER SHARES
C-
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFICATE IS TRANSFERABLE IN CUSIP 98912E 10 0
NEW YORK, N.Y. OR BOSTON, MA. SEE REVERSE FOR CERTAIN DEFINITIONS
- --------------------------------------------------------------------------------
THIS CERTIFIES THAT
is the Record Holder of
- --------------------------------------------------------------------------------
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK,
PAR VALUE $0.01 PER SHARE, OF
ZAPME! CORPORATION
transferable only on the books of the Corporation by the holder hereof in
person or by duly authorized attorney upon surrender of this Certificate
properly endorsed. This Certificate is not valid until countersigned and
registered by the Transfer Agent and Registrar.
Witness the facsimile seal of said Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
/s/ Bruce D. Bower [ZAPME! SEAL] /s/ Lance Mortensen
SECRETARY CHAIRMAN OF THE BOARD
- --------------------------------------------------------------------------------
COUNTERSIGNED AND REGISTERED
BANKBOSTON, N.A.
TRANSFER AGENT
AND REGISTRAR.
By /s/ William L. Goldberg
AUTHORIZED SIGNATURE
<PAGE>
ZAPME! CORPORATION
Keep this Certificate in a safe place. If it is lost, stolen or
destroyed, the Corporation will require a bond of indemnity as a condition to
the issuance of a replacement certificate.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C> <C> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- ________ Custodian ________
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act _______________________
in common (State)
UNIF TRF MIN ACT -- ________ Custodian (until age__)
(Cust)
________ under Uniform Transfers
(Minor)
to Minors Act _____________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _______________________ hereby sells, assigns and transfers
unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
- -------------------------------------------------------------------------------
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCUDING ZIP CODE, OF ASSIGNEE)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Shares
- ------------------------------------------------------------------------
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
Attorney
- ----------------------------------------------------------------------
to transfer the said stock on the books of the within named Corporation, with
full power of substitution in the premises.
Dated ____________________________
X ________________________________
X ________________________________
NOTICE: THE SIGNATURE(S) TO THIS
ASSIGNMENT MUST CORRESPOND WITH
THE NAME(S) AS WRITTEN UPON THE
FACE OF THE CERTIFICATE IN EVERY
PARTICULAR WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE
WHATEVER.
SIGNATURE(S) GUARANTEED:
BY ____________________________________________________________
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE>
EXHIBIT 5.1
[WILSON SONSINI GOODRICH & ROSATI, P.C. LETTERHEAD]
October 19, 1999
ZapMe! Corporation
3000 Executive Parkway, Suite 150
San Ramon, CA 94583
RE: REGISTRATION STATEMENT ON FORM S-1
Ladies and Gentlemen:
We are acting as counsel to ZapMe! Corporation, Inc., a Delaware
corporation (the "Company"), in connection with the registration of
10,804,545 shares of the Company's Common Stock, par value $0.01 per share,
including 1,350,000 shares subject to an over-allotment option (collectively,
the "Shares"), pursuant to a Registration Statement on Form S-1 (Registration
No. 333-84557), as amended (the "Registration Statement"), filed with the
Securities and Exchange Commission under the Securities Act of 1933, as
amended. The Shares are being sold by the Company.
As counsel for the Company, we have examined originals or copies,
certified or otherwise identified to our satisfaction, of such documents,
corporate records, certificates of public officials and other instruments as
we have deemed necessary for the purposes of rendering this opinion. In our
examination, we have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as originals and the conformity
with the originals of all documents submitted to us as copies.
Based upon the foregoing, we are of the opinion that the Shares to be
registered for sale by the Company have been duly authorized by the Company,
and when issued, delivered and paid for in accordance with the terms of the
underwriting agreement referred to in the Registration Statement and in
accordance with the resolutions adopted by the Board of Directors of the
Company, will be, validly issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the
Registration Statement, and we consent to the reference of our name under the
caption "Legal Matters" in the Prospectus forming a part of the Registration
Statement.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
/s/ Wilson Sonsini Goodrich & Rosati
<PAGE>
Exhibit 3.4
BYLAWS
OF
ZAPME! DELAWARE CORPORATION
(A DELAWARE CORPORATION)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I CORPORATE OFFICES . . . . . . . . . . . . . . . . . . . 1
1.1 REGISTERED OFFICE . . . . . . . . . . . . . . . . . . . . 1
1.2 OTHER OFFICES . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II MEETINGS OF STOCKHOLDERS . . . . . . . . . . . . . . . 1
2.1 PLACE OF MEETINGS . . . . . . . . . . . . . . . . . . . . 1
2.2 ANNUAL MEETING. . . . . . . . . . . . . . . . . . . . . . 1
2.3 SPECIAL MEETING . . . . . . . . . . . . . . . . . . . . . 2
2.4 NOTICE OF STOCKHOLDERS' MEETINGS. . . . . . . . . . . . . 2
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER
BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . 2
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. . . . . . . 4
2.7 QUORUM. . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.8 ADJOURNED MEETING; NOTICE . . . . . . . . . . . . . . . . 5
2.9 VOTING. . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.10 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT. . . . .5
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING . . . . . . . .6
2.12 PROXIES. . . . . . . . . . . . . . . . . . . . . . . . . .7
2.13 ORGANIZATION . . . . . . . . . . . . . . . . . . . . . . .7
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE. . . . . . . . . . .7
2.15 INSPECTORS OF ELECTION . . . . . . . . . . . . . . . . . .8
2.16 INSPECTORS OF ELECTION AND PROCEDURES FOR COUNTING WRITTEN
CONSENTS. . . . . . . . . . . . . . . . . . . . . . . . . 8
ARTICLE III DIRECTORS . . . . . . . . . . . . . . . . . . . . . .10
3.1 POWERS. . . . . . . . . . . . . . . . . . . . . . . . . .10
3.2 NUMBER OF DIRECTORS . . . . . . . . . . . . . . . . . . .10
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS. . . . . . . . .10
3.4 RESIGNATION AND VACANCIES . . . . . . . . . . . . . . . .11
3.5 REMOVAL OF DIRECTORS. . . . . . . . . . . . . . . . . . .12
3.6 PLACE OF MEETINGS; MEETINGS BY TELEPHONE. . . . . . . . .12
3.7 FIRST MEETINGS. . . . . . . . . . . . . . . . . . . . . .12
3.8 REGULAR MEETINGS. . . . . . . . . . . . . . . . . . . . .13
3.9 SPECIAL MEETINGS; NOTICE. . . . . . . . . . . . . . . . .13
3.10 QUORUM . . . . . . . . . . . . . . . . . . . . . . . . . 13
3.11 WAIVER OF NOTICE . . . . . . . . . . . . . . . . . . . . 14
3.12 ADJOURNMENT. . . . . . . . . . . . . . . . . . . . . . . 14
3.13 NOTICE OF ADJOURNMENT. . . . . . . . . . . . . . . . . . 14
3.14 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING. . . . 14
3.15 FEES AND COMPENSATION OF DIRECTORS . . . . . . . . . . . 14
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3.16 APPROVAL OF LOANS TO OFFICERS. . . . . . . . . . . . . . 14
3.17 SOLE DIRECTOR PROVIDED BY CERTIFICATE OF INCORPORATION . 15
3.18 CONDUCT OF BUSINESS. . . . . . . . . . . . . . . . . . . 15
ARTICLE IV COMMITTEES . . . . . . . . . . . . . . . . . . . . . .15
4.1 COMMITTEES OF DIRECTORS . . . . . . . . . . . . . . . . .15
4.2 MEETINGS AND ACTION OF COMMITTEES . . . . . . . . . . . .16
4.3 COMMITTEE MINUTES . . . . . . . . . . . . . . . . . . . .16
ARTICLE V OFFICERS. . . . . . . . . . . . . . . . . . . . . . . .16
5.1 OFFICERS. . . . . . . . . . . . . . . . . . . . . . . . .16
5.2 APPOINTMENT OF OFFICERS . . . . . . . . . . . . . . . . .17
5.3 SUBORDINATE OFFICERS. . . . . . . . . . . . . . . . . . .17
5.4 REMOVAL AND RESIGNATION OF OFFICERS . . . . . . . . . . .17
5.5 VACANCIES IN OFFICES. . . . . . . . . . . . . . . . . . .18
5.6 CHAIRMAN OF THE BOARD . . . . . . . . . . . . . . . . . .18
5.7 PRESIDENT . . . . . . . . . . . . . . . . . . . . . . . .18
5.8 VICE PRESIDENTS . . . . . . . . . . . . . . . . . . . . .18
5.9 SECRETARY . . . . . . . . . . . . . . . . . . . . . . . .19
5.10 CHIEF FINANCIAL OFFICER. . . . . . . . . . . . . . . . . 19
5.11 ASSISTANT SECRETARY. . . . . . . . . . . . . . . . . . . 19
5.12 ADMINISTRATIVE OFFICERS. . . . . . . . . . . . . . . . . 20
5.13 AUTHORITY AND DUTIES OF OFFICERS . . . . . . . . . . . . 20
ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND
OTHER AGENTS. . . . . . . . . . . . . . . . . . . . . . . . . 20
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS . . . . . . . .20
6.2 INDEMNIFICATION OF OTHERS . . . . . . . . . . . . . . . .21
6.3 INSURANCE . . . . . . . . . . . . . . . . . . . . . . . .22
ARTICLE VII RECORDS AND REPORTS . . . . . . . . . . . . . . . . .22
7.1 MAINTENANCE AND INSPECTION OF RECORDS . . . . . . . . . .22
7.2 INSPECTION BY DIRECTORS . . . . . . . . . . . . . . . . .22
7.3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
REPRESENTATION OF SHARES OF OTHER CORPORATIONS. . . . . . . . 23
7.4 CERTIFICATION AND INSPECTION OF BYLAWS. . . . . . . . . .23
ARTICLE VIII GENERAL MATTERS. . . . . . . . . . . . . . . . . . .23
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING . .23
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8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS . . . . . . . .23
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED. . . .24
8.4 STOCK CERTIFICATES; TRANSFER; PARTLY PAID SHARES. . . . .24
8.5 SPECIAL DESIGNATION ON CERTIFICATES . . . . . . . . . . .25
8.6 LOST CERTIFICATES . . . . . . . . . . . . . . . . . . . .25
8.7 TRANSFER AGENTS AND REGISTRARS. . . . . . . . . . . . . .25
8.8 CONSTRUCTION; DEFINITIONS . . . . . . . . . . . . . . . .26
8.10 FISCAL YEAR. . . . . . . . . . . . . . . . . . . . . . . 26
8.11 SEAL . . . . . . . . . . . . . . . . . . . . . . . . . . 26
8.12 STOCK TRANSFER AGREEMENTS . . . . . . . . . . . . . . . .26
8.13 REGISTERED STOCKHOLDERS. . . . . . . . . . . . . . . . . 26
8.14 NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . 27
ARTICLE IX AMENDMENTS . . . . . . . . . . . . . . . . . . . . . .27
ARTICLE X DISSOLUTION . . . . . . . . . . . . . . . . . . . . . .27
ARTICLE XI CUSTODIAN. . . . . . . . . . . . . . . . . . . . . . .28
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES. . . . . . . 28
11.2 DUTIES OF CUSTODIAN. . . . . . . . . . . . . . . . . . . 29
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<PAGE>
BYLAWS
OF
ZAPME! DELAWARE CORPORATION
(a Delaware corporation)
ARTICLE I
CORPORATE OFFICES
1.1 REGISTERED OFFICE
The registered office of the corporation in the State of Delaware shall
be in the City of Dover, County of Kent. The name of the registered agent of
the corporation at such location is the Corporation Trust Corporation.
1.2 OTHER OFFICES
The board of directors may at any time establish branch or subordinate
offices at any place or places where the corporation is qualified to do
business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 PLACE OF MEETINGS
Meetings of stockholders shall be held at any place within or outside the
State of Delaware designated by the board of directors. In the absence of any
such designation, stockholders' meetings shall be held at the principal
executive office of the corporation.
2.2 ANNUAL MEETING
The annual meeting of stockholders shall be held each year on a date and
at a time designated by the board of directors. In the absence of such
designation, the annual meeting of stockholders shall be held on the third
Tuesday in March in each year at 10:00 a.m. However, if such day falls on a
legal holiday, then the meeting shall be held at the same time and place on the
next succeeding full business day. At the meeting, directors shall be elected,
and any other proper business may be transacted if brought before the meeting in
accordance with Section 2.5 of these Bylaws.
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2.3 SPECIAL MEETING
A special meeting of the stockholders may be called at any time by the
Board of Directors, by the Chairman of the Board, by the President or by
stockholders holding shares in the aggregate entitled to cast not less than
fifty percent (50%) of the votes at that meeting.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
Except as otherwise provided by the General Corporation Law of Delaware
or the Certificate of Incorporation notices of all meetings of stockholders
shall be sent or otherwise given in accordance with Section 2.6 of these bylaws
not less than ten (10) nor more than sixty (60) days before the date of the
meeting to each stockholder entitled to vote at such meeting. The notice shall
specify the place, date and hour of the meeting and (i) in the case of a special
meeting, the purpose or purposes for which the meeting is called and no business
other than that specified in the notice may be transacted or (ii) in the case of
the annual meeting, those matters which the board of directors, at the time of
giving the notice, intends to present for action by the stockholders. The
notice of any meeting at which directors are to be elected shall include the
name of any nominee or nominees who, at the time of the notice, the board
intends to present for election.
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS
(a) To be properly brought before an annual meeting,
nominations for the election of directors or other business must be
(i) specified in the notice of meeting (or any supplement thereto) given by or
at the direction of the board of directors, (ii) otherwise properly brought
before the meeting by or at the direction of the board of directors or
(iii) otherwise properly brought before the meeting by a stockholder in
accordance with Section 2.5(b). To be properly brought before a special
meeting, nominations for the election of directors or other business must be
specified in the notice of meeting (or any supplement thereto) given by or at
the direction of the board of directors.
(b) For business to be properly brought before an annual
meeting by a stockholder, the stockholder must have given timely notice thereof
in writing to the Secretary of the corporation. To be timely, a stockholder's
notice shall be delivered to the Secretary at the principal executive offices of
the Corporation not later than the close of business on the one hundred
twentieth (120th) day prior to the first anniversary of the preceding year's
annual meeting; provided, however, that in the event that the date of the
meeting is advanced more than thirty (30) days prior to or delayed by more than
thirty (30) days after the anniversary of the preceding year's annual meeting,
notice by the stockholder to be timely must be so delivered not earlier than the
close of business on the one hundred twentieth (120th) day prior to such annual
meeting and not later than the close of business on the later of the ninetieth
(90th) day prior to such annual meeting or the tenth (10th) day following the
day on which public announcement of the date of such meeting is first made. A
stockholder's notice to the Secretary shall set forth as to each matter the
stockholder proposes to bring before the annual meeting: (i) a brief
description of the business desired to be brought before the annual meeting and
the reasons for conducting such business at the annual meeting, (ii) the name
and address, as they
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appear on the corporation's books, of the stockholder proposing such
business, (iii) the class and number of shares of the corporation which are
beneficially owned by the stockholder, (iv) any material interest of the
stockholder in such business and (v) any other information that is required
to be provided by the stockholder pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), in his
capacity as a proponent to a stockholder proposal. Notwithstanding the
foregoing, in order to include information with respect to a stockholder
proposal in the proxy statement and form of proxy for a stockholder's
meeting, stockholders must provide notice as required by the regulations
promulgated under the Exchange Act. Notwithstanding anything in these bylaws
to the contrary, no business shall be conducted at any annual meeting except
in accordance with the procedures set forth in this Section 2.5. The
chairman of the annual meeting shall, if the facts warrant, determine and
declare at the meeting that business was not properly brought before the
meeting and in accordance with the provisions of this Section 2.5, and, if he
or she should so determine, he or she shall so declare at the meeting that
any such business not properly brought before the meeting shall not be
transacted.
(c) Only persons who are nominated in accordance with the
procedures set forth in this paragraph (c) shall be eligible for election as
directors. Nominations of persons for election to the Board of Directors of the
corporation may be made at a meeting of stockholders by or at the direction of
the Board of Directors or by any stockholder of the corporation entitled to vote
in the election of directors at the meeting who complies with the notice
procedures set forth in this paragraph (c). Such nominations, other than those
made by or at the direction of the Board of Directors, shall be made pursuant to
timely notice in writing to the Secretary of the corporation in accordance with
the provisions of paragraph (b) of this Section 2.5. Such stockholder's notice
shall set forth (i) as to such stockholder giving notice, the information
required to be provided pursuant to paragraph (b) of this Section 2.5; and (ii)
as to each person, if any, whom the stockholder proposes to nominate for
election or re-election as a director: (A) the name, age, business address and
residence address of such person, (B) the principal occupation or employment of
such person, (C) the class and number of shares of the corporation which are
beneficially owned by such person, (D) a description of all arrangements or
understandings between the stockholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the nominations are to
be made by the stockholder and (E) any other information relating to such person
that is required to be disclosed in solicitations of proxies for elections of
directors, or is otherwise required, in each case pursuant to Regulation 14A
under the Exchange Act (including without limitation such person's written
consent to being named in the proxy statement, if any, as a nominee and to
serving as a director if elected). At the request of the Board of Directors,
any person nominated by a stockholder for election as a director shall furnish
to the Secretary of the corporation that information required to be set forth in
the stockholder's notice of nomination which pertains to the nominee. No person
shall be eligible for election as a director of the corporation unless nominated
in accordance with the procedures set forth in this paragraph (c). The chairman
of the meeting shall, if the facts warrants, determine and declare at the
meeting that a nomination was not made in accordance with the procedures
prescribed by these bylaws, and if he should so determine, he shall so declare
at the meeting, and the defective nomination shall be disregarded.
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2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
Written notice of any meeting of stockholders shall be given either
personally or by first-class mail or by telegraphic or other written
communication. Notices not personally delivered shall be sent charges prepaid
and shall be addressed to the stockholder at the address of that stockholder
appearing on the books of the corporation or given by the stockholder to the
corporation for the purpose of notice. Notice shall be deemed to have been
given at the time when delivered personally or deposited in the mail or sent by
telegram or other means of written communication. If any notice addressed to a
stockholder at the address of that stockholder appearing on the books of the
corporation is returned to the corporation by the United States Postal Service
marked to indicate that the United States Postal Service is unable to deliver
the notice to the stockholder at that address, then all future notices or
reports shall be deemed to have been duly given without further mailing if the
same shall be available to the stockholder on written demand of the stockholder
at the principal executive office of the corporation for a period of one (1)
year from the date of the giving of the notice.
An affidavit of the mailing or other means of giving any notice of any
stockholders' meeting, executed by the secretary, assistant secretary or any
transfer agent of the corporation giving the notice, shall be prima facie
evidence of the giving of such notice.
2.7 QUORUM
The holders of a majority in voting power of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute or by the
certificate of incorporation. Where a separate vote by a class or classes is
required, a majority, present in person or by proxy, of the shares of such class
or classes entitled to take action with respect to that vote on that matter
shall constitute a quorum. If, however, such quorum is not present or
represented at any meeting of the stockholders, then either (i) the chairman of
the meeting or (ii) the holders of a majority of the shares represented at the
meeting and entitled to vote thereat, present in person or represented by proxy,
shall have power to adjourn the meeting in accordance with Section 2.8 of these
bylaws.
When a quorum is present at any meeting, the vote of the holders of a
majority of the stock having voting power present in person or represented by
proxy shall decide any question brought before such meeting, unless the question
is one upon which, by express provision of the laws of the State of Delaware or
of the certificate of incorporation or these bylaws, a different vote is
required, in which case such express provision shall govern and control the
decision of the question.
If a quorum be initially present, the stockholders may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum, if any action taken is approved by a
majority of the stockholders initially constituting the quorum.
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2.8 ADJOURNED MEETING; NOTICE
Any stockholders' meeting, annual or special, whether or not a quorum is
present, may be adjourned from time to time by (i) the chairman of the meeting
or (ii) the vote of the holders of a majority of the shares represented at that
meeting and entitled to vote thereat, either in person or by proxy. In the
absence of a quorum, no other business may be transacted at that meeting except
as provided in Section 2.7 of these bylaws.
When a meeting is adjourned to another time and place, unless these
bylaws otherwise require, notice need not be given of the adjourned meeting if
the time and place thereof are announced at the meeting at which the adjournment
is taken. At the adjourned meeting the corporation may transact any business
that might have been transacted at the original meeting. If the adjournment is
for more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
2.9 VOTING
The stockholders entitled to vote at any meeting of stockholders shall be
determined in accordance with the provisions of Section 2.11 of these bylaws,
subject to the provisions of Sections 217 and 218 of the General Corporation Law
of Delaware (relating to voting rights of fiduciaries, pledgors and joint
owners, and to voting trusts and other voting agreements).
Except as may be otherwise provided in the certificate of incorporation
or these bylaws, each stockholder shall be entitled to one vote for each share
of capital stock held by such stockholder. Any stockholder entitled to vote on
any matter may vote part of the shares in favor of the proposal, refrain from
voting the remaining shares or, may vote them against the proposal; but, if the
stockholder fails to specify the number of shares which the stockholder is
voting affirmatively, it will be conclusively presumed that the stockholder's
approving vote is with respect to all shares which the stockholder is entitled
to vote.
2.10 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT
The transactions of any meeting of stockholders, either annual or
special, however called and noticed, and wherever held, shall be as valid as
though they had been taken at a meeting duly held after regular call and notice,
if a quorum be present either in person or by proxy, and if, either before or
after the meeting, each person entitled to vote, who was not present in person
or by proxy, signs a written waiver of notice or a consent to the holding of the
meeting or an approval of the minutes thereof. The waiver of notice or consent
or approval need not specify either the business to be transacted or the purpose
of any annual or special meeting of stockholders. All such waivers, consents,
and approvals shall be filed with the corporate records or made a part of the
minutes of the meeting.
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Attendance by a person at a meeting shall also constitute a waiver of
notice of and presence at that meeting, except when the person objects at the
beginning of the meeting to the transaction of any business because the meeting
is not lawfully called or convened. Attendance at a meeting is not a waiver of
any right to object to the consideration of matters required by law to be
included in the notice of the meeting but not so included, if that objection is
expressly made at the meeting.
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING
For purposes of determining the stockholders entitled to notice of any
meeting or to vote thereat the board of directors may fix, in advance, a record
date, which shall not precede the date upon which the resolution fixing the
record date is adopted by the board of directors and which shall not be more
than sixty (60) days nor less than ten (10) days before the date of any such
meeting, and in such event only stockholders of record on the date so fixed are
entitled to notice and to vote, notwithstanding any transfer of any shares on
the books of the corporation after the record date.
If the board of directors does not so fix a record date the record date
for determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the business day next
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the business day next preceding the day on which the
meeting is held.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting
unless the board of directors fixes a new record date for the adjourned meeting,
but the board of directors shall fix a new record date if the meeting is
adjourned for more than thirty (30) days from the date set for the original
meeting.
If the board of directors has not fixed a record date within such time,
the record date for determining stockholders entitled to consent to corporate
action in writing without a meeting, when no prior action by the board of
directors is required by law, shall be the first date on which a signed written
consent setting forth the action taken or proposed to be taken is delivered to
the corporation in the manner prescribed in the first paragraph of Section 2.11
of these bylaws. If the board of directors has not fixed a record date within
such time and prior action by the board of directors is required by law, the
record date for determining stockholders entitled to consent to corporate action
in writing without a meeting shall be at the close of business on the date on
which the board of directors adopts the resolution taking such prior action.
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The record date for any other purpose shall be as provided in Section 8.1
of these bylaws.
2.12 PROXIES
Every person entitled to vote for directors, or on any other matter,
shall have the right to do so either in person or by one or more agents
authorized by a written proxy signed by the person and filed with the secretary
of the corporation in accordance with the procedure established for the meeting
or taking of action in writing, as the case may be, but no such proxy shall be
voted or acted upon after three (3) years from its date, unless the proxy
provides for a longer period. A proxy shall be deemed signed if the
stockholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission, telefacsimile or otherwise) by the
stockholder or the stockholder's attorney-in-fact. The revocability of a proxy
that states on its face that it is irrevocable shall be governed by the
provisions of Section 212(e) of the General Corporation Law of Delaware
(relating to the irrevocability of proxies).
2.13 ORGANIZATION
The president, or in the absence of the president, the chairman of the
board, and in the absence of the chairman of the board, the vice presidents, in
order of their rank as fixed by the board of directors, shall call the meeting
of the stockholders to order, and shall act as chairman of the meeting. In the
absence of the president, the chairman of the board, and all of the vice
presidents, the stockholders shall appoint a chairman for such meeting. The
chairman of any meeting of stockholders shall determine the order of business
and the procedures at the meeting, including such matters as the regulation of
the manner of voting and the conduct of business. The date and time of the
opening and closing of the polls for each matter upon which the stockholders
will vote at the meeting shall be announced at the meeting. The secretary of
the corporation shall act as secretary of all meetings of the stockholders, but
in the absence of the secretary at any meeting of the stockholders, the chairman
of the meeting may appoint any person to act as secretary of the meeting.
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE
The officer who has charge of the stock ledger of the corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present. The stock
ledger shall be the only evidence as to who are the stockholders entitled to
examine the stock ledger, the list of stockholders or the books of the
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corporation, or to vote in person or by proxy at any meeting of stockholders and
of the number of shares held by each such stockholder.
2.15 INSPECTORS OF ELECTION
The corporation may, and to the extent required by law, shall, in advance
of any meeting of stockholders, appoint one or more inspectors to act at the
meeting and make a written report thereof. The corporation may designate one or
more persons as alternate inspectors to replace any inspector who fails to act.
If no inspector or alternate is able to act at a meeting of stockholders, the
person presiding at the meeting may, and to the extent required by law, shall,
appoint one or more inspectors to act at the meeting. Each inspector, before
entering upon the discharge of his duties, shall take and sign an oath
faithfully to execute the duties of inspector with strict impartiality and
according to the best of his ability. Every vote taken by ballots shall be
counted by an inspector or inspectors appointed by the chairman of the meeting.
Such inspectors shall:
(a) determine the number of shares outstanding and the voting
power of each, the number of shares represented at the meeting, the existence of
a quorum, and the authenticity, validity, and effect of proxies;
(b) receive votes, ballots or consents;
(c) hear and determine all challenges and questions in any way
arising in connection with the right to vote;
(d) count and tabulate all votes or consents;
(e) determine when the polls shall close;
(f) determine and certify the result; and
(g) do any other acts that may be proper to conduct the
election or vote with fairness to all stockholders.
2.16 INSPECTORS OF ELECTION AND PROCEDURES FOR COUNTING WRITTEN
CONSENTS
Within three (3) business days after receipt of the earliest dated
consent delivered to the corporation in the manner provided in Section 228(c) of
the General Corporation Law of Delaware or the determination by the board of
directors of the corporation that the corporation should seek corporate action
by written consent, as the case may be, the secretary may, but is not required
to, engage nationally recognized independent inspectors of elections for the
purpose of performing a
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ministerial review of the validity of the consents and revocations. The cost
of retaining inspectors of election shall be borne by the corporation.
Consents and revocations shall be delivered to the inspectors upon
receipt by the corporation, the stockholder or stockholders soliciting consents
or soliciting revocations in opposition to action by consent proposed by the
corporation (the "Soliciting Stockholders") or their proxy solicitors or other
designated agents. As soon as consents and revocations are received, the
inspectors shall review the consents and revocations and shall maintain a count
of the number of valid and unrevoked consents. The inspectors shall keep such
count confidential and shall not reveal the count to the corporation, the
Soliciting Stockholders or their representatives or any other person or entity.
As soon as practicable after the earlier of (i) sixty (60) days after the date
of the earliest dated consent delivered to the corporation in the manner
provided in Section 228(c) of the General Corporation Law of Delaware or (ii) a
written request therefor by the corporation or the Soliciting Stockholders
(whichever is soliciting consents) (which request, except in the case of
corporate action by written consent taken pursuant to the solicitations of not
more than ten (10) persons, may be made no earlier than after such reasonable
amount of time after the commencement date of the applicable solicitation of
consents as is necessary to permit the inspectors to commence and organize their
count, but in no event less than five (5) days after such commencement date),
notice of which request shall be given to the party opposing the solicitation of
consents, if any, which request shall state that the corporation or Soliciting
Stockholders, as the case may be, have a good faith belief that the requisite
number of valid and unrevoked consents to authorize or take the action specified
in the consents has been received in accordance with these bylaws, the
inspectors shall issue a preliminary report to the corporation and the
Soliciting Stockholders stating: (i) the number of valid consents; (ii) the
number of valid revocations; (iii) the number of valid and unrevoked consents;
(iv) the number of invalid consents; (v) the number of invalid revocations; and
(vi) whether, based on their preliminary count, the requisite number of valid
and unrevoked consents has been obtained to authorize or take the action
specified in the consents.
Unless the corporation and the Soliciting Stockholders shall agree in
writing to a shorter or longer period, the corporation and the Soliciting
Stockholders shall have 48 hours to review the consents and revocations and to
advise the inspectors and the opposing party in writing as to whether they
intend to challenge the preliminary report of the inspectors. If no written
notice of an intention to challenge the preliminary report is received within 48
hours after the inspectors' issuance of the preliminary report, the inspectors
shall issue to the corporation and the Soliciting Stockholders their final
report containing the information from the inspectors' determination with
respect to whether the requisite number of valid and unrevoked consents was
obtained to authorize and take the action specified in the consents. If the
corporation or the Soliciting Stockholders issue written notice of an intention
to challenge the inspectors' preliminary report within 48 hours after the
issuance of that report, a challenge session shall be scheduled by the
inspectors as promptly as practicable. A transcript of the challenge session
shall be recorded by a certified court reporter. Following completion of the
challenge session, the inspectors shall as promptly as practicable issue their
final report to the corporation and the Soliciting Stockholders, which report
shall contain the information included in the preliminary report, plus all
changes made to the vote totals as a result of the challenge
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and a certification of whether the requisite number of valid and unrevoked
consents was obtained to authorize or take the action specified in the
consents. A copy of the final report of the inspectors shall be included in
the book in which the proceedings of meetings of stockholders are recorded.
ARTICLE III
DIRECTORS
3.1 POWERS
Subject to the provisions of the General Corporation Law of Delaware and
to any limitations in the certificate of incorporation or these bylaws relating
to action required to be approved by the stockholders or by the outstanding
shares, the business and affairs of the corporation shall be managed and all
corporate powers shall be exercised by or under the direction of the board of
directors.
3.2 NUMBER OF DIRECTORS
Unless otherwise provided in the corporation's certificate of
incorporation, the board of directors shall consist of seven (7) members until
changed by a bylaw amending this Section 3.2, duly adopted by the board of
directors or by the stockholders, or by a duly adopted amendment to the
certificate of incorporation. No reduction of the authorized number of
directors shall have the effect of removing any director before that director's
term of office expires. If for any cause, the directors shall not have been
elected at an annual meeting, they may be elected as soon thereafter as
convenient at a special meeting of the stockholders called for that purpose in
the manner provided in these Bylaws.
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS
Except as provided in Section 3.4 of these bylaws, directors shall hold
office until the expiration of the term for which elected and until a successor
has been elected and qualified; except that if any such election shall not be so
held, such election shall take place at a stockholders' meeting called and held
in accordance with the General Corporation Law of Delaware.
Directors need not be stockholders unless so required by the certificate
of incorporation or these bylaws, wherein other qualifications for directors may
be prescribed.
Elections of directors need not be by written ballot.
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3.4 RESIGNATION AND VACANCIES
Any director may resign effective on giving written notice to the
chairman of the board, the president, the secretary or the board of directors,
unless the notice specifies a later time for that resignation to become
effective. If the resignation of a director is effective at a future time, only
a majority of the board of directors then in office, including those who have so
resigned (until the effective date of such resignation), shall have the power to
fill such vacancy or vacancies, the vote thereon to take effect when such
resignation or resignations shall become effective.
Vacancies in the board of directors may be filled by a majority of the
remaining directors, even if less than a quorum, or by a sole remaining
director. Each director so elected shall hold office until the next annual
meeting of the stockholders and until a successor has been elected and
qualified.
Unless otherwise provided in the certificate of incorporation or these
bylaws:
(i) Vacancies and newly created directorships resulting from
any increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled only by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director.
(ii) Whenever the holders of any class or classes of stock or
series thereof are entitled to elect one or more directors by the provisions of
the certificate of incorporation, vacancies and newly created directorships of
such class or classes or series may be filled only by a majority of the
directors elected by such class or classes or series thereof then in office, or
by a sole remaining director so elected. In the event that no directors elected
by such class or classes of stock or series remain, the majority of the other
directors then in office, although less than a quorum, or a sole remaining
director may fill such vacancy or vacancies.
If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the certificate of incorporation or these bylaws, or may apply
to the Court of Chancery for a decree summarily ordering an election as provided
in Section 211 of the General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created directorship,
the directors then in office constitute less than a majority of the whole board
(as constituted immediately prior to any such increase), then the Court of
Chancery may, upon application of any stockholder or stockholders holding at
least ten (10) percent of the total number of the shares at the time outstanding
having the right to vote for such directors, summarily order an election to be
held to fill any such vacancies or newly created directorships, or to replace
the directors chosen by the directors then in office as
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aforesaid, which election shall be governed by the provisions of Section 211
of the General Corporation Law of Delaware as far as applicable.
3.5 REMOVAL OF DIRECTORS
Unless otherwise restricted by statute, by the certificate of
incorporation or by these bylaws, any director or the entire board of directors
may be removed, with or without cause, by the holders of a majority of the
shares then entitled to vote at an election of directors; provided, however,
that, if and so long as stockholders of the corporation are entitled to
cumulative voting, if less than the entire board is to be removed, no director
may be removed without cause if the votes cast against his removal would be
sufficient to elect him if then cumulatively voted at an election of the entire
board of directors. Whenever the holders of any class or series are entitled to
elect one or more directors by the certificate of incorporation, this Section
3.5 shall apply, in respect to the removal without cause of a director or
directors so elected, to the vote of the holders of the outstanding shares of
that class or series and not to the vote of the outstanding shares as a whole.
No reduction of the authorized number of directors shall have the effect
of removing any director prior to the expiration of such director's term of
office.
3.6 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
Regular meetings of the board of directors may be held at any place
within or outside the State of Delaware that has been designated from time to
time by resolution of the board. In the absence of such a designation, regular
meetings shall be held at the principal executive office of the corporation.
Special meetings of the board may be held at any place within or outside the
State of Delaware that has been designated in the notice of the meeting or, if
not stated in the notice or if there is no notice, at the principal executive
office of the corporation.
Any meeting of the board, regular or special, may be held by conference
telephone or similar communication equipment, so long as all directors
participating in the meeting can hear one another; and all such participating
directors shall be deemed to be present in person at the meeting.
3.7 FIRST MEETINGS
The first meeting of each newly elected board of directors shall be held
at such time and place as shall be fixed by the vote of the stockholders at the
annual meeting and no notice of such meeting shall be necessary to the newly
elected directors in order legally to constitute the meeting, provided a quorum
shall be present. In the event of the failure of the stockholders to fix the
time or place of such first meeting of the newly elected board of directors, or
in the event such meeting is not held at the time and place so fixed by the
stockholders, the meeting may be held at such time and place as shall be
specified in a notice given as hereinafter provided for special meetings of the
board of directors, or as shall be specified in a written waiver signed by all
of the directors.
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3.8 REGULAR MEETINGS
Regular meetings of the board of directors may be held without notice at
such time as shall from time to time be determined by the board of directors.
If any regular meeting day shall fall on a legal holiday, then the meeting shall
be held at the same time and place on the next succeeding full business day.
3.9 SPECIAL MEETINGS; NOTICE
Special meetings of the board of directors for any purpose or purposes
may be called at any time by the chairman of the board, the chief executive
officer, any vice president, the secretary or any two directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail,
telecopy or telegram, charges prepaid, addressed to each director at that
director's address as it is shown on the records of the corporation. If the
notice is mailed, it shall be deposited in the United States mail at least two
(2) days before the time of the holding of the meeting. If the notice is
delivered personally or by telephone, telecopy or telegram, it shall be
delivered personally or by telephone or telecopy or to the telegraph company at
least four (4) hours before the time of the holding of the meeting. Any oral
notice given personally or by telephone may be communicated either to the
director or to a person at the office of the director who the person giving the
notice has reason to believe will promptly communicate it to the director. If
the meeting is to be held at the principal executive office of the corporation,
the notice need not specify the place of the meeting. Moreover, a notice of
special meeting need not state the purpose of such meeting, and, unless
indicated in the notice thereof, any and all business may be transacted at a
special meeting.
3.10 QUORUM
A majority of the authorized number of directors shall constitute a
quorum for the transaction of business, except to adjourn as provided in
Section 3.12 of these bylaws. Every act or decision done or made by a majority
of the directors present at a duly held meeting at which a quorum is present
shall be regarded as the act of the board of directors, subject to the
provisions of the certificate of incorporation and applicable law.
A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, if any action taken is
approved by at least a majority of the quorum for that meeting.
3.11 WAIVER OF NOTICE
Notice of a meeting need not be given to any director (i) who signs a
waiver of notice, whether before or after the meeting, or (ii) who attends the
meeting without protesting, prior thereto or at its commencement, the lack of
notice to such directors. All such waivers shall be filed with the
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corporate records or made part of the minutes of the meeting. A waiver of
notice need not specify the purpose of any regular or special meeting of the
board of directors.
3.12 ADJOURNMENT
A majority of the directors present, whether or not constituting a
quorum, may adjourn any meeting of the board to another time and place.
3.13 NOTICE OF ADJOURNMENT
Notice of the time and place of holding an adjourned meeting of the board
need not be given unless the meeting is adjourned for more than twenty-four (24)
hours. If the meeting is adjourned for more than twenty-four (24) hours, then
notice of the time and place of the adjourned meeting shall be given before the
adjourned meeting takes place, in the manner specified in Section 3.9 of these
bylaws, to the directors who were not present at the time of the adjournment.
3.14 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Any action required or permitted to be taken by the board of directors
may be taken without a meeting, provided that all members of the board
individually or collectively consent in writing to that action. Such action by
written consent shall have the same force and effect as a unanimous vote of the
board of directors. Such written consent and any counterparts thereof shall be
filed with the minutes of the proceedings of the board of directors.
3.15 FEES AND COMPENSATION OF DIRECTORS
Directors and members of committees may receive such compensation, if
any, for their services and such reimbursement of expenses as may be fixed or
determined by resolution of the board of directors. This Section 3.15 shall not
be construed to preclude any director from serving the corporation in any other
capacity as an officer, agent, employee or otherwise and receiving compensation
for those services. Members of special or standing committees may be allowed
like compensation for attending committee meetings.
3.16 APPROVAL OF LOANS TO OFFICERS
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or any of its
subsidiaries, including any officer or employee who is a director of the
corporation or any of its subsidiaries, whenever, in the judgment of the
directors, such loan, guaranty or assistance may reasonably be expected to
benefit the corporation. The loan, guaranty or other assistance may be with or
without interest and may be unsecured, or secured in such manner as the board of
directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing contained in this section shall be
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deemed to deny, limit or restrict the powers of guaranty or warranty of the
corporation at common law or under any statute.
3.17 SOLE DIRECTOR PROVIDED BY CERTIFICATE OF INCORPORATION
In the event only one director is required by these bylaws or the
certificate of incorporation, then any reference herein to notices, waivers,
consents, meetings or other actions by a majority or quorum of the directors
shall be deemed to refer to such notice, waiver, etc., by such sole director,
who shall have all the rights and duties and shall be entitled to exercise all
of the powers and shall assume all the responsibilities otherwise herein
described as given to the board of directors.
3.18 CONDUCT OF BUSINESS
At any meeting of the board of directors, business shall be transacted in
such order and manner as the board may from time to time determine, and all
matters shall be determined by the vote of a majority of the directors present,
except as otherwise provided herein or required by law.
ARTICLE IV
COMMITTEES
4.1 COMMITTEES OF DIRECTORS
The board of directors may, by resolution adopted by a majority of the
authorized number of directors, designate one or more committees, each
consisting of one or more directors, to serve at the pleasure of the board. The
board may designate one or more directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of the
committee. The appointment of members or alternate members of a committee
requires the vote of a majority of the authorized number of directors. Any
committee, to the extent provided in the resolution of the board, shall have and
may exercise all the powers and authority of the board, but no such committee
shall have the power or authority to (i) amend the certificate of incorporation
(except that a committee may, to the extent authorized in the resolution or
resolutions providing for the issuance of shares of stock adopted by the board
of directors as provided in Section 151(a) of the General Corporation Law of
Delaware, fix the designations and any of the preferences or rights of such
shares relating to dividends, redemption, dissolution, any distribution of
assets of the corporation or the conversion into, or the exchange of such shares
for, shares of any other class or classes or any other series of the same or any
other class or classes of stock of the corporation or fix the number of shares
of any series of stock or authorize the increase or decrease of the shares of
any series), (ii) adopt an agreement of merger or consolidation under
Sections 251 or 252 of the General Corporation Law of Delaware, (iii) recommend
to the stockholders the sale, lease or exchange of all or substantially all of
the corporation's property and assets, (iv) recommend to the stockholders a
dissolution of the corporation
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or a revocation of a dissolution or (v) amend the bylaws of the corporation;
and, unless the board resolution establishing the committee, a supplemental
resolution of the board of directors, the bylaws or the certificate of
incorporation expressly so provide, no such committee shall have the power or
authority to declare a dividend, to authorize the issuance of stock, or to
adopt a certificate of ownership and merger pursuant to Section 253 of the
General Corporation Law of Delaware.
4.2 MEETINGS AND ACTION OF COMMITTEES
Meetings and actions of committees shall be governed by, and held and
taken in accordance with, the following provisions of Article III of these
bylaws: Section 3.6 (place of meetings; meetings by telephone), Section 3.8
(regular meetings), Section 3.9 (special meetings; notice), Section 3.10
(quorum), Section 3.11 (waiver of notice), Section 3.12 (adjournment),
Section 3.13 (notice of adjournment) and Section 3.14 (board action by written
consent without meeting), with such changes in the context of those bylaws as
are necessary to substitute the committee and its members for the board of
directors and its members; provided, however, that the time of regular meetings
of committees may be determined either by resolution of the board of directors
or by resolution of the committee, that special meetings of committees may also
be called by resolution of the board of directors, and that notice of special
meetings of committees shall also be given to all alternate members, who shall
have the right to attend all meetings of the committee. The board of directors
may adopt rules for the government of any committee not inconsistent with the
provisions of these bylaws.
4.3 COMMITTEE MINUTES
Each committee shall keep regular minutes of its meetings and report the
same to the board of directors when required.
ARTICLE V
OFFICERS
5.1 OFFICERS
The Corporate Officers of the corporation shall be a president, a
secretary and a chief financial officer. The corporation may also have, at the
discretion of the board of directors, a chairman of the board, a chief executive
officer, a chief operating officer, a chief technical officer, one or more vice
presidents (however denominated), one or more assistant secretaries, a
treasurer, one or more assistant treasurers and such other officers as may be
appointed in accordance with the provisions of Section 5.3 of these bylaws. Any
number of offices may be held by the same person.
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In addition to the Corporate Officers of the Company described above,
there may also be such Administrative Officers of the corporation as may be
designated and appointed from time to time by the president of the corporation
in accordance with the provisions of Section 5.12 of these bylaws.
5.2 APPOINTMENT OF OFFICERS
The Corporate Officers of the corporation, except such officers as may be
appointed in accordance with the provisions of Section 5.3 or Section 5.5 of
these bylaws, shall be chosen by the board of directors, subject to the rights,
if any, of an officer under any contract of employment, and shall hold their
respective offices for such terms as the board of directors may from time to
time determine.
5.3 SUBORDINATE OFFICERS
The board of directors may appoint, or may empower the president to
appoint, such other Corporate Officers as the business of the corporation may
require, each of whom shall hold office for such period, have such power and
authority, and perform such duties as are provided in these bylaws or as the
board of directors may from time to time determine.
The president may from time to time designate and appoint Administrative
Officers of the corporation in accordance with the provisions of Section 5.12 of
these bylaws.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
Subject to the rights, if any, of a Corporate Officer under any contract
of employment, any Corporate Officer may be removed, either with or without
cause, by the board of directors at any regular or special meeting of the board
or, except in case of a Corporate Officer chosen by the board of directors, by
any Corporate Officer upon whom such power of removal may be conferred by the
board of directors.
Any Corporate Officer may resign at any time by giving written notice to
the corporation. Any resignation shall take effect at the date of the receipt
of that notice or at any later time specified in that notice; and, unless
otherwise specified in that notice, the acceptance of the resignation shall not
be necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the Corporate
Officer is a party.
Any Administrative Officer designated and appointed by the president may
be removed, either with or without cause, at any time by the president. Any
Administrative Officer may resign at any time by giving written notice to the
president or to the secretary of the corporation.
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5.5 VACANCIES IN OFFICES
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed in
these bylaws for regular appointments to that office.
5.6 CHAIRMAN OF THE BOARD
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise such other
powers and perform such other duties as may from time to time be assigned to him
by the board of directors or as may be prescribed by these bylaws. If there is
no president, then the chairman of the board shall also be the chief executive
officer of the corporation and shall have the powers and duties prescribed in
Section 5.7 of these bylaws.
5.7 PRESIDENT
Subject to such supervisory powers, if any, as may be given by the board
of directors to the chairman of the board, if there be such an officer, the
president shall be the chief executive officer of the corporation and shall,
subject to the control of the board of directors, have general supervision,
direction and control of the business and the officers of the corporation. He
or she shall preside at all meetings of the stockholders and, in the absence or
nonexistence of a chairman of the board, at all meetings of the board of
directors. He or she shall have the general powers and duties of management
usually vested in the office of president of a corporation, and shall have such
other powers and perform such other duties as may be prescribed by the board of
directors or these bylaws.
The president shall, without limitation, have the authority to execute
bonds, mortgages and other contracts requiring a seal, under the seal of the
Corporation, except where required or permitted by law to be otherwise signed
and executed and except where the signing and execution thereof shall be
expressly delegated by the Board of Directors to some other officer or agent of
the corporation.
5.8 VICE PRESIDENTS
In the absence or disability of the president, and if there is no
chairman of the board, the vice presidents, if any, in order of their rank as
fixed by the board of directors or, if not ranked, a vice president designated
by the board of directors, shall perform all the duties of the president and
when so acting shall have all the powers of, and be subject to all the
restrictions upon, the president. The vice presidents shall have such other
powers and perform such other duties as from time to time may be prescribed for
them respectively by the board of directors, these bylaws, the president or the
chairman of the board.
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5.9 SECRETARY
The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of the board of directors,
committees of directors and stockholders. The minutes shall show the time and
place of each meeting, whether regular or special (and, if special, how
authorized and the notice given), the names of those present at directors'
meetings or committee meetings, the number of shares present or represented at
stockholders' meetings and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal executive
office of the corporation or at the office of the corporation's transfer agent
or registrar, as determined by resolution of the board of directors, a share
register or a duplicate share register, showing the names of all stockholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates evidencing such shares and the number and date of
cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings of
the stockholders and of the board of directors required to be given by law or by
these bylaws. He or she shall keep the seal of the corporation, if one be
adopted, in safe custody and shall have such other powers and perform such other
duties as may be prescribed by the board of directors or by these bylaws.
5.10 CHIEF FINANCIAL OFFICER
The chief financial officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings and shares. The books of account shall at all reasonable
times be open to inspection by any director for a purpose reasonably related to
his position as a director.
The chief financial officer shall deposit all money and other valuables
in the name and to the credit of the corporation with such depositaries as may
be designated by the board of directors. He or she shall disburse the funds of
the corporation as may be ordered by the board of directors, shall render to the
president and directors, whenever they request it, an account of all of his or
her transactions as chief financial officer and of the financial condition of
the corporation, and shall have such other powers and perform such other duties
as may be prescribed by the board of directors or these bylaws.
5.11 ASSISTANT SECRETARY
The assistant secretary, if any, or, if there is more than one, the
assistant secretaries in the order determined by the board of directors (or if
there be no such determination, then in the order of their election) shall, in
the absence of the secretary or in the event of his or her inability or refusal
to
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act, perform the duties and exercise the powers of the secretary and shall
perform such other duties and have such other powers as the board of directors
may from time to time prescribe.
5.12 ADMINISTRATIVE OFFICERS
In addition to the Corporate Officers of the corporation as provided in
Section 5.1 of these bylaws and such subordinate Corporate Officers as may be
appointed in accordance with Section 5.3 of these bylaws, there may also be such
Administrative Officers of the corporation as may be designated and appointed
from time to time by the president of the corporation. Administrative Officers
shall perform such duties and have such powers as from time to time may be
determined by the president or the board of directors in order to assist the
Corporate Officers in the furtherance of their duties. In the performance of
such duties and the exercise of such powers, however, such Administrative
Officers shall have limited authority to act on behalf of the corporation as the
board of directors shall establish, including but not limited to limitations on
the dollar amount and on the scope of agreements or commitments that may be made
by such Administrative Officers on behalf of the corporation, which limitations
may not be exceeded by such individuals or altered by the president without
further approval by the board of directors.
5.13 AUTHORITY AND DUTIES OF OFFICERS
In addition to the foregoing powers, authority and duties, all officers
of the corporation shall respectively have such authority and powers and perform
such duties in the management of the business of the corporation as may be
designated from time to time by the board of directors.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES
AND OTHER AGENTS
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
The corporation shall, to the maximum extent and in the manner permitted
by the General Corporation Law of Delaware as the same now exists or may
hereafter be amended, indemnify any person against expenses (including
attorneys' fees), judgments, fines, and amounts paid in settlement actually and
reasonably incurred in connection with any threatened, pending or completed
action, suit, or proceeding in which such person was or is a party or is
threatened to be made a party by reason of the fact that such person is or was a
director or officer of the corporation. For purposes of this Section 6.1, a
"director" or "officer" of the corporation shall mean any person (i) who is or
was a director or officer of the corporation, (ii) who is or was serving at the
request of the corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise or
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(iii) who was a director or officer of a corporation which was a predecessor
corporation of the corporation or of another enterprise at the request of
such predecessor corporation.
The corporation shall be required to indemnify a director or officer in
connection with an action, suit, or proceeding (or part thereof) initiated by
such director or officer only if the initiation of such action, suit, or
proceeding (or part thereof) by the director or officer was authorized by the
board of Directors of the corporation.
The corporation shall pay the expenses (including attorney's fees)
incurred by a director or officer of the corporation entitled to indemnification
hereunder in defending any action, suit or proceeding referred to in this
Section 6.1 in advance of its final disposition; provided, however, that payment
of expenses incurred by a director or officer of the corporation in advance of
the final disposition of such action, suit or proceeding shall be made only upon
receipt of an undertaking by the director or officer to repay all amounts
advanced if it should ultimately be determined that the director or officer is
not entitled to be indemnified under this Section 6.1 or otherwise.
The rights conferred on any person by this Article shall not be exclusive
of any other rights which such person may have or hereafter acquire under any
statute, provision of the corporation's Certificate of Incorporation, these
bylaws, agreement, vote of the stockholders or disinterested directors or
otherwise.
Any repeal or modification of the foregoing provisions of this Article
shall not adversely affect any right or protection hereunder of any person in
respect of any act or omission occurring prior to the time of such repeal or
modification.
6.2 INDEMNIFICATION OF OTHERS
The corporation shall have the power, to the maximum extent and in the
manner permitted by the General Corporation Law of Delaware as the same now
exists or may hereafter be amended, to indemnify any person (other than
directors and officers) against expenses (including attorneys' fees), judgments,
fines, and amounts paid in settlement actually and reasonably incurred in
connection with any threatened, pending or completed action, suit, or
proceeding, in which such person was or is a party or is threatened to be made a
party by reason of the fact that such person is or was an employee or agent of
the corporation. For purposes of this Section 6.2, an "employee" or "agent" of
the corporation (other than a director or officer) shall mean any person (i) who
is or was an employee or agent of the corporation, (ii) who is or was serving at
the request of the corporation as an employee or agent of another corporation,
partnership, joint venture, trust or other enterprise or (iii) who was an
employee or agent of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
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6.3 INSURANCE
The corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the corporation,
or is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him or her and incurred
by him or her in any such capacity, or arising out of his or her status as such,
whether or not the corporation would have the power to indemnify him or her
against such liability under the provisions of the General Corporation Law of
Delaware.
ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF RECORDS
The corporation shall, either at its principal executive office or at
such place or places as designated by the board of directors, keep a record of
its stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these bylaws as amended to date,
accounting books and other records of its business and properties.
Any stockholder of record, in person or by attorney or other agent,
shall, upon written demand under oath stating the purpose thereof, have the
right during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.
7.2 INSPECTION BY DIRECTORS
Any director shall have the right to examine the corporation's stock
ledger, a list of its stockholders and its other books and records for a purpose
reasonably related to his or her position as a director. The Court of Chancery
is hereby vested with the exclusive jurisdiction to determine whether a director
is entitled to the inspection sought. The Court may summarily order the
corporation to permit the director to inspect any and all books and records, the
stock ledger, and the stock list and to make copies or extracts therefrom. The
Court may, in its discretion, prescribe any limitations or conditions with
reference to the inspection, or award such other and further relief as the Court
may deem just and proper.
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7.3 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The chairman of the board, if any, the president, any vice president, the
chief financial officer, the secretary or any assistant secretary of this
corporation, or any other person authorized by the board of directors or the
president or a vice president, is authorized to vote, represent and exercise on
behalf of this corporation all rights incident to any and all shares of the
stock of any other corporation or corporations standing in the name of this
corporation. The authority herein granted may be exercised either by such
person directly or by any other person authorized to do so by proxy or power of
attorney duly executed by such person having the authority.
7.4 CERTIFICATION AND INSPECTION OF BYLAWS
The original or a copy of these bylaws, as amended or otherwise altered
to date, certified by the secretary, shall be kept at the corporation's
principal executive office and shall be open to inspection by the stockholders
of the corporation, at all reasonable times during office hours.
ARTICLE VIII
GENERAL MATTERS
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING
For purposes of determining the stockholders entitled to receive payment
of any dividend or other distribution or allotment of any rights or the
stockholders entitled to exercise any rights in respect of any change,
conversion or exchange of stock, or for the purpose of any other lawful action,
the board of directors may fix, in advance, a record date, which shall not
precede the date upon which the resolution fixing the record date is adopted and
which shall not be more than sixty (60) days before any such action. In that
case, only stockholders of record at the close of business on the date so fixed
are entitled to receive the dividend, distribution or allotment of rights, or to
exercise such rights, as the case may be, notwithstanding any transfer of any
shares on the books of the corporation after the record date so fixed, except as
otherwise provided by law.
If the board of directors does not so fix a record date, then the record
date for determining stockholders for any such purpose shall be at the close of
business on the day on which the board of directors adopts the applicable
resolution.
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other
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evidences of indebtedness that are issued in the name of or payable to the
corporation, and only the persons so authorized shall sign or endorse those
instruments.
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED
The board of directors, except as otherwise provided in these bylaws, may
authorize and empower any officer or officers, or agent or agents, to enter into
any contract or execute any instrument in the name of and on behalf of the
corporation; such power and authority may be general or confined to specific
instances. Unless so authorized or ratified by the board of directors or within
the agency power of an officer, no officer, agent or employee shall have any
power or authority to bind the corporation by any contract or engagement or to
pledge its credit or to render it liable for any purpose or for any amount.
8.4 STOCK CERTIFICATES; TRANSFER; PARTLY PAID SHARES
The shares of the corporation shall be represented by certificates,
provided that the board of directors of the corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not apply
to shares represented by a certificate until such certificate is surrendered to
the corporation. Notwithstanding the adoption of such a resolution by the board
of directors, every holder of stock represented by certificates and, upon
request, every holder of uncertificated shares, shall be entitled to have a
certificate signed by, or in the name of the corporation by, the chairman or
vice-chairman of the board of directors, or the president or vice-president, and
by the treasurer or an assistant treasurer, or the secretary or an assistant
secretary of such corporation representing the number of shares registered in
certificate form. Any or all of the signatures on the certificate may be a
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate has ceased to be
such officer, transfer agent or registrar before such certificate is issued, it
may be issued by the corporation with the same effect as if he or she were such
officer, transfer agent or registrar at the date of issue.
Certificates for shares shall be of such form and device as the board of
directors may designate and shall state the name of the record holder of the
shares represented thereby; its number; date of issuance; the number of shares
for which it is issued; a summary statement or reference to the powers,
designations, preferences or other special rights of such stock and the
qualifications, limitations or restrictions of such preferences and/or rights,
if any; a statement or summary of liens, if any; a conspicuous notice of
restrictions upon transfer or registration of transfer, if any; a statement as
to any applicable voting trust agreement; if the shares be assessable, or, if
assessments are collectible by personal action, a plain statement of such facts.
Upon surrender to the secretary or transfer agent of the corporation of a
certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer, it shall be the duty of the
corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.
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The corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, or upon the books and records of the corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Upon the declaration of any dividend on fully paid shares, the corporation shall
declare a dividend upon partly paid shares of the same class, but only upon the
basis of the percentage of the consideration actually paid thereon.
8.5 SPECIAL DESIGNATION ON CERTIFICATES
If the corporation is authorized to issue more than one class of stock or
more than one series of any class, then the powers, the designations, the
preferences and the relative, participating, optional or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the corporation shall issue to represent
such class or series of stock a statement that the corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
8.6 LOST CERTIFICATES
Except as provided in this Section 8.6, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and cancelled at the same time. The board of
directors may, in case any share certificate or certificate for any other
security is lost, stolen or destroyed, authorize the issuance of replacement
certificates on such terms and conditions as the board may require; the board
may require indemnification of the corporation secured by a bond or other
adequate security sufficient to protect the corporation against any claim that
may be made against it, including any expense or liability, on account of the
alleged loss, theft or destruction of the certificate or the issuance of the
replacement certificate.
8.7 TRANSFER AGENTS AND REGISTRARS
The board of directors may appoint one or more transfer agents or
transfer clerks, and one or more registrars, each of which shall be an
incorporated bank or trust company -- either domestic or foreign, who shall be
appointed at such times and places as the requirements of the corporation may
necessitate and the board of directors may designate.
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8.8 CONSTRUCTION; DEFINITIONS
Unless the context requires otherwise, the general provisions, rules of
construction and definitions in the General Corporation Law of Delaware shall
govern the construction of these bylaws. Without limiting the generality of
this provision, as used in these bylaws, the singular number includes the
plural, the plural number includes the singular, and the term "person" includes
both an entity and a natural person.
8.9 DIVIDENDS
The directors of the corporation, subject to any restrictions contained
in the certificate of incorporation, may declare and pay dividends upon the
shares of its capital stock pursuant to the General Corporation Law of Delaware.
Dividends may be paid in cash, in property, or in shares of the corporation's
capital stock.
The directors of the corporation may set apart out of any of the funds of
the corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve. Such purposes shall include but not be
limited to equalizing dividends, repairing or maintaining any property of the
corporation, and meeting contingencies.
8.10 FISCAL YEAR
The fiscal year of the corporation shall be fixed by resolution of the
board of directors and may be changed by the board of directors.
8.11 SEAL
The corporation may adopt a corporate seal, which may be altered at
pleasure, and may use the same by causing it or a facsimile thereof to be
impressed or affixed or in any other manner reproduced.
8.12 STOCK TRANSFER AGREEMENTS
The corporation shall have power to enter into and perform any agreement
with any number of stockholders of any one or more classes of stock of the
corporation to restrict the transfer of shares of stock of the corporation of
any one or more classes owned by such stockholders in any manner not prohibited
by the General Corporation Law of Delaware.
8.13 REGISTERED STOCKHOLDERS
The corporation shall be entitled to recognize the exclusive right of a
person registered on its books as the owner of shares to receive dividends and
to vote as such owner, shall be entitled to hold liable for calls and
assessments the person registered on its books as the owner of shares, and shall
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not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of another person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
8.14 NOTICES
Except as otherwise specifically provided herein or required by law, all
notices required to be given to any stockholder, director, officer, employee or
agent shall be in writing and may in every instance be effectively given by hand
delivery, by mail, postage paid, or by facsimile transmission. Any such notice
shall be addressed to such stockholder, director, officer, employee or agent at
his last known address as it appears on the books of the corporation. The time
when such notice shall be deemed received, if hand delivered, or dispatched, if
sent by mail or facsimile, transmission, shall be the time of the giving of the
notice.
ARTICLE IX
AMENDMENTS
The original or other bylaws of the corporation may be adopted, amended
or repealed by the stockholders entitled to vote; provided, however, that the
corporation may, in its certificate of incorporation, confer the power to adopt,
amend or repeal bylaws upon the directors. The fact that such power has been so
conferred upon the directors shall not divest the stockholders of the power, nor
limit their power to adopt, amend or repeal bylaws.
Whenever an amendment or new bylaw is adopted, it shall be copied in the
book of bylaws with the original bylaws, in the appropriate place. If any bylaw
is repealed, the fact of repeal with the date of the meeting at which the repeal
was enacted or the filing of the operative written consent(s) shall be stated in
said book.
ARTICLE X
DISSOLUTION
If it should be deemed advisable in the judgment of the board of
directors of the corporation that the corporation should be dissolved, the
board, after the adoption of a resolution to that effect by a majority of the
whole board at any meeting called for that purpose, shall cause notice to be
mailed to each stockholder entitled to vote thereon of the adoption of the
resolution and of a meeting of stockholders to take action upon the resolution.
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At the meeting a vote shall be taken for and against the proposed
dissolution. If a majority of the outstanding stock of the corporation entitled
to vote thereon votes for the proposed dissolution, then a certificate stating
that the dissolution has been authorized in accordance with the provisions of
Section 275 of the General Corporation Law of Delaware and setting forth the
names and residences of the directors and officers shall be executed,
acknowledged, and filed and shall become effective in accordance with
Section 103 of the General Corporation Law of Delaware. Upon such certificate's
becoming effective in accordance with Section 103 of the General Corporation Law
of Delaware, the corporation shall be dissolved.
Whenever all the stockholders entitled to vote on a dissolution consent
in writing, either in person or by duly authorized attorney, to a dissolution,
no meeting of directors or stockholders shall be necessary. The consent shall
be filed and shall become effective in accordance with Section 103 of the
General Corporation Law of Delaware. Upon such consent's becoming effective in
accordance with Section 103 of the General Corporation Law of Delaware, the
corporation shall be dissolved. If the consent is signed by an attorney, then
the original power of attorney or a photocopy thereof shall be attached to and
filed with the consent. The consent filed with the Secretary of State shall
have attached to it the affidavit of the secretary or some other officer of the
corporation stating that the consent has been signed by or on behalf of all the
stockholders entitled to vote on a dissolution; in addition, there shall be
attached to the consent a certification by the secretary or some other officer
of the corporation setting forth the names and residences of the directors and
officers of the corporation.
ARTICLE XI
CUSTODIAN
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES
The Court of Chancery, upon application of any stockholder, may appoint
one or more persons to be custodians and, if the corporation is insolvent, to be
receivers, of and for the corporation when:
(i) at any meeting held for the election of directors
the stockholders are so divided that they have failed to elect successors to
directors whose terms have expired or would have expired upon qualification of
their successors; or
(ii) the business of the corporation is suffering or is
threatened with irreparable injury because the directors are so divided
respecting the management of the affairs of the corporation that the required
vote for action by the board of directors cannot be obtained and the
stockholders are unable to terminate this division; or
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(iii) the corporation has abandoned its business and has
failed within a reasonable time to take steps to dissolve, liquidate or
distribute its assets.
11.2 DUTIES OF CUSTODIAN
The custodian shall have all the powers and title of a receiver appointed
under Section 291 of the General Corporation Law of Delaware, but the authority
of the custodian shall be to continue the business of the corporation and not to
liquidate its affairs and distribute its assets, except when the Court of
Chancery otherwise orders and except in cases arising under Sections 226(a)(3)
or 352(a)(2) of the General Corporation Law of Delaware.
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CERTIFICATE OF ADOPTION OF BYLAWS
OF
ZAPME! DELAWARE CORPORATION
CERTIFICATE BY SECRETARY OF ADOPTION BY BOARD OF DIRECTORS
The undersigned hereby certifies that he is the duly elected, qualified,
and acting Secretary of ZapMe! Delaware Corporation. and that the foregoing
Bylaws, comprising thirty (30) pages, were adopted as the Bylaws of the
corporation on________, 1999, by the person Board of Directors of the
corporation.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this ___th
day of _____, 1999.
--------------------------------
Bruce Bower
Secretary
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ZAPME! CORPORATION EXHIBIT 10.1
FOURTH AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
This Fourth Amended and Restated Investors' Rights Agreement (this
"Agreement") is dated as of August 4, 1999 by and among ZapMe! Corporation (the
"Company"), and the individuals and entities set forth on EXHIBIT A hereto
(individually an "Investor" and collectively, the "Investors").
RECITALS
WHEREAS, certain of the Investors (the "Prior Holders") and the Company
are parties to that certain Third Amended and Restated Investors' Rights
Agreement dated as of March 31, 1999 (the "Prior Agreement"), and were granted
pursuant thereto certain rights regarding, among other things, financial
information, Company Board Meeting visitation, registration of the Company's
securities under the Securities Act and Company records inspection
(collectively, the "Rights");
WHEREAS, pursuant to Section 3.4 of the Prior Agreement, the Majority
Holders (as defined in the Prior Agreement) may, with the written consent of the
Company, amend or waive on behalf of all Holders any provision of the Prior
Agreement so long as the effect thereof will not be adverse to the relative
rights of a particular class of Holders (as defined in the Prior Agreement) or
amend or waive certain rights of Ares or the Ares Affiliates (each as defined in
the Prior Agreement);
WHEREAS, the Investors set forth on Exhibit A under the caption "New
Investors" (the "New Investors") in connection with their proposal to purchase
shares of the Company's Series E Preferred Stock pursuant to that certain Series
E Preferred Stock Purchase Agreement dated of even date herewith (the "Purchase
Agreement"), desire to obtain the types of Rights referenced above;
WHEREAS, the Company and the Prior Holders, to induce the New Investors
to purchase the Series E Preferred Stock pursuant to the Purchase Agreement,
desire to grant the New Investors the types of Rights referenced above and to
amend and restate the Prior Rights Agreement as provided herein;
WHEREAS, the Company has entered into an agreement with Pacesetter
Capital Corporation ("Pacesetter") dated December 11, 1998 (the "Pacesetter
Agreement") whereby Pacesetter has arranged, and may in the future arrange,
lease or other specific equipment financing for the Company (collectively, the
"Lease Transactions") with various lessors (the "Lessors");
WHEREAS, the Lease Transactions arranged pursuant to the Pacesetter
Agreement require the Company to issue certain warrants (the "Warrants") to the
Lessors which may be issued to or transferred in full or in part to Pacesetter;
WHEREAS, the terms of the Warrants provide that the securities issuable
upon exercise of the Warrants (the "Warrant Securities") shall have registration
rights;
<PAGE>
NOW, THEREFORE, in consideration of the mutual promises and covenants
set forth herein, the parties hereby agree as follows:
1. RESTRICTIONS ON TRANSFERABILITY OF
SECURITIES; REGISTRATION RIGHTS.
1.1 CERTAIN DEFINITIONS. As used in this Agreement, the following
terms shall have the meanings set forth below:
(a) "Ares Affiliate" shall mean (i) Ares Leveraged Investment
Fund, L.P., Ares Leveraged Investment Fund II, L.P. and ZM Co-Investments LLC
(collectively, "Ares"); (ii) any affiliate of Ares (provided that any other
person whose investment activities are managed or advised under contract by
either Ares or another person who manages or advises the investment
activities of Ares (a "Manager") or an affiliate of a Manager shall be deemed
to be an affiliate of such holder for purposes of this clause ); provided
that such person shall only be an Ares Affiliate for so long as such person
is an affiliate of Ares or a person the investment or management activities
of which are managed or advised by any of the foregoing; (iii) in the event
of the dissolution, liquidation or winding up of Ares or other Ares Affiliate
that is a corporation or a partnership, the stockholders of any such
corporation or the partners of any such partnership, all of the stockholders
which in the case of a corporation or all of the partners of which in the
case of a partnership are the persons who were the stockholders of any such
corporation or the partners of any such partnership immediately prior to the
dissolution, liquidation or winding up of such person; or (iv) a trust
transferee established to hold Restricted Securities for the benefit of Ares
or by an affiliate of Ares.
(b) "Commission" shall mean the Securities and Exchange
Commission or any other federal agency at the time administering the
Securities Act.
(c) "Common Stock" means the Company's Common Stock, par value
$0.01 per share.
(d) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended, or any similar successor federal statute and the rules and
regulations thereunder, all as the same shall be in effect from time to time.
(e) "Holder" shall mean each Investor which holds Registrable
Securities and any assignee or successor thereof which has been transferred
Registrable Securities and the rights hereunder in accordance with the
provisions hereof.
(f) "Initiating Holders" shall mean the Investors who, in the
case of a demand registration under Section 1.4, are in the aggregate Holders
of not less than twenty-five percent (25%) of the outstanding Series C
Registrable Securities and Series D Registrable Securities then held by the
Holders of Series C Registrable Securities and Series D Registrable
Securities; PROVIDED, HOWEVER, that whether or not they are Holders of not
less than twenty-five percent (25%) of the outstanding Series C Registrable
Securities and Securities Series D Registrable Securities then held by the
Holders of Series C Registrable Securities and Series D Registrable
Securities, (i) one (1) of
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the three demand registrations available under Section 1.4 may only be
exercised by one or more Ares Affiliates for as long as the Ares Affiliates
are Holders of not less than 15% of the Series D Registrable Securities
originally issued to them on March 31, 1999 and May 28, 1999 (as if the
Series D Preferred Stock converted into Common Stock and subject to
subsequent adjustment for stock splits, stock dividends, reverse stock
splits, recapitalizations and the like) and (ii) one (1) of the three demand
registrations available under Section 1.4 may only be exercised by one or
more Holders of Series C Registrable Securities who are, in the aggregate,
Holders of not less than fifty percent (50%) of the outstanding Series C
Registrable Securities then held by the Holders of Series C Registrable
Securities for as long as the Holders of Series C Registrable Securities are
Holders of not less than 15% of the Series C Registrable Securities
originally issued to them on August 27, 1998 (as if the Series C Preferred
Stock converted into Common Stock and subject to subsequent adjustment for
stock splits, stock dividends, reverse stock splits, recapitalizations and
the like).
(g) "Investors" and "Investor" are defined in the preamble and
shall include any transferee of Restricted Securities in a transfer permitted
hereunder.
(h) "Majority Holders" shall mean the Investor or Investors
who in the aggregate hold (or are deemed to hold) EACH OF (i) greater than
fifty percent (50%) of the Series C Registrable Securities, (ii) greater than
fifty percent (50%) of the Series D Registrable Securities and (iii) greater
than fifty percent (50%) of the Series E Registrable Securities.
(i) "Registrable Securities" shall mean (i) the Wharton Note
Shares, (ii) the Series C Registrable Securities, (iii) the Series D
Registrable Securities, (iv) the Series E Registrable Securities, (v) only
for purposes of all registrations pursuant to Section 1.5 following the first
registration thereunder and all registrations on Form S-3 under Section 1.7,
the Wharton Warrant Shares, (vi) all shares of Common Stock of the Company
now or hereafter held by Pacesetter, Leasing Technologies International, Inc.
("LTI"), Imperial Bank, or any of the Lessors, including, without limitation,
the shares of Common Stock issued or issuable upon conversion of the shares
of Series D Preferred Stock now or hereafter held by any Lessor (including
the Series D Preferred Stock or other securities issued or issuable upon
exercise of the warrants to purchase Series D Preferred Stock held by any
Lessor) or any shares of Common Stock otherwise issuable under warrants held
by any Lessor, and (vii) any Common Stock issued as a dividend or other
distribution with respect to or in exchange for or in replacement of the
shares referenced in (i)-(vi) above, provided, however, that Registrable
Securities shall not include shares of Common Stock which have previously
been registered or which have been sold to the public either pursuant to a
registration statement or Rule 144, or which have been sold in a private
transaction in which the transferor's rights under this Agreement are not
assigned.
(j) The terms "register," "registered" and "registration"
shall refer to a registration effected by preparing and filing a registration
statement in compliance with the Securities Act and applicable rules and
regulations thereunder, and the declaration or ordering of the effectiveness
of such registration statement.
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(k) "Registration Expenses" shall mean all expenses incurred
in effecting any registration pursuant to this Agreement, including, without
limitation, all registration, qualification, and filing fees, printing
expenses, escrow fees, reasonable fees and disbursements of counsel,
including one counsel for all Holders participating in such registration,
blue sky fees and expenses, and expenses of any regular or special audits
incident to or required by any such registration, but shall not include
Selling Expenses.
(l) "Restated Articles" shall mean the Amended and Restated
Articles of Incorporation of the Company.
(m) "Restricted Securities" shall mean the Registrable
Securities, shares of Series C Preferred Stock, shares of Series D Preferred
Stock, shares of Series E Preferred Stock and the Wharton Warrant.
(n) "Rule 144" shall mean Rule 144 as promulgated by the
Commission under the Securities Act, as such Rule may be amended from time to
time, or any similar successor Rule that may be promulgated by the Commission.
(o) "Rule 145" shall mean Rule 145 as promulgated by the
Commission under the Securities Act, as such Rule may be amended from time to
time, or any similar successor Rule that may be promulgated by the Commission.
(p) "Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar successor federal statute and the rules and
regulations thereunder, all as the same shall be in effect from time to time.
(q) "Selling Expenses" shall mean all underwriting discounts,
selling commissions and stock transfer taxes applicable to the sale of
Registrable Securities.
(r) "Series C Registrable Securities" shall mean (i) the
shares of Common Stock issued upon conversion or issuable assuming the
conversion of the Company's Series C Preferred Stock and any additional
shares of Common Stock issued to the holders of the Company's Series C
Preferred Stock pursuant to Section 5(b) of Article V(B) of the Restated
Articles and (ii) any other shares of capital stock of the Company issued in
exchange for any such shares of Common Stock or other shares of capital stock
of the Company referred to in this clause (ii) upon a reclassification,
merger or other transaction involving the exchange of equity interests in the
Company for Common Stock or other shares of capital stock of the Company
referred to in this clause (ii) or issued as a distribution thereon.
(s) "Series D Registrable Securities" shall mean (i) the
shares of Common Stock issued upon conversion or issuable assuming the
conversion of the Company's Series D Preferred Stock and any additional
shares of Common Stock issued to the holders of the Company's Series D
Preferred Stock pursuant to Section 5(b) of Article V(B) of the Restated
Articles and (ii) any other shares of capital stock of the Company issued in
exchange for any such shares of Common Stock or other shares of capital stock
of the Company referred to in this clause (ii) upon a reclassification,
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merger or other transaction involving the exchange of equity interests in the
Company for Common Stock or other shares of capital stock of the Company
referred to in this clause (ii) or issued as a distribution thereon.
(t) "Series E Registrable Securities " shall mean (i) the
shares of Common Stock issued upon conversion or issuable assuming the
conversion of the Company's Series E Preferred Stock and (ii) any other
shares of capital stock of the Company issued in exchange for any such shares
of Common Stock or other shares of capital stock of the Company referred to
in this clause (ii) upon a reclassification, merger or other transaction
involving the exchange of equity interests in the Company for Common Stock or
other shares of capital stock of the Company referred to in this clause (ii)
or issued as a distribution thereon.
(u) "Wharton Note Shares" shall mean the shares of Common
Stock issuable directly or indirectly upon conversion of the note issued to
Wharton Capital Partners, Ltd. pursuant to the Wharton Purchase Agreement.
(v) "Wharton Purchase Agreement" shall mean that certain
Convertible Note and Warrant Purchase Agreement dated May 7, 1998 pursuant to
which a note and warrant were issued by the Company to Wharton Capital
Partners, Ltd.
(w) "Wharton Warrant" shall mean that certain warrant issued
to Wharton Capital Partners, Ltd. pursuant to the Wharton Purchase Agreement.
(x) "Wharton Warrant Shares" shall mean the shares of Common
Stock issuable directly or indirectly upon exercise of the Wharton Warrant.
1.2 RESTRICTIONS ON TRANSFER.
(a) Each Investor agrees not to make any disposition of all or
any portion of the Restricted Securities held by such Investor unless and
until the transferee has agreed in writing for the benefit of the Company to
be bound by this Section 1.2, provided and to the extent such Section is then
applicable, and:
(i) There is then in effect a registration statement under
the Securities Act covering such proposed disposition and such disposition is
made in accordance with such registration statement; or
(ii) (A) Such Investor shall have notified the Company of
the proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, and
(B) if reasonably requested by the Company, such Investor shall have
furnished the Company with an opinion of counsel, reasonably satisfactory to
the Company, that such disposition will not require registration of such
shares under the Securities Act;
Notwithstanding the provisions of paragraphs (i) and (ii) above, no
such registration statement or opinion of counsel shall be necessary for a
transfer by an Investor which is (A) by a
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partnership to its partners or retired partners in accordance with partnership
interests, (B) by a corporation to its shareholders in accordance with their
interest in the corporation or to any majority-owned subsidiary, (C) by a
limited liability company to its members or former members in accordance with
their interest in the limited liability company, (D) by an Investor to such
Investor's family member or a trust for the benefit of such Investor, (E) in
the case of Gilat Satellite Networks, Ltd. only, to a Gilat Affiliate (as
defined in the Series D Preferred Stock Purchase Agreement between Gilat and
the Company dated as of December 3, 1998), (F) in the case of an Ares
Affiliate, to another Ares Affiliate, or (G) in the case of Dell USA L.P., to
any of its affiliates, provided, in any such case, that the transferee will
be subject to the terms of this Section 1.2 to the same extent as if such
transferee were an original Investor hereunder.
(b) Each certificate representing Restricted Securities shall
(unless otherwise permitted by the provisions of this Agreement) be stamped
or otherwise imprinted with a legend substantially similar to the following
(in addition to any legend required under applicable state securities laws):
THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD OR TRANSFERRED,
ASSIGNED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER SUCH ACT
OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL OR OTHER EVIDENCE,
SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT
REQUIRED.
(c) The Company shall be obligated to reissue promptly
unlegended certificates at the request of any holder thereof if the holder
shall have obtained an opinion of counsel at such Investor's expense (which
counsel may be counsel to the Company) reasonably acceptable to the Company
to the effect that the securities proposed to be disposed of may lawfully be
so disposed of without registration, qualification or legend.
(d) Any legend endorsed on an instrument pursuant to
applicable state securities laws and the stop-transfer instructions with
respect to such securities shall be removed upon receipt by the Company of an
order of the appropriate blue sky authority authorizing such removal.
1.3 COMPANY RIGHT OF FIRST REFUSAL. In addition to the provisions
of Section 1.2 hereof, each Investor agrees not to assign, encumber or
dispose of any interest in Restricted Securities except as provided by this
Section 1.3.
(a) RIGHT OF FIRST REFUSAL.
(i) In the event that an Investor desires (or is
required) to sell or transfer any Restricted Securities, such Investor shall
first offer such Restricted Securities for sale to the Company upon the terms
and conditions specified herein (the "Right of First Refusal") by delivering
a notice (the "Notice") to the Company stating (1) the Investor's bona fide
intention to sell or otherwise transfer such Restricted Securities, (2) the
number of Restricted Securities to be sold or otherwise transferred, (3) the
price for which the Investor proposes to sell such Restricted Securities
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and (4) all additional material terms and conditions, if any, of the proposed
sale or transfer. The Notice shall also state the name of the proposed buyer
or transferee, if known. If the proposed buyer or transferee is unknown at
the time such notice is given, the Investor shall so state in the Notice;
PROVIDED, HOWEVER, that the Investor may not sell or transfer any Restricted
Securities to any competitor of the Company or any party whose interests are
materially adverse to the Company, each as determined in good faith by the
Board of Directors. The Investor shall attach to the Notice a copy of the
written offer, if any, reflecting the terms and conditions of the proposed
sale or transfer of the Restricted Securities to the third party.
(ii) Within fifteen (15) days following receipt by the
Company of the Notice (the "Acceptance Period"), the Company may elect to
purchase all but not less than all of the Restricted Securities to which the
Notice refers, at the price per share and on the same terms and conditions
(including as to form of consideration) as set forth in the Notice.
(iii) If the Company elects to purchase such Restricted
Securities hereunder, it shall notify the Investor in writing of its
intention to purchase such Restricted Securities hereunder and either (1) set
a date for the closing of the transaction at a place to be mutually agreed to
by the Investor and the Company not later than ten (10) days from the date of
such notice at which time the Company shall tender payment for the Restricted
Securities so purchased, or (2) include payment in immediately available
funds for the Restricted Securities with the Company's notice to the
Investor. At such closing, the certificate(s) representing the Restricted
Securities so purchased shall be delivered to the Company and canceled or, in
the case of payment by the Company by mail, such certificate(s) shall be
deemed canceled as of the date of the mailing of the Company's notice and,
thereafter, shall be promptly returned by the Investor to the Company by
certified or registered mail.
(iv) If the Company does not elect to purchase all of
the shares to which the Notice refers or does not purchase all of the shares
within the required time, the Investor may sell or otherwise transfer such
Restricted Securities at the price and on substantially the same terms and
conditions specified in the Notice or at a higher price, provided that such
sale or transfer is consummated within one hundred and twenty (120) days from
the earlier of (1) the lapse of the Acceptance Period or (2) the date of the
Company's notice, whether written or oral, advising the Investor that the
Company does not intend to purchase the Restricted Securities hereunder; and
provided further, that any such sale or transfer is made in accordance with
all of the terms and conditions set forth in this Agreement. In the event the
Restricted Securities are not disposed of by the Purchaser within such one
hundred and twenty (120) day period, such Restricted Securities shall once
again be subject to the Right of First Refusal herein provided.
(b) INVOLUNTARY TRANSFER.
(i) In the event of any transfer by operation of law or
other involuntary transfer of all, or a portion, of the Restricted Securities
held by an Investor, the Company shall have an option to purchase all of the
Restricted Securities so transferred (the "Involuntary Transfer Option") at a
price determined in good faith by the Board of Directors of the Company to
represent the then-current market value of the Restricted Securities. Upon
such a transfer, the person
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acquiring the subject shares shall promptly notify the Secretary of the
Company of such transfer. Notwithstanding the foregoing, an Investor shall
not be required to comply with this Section 1.3(b) if such compliance would
conflict with any law, Rule or regulation.
(ii) The Company shall notify the Investor and the person
acquiring the Restricted Securities as to whether the Company wishes to
purchase the Restricted Securities pursuant to the Involuntary Transfer
Option within fifteen (15) days following the date on which the Company was
notified of the transfer. If the Company elects to purchase such shares
hereunder, it shall set a date for the closing of the transaction at a place
specified by the Company not later than ten (10) days from the date of the
Company's notice to the Investor and the person acquiring the Restricted
Securities. At such closing, the Company shall tender payment for the
Restricted Securities in the form of a check and the certificate(s)
representing the shares so purchased shall be canceled.
(c) RESTRICTION ON ALIENATION. Each Investor agrees that it
will not sell, transfer, or otherwise dispose of any of the Restricted
Securities unless it complies with the provisions of this Section 1.3, if
applicable. Any sale, transfer or disposition or purported sale, transfer or
disposition of any Restricted Securities by an Investor shall be null and
void unless the terms, conditions and provisions of this Section 1.3, if
applicable, are complied with. Each Investor further authorizes the Company
to refuse, or to cause its Transfer Agent to refuse, to transfer or record
any Restricted Securities to be transferred in violation of this Agreement.
(d) OBLIGATIONS BINDING UPON TRANSFEREES. All transferees of
Restricted Securities or any interest therein will receive and hold such
Restricted Securities or interests subject to the provisions of this
Agreement, including, insofar as applicable, the Company's Right of First
Refusal and Involuntary Transfer Option under this Section 1.3.
(e) TERMINATION OF RESTRICTIONS. The Right of First Refusal
and Involuntary Transfer Option granted by this Section 1.3 shall terminate
at such time as any registered initial public offering of Common Stock of the
Company, Merger Event or Liquidation Event occurs, as "Merger Event" or
"Liquidation Event" are defined in the Restated Articles.
(f) EXCLUDED TRANSFERS. The restrictions on transfer of this
Article 1.3 shall not apply to a transfer by an Investor which is (A) a
partnership to its partners or retired partners in accordance with
partnership interests, (B) a corporation to its shareholders in accordance
with their interest in the corporation or to a majority-owned subsidiary,
(C) a limited liability company to its members or former members in
accordance with their interest in the limited liability company, (D) to the
Investor's family member or trust for the benefit of an individual Investor,
(E) made by way of inheritance or bequest, (F) made, in the case of Gilat
Satellite Networks, Ltd. only, to a Gilat Affiliate (as defined in the Series D
Preferred Stock Purchase Agreement between Gilat and the Company dated as of
December 3, 1998), (G) made, in the case of an Ares Affiliate only, to
another Ares Affiliate or (H) made, in the case of Dell USA L.P., to one of
its affiliates, provided, in any such case, that the transferee will be
subject to the terms of this Section 1.3 to the same extent as if such
transferee were an original Investor hereunder.
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1.4 DEMAND REGISTRATION.
(a) DEMAND FOR REGISTRATION. In case the Company shall receive
from the Initiating Holders a written demand that the Company effect any
registration, qualification or compliance with respect to all or a part of
the Registrable Securities, and only in the event that the aggregate offering
price of the Registrable Securities proposed to be registered equals or
exceeds two million dollars ($2,000,000) (provided that the determination of
the aggregate offering price of the Registrable Securities proposed to be
registered shall be made by the Initiating Holders in good faith), the
Company will:
(i) promptly give written notice of the proposed registration,
qualification or compliance to all other Holders, which notice, in any event,
shall be given at least twenty (20) business days before the effectiveness of
any registration under this Section 1.4; and
(ii) use its best efforts to effect such registration,
qualification or compliance as soon as practicable (including, without
limitation, the execution of an undertaking to file post-effective
amendments, appropriate qualification under applicable blue sky or other
state securities laws and appropriate compliance with applicable regulations
issued under the Securities Act and any other governmental requirements or
regulations), in respect of such Registrable Securities and as may be so
requested and as would permit or facilitate the sale and distribution of all
or such portion of such Registrable Securities as are specified in such
request in writing received by the Company within twenty (20) days after
receipt of such written notice from the Company; PROVIDED, that the Company
shall NOT be obligated to take any action to effect any such registration,
qualification or compliance pursuant to this Section 1.4:
(A) In any particular jurisdiction in which the Company
would be required to execute a general consent to service of process in
effecting such registration, qualification or compliance unless the Company
is already subject to service in such jurisdiction and except as may be
required by the Securities Act;
(B) Before the earlier to occur of March 31, 2004 or six
(6) months after the effective date of the Company's first registered
offering to the general public of its securities for its own account;
(C) After the Company has effected three registrations
pursuant to this Section 1.4(a), so long as such registrations have been
declared or ordered effective and the securities offered pursuant to such
registrations have been sold.
Subject to the foregoing clauses (A) through (C), the Company shall
file a registration statement covering the Registrable Securities so demanded
pursuant to this Section 1.4(a); PROVIDED, HOWEVER, that if the Company shall
furnish to the Initiating Holders a certificate signed by the President of the
Company stating that, in the good faith judgment of the Board of Directors, it
would be seriously detrimental to the Company and its shareholders for such
registration statement to be filed the Company shall have the right to defer
such filing for a period of not more than ninety (90)
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days after receipt of the demand of the Initiating Holders; PROVIDED,
HOWEVER, that the Company may not utilize this right more than once in any
twelve month period.
(b) UNDERWRITING. The Initiating Holders of any given demand
registration pursuant to this Section 1.4 shall determine the method of
distribution. If the Initiating Holders intend to distribute the Registrable
Securities covered by their demand by means of an underwriting, they shall so
advise the Company as part of their demand made pursuant to Section 1.4 and
the Company shall include such information in the written notice referred to
in this Section 1.4(a)(i). The right of any Holder to registration pursuant
to Section 1.4 shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable Securities in the
underwriting to the extent requested and provided herein.
The Company shall (together with all Holders and other parties
proposing to distribute their securities through such underwriting) enter into
an underwriting agreement in customary form with the representative(s) of an
underwriter or underwriters of recognized national standing (the "Underwriter's
Representative") selected for such underwriting by the Company, subject to the
approval of the Initiating Holders, which shall not be unreasonably withheld.
Notwithstanding any other provision of this Section 1.4, if the Underwriter's
Representative advises the Company and the Initiating Holders in writing at any
time prior to effectiveness that marketing factors require a limitation of the
number of shares to be underwritten, the Company shall so advise all holders of
Registrable Securities, and the Underwriter's Representative may limit the
number of Registrable Securities to be included in the registration and
underwriting; PROVIDED, HOWEVER, that if the registration was demanded (i) by
the Holders of not less than twenty-five (25%) of the outstanding Series C
Registrable and Securities Series D Registrable Securities then any such
limitation will first exclude securities that are not Series C Registrable
Securities or Series D Registrable Securities, and to the extent Series C
Registrable Securities and/or Series D Registrable Securities are excluded, they
shall be excluded on a pro-rata basis in proportion to the number of Series C
Registrable Securities and/or Series D Registrable Securities held by each such
Holder; or (ii) by one or more Holders of Series C Registrable Securities or by
one or more Ares Affiliates, then any such limitation will first exclude
securities that are not Series C Registrable Securities or Series D Registrable
Securities held by an Ares Affiliate, and to the extent Series C Registrable
Securities and/or Series D Registrable Securities held by an Ares Affiliate are
excluded, they shall be excluded on a pro-rata basis in proportion to the number
of Series C Registrable Securities and/or Series D Registrable Securities held
by each such Holder. The Company and/or the Underwriters's Representative may,
in their sole discretion, round the number of securities offered hereunder to
the nearest 100 shares. No securities excluded from the underwriting by reason
of the Underwriter's Representative marketing limitation shall be included in
such registration.
If any Holder of Registrable Securities disapproves of the terms of the
underwriting, such person may elect to withdraw therefrom by written notice to
the Company, the Underwriter's Representative and the Initiating Holders. The
Registrable Securities and/or other securities so withdrawn shall also be
withdrawn from registration; PROVIDED, HOWEVER, that, if by the withdrawal of
such Registrable Securities a greater number of Registrable Securities held by
other participating Holders may be included in such registration (up to the
maximum of any limitation imposed by the
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Underwriter's Representative), then the Company shall allocate such greater
number of Registrable Securities first to the Initiating Holders of such
registration, on a pro-rata basis in proportion to the number of Registrable
Securities then held by each such Initiating Holder, and second to such other
Holders on a pro rata basis in proportion to the number of shares of
Registrable Securities requested by such other Holders. Any Registrable
Securities so withdrawn from registration shall be subject to the market
standoff provisions set forth in Section 1.14 hereof.
If the Underwriter's Representative has not limited the number of
Registrable Securities to be underwritten, the Company may include securities
for its own account or for the account of other shareholders of the Company in
such registration if the Underwriter's Representative so agrees.
(c) WITHDRAWAL. The Initiating Holders at any time prior to the
effective date of any registration pursuant to this Section 1.4 may withdraw
its demand for such registration by giving written notice to the Company and
such registration shall not count towards determining if the Company has
effected three registrations pursuant to Section 1.4(a)(ii)(C); PROVIDED,
HOWEVER, that the Initiating Holders shall be responsible for the reasonable
expenses of such registration so long as the Company shall have complied in
good faith with its obligations hereunder to effect such registration as soon
as practicable after the demand of the Initiating Holders, and, PROVIDED,
FURTHER, that the Initiating Holders will not be responsible for any such
expenses if they withdraw their demand within ten (10) business days after
the end of a registration deferral period effected by the Company pursuant to
Section 1.4(a)(ii).
1.5 COMPANY REGISTRATION.
(a) If at any time or from time to time the Company shall determine
to register any of its securities either for its own account or the account
of a security holder or holders exercising their registration rights pursuant
to Section 1.4 or 1.7, other than (i) a registration relating solely to
employee benefit plans or a registration relating to a corporate
reorganization or other transaction under Rule 145, or (ii) a registration in
which the only equity security being registered is Common Stock issuable upon
conversion of debt securities which are also being registered, the Company
will:
(i) promptly give to each Holder written notice thereof, which
notice, in any event, shall be given at least twenty (20) business days
before the effectiveness of any registration under this Section 1.5; and
(ii) use its best efforts to include in such registration (and
any related qualification under blue sky laws or other compliance), except as
set forth in Section 1.5(b) below, and in any underwriting involved therein,
all the Registrable Securities specified in a written request or requests,
made by any Holder and received by the Company within twenty (20) days after
the written notice from the Company described in clause (i) above is mailed
or delivered by the Company. Such written request may specify all or a part
of a Holder's Registrable Securities.
(b) UNDERWRITING. If the registration of which the Company gives
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a
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part of the written notice given pursuant to Section 1.5(a)(i). In such
event, the right of any Holder to registration pursuant to this Section 1.5
shall be conditioned upon such Holder's participation in such underwriting
and the inclusion of such Holder's Registrable Securities in the underwriting
to the extent provided herein. All Holders proposing to distribute their
securities through such underwriting shall (together with the Company and the
other holders of securities of the Company distributing their securities
through such underwriting) enter into an underwriting agreement in customary
form with the representative of the underwriter or underwriters selected by
the Company.
Notwithstanding any other provision of this Section 1.5, if the
representative of the underwriters advises the Company in writing that
marketing factors require a limitation on the number of shares to be
underwritten, and the Company so advises the Holders of Registrable
Securities, the representative may (subject to the limitations set forth
below) limit the number of Registrable Securities to be included in, the
registration and underwriting; PROVIDED, HOWEVER, that such underwriting
limitation shall be applied first to exclude shares that are not Registrable
Securities, and any balance of the shares to be excluded then shall be
allocated pro rata among the Holders of Registrable Securities in proportion
to the number of Registrable Securities requested by each such Holder to be
included in such registration and underwriting, except that the underwriter's
representative may (i) in the case of the Company's initial registered public
offering, exclude some or all Registrable Securities from such registration
and underwriting on a pro rata basis as described above and (ii) in the case
of any subsequent registered public offering (other than a registered public
offering effected pursuant to Section 1.4), not limit the number of shares of
Registrable Securities to be included in such registration and underwriting
to less than thirty-five percent (35%) of the securities included in such
public offering (based on aggregate market values). If any person does not
agree to the terms of any such underwriting, he shall be excluded therefrom
by written notice from the Company or the underwriter. Any Registrable
Securities or other securities excluded or withdrawn from such underwriting
shall be withdrawn from such registration.
If shares are so withdrawn from the registration or if the number of
shares of Registrable Securities to be included in such registration was
previously reduced as a result of marketing factors, the Company shall then
offer to all persons who have retained the right to include securities in the
registration the right to include additional securities in the registration in
an aggregate amount equal to the number of shares so withdrawn. Any Registrable
Securities so withdrawn shall be subject to the market standoff provisions of
Section 1.14 hereof.
(c) RIGHT TO TERMINATE REGISTRATION. The Company shall have the
right to terminate or withdraw any registration initiated by it under this
Section 1.5 prior to the effectiveness of such registration whether or not
any Holder has elected to include Registrable Securities in such registration.
1.6 EXPENSES OF REGISTRATION. All Registration Expenses incurred in
connection with any registration, qualification or compliance pursuant to
Sections 1.4, 1.5 and 1.7 hereof shall be paid by the Company.
1.7 REGISTRATION ON FORM S-3 AND FOLLOWING THE INITIAL PUBLIC
OFFERING OF THE COMPANY. After its initial public offering, the Company shall
use its best efforts to qualify for registration on
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Form S-3 under the Securities Act or any comparable or successor form or
forms. After the Company has qualified for the use of Form S-3, in addition
to the rights contained in the foregoing provisions of this Section 1, the
Holders of Registrable Securities shall have the right to demand
registrations on Form S-3; PROVIDED, HOWEVER, that the proposed aggregate
offering price to the public of the securities to be so registered (net of
underwriting discounts and commissions, if any) would exceed $2,000,000
(provided that the determination of the aggregate offering price of the
Registrable Securities proposed to be registered shall be made by the Holders
demanding such registration in good faith); and, PROVIDED FURTHER, that the
Company shall not be required to effect more than two registrations pursuant
to this Section 1.7 in any twelve (12) month period. In the event the
registration is proposed by the Holders of a majority of the Registrable
Securities to be included in such registration to be part of a firm
commitment underwritten public offering, (i) the substantive provisions of
Section 1.5(b) shall be applicable to each such registration initiated under
this Section 1.7, and (ii) subject to the reasonable approval of the Holders
of a majority of the Registrable Securities to be included in such
registration, the Company shall be entitled to select the underwriter, which
shall be an investment bank of recognized national standing.
Notwithstanding the foregoing, the Company shall not be obligated to
take any action pursuant to this Section 1.7:
(a) in any particular jurisdiction in which the Company would be
required to execute a general consent to service or process in effecting such
registration, qualification or compliance, unless the Company is already
subject to service in such jurisdiction and except as may be required by the
Securities Act;
(b) if the Company, within ten (10) days of the receipt of the
request of the Holders, gives notice of its BONA FIDE intention to effect the
filing of a registration statement with the Commission within ninety (90)
days of receipt of such demand (other than with respect to a registration
statement relating to Rule 145 transaction, an offering solely to employees,
or any other registration which is similarly not appropriate for the
registration of Registrable Securities);
(c) on the date filing of, and ending on the date six (6) months
immediately following the effective date of, any registration statement
pertaining to securities of the Company (other than a registration of
securities in a Rule 145 transaction or with respect to an employee benefit
plan or any other registration which is similarly not appropriate for the
registration of Registrable Securities); or
(d) if the Company shall furnish to the Holders proposing to
distribute Registrable Securities a certificate signed by the President of
the Company stating that in the good faith judgment of the Board of Directors
it would be seriously detrimental to the Company or its shareholders for
registration statements to be filed in the near future, then the Company's
obligation to use its reasonable best efforts to file a registration
statement shall be deferred for a period not to exceed 90 days from the
receipt of the demand to file such registration by such Holders, provided
that the Company may not exercise this deferral right more than once in any
twelve (12) month period with respect to any one such demand for registration.
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1.8 REGISTRATION PROCEDURES. In the case of each registration
effected by the Company pursuant to Section 1, the Company will prepare and
file with the Commission a registration statement on an appropriate term
including the Registrable Securities being registered and, subject to Section
1.5(c), will use its best efforts to cause such registration statement to
become effective and will keep each Holder advised in writing as to the
initiation of each registration and as to the completion thereof. At its
expense, the Company will use its best efforts to:
(a) Keep such registration continuously effective for a period of
one hundred and eighty (180) days or until the Holder or Holders have
completed the distribution described in the registration statement relating
thereto, whichever first occurs; provided, however, that such 180 day period
shall be extended for a period of time equal to the period the Holder
refrains from selling any securities included in such registration at the
request of an underwriter of Common Stock (or other securities) of the
Company;
(b) Prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection with such registration statement as may be necessary to comply
with the provisions of the Securities Act with respect to the disposition of
all securities covered by such registration statement and so that such
registration statement and prospectus shall not include an untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading or
incomplete in the light of the circumstances then existing;
(c) Furnish such number of prospectuses and other documents
incident thereto, including any amendment of or supplement to the prospectus,
as a Holder from time to time may reasonably request;
(d) Notify each seller of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any
event as a result of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a material fact
or omits to state a material fact required to be stated therein or necessary
to make the statements therein not misleading or incomplete in the light of
the circumstances then existing, and at the request of any such seller,
prepare and furnish to such seller a reasonable number of copies of a
supplement to or an amendment of such prospectus as may be necessary so that,
as thereafter delivered to the purchasers of such shares, such prospectus
shall not include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading or incomplete in the light of the
circumstances then existing;
(e) Cause all such Registrable Securities registered pursuant
hereunder to be listed on each securities exchange on which similar
securities issued by the Company are then listed;
(f) Provide a transfer agent and registrar for all Registrable
Securities registered pursuant to such registration statement and a CUSIP
number for all such Registrable Securities, in each case not later than the
effective date of such registration;
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(g) Otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission, and make available to its security
holders, as soon as reasonably practicable, an earnings statement covering
the period of at least twelve months, but not more than eighteen months,
beginning with the first month after the effective date of the Registration
Statement, which earnings statement shall satisfy the provisions of Section
11(a) of the Securities Act; and
(h) In connection with any underwritten offering pursuant to a
registration statement filed pursuant to Section 1 hereof, the Company will
enter into an underwriting agreement in form reasonably necessary to effect
the offer and sale of Common Stock, provided such underwriting agreement
contains customary underwriting provisions and provided further that if the
underwriter so requests the underwriting agreement will contain customary
contribution and indemnification provisions. The Company will retain the
necessary counsel and accountants in order to provide the legal opinions on
behalf of the Company and comfort letters required by such underwriting
agreement and shall provide copies thereof to each seller of Registrable
Securities who so requests.
1.9 INDEMNIFICATION.
(a) The Company will indemnify each Holder, each of its officers,
directors, partners, members, legal counsel, and accountants and each person
controlling such Holder within the meaning of Section 15 of the Securities
Act, with respect to which registration, qualification, or compliance has
been effected pursuant to this Section 1, and each underwriter, if any, and
each person who controls any such underwriter within the meaning of Section
15 of the Securities Act, against all expenses, claims, losses, damages, and
liabilities (or actions, proceedings, or settlements in respect thereof)
arising out of or based on any untrue statement (or alleged untrue statement)
of a material fact contained in any prospectus, offering circular, or other
document (including any related registration statement, notification, or the
like) incident to any such registration, qualification, or compliance, or
based on any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or any violation by the Company of the Securities Act or the
Exchange Act or any Rule or regulation thereunder applicable to the Company
and relating to action or inaction required of the Company in connection with
any such registration, qualification, or compliance, and will reimburse each
such Holder, each of its officers, directors, partners, members, legal
counsel, and accountants and each person controlling such Holder, each such
underwriter, and each person who controls any such underwriter, for any legal
and any other expenses reasonably incurred in connection with investigating
and defending or settling any such claim, loss, damage, liability, or action
provided that the Company will not be liable in any such case to any Holder
or underwriter to the extent that any such claim, loss, damage, liability, or
expense arises out of or is based on any untrue statement or omission based
upon written information furnished to the Company by such Holder or
underwriter and stated to be specifically for use therein. It is agreed that
the indemnity agreement contained in this Section 1.9(a) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability, or
action if such settlement is effected without the consent of the Company
(which consent has not been unreasonably withheld).
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(b) Each Holder will, if Registrable Securities held by such Holder
are included in the securities as to which such registration, qualification,
or compliance is being effected, indemnify (severally, but not jointly) the
Company, each of its directors, officers, partners, members and each
underwriter, if any, of the Company's securities covered by such a
registration statement, each person who controls the Company or such
underwriter within the meaning of Section 15 of the Securities Act, each
other such Holder, and each of their officers, directors, partners and
members, and each person controlling such Holder, against all claims, losses,
damages and liabilities (or actions in respect thereof) arising out of or
based on any untrue statement (or alleged untrue statement) of a material
fact contained in any such registration statement, prospectus, offering
circular, or other document, or any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, and will reimburse the Company and
such Holders, directors, officers, partners, members, persons, underwriters,
or control persons for any legal or any other expenses reasonably incurred in
connection with investigating or defending any such claim, loss, damage,
liability, or action, in each case to the extent, but only to the extent,
that such untrue statement (or alleged untrue statement) or omission (or
alleged omission) is made in such registration statement, prospectus,
offering circular, or other document in reliance upon and in conformity with
written information furnished to the Company by such Holder and stated to be
specifically for use therein, provided, however, that the obligations of such
Holder hereunder shall not apply to amounts paid in settlement of any such
claims, losses, damages, or liabilities (or actions in respect thereof) if
such settlement is effected without the consent of such Holder (which consent
shall not be unreasonably withheld).
(c) Each party entitled to indemnification under this Section 1.9
(the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified
Party has actual knowledge of any claim as to which indemnity may be sought,
and shall permit the Indemnifying Party to assume the defense of such claim
or any litigation resulting therefrom, PROVIDED, HOWEVER, that counsel for
the Indemnifying Party, who shall conduct the defense of such claim or any
litigation resulting therefrom, shall be approved by the Indemnified Party
(whose approval shall not unreasonably be withheld), and the Indemnified
Party may participate in such defense at such party's expense; and PROVIDED
FURTHER, that the failure of any Indemnified Party to give notice as provided
herein shall not relieve the Indemnifying Party of its obligations under this
Section 1, to the extent such failure is not materially prejudicial; and
PROVIDED FURTHER, that the Indemnifying Party shall not assume the defense
for matters as to which representation of both the Indemnifying Party and the
Indemnified Party by the same counsel would be inappropriate due to actual or
potential differing interests between them or if the Indemnified Party has
reasonably concluded that there may be one or more legal defenses available
to it which are different from or additional to those available to the
Indemnifying Party, but shall instead in such event pay the fees and costs of
separate counsel for the Indemnified Party or any other Indemnified Party. No
Indemnifying Party, in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party, consent to entry of any
judgment or enter into any settlement that: (i) contains an admission of
fault on the part of any Indemnified Party; or (ii) does not include as an
unconditional term thereof the giving by the claimant or plaintiff to each
such Indemnified Party of a release from all liability in respect to such
claim or litigation. Each Indemnified Party shall furnish such information
regarding itself or the claim in question as an
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Indemnifying Party may reasonably request in writing and as shall be
reasonably required in connection with defense of such claim and litigation
resulting therefrom.
(d) If the indemnification provided for in this Section 1.9 is
held by a court of competent jurisdiction to be unavailable to an Indemnified
Party with respect to any loss, liability, claim, damage, or expense referred
to therein, then the Indemnifying Party, in lieu of indemnifying such
Indemnified Party hereunder, shall contribute to the amount paid or payable
by such Indemnified Party as a result of such loss, liability, claim, damage,
or expense in such proportion as is appropriate to reflect the relative fault
of the Indemnifying Party on the one hand and of the Indemnified Party on the
other in connection with the statements or omissions that resulted in such
loss, liability, claim, damage, or expense as well as any other relevant
equitable considerations. The relative fault of the Indemnifying Party and of
the Indemnified Party shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or
omission to state a material fact relates to information supplied by the
Indemnifying Party or by the Indemnified Party and the parties' relative
intent, knowledge, access to information, and opportunity to correct or
prevent such statement of omission.
(e) Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in the underwriting
agreement entered into in connection with the underwritten public offering
are in conflict with the foregoing provisions, the provisions in the
underwriting agreement shall control.
1.10 INFORMATION BY HOLDER. Each Holder of Registrable Securities shall
furnish to the Company such information regarding such Holder and the
distribution proposed by such Holder as the Company may reasonably request in
writing and as shall be reasonably required in connection with any
registration, qualification, or compliance referred to in this Section 1.
1.11 LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. From and after the
date of this Agreement, the Company shall not, without the prior written
consent of the Majority Holders, enter into any agreement with any holder or
prospective holder of any securities of the Company giving such holder or
prospective holder any registration rights which are senior or more
advantageous in any respects to the rights granted hereunder.
1.12 RULE 144 REPORTING. With a view to making available the benefits
of certain rules and regulations of the Commission that may permit the sale
of the Restricted Securities to the public without registration, the Company
agrees to use its best efforts to:
(a) Make and keep public information regarding the Company
available as those terms are understood and defined in Rule 144 under the
Securities Act, at all times from and after ninety (90) days following the
effective date of the first registration under the Securities Act filed by
the Company for an offering of its securities to the general public;
(b) File with the Commission in a timely manner all reports and
other documents required of the Company under the Securities Act and the
Exchange Act at any time after it has become subject to such reporting
requirements; and
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(c) So long as a Investor owns any Restricted Securities, furnish
to the Investor forthwith upon written request a written statement by the
Company as to its compliance with the reporting requirements of Rule 144 (at
any time from and after ninety (90) days following the effective date of the
first registration statement filed by the Company for an offering of its
securities to the general public), and of the Securities Act and the Exchange
Act (at any time after it has become subject to such reporting requirements),
a copy of the most recent annual or quarterly report of the Company, and such
other reports and documents so filed as a Investor may reasonably request in
availing itself of any Rule or regulation of the Commission allowing a
Investor to sell any such securities without registration.
1.13 TRANSFER OR ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause
the Company to register Registrable Securities granted to a Holder by the
Company under this Section 1 may be transferred or assigned by a Holder in
connection with the transfer of such Registrable Securities, provided that
the Company is given written notice at the time of or within a reasonable
time after said transfer or assignment, stating the name and address of the
transferee or assignee and identifying the securities with respect to which
such registration rights are being transferred or assigned, and, provided
further, that the transferee or assignee of such rights assumes in writing
the obligations of such Holder under this Section 1; and provided further
that such transferee acquires at least 50,000 shares of Registrable
Securities (as presently constituted and subject to subsequent adjustment for
stock splits, stock dividends, reverse stock splits, recapitalizations and
the like) or all remaining shares held by any Holder
1.14 MARKET STANDOFF AGREEMENT. In connection with any firm commitment
underwritten initial public offering of the Company's securities in
connection with an effective registration statement under the Securities Act,
each Holder agrees, upon the request of the underwriters managing such
underwritten offering of the Company's securities, not to sell, make any
short sale of, loan, grant any option for the purchase of, or otherwise
dispose of any securities of the Company (other than those included in the
registration) without the prior written consent of such underwriters for such
period of time not to exceed one hundred eighty (180) days from the effective
date of such registration, as may be requested by the underwriters, provided
that the officers and directors of the Company and any beneficial holders of
five percent (5%) or more of the number of shares of outstanding Common Stock
also agree to such restrictions. With respect to any other firm commitment
underwritten public offering of the Company's securities in connection with
an effective registration statement under the Securities Act, upon the
request of the underwriters managing such underwritten offering of the
Company's securities, each Holder who is an officer, director or affiliate
(as that term is defined in Rule 144) of the Company or is a beneficial
holder of five percent (5%) or more of the number of shares outstanding
Common Stock agrees not to sell, make any short sale of, loan, grant any
option for the purchase of, or otherwise dispose of any securities of the
Company (other than those included in the registration) without the prior
written consent of such underwriters for such period of time not to exceed
ninety (90) days from the effective date of such registration, as may be
requested by the underwriters, provided that the officers and directors of
the Company and any beneficial holders of five percent (5%) or more of the
number of shares of outstanding Common Stock also agree to such restrictions.
Each Holder agrees
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that the Company may instruct its transfer agent to place stop-transfer
notations in its records to enforce the provisions of this Section 1.14.
1.15 TERMINATION OF REGISTRATION RIGHTS. The rights granted pursuant to
Sections 1.4, 1.5 and 1.7 of this Agreement shall terminate as to any Holder
upon the earlier of (i) the date five (5) years after the effective date of
the initial registered public offering of the Common Stock of the Company or
(ii) the date one (1) year after such time that such Holder may sell all the
Registrable Securities held by such Holder under Rule 144(k), so long as the
Company's Common Stock is traded on either the New York Stock Exchange or on
NASDAQ, or any successor exchange or listing thereto.
2. COVENANTS OF THE COMPANY.
The Company hereby covenants and agrees as follows:
2.1 BASIC FINANCIAL INFORMATION. The Company will furnish the
following reports to each Investor:
(a) As soon as practicable after the end of each fiscal year of
the Company (including, without limitation, fiscal 1998), and in any event
within ninety (90) days thereafter, an audited consolidated balance sheet of
the Company and its subsidiaries, if any, as at the end of such fiscal year,
and audited consolidated statements of income and cash flows of the Company
and its subsidiaries, if any, for such year, prepared in accordance with
generally accepted accounting principles consistently applied and setting
forth in each case in comparative form the figures for the previous fiscal
year, all in reasonable detail and certified by independent public
accountants of recognized national standing selected by the Company, and a
Company-prepared comparison to the Company's operating plan for such year.
(b) As soon as practicable after the end of the first, second,
and third quarterly accounting periods in each fiscal year of the Company,
and in any event within forty-five (45) days thereafter, a consolidated
balance sheet of the Company and its subsidiaries, if any, as of the end of
each such quarterly period, and consolidated statements of income and cash
flows of the Company and its subsidiaries, if any, for such period and for
the current fiscal year to date, prepared in accordance with generally
accepted accounting principles consistently applied and setting forth in
comparative form the figures for the corresponding periods of the previous
fiscal year and to the Company's operating plan then in effect and approved
by its Board of Directors, subject to changes resulting from normal year-end
audit adjustments, all in reasonable detail and certified by the principal
financial or accounting officer of the Company, except that such financial
statements need not contain the notes required by generally accepted
accounting principles.
2.2 ADDITIONAL INFORMATION AND RIGHTS.
(a) The Company will permit any Investor or its representative,
so long as such Investor or its representative either (i) owns at least
50,000 shares of Restricted Securities (subject to subsequent adjustment for
stock splits, stock dividends, reverse stock splits, recapitalizations and
the
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like) or (ii) represents that it is a "venture capital operating company" for
purposes of Department of Labor Regulation Section 2510.3-101 (each, a
"Significant Holder"), and provided such Investor is not reasonably
identified by the Board of Directors of the Company as a competitor of the
Company, to visit and inspect any of the properties of the Company, including
its books of account and other records (and make copies thereof and take
extracts therefrom), and to discuss its affairs, finances and accounts with
the Company's officers and its independent public accountants, all at such
reasonable times and as often as any such person may reasonably request.
(b) The Company will deliver the reports described below in this
Section 2.2 to each Significant Holder:
(i) Annually (and in any event no later than ten (10)
days after adoption by the Board of Directors of the Company) the financial
plan of the Company, in such manner and form as approved by the Board of
Directors of the Company, which financial plan shall include at least a
projection of income and a projected cash flow statement for each fiscal
quarter in such fiscal year and a projected balance sheet as of the end of
each fiscal quarter in such fiscal year. Any material changes in such
financial plan shall be delivered to each Significant Holder as promptly as
practicable after such changes have been approved by the Board of Directors
of the Company.
(ii) With reasonable promptness, such other information
and data with respect to the Company and its subsidiaries as any such person
may from time to time reasonably request.
(iii) As soon as practicable after transmission or
occurrence and in any event within ten (10) days thereof, copies of any
response or communications delivered to any class of the Company's security
holders or broadly to the financial community, including any filings by the
Company with any securities exchange, the Securities and Exchange Commission
or the National Association of Securities Dealers, Inc.
(c) The provisions of Section 2.1 and this Section 2.2 shall not
be in limitation of any rights which any Investor or Significant Holder may
have with respect to the books and records of the Company and its
subsidiaries, or to inspect their properties or discuss their affairs,
finances and accounts, under the laws of the jurisdictions in which they are
incorporated.
(d) Anything in Section 2 to the contrary notwithstanding, no
Investor or Significant Holder by reason of this Agreement shall have access
to any trade secrets or confidential information of the Company. Each
Significant Holder hereby agrees to hold in confidence and trust and not to
misuse or disclose any confidential information provided pursuant to this
Section 2.2 or obtained pursuant to Section 2.12. Notwithstanding the
foregoing sentence, a Significant Holder may disclose confidential
information obtained pursuant to this Section 2.2 or Section 2.12 if the
Company has previously made such information available to the public
generally or if required by law or regulation or to assert a claim or
defense, provided the Company is given reasonable advance notice of the
intended disclosure and an opportunity to seek confidential treatment or an
appropriate court order preventing public disclosure.
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(e) From the date the Company becomes subject to the reporting
requirements of the Exchange Act (which shall include any successor federal
statute), and in lieu of the financial information required pursuant to
Sections 2.1 and 2.2, copies of its annual reports on Form 10-K and its
quarterly reports on Form 10-Q, respectively.
(f) Each Investor who represents to the Company that it is a
"venture capital operating company" for purposes of Department of Labor
Regulation Section 2510.3-101 shall in addition have the right to consult
with and advise the officers of the Company as to the management of the
Company.
(g) The information and other rights granted to an Investor under
Section 2.1 and 2.2 may be transferred or assigned by an Investor in
connection with the transfer of Restricted Securities, provided that the
Company is given written notice at the time of or within a reasonable time
after said transfer or assignment, stating the name and address of the
transferee or assignee and identifying the securities with respect to which
such rights are being transferred or assigned, and, provided further, that
the transferee or assignee of such rights is not reasonably deemed to be a
competitor of the Company; and provided further that such transferee acquires
at least 50,000 shares of Restricted Securities (as presently constituted and
subject to subsequent adjustment for stock splits, stock dividends, reverse
stock splits, recapitalizations and the like) or all remaining shares held by
any Investor.
2.3 RIGHT OF FIRST REFUSAL. The Company hereby grants to each Holder
of at least 50,000 Registrable Securities (as presently constituted and
subject to subsequent adjustment for stock splits, stock dividends, reverse
stock splits, recapitalizations and the like) the right of first refusal to
purchase a pro rata share of New Securities (as defined in this Section 2.3)
which the Company may, from time to time, propose to sell and issue. A
Holder's pro rata share, for purposes of this right of first refusal, is the
ratio of the number of shares of Common Stock owned by such Holder
immediately prior to the issuance of New Securities, assuming full conversion
of all Preferred Stock, to the total number of shares of Common Stock
beneficially held by all Holders immediately prior to the issuance of New
Securities, assuming full conversion of all Preferred Stock and exercise of
all outstanding rights, options and warrants to acquire Common Stock of the
Company held by all Holders. Each Holder of at least 50,000 Registrable
Securities (as presently constituted and subject to subsequent adjustment for
stock splits, stock dividends, reverse stock splits, recapitalizations and
the like) shall have a right of over-allotment such that if any Holder fails
to exercise its right hereunder to purchase its pro rata share of New
Securities hereunder, the other Holders may purchase the non-purchasing
Holder's portion on a pro rata basis within ten (10) days from the date such
non-purchasing Holder fails to exercise its right hereunder to purchase its
pro rata share of New Securities. This right of first refusal shall be
subject to the following provisions:
(a) "New Securities" shall mean any capital stock (including
Common Stock and/or Preferred Stock) of the Company whether now authorized or
not, and rights, options or warrants to purchase such capital stock, and
securities of any type whatsoever that are, or may become, convertible into
capital stock; provided that the term "New Securities" does not include (i)
any securities issued pursuant to the Purchase Agreement or outstanding on
the date of this
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Agreement; (ii) securities issued upon conversion of the Company's Preferred
Stock; (iii) any additional shares of Common Stock issued pursuant to Section
5(c) of Article V(B) of the Restated Articles; (iv) securities issued
pursuant to the acquisition of another business entity or business segment of
any such entity by the Company by merger, purchase of substantially all the
assets or other reorganization whereby the Company will own more than fifty
percent (50%) of the voting power of such business entity or business segment
of any such entity; (v) any borrowings, direct or indirect, from financial
institutions or other persons by the Company, whether or not presently
authorized, including any type of loan or payment evidenced by any type of
debt instrument, provided such borrowings do not have any equity features
including warrants, options or other rights to purchase capital stock and are
not convertible into capital stock of the Company; (vi) securities issued to
employees, consultants, officers or directors of the Company pursuant to any
stock option, stock purchase or stock bonus plan, agreement or arrangement
approved by the Board of Directors; (vii) securities issued to vendors or
customers or to other persons in similar commercial situations with the
Company if such issuance is approved by the Board of Directors; (viii)
securities issued in connection with obtaining lease financing, whether
issued to a lessor, guarantor or other person; (ix) securities issued in an
underwritten public offering pursuant to a registration under the Securities
Act; (x) securities issued in connection with any stock split, stock dividend
or recapitalization of the Company; (xi) securities issued to strategic
investors in connection with corporate partnering transactions not
principally designed to raise capital, up to an aggregate of $50,000,000 on
terms approved by the Board of Directors; and (xii) any right, option or
warrant to acquire any security convertible into the securities excluded from
the definition of New Securities pursuant to subsections (i) through (xi)
above.
(b) In the event the Company proposes to undertake an issuance of
New Securities, it shall give each Holder of at least 50,000 Registrable
Securities (as presently constituted and subject to subsequent adjustment for
stock splits, stock dividends, reverse stock splits, recapitalizations and
the like) written notice of its intention, describing the type of New
Securities, and their price and the general terms upon which the Company
proposes to issue the same. Each such Holder shall have twenty (20) days
after any such notice is mailed or delivered to agree to purchase such
Holder's pro rata share of such New Securities for the price and upon the
terms (including as to form of consideration) specified in the notice by
giving written notice to the Company and stating therein the quantity of New
Securities to be purchased.
(c) In the event the Holders of at least 50,000 Registrable
Securities (as presently constituted and subject to subsequent adjustment for
stock splits, stock dividends, reverse stock splits, recapitalizations and
the like) fail to exercise fully their right of first refusal within said
twenty (20) day period and after the expiration of the 10-day period for the
exercise of the over-allotment provisions of this Section 2.3, the Company
shall have one hundred twenty (120) days thereafter to sell or enter into an
agreement (pursuant to which the sale of New Securities covered thereby shall
be closed, if at all, within one hundred twenty (120) days from the date of
said agreement) to sell the New Securities in respect of which such Holders'
right of first refusal option set forth in this Section 2.3 was not
exercised, at a price and upon terms (including as to form of consideration)
no more favorable to the purchasers thereof than specified in the Company's
notice to the Holders pursuant to Section 2.3(b). In the event the Company
has not sold within said 120-day
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period or entered into an agreement to sell the New Securities in accordance
with the foregoing within one hundred twenty (120) days from the date of said
agreement, the Company shall not thereafter issue or sell any New Securities,
without first again offering such securities to the Holders in the manner
provided in Section 2.3(b) above.
(d) The right of first refusal granted to a Holder under this
Section 2.3 may be transferred or assigned by such Holder in connection with
the transfer of Registrable Securities, provided that the Company is given
written notice at the time of or within a reasonable time after said transfer
or assignment, stating the name and address of the transferee or assignee and
identifying the securities with respect to which such rights are being
transferred or assigned, and, provided further that such transferee acquires
at least 50,000 shares of Registrable Securities (as presently constituted
and subject to subsequent adjustment for stock splits, stock dividends,
reverse stock splits, recapitalizations and the like) or all remaining shares
held by any Holder.
2.4 PROMPT PAYMENT OF TAXES, ETC. The Company will timely file all
required tax returns and reports and will promptly pay and discharge, or
cause to be paid and discharged, when due and payable (or prior to the
expiration of any applicable extensions therefor), all lawful taxes,
assessments and governmental charges or levies imposed upon the income,
profits, property or business of the Company or any subsidiary; provided,
however, that any such tax, assessment, charge or levy need not be paid if
the validity thereof shall currently be contested in good faith by
appropriate proceedings and if the Company shall have set aside on its books
adequate reserves with respect thereto in accordance with generally accepted
accounting principles, and provided, further, that the Company will pay all
such taxes, assessments, charges or levies forthwith upon the commencement of
proceedings to foreclose any lien which may have attached as security
therefor. The Company will promptly pay or cause to be paid when due, or in
conformance with customary trade terms or otherwise in accordance with
policies related thereto adopted by the Company's Board of Directors, all
other indebtedness incident to operations of the Company.
2.5 MAINTENANCE OF PROPERTIES AND LEASES. The Company will keep its
properties and those of its subsidiaries in good repair, working order and
condition, reasonable wear and tear excepted, and from time to time make all
needful and proper repairs, renewals, replacements, additions and
improvements thereto; and the Company and its subsidiaries will at all times
comply with each material provision of all leases to which any of them is a
party or under which any of them occupies property if the breach of such
provision might have a material and adverse effect on the business, assets,
operations, condition (financial or otherwise) or results of operations of
the Company.
2.6 INSURANCE. Except as otherwise decided in accordance with policies
adopted by the Company's Board of Directors, the Company will keep its assets
and those of its subsidiaries which are of an insurable character insured by
financially sound and reputable insurers against loss or damage by fire,
explosion and other risks customarily insured against by similarly situated
companies in the Company's line of business, and the Company will maintain,
with financially sound and reputable insurers, insurance against other
hazards and risks and liability to persons and
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property to the extent and in the manner customary for companies in similar
businesses similarly situated.
2.7 ACCOUNTS AND RECORDS. The Company will keep true records and books
of account in which full, true and correct entries will be made of all
dealings or transactions in relation to its business and affairs in
accordance with generally accepted accounting principles applied on a
consistent basis.
2.8 INDEPENDENT ACCOUNTANTS. The Company will retain independent
public accountants of recognized national standing who shall audit and
certify the Company's financial statements at the end of each fiscal year. In
the event the services of the independent public accountants so selected, or
any firm of independent public accountants hereafter employed by the Company,
are terminated, the Company will promptly thereafter notify the Investors and
will request the firm of independent public accountants whose services are
terminated to deliver to the Investors a letter from such firm setting forth
the reasons for the termination of their services. In the event of such
termination, the Company will promptly thereafter engage another firm of
independent public accountants of recognized national standing. In its notice
to the Investors the Company shall state whether the change of accountants
was recommended or approved by the Board of Directors of the Company or any
committee thereof.
2.9 COMPLIANCE WITH REQUIREMENTS OF GOVERNMENT AUTHORITIES. The
Company and all its subsidiaries shall duly observe and conform to all laws,
statutes, rules, regulations and valid requirements of governmental
authorities relating to the conduct of their businesses or to their
properties or assets.
2.10 MAINTENANCE OF CORPORATE EXISTENCE, ETC. The Company shall
maintain in full force and effect its corporate existence, rights and
franchises and all licenses and other rights in or to use patents, processes,
licenses, trademarks, trade names or copyrights owned or possessed by it or
any subsidiary and deemed by the Company to be necessary to the conduct of
its business.
2.11 EMPLOYEE AND OTHER STOCK ARRANGEMENTS. The Company will not,
without the written approval of the Majority Holders, issue any of its
capital stock, or grant an option or rights to subscribe for, purchase or
acquire any of its capital stock, to any employee, consultant, officer or
director of the Company or a subsidiary except for (a) the issuance of up to
5,400,000 shares of Common Stock under the Company's 1997 and 1998 Stock
Option Plans and (b) the issuance of additional shares of additional Common
Stock or options or rights exercisable for shares of Common Stock, such
additional shares not to exceed on an aggregate basis 5% of the outstanding
Common Stock of the Company as of the date hereof on a fully diluted basis.
2.12 ATTENDANCE AT BOARD MEETINGS. Each Significant Holder or its
representative shall have the right to attend all meetings of the Board of
Directors in a nonvoting observer capacity, to receive notice of such
meetings and to receive the information provided by the Company to the Board
of Directors; provided, however, that the Company may require as a condition
precedent to any Significant Holder's rights under this Section 2.12 that
each person proposing to attend any meeting of the Board of Directors and
each person to have access to any of the information provided
-24-
<PAGE>
by the Company to the Board of Directors shall agree to abide by the
confidentiality provisions set forth in Section 2.2(d) with respect to all
information so received during such meetings or otherwise; and, provided
further, that the Company reserves the right not to provide information and
to exclude such Significant Holder (or its representative) from any meeting
of its Board of Directors if delivery of such information or attendance at
such meeting by such Significant Holder (or its representative) would result
in disclosure of trade secrets to such Significant Holder or its representative
or would adversely affect the attorney-client privilege between the Company
and its counsel or if such Significant Holder or its representative is a
direct competitor of the Company.
2.13 TRANSACTIONS WITH AFFILIATES. The Company shall not, without the
approval of the disinterested members of the Company's Board of Directors ,
engage in any loans, leases, contracts or other transactions with any
director, officer, key employee or other affiliate of the Company, or any
member of any such person's immediate family, including the parents, spouse,
children and other relatives of any such person, on terms less favorable than
the Company would obtain in a transaction with an unrelated party, as
determined in good faith by the Board of Directors.
2.14 OTHER CAPITAL STOCK. The Company shall not issue any other capital
stock of the Company other than the Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock or capital stock which is junior in
all respects to the Series C Preferred Stock, Series D Preferred Stock and
Series E Preferred Stock without the written prior approval of the Majority
Holders.
2.15 PUBLIC COMPANY. The Company shall exert reasonable best efforts to
complete a Qualified Public Offering, as such term is defined in Section 4(b)
of Article V(B) set forth in the Restated Articles, as soon as possible
following the date hereof.
2.16 TERMINATION OF COVENANTS. The covenants set forth in this Section 2
shall terminate and be of no further force and effect after the closing of a
Qualified Public Offering, as such term is defined in Section 4(b) of
Article V(B) set forth in the Restated Articles.
3. MISCELLANEOUS.
3.1 GOVERNING LAW. This Agreement shall be governed in all respects by
the laws of the State of California, as applied to agreements among
California residents entered into and to be performed entirely within
California.
3.2 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto.
3.3 ENTIRE AGREEMENT. This Agreement (including the Exhibits hereto)
constitutes the full and entire understanding and agreement between the
parties with regard to the subjects hereof and thereof.
3.4 AMENDMENT; WAIVER. Except as otherwise provided above, any
provision of this Agreement may be amended or the observance thereof may be
waived (either generally or in a
-25-
<PAGE>
particular instance and either retroactively or prospectively), only with the
written consent of the Company and the Majority Holders. Notwithstanding the
foregoing, (i) no amendment shall be made to this Agreement which adversely
affects the relative rights and preferences of a particular class of Holders
(i.e., the Series C Registrable Securities, the Series D Registrable
Securities, the Series E Registrable Securities, the Wharton Note Shares or
the Wharton Warrant Shares) without the written consent of a majority of the
Registrable Securities held by the Holders in such adversely affected class
and (ii) in no event shall the rights of Ares or an Ares Affiliate under
Section 1.1(f) (as applied in Section 1.4), Section 1.2, Section 1.3(f) or
this Section 3.4 be amended or waived, except upon the written consent of
Ares or such Ares Affiliate. Any amendment or waiver effected in accordance
with this Section 3.4, as applicable, shall be binding upon each Investor,
Holder of Registrable Securities at the time outstanding, each future holder
of any of such securities, and the Company.
3.5 NOTICES, ETC. All notices and other communications required or
permitted hereunder shall be in writing and shall be mailed by United States
first-class mail, postage prepaid, sent by facsimile or delivered personally
by hand or nationally recognized courier, addressed (a) if to an Investor, as
indicated on the list of Investors attached hereto as EXHIBIT A, or at such
other address as such holder or permitted assignee shall have furnished to
the Company in writing, or (b) if to the Company, at such address or
facsimile number set forth on Exhibit A or as the Company shall have
furnished to each Investor in writing. All such notices and other written
communications shall be effective on the date of mailing, facsimile transfer
or delivery.
3.6 DELAYS OR OMISSIONS. No delay or omission to exercise any right,
power or remedy accruing to any Holder, upon any breach or default of the
Company under this Agreement, shall impair any such right, power or remedy of
such Investor nor shall it be construed to be a waiver of any such breach or
default, or an acquiescence therein, or of or in any similar breach or
default thereafter occurring; nor shall any waiver of any single breach or
default be deemed a waiver of any other breach or default therefore or
thereafter occurring. Any waiver, permit, consent or approval of any kind or
character on the part of any Investor of any breach or default under this
Agreement or any waiver on the part of any Investor of any provisions or
conditions of this Agreement must be made in writing and shall be effective
only to the extent specifically set forth in such writing. All remedies,
either under this Agreement or by law or otherwise afforded to any Investor,
shall be cumulative and not alternative.
3.7 RIGHTS; SEPARABILITY. Unless otherwise expressly provided herein,
an Investor's rights hereunder are several rights, not rights jointly held
with any of the other Investors. In case any provision of the Agreement shall
be invalid, illegal or unenforceable, the validity, legality and enforceability
of the remaining provisions shall not in any way be affected or impaired
thereby.
3.8 CONFIDENTIAL INFORMATION. Each Investor acknowledges that the
information received by them pursuant hereto may be confidential and for its
use only, and it will not use such confidential information in violation of
the Exchange Act or reproduce, disclose or disseminate such information to
any other person (other than its employees or agents having a need to know
the contents of such information, and its attorneys) except in connection
with the exercise of rights
-26-
<PAGE>
under this Agreement. Notwithstanding the foregoing sentence, an Investor may
disclose such confidential information if the Company has previously made
such information available to the public generally or if required by law or
regulation or to assert a claim or defense, provided the Company is given
reasonable advance notice of the intended disclosure and an opportunity to
seek confidential treatment or an appropriate court order preventing public
disclosure.
3.9 TITLES AND SUBTITLES. The titles of the paragraphs and subparagraphs
of this Agreement are for convenience of reference only and are not to be
considered in construing or interpreting this Agreement.
3.10 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument. Counterparts may be executed and delivered
by facsimile, provided that such delivery is promptly followed by the
delivery of hard copy of the same.
3.11 PRIOR AGREEMENT. Upon the execution of this Agreement by (i) the
Company, (ii) the New Investors, (iii) the Warrant Holders and (iv) the
holders of a majority of the Series C Registrable Securities and the holders
of a majority of the Series D Registrable Securities, this Agreement shall
supersede and replace the Prior Agreement, which shall be terminated and
cease to have any further force and effect. Each Series C Holder and Series D
Holder executing this Agreement hereby waives any and all rights of the
Holders of Registrable Securities granted pursuant to Section 2.3 of the
Prior Agreement with respect to all shares of the Company's Series E
Preferred Stock to be issued pursuant to the Purchase Agreement. Each Series C
Holder and Series D Holder executing this Agreement hereby consents, pursuant
to the terms of Section 2.14 of the Prior Agreement, to the issuance of the
Series E Preferred Stock.
-27-
<PAGE>
3.12 NEW HOLDERS. If a warrant to purchase the Company's Series D
Preferred Stock or Common Stock is granted by the Company to a Lessor, then,
notwithstanding anything in Section 3.4 to the contrary, no consent of any
Holder shall be required to add such Lessor as a party to this Agreement.
Each such Lessor shall execute a counterpart to this Agreement in
substantially the form attached hereto as EXHIBIT B and, upon execution by
such Lessor and by the Company, shall be considered a 'Holder' and an
'Investor' for purposes of this Agreement and shall be added to EXHIBIT A
under the caption 'Warrant Investors.'
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-28-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Fourth
Amended and Restated Investor's Rights Agreement effective as of the day and
year first above written.
ZAPME! CORPORATION DELL USA L.P.
BY DELL GEN. P. CORP., ITS GENERAL PARTNER
By: /s/ Lance Mortensen By: /s/ Thomas H. Welch
------------------------- ---------------------------------------
Chairman and Chief
Title: Executive Officer Print your name: Thomas H. Welch
---------------------- --------------------------
Title: Vice President and Assistant
Secretary
------------------------------------
INVESTOR
By: /s/ Richard Gadbois
---------------------------------------
Print your name: Richard Gadbois
--------------------------
PACESETTER CAPITAL CORPORATION
By:
---------------------------------------
Print your name:
--------------------------
Title:
------------------------------------
LEASING TECHNOLOGIES INTERNATIONAL, INC.
By:
---------------------------------------
Print your name:
--------------------------
Title:
------------------------------------
EXISTING INVESTOR
Entity Name:
------------------------------
By:
---------------------------------------
Print your name:
--------------------------
Title:
------------------------------------
(SIGNATURE PAGE TO THE FOURTH AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT)
<PAGE>
IMPERIAL BANK
By:
---------------------------------------
Print your name:
--------------------------
Title:
------------------------------------
(SIGNATURE PAGE TO THE FOURTH AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT)
<PAGE>
EXHIBIT A
INVESTOR ("PRIOR HOLDERS")
JNC STRATEGIC FUND, LTD.
Address: c/o Olympia Capital (Cayman) Ltd.
Williams House, 20 Reid Street
Hamilton HM 11, Bermuda
Attn: Thomas Davis
with a copy to:
Neil Chau
Encore Capital Management LLC
12007 Sunrise Valley Drive, Suite 460
Reston, VA 20191
RESONANCE LIMITED
Address: c/o Pergrine Corporate Service Limited
Burleigh Manor, Peel Road
Douglas, Isle of Man IM15EP
British Isles
Tel: 011-44-624-626-586
Fax: 011-44-624-612-960
JULES NORDLICHT
Address: 255 West Beach Street
Long Beach, NY 11561
Tel: ( ) 432-4636
BRIAN HERRERA
Address: 4350 Rosewood Drive
Pleasanton, CA 94588
Tel: (925) 416-1100
CAVCO OF NORTH FLORIDA, INC.
Address: 9250 Baymeadows Road
Suite 220
Jacksonville, FL 32256
Attn: Charles C. Appleby
Tel: (904) 636-0032
Fax: (904) 636-0699
<PAGE>
BARRY MINSKY
Address: c/o Wharton Capital Partners, Ltd.
545 Madison Avenue
New York, NY 10022
GILAT SATELLITE NETWORKS LTD.
Address: Gilat House
Yegia Kapayim Street,
Daniv Park
Kiryat Arye,
Petach Tikva 49130
Israel
Attn: Ami Samuels
Tel: 011-972-3-925-2000
Fax: 011-972-3-925-2222
ARES LEVERAGED INVESTMENT FUND, L.P.
Address: 1999 Avenue of the Stars, Suite 1900
Los Angeles, CA 90067
Attn: Eric Beckman
Tel: (301) 201-4215
Fax: (301) 201-4171
ARES LEVERAGED INVESTMENT FUND II, L.P.
Address: 1999 Avenue of the Stars, Suite 1900
Los Angeles, CA 90067
Attn: Eric Beckman
Tel: (301) 201-4215
Fax: (301) 201-4171
SYLVAN LEARNING SYSTEMS, INC.
Address: 1000 Lancaster St.,
Baltimore, MD 21202
Attn: Bob Zentz
Tel: (410) 843-8000
Fax: (401) 843-8060
RICK INATOME
Address: 1800 West Maple Road,
Troy, MI 48084
Tel:
Fax:
<PAGE>
SALLY MCGUIRE
Address: 7803 Glenroy Rd., Suite 300
Bloomington, MN 55439
Tel:
Fax:
J. P. SAMPER
Address: 505 Hamilton Avenue,
Palo Alto, CA 94301
Tel:
Fax:
STERLING ZAPME LLC
Address: 650 Dundee Rd., Suite 370
Northbrook, IL 60062
Attn: Steven M. Taslitz
Tel:
Fax:
TROCADERO GROUP LLC
Address: 7803 Glenroy Road
Suite 300
Bloomington, MN 55439
Tel:
Fax:
QUINCE ASSOCIATES, L.P.
Address: 555 Zang Street, Suite 300
Lakewood, CO 80228
Tel:
Fax:
DRAKE HOLDINGS LIMITED
Address: 33 Yonge Street, Suite 300
Toronto, Ontario, M5E1G4, Canada
Tel:
Fax:
ENCORE CAPITAL MANAGEMENT, LLC
Address: 12007 Sunrise Drive
Reston, VA 20191
Tel:
Fax:
<PAGE>
STRONG RIVER INVESTMENTS LTD
Address: 630 Fifth Avenue, 20th Floor
New York, NY 10111
Tel:
Fax:
HEADWATERS CAPITAL
Address: 220 Montgomery Street, Suite 500
San Francisco, CA 94104
Attn: Tim Keating
Tel:
Fax:
JOEL KIRSCHBAUM
Address: Kirkland Investors LLC
527 Madison Ave., 17th Floor
New York, NY 10022
Tel:
Fax:
ANTHONY L. DICESARE
Address: Kirkland Investors LLC
527 Madison Ave., 17th Floor
New York, NY 10022
Tel:
Fax:
STEPHEN C. PERRY
Address: Kirkland Investors LLC
527 Madison Ave., 17th Floor
New York, NY 10022
Tel:
Fax:
WS INVESTMENT COMPANY 99A
Address: 650 Page Mill Road
Palo Alto, CA 94304
Tel: (650) 493-9300
Fax: (650) 493-6811
JAMES N. STRAWBRIDGE
Address: Centraal Corporation
2 Circle Star Way, 2nd Floor
San Carlos, CA 94070-1350
Tel: (650) 298 8080
<PAGE>
Fax: (650) 298 8085
SUZANNE BELL
Address: 650 Page Mill Road
Palo Alto, CA 94304
Tel: (650) 493-9300
Fax: (650) 493-6811
QUESTMARK PARTNERS, L.P.
Address: c/o QuestMark Management Co., Inc.
One South Street, Suite 800
Baltimore, MD 21202
Attn: Tim Krongard
Tel: ( )
Fax: ( )
ZM CO-INVESTMENT LLC
Address: 1999 Avenue of the Stars, Suite 1900
Los Angeles, CA 90067
Attn: Eric Beckman
Tel: ( )
Fax: ( )
LANCASTER EQUITIES, LLC
Address: 1000 Lancaster St.
Baltimore, MD 21202
Attn: Thomas McCord
Tel: ( )
Fax: ( )
ZAP INVESTMENTS, LLC
Address: 1000 Lancaster St.
Baltimore, MD 21202
Attn: William F. Achtmeyer
Tel: ( )
Fax: ( )
PHOENIX WORLDWIDE LIMITED
Address: c/o Kleinhadler Halevy Law Firm
30 Kalisher Street
Tel Aviv, 65257, Isreal
Attn: Amir Halevy
Tel: ( )
Fax: ( )
<PAGE>
MAPLE PROPERTIES LIMITED
Address: c/o Kleinhadler Halevy Law Firm
30 Kalisher Street
Tel Aviv, 65257, Isreal
Attn: Amir Halevy
Tel: ( )
Fax: ( )
AMI SAMUELS
Address: c/o Gilat Satellite Networks, Ltd.
Yegia Kapayim Street
Kiryat Arye, Petah Tikva, 49130, Isreal
Tel: ( )
Fax: ( )
EL QUESTOR LIMITED
Address: c/o Kleinhadler Halevy Law Firm
30 Kalisher Street
Tel Aviv, 65257, Isreal
Attn: Amir Halevy
Tel: ( )
Fax: ( )
MORENO LTD.
Address: c/o Kleinhadler Halevy Law Firm
30 Kalisher Street
Tel Aviv, 65257, Isreal
Attn: Amir Halevy
Tel: ( )
Fax: ( )
YOUNG PROPERTIES LIMITED
Address: c/o Kleinhadler Halevy Law Firm
30 Kalisher Street
Tel Aviv, 65257, Isreal
Attn: Amir Halevy
Tel: ( )
Fax: ( )
GARCIA LIMITED
Address: c/o Kleinhadler Halevy Law Firm
30 Kalisher Street
Tel Aviv, 65257, Isreal
Attn: Amir Halevy
Tel: ( )
<PAGE>
Fax: ( )
MICHAEL TSUK
Address: 7 Aliya St.
Ramat-Hasharon 47249, Isreal
Tel: ( )
Fax: ( )
SHELDON REVKIN
Address: 11900 Gainsborough Road
Potomac, Maryland 20854
Tel: ( )
Fax: ( )
DAVID SHIFF
Address: 8510 Garfield St.
Bethseda, MD 20817
Tel: ( )
Fax: ( )
DANIEL J. BERGESON
Address: Ten Almaden Blvd., Suite 200
San Jose, CA 95113
Tel: (408)
Fax: (408)
DAVID J. BERGER
Address: 650 Page Mill Road
Palo Alto, CA 94304
Tel: (650) 493-9300
Fax: (650) 493-
THOMAS G. BROWN
Address: 650 Page Mill Road
Palo Alto, CA 94304
Tel: (650) 493-9300
Fax: (650) 493-6811
ANDREW P. BRIDGES
Address: 650 Page Mill Road
Palo Alto, CA 94304
Tel: (650) 493-9300
Fax: (650) 493-6811
<PAGE>
JAMES A. DIBOISE
Address: 650 Page Mill Road
Palo Alto, CA 94304
Tel: (650) 493-9300
Fax: (650) 493-6811
MICHAEL S. ELLIS
Address: 650 Page Mill Road
Palo Alto, CA 94304
Tel: (650) 493-9300
Fax: (650) 493-6811
ANDREW HIRSCH
Address: 650 Page Mill Road
Palo Alto, CA 94304
Tel: (650) 493-9300
Fax: (650) 493-6811
TIMOTHY T. SCOTT
Address: 650 Page Mill Road
Palo Alto, CA 94304
Tel: (650) 493-9300
Fax: (650) 493-6811
TIMOTHY V. SPARKS
Address: 650 Page Mill Road
Palo Alto, CA 94304
Tel: (650) 493-9300
Fax: (650) 493-6811
RICHARD STEELE
Address: Centraal Corporation
2 Circle Star Way, 2nd Floor
San Carlos, CA 94070-1350
Tel: (650) 298 8080
Fax: (650) 298 8085
<PAGE>
INVESTOR ("NEW INVESTORS")
DELL USA L.P.
Address: One Dell Way
Round Rock, Texas 78682
Attn: Vice President, Business Development
Tel:
Fax:
RICHARD GADBOIS
Address: 4000 MacArthur Court
Newport Beach, CA 92660
Tel: (800) 814-5666
Fax: (949) 955-6079
<PAGE>
INVESTOR ("WARRANT HOLDERS")
PACESETTER CAPITAL CORPORATION
Address: 351 California Street Suite 1600
San Francisco, CA 94104-2412
Attn: Mr. Max E. LaCounte, President
Tel: (415) 834-0773
Fax: (415) 834-0774
LEASING TECHNOLOGIES INTERNATIONAL, INC.
Address:
Tel: ( )
Fax: ( )
IMPERIAL BANK
Address:
Tel: ( )
Fax: ( )
COMPANY
ZAPME! CORPORATION:
3000 Executive Parkway, Suite 150
San Ramon, CA 94583
Tel: (925) 543-0300
Facsimile: (925) 543-0301
Attn: Bruce D. Bower,
Vice President, Business Development
General Counsel and Secretary
<PAGE>
EXHIBIT B
IN WITNESS WHEREOF, pursuant to Section 3.12 of the Fourth Amended and
Restated Investors' Rights Agreement (the "Agreement") the parties have executed
this signature page to the Agreement this ___ day of _______, ____.
ZAPME! CORPORATION
By:
----------------------------------
Title:
-------------------------------
[WARRANT INVESTOR]
Name:
--------------------------------
Signature:
---------------------------
Print your name:
---------------------
Title (if applicable):
---------------
<PAGE>
Exhibit 10.3
ZAPME! CORPORATION
1998 STOCK PLAN
(AS AMENDED AND RESTATED AUGUST 2, 1999)
1. PURPOSES OF THE PLAN. The purposes of this 1998 Stock 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.
Options granted under the Plan may be Incentive Stock Options or
Nonstatutory Stock Options, as determined by the Administrator at the time of
grant. Stock Purchase Rights may also be granted under the Plan.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "ADMINISTRATOR" means the Board or any of its Committees as
shall be administering the Plan, in accordance with Section 4 of the Plan.
(b) "APPLICABLE LAWS" means the requirements relating to the
administration of stock option plans under U. S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws
of any foreign country or jurisdiction where Options or Stock Purchase Rights
are, or will be, granted under the Plan.
(c) "BOARD" means the Board of Directors of the Company.
(d) "CODE" means the Internal Revenue Code of 1986, as amended.
(e) "COMMITTEE" means a committee of Directors appointed by the
Board in accordance with Section 4 of the Plan.
(f) "COMMON STOCK" means the common stock of the Company.
(g) "COMPANY" means ZapMe! Corporation, Inc., a California
corporation.
(h) "CONSULTANT" means any person, including an advisor, engaged by
the Company or a Parent or Subsidiary to render services to such entity.
(i) "DIRECTOR" means a member of the Board.
<PAGE>
(j) "DISABILITY" means total and permanent disability as defined in
Section 22(e)(3) of the Code.
(k) "EMPLOYEE" means any person, including Officers and Directors,
employed by the Company or any Parent or Subsidiary of the Company. A Service
Provider shall not cease to be an Employee in the case of (i) any leave of
absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any successor.
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. If reemployment upon expiration of a leave of absence
approved by the Company is not so guaranteed, on the 181st day of such leave
any Incentive Stock Option held by the Optionee shall cease to be treated as
an Incentive Stock Option and shall be treated for tax purposes as a
Nonstatutory Stock Option. Neither service as a Director nor payment of a
director's fee by the Company shall be sufficient to constitute "employment"
by the Company.
(l) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(m) "FAIR MARKET VALUE" means, as of any date, the value of Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system
for the last market trading day prior to the time of determination, as
reported in THE WALL STREET JOURNAL or such other source as the Administrator
deems reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value
of a Share of Common Stock shall be the mean between the high bid and low
asked prices for the Common Stock on the last market trading day prior to the
day of determination, as reported in THE WALL STREET JOURNAL or such other
source as the Administrator deems reliable; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value shall be determined in good faith by the
Administrator.
(n) "INCENTIVE STOCK OPTION" means an Option intended to qualify as
an incentive stock option within the meaning of Section 422 of the Code and
the regulations promulgated thereunder.
(o) "NONSTATUTORY STOCK OPTION" means an Option not intended to
qualify as an Incentive Stock Option.
(p) "NOTICE OF GRANT" means a written or electronic notice
evidencing certain times and conditions of an individual Option or Stock
Purchase Right grant. The Notice of Grant is part of the Option Agreement.
-2-
<PAGE>
(q) "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.
(r) "OPTION" means a stock option granted pursuant to the Plan.
(s) "OPTION AGREEMENT" means an agreement between the Company and
an Optionee evidencing the terms and conditions of an individual Option
grant. The Option Agreement is subject to the terms and conditions of the
Plan.
(t) "OPTION EXCHANGE PROGRAM" means a program whereby outstanding
Options are surrendered in exchange for Options with a lower exercise price.
(u) "OPTIONED STOCK" means the Common Stock subject to an Option or
Stock Purchase Right.
(v) "OPTIONEE" means the holder of an outstanding Option or Stock
Purchase Right granted under the Plan.
(w) "OUTSIDE DIRECTOR" means a Director who is not an Employee.
(x) "PARENT" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(y) "PLAN" means this 1998 Stock Plan, as amended and restated.
(z) "RESTRICTED STOCK" means shares of Common Stock acquired
pursuant to a grant of Stock Purchase Rights under Section 11 of the Plan.
(aa) "RESTRICTED STOCK PURCHASE AGREEMENT" means a written
agreement between the Company and the Optionee evidencing the terms and
restrictions applying to stock purchased under a Stock Purchase Right. The
Restricted Stock Purchase Agreement is subject to the terms and conditions of
the Plan and the Notice of Grant.
(bb) "RULE 16b-3" means Rule 16b-3 of the Exchange Act or any
successor to Rule 16b-3, as in effect when discretion is being exercised with
respect to the Plan.
(cc) "SECTION 16(b)" means Section 16(b) of the Exchange Act.
(dd) "SERVICE PROVIDER" means an Employee, Director or Consultant.
(ee) "SHARE" means a share of the Common Stock, as adjusted in
accordance with Section 14 of the Plan.
(ff) "STOCK PURCHASE RIGHT" means the right to purchase Common
Stock pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant.
(gg) "SUBSIDIARY" means a "subsidiary corporation", whether now or
hereafter existing, as defined in Section 424(f) of the Code.
-3-
<PAGE>
3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 14
of the Plan, the maximum aggregate number of Shares which may be optioned and
sold under the Plan is [5,536,270] Shares, plus (a) any Shares which were
reserved but unissued under the Company's 1997 Stock Option Plan ("1997
Plan") as of the date of stockholder approval of the original adoption of
this Plan, (b) any Shares subsequently returned to the 1997 Plan as a result
of termination of options or repurchase of Shares issued under the 1997 Plan,
and (c) an annual increase to be added on the first day of the Company's
fiscal year beginning in fiscal year 2000 equal to the lesser of (i)
2,000,000 shares, (ii) 5% of the outstanding shares on such date, or (iii) an
amount determined by the Board. The Shares may be authorized, but unissued,
or reacquired Common Stock.
If an Option or Stock Purchase Right expires or becomes
unexercisable without having been exercised in full, or is surrendered
pursuant to an Option Exchange Program, the unpurchased Shares which were
subject thereto shall become available for future grant or sale under the
Plan (unless the Plan has terminated); PROVIDED, however, that Shares that
have actually been issued under the Plan, whether upon exercise of an Option
or Stock Purchase Right, shall not be returned to the Plan and shall not
become available for future distribution under the Plan, except that if
Shares of Restricted Stock are repurchased by the Company at their original
purchase price, such Shares shall become available for future grant under the
Plan.
4. ADMINISTRATION OF THE PLAN.
(a) PROCEDURE.
(i) MULTIPLE ADMINISTRATIVE BODIES. The Plan may be
administered by different Committees with respect to different groups of
Service Providers.
(ii) SECTION 162(m). To the extent that the Administrator
determines it to be desirable to qualify Options granted hereunder as
"performance-based compensation" within the meaning of Section 162(m) of the
Code, the Plan shall be administered by a Committee of two or more "outside
directors" within the meaning of Section 162(m) of the Code.
(iii) RULE 16b-3. To the extent desirable to qualify
transactions hereunder as exempt under Rule 16b-3, the transactions
contemplated hereunder shall be structured to satisfy the requirements for
exemption under Rule 16b-3.
(iv) OTHER ADMINISTRATION. Other than as provided above, the
Plan shall be administered by (A) the Board or (B) a Committee, which
committee shall be constituted to satisfy Applicable Laws.
(b) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the
Plan, and in the case of a Committee, subject to the specific duties
delegated by the Board to such Committee, the Administrator shall have the
authority, in its discretion:
(i) to determine Fair Market Value;
(ii) to select the Service Providers to whom Options and Stock
Purchase Rights may be granted hereunder;
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(iii) to determine the number of shares of Common Stock to be
covered by each Option and Stock Purchase Right granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any Option or Stock Purchase Right granted
hereunder. Such terms and conditions include, but are not limited to, the
exercise price, the time or times when Options or Stock Purchase Rights may
be exercised (which may be based on performance criteria), any vesting
acceleration or waiver of forfeiture restrictions, and any restriction or
limitation regarding any Option or Stock Purchase Right or the shares of
Common Stock relating thereto, based in each case on such factors as the
Administrator, in its sole discretion, shall determine;
(vi) to reduce the exercise price of any Option or Stock
Purchase Right to the then current Fair Market Value if the Fair Market Value
of the Common Stock covered by such Option or Stock Purchase Right shall have
declined since the date the Option or Stock Purchase Right was granted;
(vii) to institute an Option Exchange Program;
(viii) to construe and interpret the terms of the Plan and
awards granted pursuant to the Plan;
(ix) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
(x) to modify or amend each Option or Stock Purchase Right
(subject to Section 16(c) of the Plan), including the discretionary authority
to extend the post-termination exercisability period of Options longer than
is otherwise provided for in the Plan;
(xi) to allow Optionees to satisfy withholding tax obligations
by electing to have the Company withhold from the Shares to be issued upon
exercise of an Option or Stock Purchase Right that number of Shares having a
Fair Market Value equal to the amount required to be withheld. The Fair
Market Value of the Shares to be withheld shall be determined on the date
that the amount of tax to be withheld is to be determined. All elections by
an Optionee to have Shares withheld for this purpose shall be made in such
form and under such conditions as the Administrator may deem necessary or
advisable;
(xii) to authorize any person to execute on behalf of the
Company any instrument required to effect the grant of an Option or Stock
Purchase Right previously granted by the Administrator;
(xiii) to make all other determinations deemed necessary or
advisable for administering the Plan.
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(c) EFFECT OF ADMINISTRATOR'S DECISION. The Administrator's
decisions, determinations and interpretations shall be final and binding on
all Optionees and any other holders of Options or Stock Purchase Rights.
5. ELIGIBILITY. Nonstatutory Stock Options and Stock Purchase Rights
may be granted to Service Providers. Incentive Stock Options may be granted
only to Employees.
6. LIMITATIONS.
(a) Each Option shall be designated in the Option Agreement as
either an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair
Market Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year
(under all plans of the Company and any Parent or Subsidiary) exceeds
$100,000, such Options shall be treated as Nonstatutory Stock Options. For
purposes of this Section 6(a), Incentive Stock Options shall be taken into
account in the order in which they were granted. The Fair Market Value of the
Shares shall be determined as of the time the Option with respect to such
Shares is granted.
(b) Neither the Plan nor any Option or Stock Purchase Right shall
confer upon an Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall they interfere
in any way with the Optionee's right or the Company's right to terminate such
relationship at any time, with or without cause.
(c) The following limitations shall apply to grants of Options:
(i) No Service Provider shall be granted, in any fiscal year
of the Company, Options to purchase more than 1,000,000 Shares.
(ii) In connection with his or her initial service, a Service
Provider may be granted Options to purchase up to an additional 1,000,000
Shares, which shall not count against the limit, set forth in subsection (i)
above.
(iii) The foregoing limitations shall be adjusted
proportionately in connection with any change in the Company's capitalization
as described in Section 14.
(iv) If an Option is cancelled in the same fiscal year of the
Company in which it was granted (other than in connection with a transaction
described in Section 14), the cancelled Option will be counted against the
limits set forth in subsections (i) and (ii) above. For this purpose, if the
exercise price of an Option is reduced, the transaction will be treated as a
cancellation of the Option and the grant of a new Option.
7. TERM OF PLAN. Subject to Section 20 of the Plan, the Plan shall
become effective upon its adoption by the Board. It shall continue in effect
for a term of ten (10) years unless terminated earlier under Section 16 of
the Plan.
8. TERM OF OPTION. The term of each Option shall be stated in the
Option Agreement. In the case of an Incentive Stock Option, the term shall be
ten (10) years from the date of grant or such shorter term as may be provided
in the Option Agreement. Moreover, in the case of an
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Incentive Stock Option granted to an Optionee who, at the time the Incentive
Stock Option is granted, owns stock representing more than ten percent (10%)
of the total combined 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 or such shorter term as may be provided
in the Option Agreement.
9. OPTION EXERCISE PRICE AND CONSIDERATION.
(a) EXERCISE PRICE. The per share exercise price for the Shares to
be issued pursuant to exercise of an Option shall be determined by the
Administrator, subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time the Incentive
Stock 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 per Share exercise price shall be no less than 110% of the
Fair Market Value per Share on the date of grant.
(B) granted to any Employee other than an Employee
described in paragraph (A) immediately above, the per Share exercise price
shall be no less than 100% of the Fair Market Value per Share on the date of
grant.
(ii) In the case of a Nonstatutory Stock Option, the per Share
exercise price shall be determined by the Administrator. In the case of a
Nonstatutory Stock Option intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share
on the date of grant.
(iii) Notwithstanding the foregoing, Options may be granted
with a per Share exercise price of less than 100% of the Fair Market Value
per Share on the date of grant pursuant to a merger or other corporate
transaction.
(b) WAITING PERIOD AND EXERCISE DATES. At the time an Option is
granted, the Administrator shall fix the period within which the Option may
be exercised and shall determine any conditions that must be satisfied before
the Option may be exercised.
(c) FORM OF CONSIDERATION. The Administrator shall determine the
acceptable form of consideration for exercising an Option, including the
method of payment. In the case of an Incentive Stock Option, the
Administrator shall determine the acceptable form of consideration at the
time of grant. Such consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
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(iv) other Shares which (A) in the case of Shares acquired
upon exercise of an option, have been owned by the Optionee for more than six
(6) months on the date of surrender, and (B) have a Fair Market Value on the
date of surrender equal to the aggregate exercise price of the Shares as to
which said Option shall be exercised;
(v) consideration received by the Company under a cashless
exercise program implemented by the Company in connection with the Plan;
(vi) a reduction in the amount of any Company liability to the
Optionee, including any liability attributable to the Optionee's
participation in any Company-sponsored deferred compensation program or
arrangement;
(vii) any combination of the foregoing methods of payment; or
(viii) such other consideration and method of payment for the
issuance of Shares to the extent permitted by Applicable Laws.
10. EXERCISE OF OPTION.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A SHAREHOLDER. Any Option
granted hereunder shall be exercisable according to the terms of the Plan and
at such times and under such conditions as determined by the Administrator
and set forth in the Option Agreement. Unless the Administrator provides
otherwise, vesting of Options granted hereunder shall be tolled during any
unpaid leave of absence. An Option may not be exercised for a fraction of a
Share.
An Option shall be deemed exercised when the Company receives:
(i) written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by
the Administrator and permitted by the Option Agreement and the Plan. Shares
issued upon exercise of an Option shall be issued in the name of the Optionee
or, if requested by the Optionee, in the name of the Optionee and his or her
spouse. Until the Shares are 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
shareholder shall exist with respect to the Optioned Stock, notwithstanding
the exercise of the Option. The Company shall issue (or cause to be issued)
such Shares promptly after the Option is exercised. No adjustment will be
made for a dividend or other right for which the record date is prior to the
date the Shares are issued, except as provided in Section 14 of the Plan.
Exercising an Option in any manner shall decrease the number
of Shares thereafter available, both for purposes of the Plan and for sale
under the Option, by the number of Shares as to which the Option is exercised.
(b) TERMINATION OF RELATIONSHIP AS A SERVICE PROVIDER. Subject to
Section 14, if an Optionee ceases to be a Service Provider (but not in the
event of an Optionee's change of status from Employee to Consultant (in which
case an Employee's Incentive Stock Option shall automatically convert to a
Nonstatutory Stock Option on the ninety-first (91st) day following such
change of status) or from Consultant to Employee), such Optionee may, but
only within such period
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of time as is specified in the Option Agreement (but in no event later than
the expiration date of the term of such Option as set forth in the Option
Agreement), exercise his or her Option to the extent that Optionee was
entitled to exercise it at the date of such termination. In the absence of a
specified time in the Option Agreement, the Option shall remain exercisable
for three (3) months following the Optionee's termination. If, on the date of
termination, the Optionee is not vested as to his or her entire Option, the
Shares covered by the unvested portion of the Option shall revert to the
Plan. If, after termination, the Optionee does not exercise his or her Option
within the time specified by the Administrator, the Option shall terminate,
and the Shares covered by such Option shall revert to the Plan.
(c) DISABILITY OF OPTIONEE. If an Optionee ceases to be a Service
Provider as a result of the Optionee's Disability, the Optionee 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 Option as set forth in the
Option Agreement), exercise his or her Option the extent the Option is vested
on the date of termination. If, on the date of termination, the Optionee is
not vested as to his or her entire Option, the Shares covered by the unvested
portion of the Option shall revert to the Plan. If, after termination, the
Optionee does not exercise his or her Option within the time specified
herein, the Option shall terminate, and the Shares covered by such Option
shall revert to the Plan.
(d) DEATH OF OPTIONEE. If an Optionee dies while a Service
Provider, the Option 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 Option as set forth in the Notice of Grant), by the Optionee's
estate or by a person who acquires the right to exercise the Option by
bequest or inheritance, but only to the extent that the Option is vested on
the date of death. If, at the time of death, the Optionee is not vested as to
his or her entire Option, the Shares covered by the unvested portion of the
Option shall immediately revert to the Plan. The Option may be exercised by
the executor or administrator of the Optionee's estate or, if none, by the
person(s) entitled to exercise the Option under the Optionee's will or the
laws of descent or distribution. If the Option is not so exercised within the
time specified herein, the Option shall terminate, and the Shares covered by
such Option shall revert to the Plan.
(e) BUYOUT PROVISIONS. The Administrator may at any time offer to
buy out for a payment in cash or Shares an Option previously granted based on
such terms and conditions as the Administrator shall establish and
communicate to the Optionee at the time that such offer is made.
11. STOCK PURCHASE RIGHTS.
(a) RIGHTS TO PURCHASE. Stock Purchase Rights may be issued either
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator
determines that it will offer Stock Purchase Rights under the Plan, it shall
advise the offeree in writing or electronically, by means of a Notice of
Grant, of the terms, conditions and restrictions related to the offer,
including the number of Shares that the offeree shall be entitled to
purchase, the price to be paid, and the time within which the offeree must
accept such offer. The offer shall be accepted by execution of a Restricted
Stock Purchase Agreement in the form determined by the Administrator.
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(b) REPURCHASE OPTION. Unless the Administrator determines
otherwise, the Restricted Stock Purchase Agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination
of the purchaser's service with the Company for any reason (including death
or Disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock Purchase Agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the
purchaser to the Company. The repurchase option shall lapse at a rate
determined by the Administrator.
(c) OTHER PROVISIONS. The Restricted Stock Purchase Agreement
shall contain such other terms, provisions and conditions not inconsistent
with the Plan as may be determined by the Administrator in its sole
discretion.
(d) RIGHTS AS A SHAREHOLDER. Once the Stock Purchase Right is
exercised, the purchaser shall have the rights equivalent to those of a
shareholder, and shall be a shareholder when his or her purchase is entered
upon the records of the duly authorized transfer agent of the Company. No
adjustment will be made for a dividend or other right for which the record
date is prior to the date the Stock Purchase Right is exercised, except as
provided in Section 14 of the Plan.
12. NON-TRANSFERABILITY OF OPTIONS AND STOCK PURCHASE RIGHTS. Unless
determined otherwise by the Administrator, an Option or Stock Purchase Right
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 Optionee, only by the
Optionee. If the Administrator makes an Option or Stock Purchase Right
transferable, such Option or Stock Purchase Right shall contain such
additional terms and conditions as the Administrator deems appropriate.
13. FORMULA OPTION GRANTS TO OUTSIDE DIRECTORS. Outside Directors shall
be automatically granted Options each year in accordance with the following
provisions:
(a) All Options granted pursuant to this Section shall be
Nonstatutory Stock Options and, except as otherwise provided herein, shall be
subject to the other terms and conditions of the Plan.
(b) Each Outside Director shall be automatically granted an Option
to purchase 7,500 Shares (each an "Option") following each annual meeting of
the stockholders of the Company.
(c) Any exercise of an Option granted before the Company has
obtained stockholder approval of the Plan in accordance with Section 20
hereof shall be conditioned upon obtaining such stockholder approval of the
Plan in accordance with Section 20 hereof.
(d) The terms of each Option granted pursuant to this Section
shall be as follows:
(i) the term of the Option shall be ten (10) years.
(ii) the exercise price per Share shall be 100% of the Fair
Market Value per Share on the date of grant of the Option.
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(iii) the Option shall be fully vested and exercisable as to
100% of the Shares subject to the Option on its date of grant.
14. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, MERGER OR
ASSET SALE.
(a) CHANGES IN CAPITALIZATION. Subject to any required action by
the shareholders of the Company, the number of shares of Common Stock covered
by each outstanding Option and Stock Purchase Right, the number of shares of
Common Stock covered by First Options and Subsequent Options to be granted
under the Plan, the number of shares of Common Stock which have been
authorized for issuance under the Plan but as to which no Options or Stock
Purchase Rights have yet been granted or which have been returned to the Plan
upon cancellation or expiration of an Option or Stock Purchase Right and the
number of shares of Common Stock which may be added to the Plan each fiscal
year (pursuant to Section 3), as well as the price per share of Common Stock
covered by each such outstanding Option or Stock Purchase Right, 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 increase or decrease in the number of issued shares of Common Stock
effected without receipt of consideration by the Company; provided, however,
that conversion of any convertible securities of the Company shall not be
deemed to have been "effected without receipt of consideration." Such
adjustment shall be made by the Board, whose determination in that respect
shall be final, binding and conclusive. 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 thereof shall be made with respect to, the number or
price of shares of Common Stock subject to an Option or Stock Purchase Right.
(b) DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, the Administrator shall notify
each Optionee as soon as practicable prior to the effective date of such
proposed transaction. The Administrator in its discretion may provide for an
Optionee to have the right to exercise his or her Option until ten (10) days
prior to such transaction as to all of the Optioned Stock covered thereby,
including Shares as to which the Option would not otherwise be exercisable.
In addition, the Administrator may provide that any Company repurchase option
applicable to any Shares purchased upon exercise of an Option or Stock
Purchase Right shall lapse as to all such Shares, provided the proposed
dissolution or liquidation takes place at the time and in the manner
contemplated. To the extent it has not been previously exercised, an Option
or Stock Purchase Right will terminate immediately prior to the consummation
of such proposed action.
15. DATE OF GRANT. The date of grant of an Option or Stock Purchase
Right shall be, for all purposes, the date on which the Administrator makes
the determination granting such Option or Stock Purchase Right, or such other
later date as is determined by the Administrator. Notice of the determination
shall be provided to each Optionee within a reasonable time after the date of
such grant.
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16. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AMENDMENT AND TERMINATION. The Board may at any time amend,
alter, suspend or terminate the Plan.
(b) SHAREHOLDER APPROVAL. The Company shall obtain shareholder
approval of any Plan amendment to the extent necessary and desirable to
comply with Applicable Laws.
(c) EFFECT OF AMENDMENT OR TERMINATION. No amendment, alteration,
suspension or termination of the Plan shall impair the rights of any
Optionee, unless mutually agreed otherwise between the Optionee and the
Administrator, which agreement must be in writing and signed by the Optionee
and the Company. Termination of the Plan shall not affect the Administrator's
ability to exercise the powers granted to it hereunder with respect to
Options granted under the Plan prior to the date of such termination.
17. CONDITIONS UPON ISSUANCE OF SHARES.
(a) LEGAL COMPLIANCE. Shares shall not be issued pursuant to the
exercise of an Option or Stock Purchase Right unless the exercise of such
Option or Stock Purchase Right and the issuance and delivery of such Shares
shall comply with Applicable Laws and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
(b) INVESTMENT REPRESENTATIONS. As a condition to the exercise of
an Option or Stock Purchase Right, the Company may require the person
exercising such Option or Stock Purchase Right to represent and warrant at
the time of any such exercise that the Shares are being
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purchased only for investment and without any present intention to sell or
distribute such Shares if, in the opinion of counsel for the Company, such a
representation is required.
18. INABILITY TO OBTAIN AUTHORITY. 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.
19. RESERVATION OF SHARES. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall
be sufficient to satisfy the requirements of the Plan.
20. SHAREHOLDER APPROVAL. The Plan shall be subject to approval by the
shareholders of the Company within twelve (12) months after the date the Plan
is adopted. Such shareholder approval shall be obtained in the manner and to
the degree required under Applicable Laws.
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ZAPME! CORPORATION
1998 STOCK PLAN
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall
have the same defined meanings in this Option Agreement.
I. NOTICE OF STOCK OPTION GRANT
[Optionee's Name and Address]
You have been granted an option to purchase Common Stock of the
Company, subject to the terms and conditions of the Plan and this 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
___ Nonstatutory Stock Option
Term/Expiration Date: _________________________________
VESTING SCHEDULE:
Subject to accelerated vesting as set forth in the Plan, this Option
may be exercised, in whole or in part, in accordance with the following
schedule:
One-third (1/3) of the Shares subject to the Option shall vest
twelve months after the Vesting Commencement Date, and 1/36 of the Shares
subject to the Option shall vest each month thereafter, provided that on such
dates the Optionee remains in Continuous status as a Service Provider on such
dates.
<PAGE>
TERMINATION PERIOD:
This Option may be exercised for three (3) months after Optionee
ceases to be a Service Provider. Upon the death or Disability of the
Optionee, this Option may be exercised for twelve (12) months after Optionee
ceases to be a Service Provider. In no event shall this Option be exercised
later than the Term/Expiration Date as provided above.
II. AGREEMENT
A. GRANT OF OPTION.
The Plan Administrator of the Company hereby grants to the Optionee
named in the Notice of Grant attached as Part I of this Agreement (the
"Optionee") an option (the "Option") to purchase the number of Shares, as set
forth in the Notice of Grant, at the exercise price per share set forth in the
Notice of Grant (the "Exercise Price"), subject to the terms and conditions of
the Plan, which is incorporated herein by reference. Subject to Section 15(c) of
the Plan, in the event of a conflict between the terms and conditions of the
Plan and the terms and conditions of this Option Agreement, the terms and
conditions of the Plan shall prevail.
If designated in the Notice of Grant as an Incentive Stock Option
("ISO"), this Option is intended to qualify as an Incentive Stock Option under
Section 422 of the Code. However, if this Option is intended to be an Incentive
Stock Option, to the extent that it exceeds the $100,000 rule of Code Section
422(d) it shall be treated as a Nonstatutory Stock Option ("NSO").
B. EXERCISE OF OPTION.
(a) RIGHT TO EXERCISE. This Option is exercisable during its term
in accordance with the Vesting Schedule set out in the Notice of Grant and
the applicable provisions of the Plan and this Option Agreement.
(b) METHOD OF EXERCISE. This Option is exercisable by delivery of
an exercise notice, in the form attached as Exhibit A (the "Exercise
Notice"), which shall state the election to exercise the Option, the number
of Shares in respect of which the Option is being exercised (the "Exercised
Shares"), and such other representations and agreements as may be required by
the Company pursuant to the provisions of the Plan. The Exercise Notice shall
be completed by the Optionee and delivered to the Stock Plan Administrator of
the Company. The Exercise Notice shall be accompanied by payment of the
aggregate Exercise Price as to all Exercised Shares. This Option shall be
deemed to be exercised upon receipt by the Company of such fully executed
Exercise Notice accompanied by such aggregate Exercise Price.
No Shares shall be issued pursuant to the exercise of this
Option unless such issuance and exercise complies with Applicable Laws.
Assuming such compliance, for income tax purposes the Exercised Shares shall
be considered transferred to the Optionee on the date the Option is exercised
with respect to such Exercised Shares.
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C. METHOD OF PAYMENT.
Payment of the aggregate Exercise Price shall be by any of the
following, or a combination thereof, at the election of the Optionee:
1. cash; or
2. check; or
3. consideration received by the Company under a cashless exercise
program implemented by the Company in connection with the Plan; or
4. surrender of other Shares which (i) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six (6) months on the date of surrender, and (ii) have a Fair Market
Value on the date of surrender equal to the aggregate Exercise Price of the
Exercised Shares.
D. NON-TRANSFERABILITY OF OPTION.
This 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 Optionee only by the Optionee. The terms of the Plan and this
Option Agreement shall be binding upon the executors, administrators, heirs,
successors and assigns of the Optionee.
E. TERM OF OPTION.
This Option may be exercised only within the term set out in the
Notice of Grant, and may be exercised during such term only in accordance
with the Plan and the terms of this Option Agreement.
F. TAX CONSEQUENCES.
Some of the federal tax consequences relating to this Option, as of
the date of this Option, are set forth below. THIS SUMMARY IS NECESSARILY
INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE
OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR
DISPOSING OF THE SHARES.
G. EXERCISING THE OPTION.
1. NONSTATUTORY STOCK OPTION. The Optionee may incur regular
federal income tax liability upon exercise of a NSO. 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
Exercised Shares on the date of exercise over their aggregate Exercise Price.
If the Optionee is an Employee or a former Employee, the Company will be
required to withhold from his or her compensation or collect from 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
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honor the exercise and refuse to deliver Shares if such withholding amounts
are not delivered at the time of exercise.
2. INCENTIVE STOCK OPTION. If this Option qualifies as an ISO,
the Optionee will have no regular federal income tax liability upon its
exercise, although the excess, if any, of the Fair Market Value of the
Exercised Shares on the date of exercise over their aggregate Exercise Price
will be treated as an adjustment to alternative minimum taxable income for
federal tax purposes and may subject the Optionee to alternative minimum tax
in the year of exercise. In the event that the Optionee ceases to be an
Employee but remains a Service Provider, any Incentive Stock Option of the
Optionee that remains unexercised shall cease to qualify as an Incentive
Stock Option and will be treated for tax purposes as a Nonstatutory Stock
Option on the date three (3) months and one (1) day following such change of
status.
3. DISPOSITION OF SHARES.
(a) NSO. If the Optionee holds NSO Shares 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.
(b) ISO. If the Optionee holds ISO Shares for at least one year
after exercise and two years after the grant date, any gain realized on
disposition of the Shares will be treated as long-term capital gain for
federal income tax purposes. If the Optionee disposes of ISO Shares within
one year after exercise or two years after the grant date, any gain realized
on such disposition will be treated as compensation income (taxable at
ordinary income rates) to the extent of the excess, if any, of the lesser of
(A) the difference between the Fair Market Value of the Shares acquired on
the date of exercise and the aggregate Exercise Price, or (B) the difference
between the sale price of such Shares and the aggregate Exercise Price. Any
additional gain will be taxed as capital gain, short-term or long-term
depending on the period that the ISO Shares were held.
(c) NOTICE OF DISQUALIFYING DISPOSITION OF ISO SHARES. If the
Optionee sells or otherwise disposes of any of the Shares acquired pursuant
to an ISO on or before the later of (i) two years after the grant date, or
(ii) one year after the exercise date, the Optionee shall immediately notify
the Company in writing of such disposition. The Optionee agrees that he or
she may be subject to income tax withholding by the Company on the
compensation income recognized from such early disposition of ISO Shares by
payment in cash or out of the current earnings paid to the Optionee.
H. ENTIRE AGREEMENT; GOVERNING LAW.
The Plan is incorporated herein by reference. 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 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.
This agreement is governed by the internal substantive laws, but not the
choice of law rules, of California.
-4-
<PAGE>
I. NO GUARANTEE OF CONTINUED SERVICE.
OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES
PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED ONLY BY CONTINUING AS A
SERVICE PROVIDER AT THE WILL OF THE COMPANY (AND NOT THROUGH THE ACT OF BEING
HIRED, BEING GRANTED AN OPTION OR PURCHASING SHARES HEREUNDER). OPTIONEE
FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS
CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT
CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE
PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT
INTERFERE WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE
OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT
CAUSE.
By your signature and the signature of the Company's representative
below, you and the Company agree that this Option is granted under and
governed by the terms and conditions of the Plan and this Option Agreement.
Optionee has reviewed the Plan and this Option Agreement in their entirety,
has had an opportunity to obtain the advice of counsel prior to executing
this Option Agreement and fully understands all provisions of the Plan and
Option Agreement. Optionee hereby agrees to accept as binding, conclusive and
final all decisions or interpretations of the Administrator upon any
questions relating to the Plan and Option Agreement. Optionee further agrees
to notify the Company upon any change in the residence address indicated
below.
OPTIONEE: ZapMe! CORPORATION
- ------------------------------ ------------------------------
Signature By
- ------------------------------ ------------------------------
Print Name Title
- ------------------------------
Residence Address
- ------------------------------
-5-
<PAGE>
EXHIBIT A
ZAPME! CORPORATION
1998 STOCK OPTION PLAN
EXERCISE NOTICE
ZapMe! Corporation
3000 Executive Pkwy, Suite 150
San Ramon, CA 94583
Attention: [Title]
1. EXERCISE OF OPTION. Effective as of today, ________________, _____,
the undersigned ("Purchaser") hereby elects to purchase ______________ shares
(the "Shares") of the Common Stock of ZapMe! Corporation (the "Company")
under and pursuant to the ZapMe! Corporation 1998 (the "Plan") and the Stock
Option Agreement dated, _____ (the "Option Agreement"). The purchase price
for the Shares shall be $_____, as required by the Option Agreement.
2. DELIVERY OF PAYMENT. Purchaser herewith delivers to the Company the
full purchase price for the Shares.
3. REPRESENTATIONS OF PURCHASER. Purchaser acknowledges that Purchaser
has received, read and understood the Plan and the Option Agreement and
agrees to abide by and be bound by their terms and conditions.
4. RIGHTS AS SHAREHOLDER. 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 Shares, no right to vote or receive
dividends or any other rights as a shareholder shall exist with respect to
the Optioned Stock, notwithstanding the exercise of the Option. The Shares so
acquired shall be issued to the Optionee as soon as practicable after
exercise of the Option. No adjustment will be made for a dividend or other
right for which the record date is prior to the date of issuance, except as
provided in Section 14 of the Plan.
5. TAX CONSULTATION. Purchaser understands that Purchaser may suffer
adverse tax consequences as a result of Purchaser's purchase or disposition
of the Shares. Purchaser represents that Purchaser has consulted with any tax
consultants Purchaser deems advisable in connection with the purchase or
disposition of the Shares and that Purchaser is not relying on the Company
for any tax advice.
6. ENTIRE AGREEMENT; GOVERNING LAW. The Plan and Option Agreement are
incorporated herein by reference. This Agreement, the Plan and the Option
Agreement constitute the entire agreement of the parties with respect to the
subject matter hereof and supersede in their entirety all
-2-
<PAGE>
prior undertakings and agreements of the Company and Purchaser with respect
to the subject matter hereof, and may not be modified adversely to the
Purchaser's interest except by means of a writing signed by the Company and
Purchaser. This agreement is governed by the internal substantive laws, but
not the choice of law rules, of California.
Submitted by: Accepted by:
PURCHASER ZapMe! CORPORATION
- ------------------------------- -------------------------------
Signature By
- ------------------------------- -------------------------------
Print Name Its
Address: Address:
- ------------------------------- ZapMe! Corporation
3000 Executive Pkwy, Suite 150
- ------------------------------- San Ramon, CA 94583
------------------------------
Date Received
-2-
<PAGE>
ZAPME! CORPORATION
DIRECTOR OPTION AGREEMENT
ZapMe! Corporation, (the "Company"), has granted to _________________
(the "Optionee"), an option to purchase a total of [_______ (_____)] shares
of the Company's Common Stock (the "Optioned Stock"), at the price determined
as provided herein, and in all respects subject to the terms, definitions and
provisions of the Company's 1998 Stock Plan (the "Plan") adopted by the
Company which is incorporated herein by reference. The terms defined in the
Plan shall have the same defined meanings herein.
1. NATURE OF THE OPTION. This Option is a nonstatutory option and is
not intended to qualify for any special tax benefits to the Optionee.
2. EXERCISE PRICE. The exercise price is $______ for each share of
Common Stock.
3. EXERCISE OF OPTION. This Option shall be exercisable during its
term in accordance with the provisions of Section 8 of the Plan as follows:
(i) Right to Exercise.
(a) This Option shall become exercisable with respect to one
hundred percent (100%) of the Optioned Stock on the date of grant; provided,
however, that in no event shall any Option be exercisable prior to the date
the stockholders of the Company approve the Plan.
(b) This Option may not be exercised for a fraction of a share.
(c) In the event of Optionee's death, disability or other
termination of service as a Director, the exercisability of the Option is
governed by Section 8 of the Plan.
(ii) METHOD OF EXERCISE. This Option shall be exercisable by
written notice, which shall state the election to exercise the Option and the
number of Shares in respect of which the Option is being exercised. Such
written option, in the form attached hereto as Exhibit A, shall be signed by
the Optionee and shall be delivered in person or by certified mail to the
Stock Plan Administrator of the Company. The written notice shall be
accompanied by payment of the exercise price.
4. 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:
(i) cash;
(ii) check; or
(iii) consideration received by the Company under a cashless
exercise program implemented by the Company in connection with the Plan; or
<PAGE>
(iv) surrender of other Shares which (i) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six (6) months on the date of surrender, and (ii) have a Fair Market
Value on the date of surrender equal to the aggregate Exercise Price of the
Exercised Shares.
5. RESTRICTIONS ON EXERCISE. This Option may not be exercised if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any applicable
federal or state securities or other law or regulations, or if such issuance
would not comply with the requirements of any stock exchange upon which the
Shares may then be listed. As a condition to the exercise of this Option, the
Company may require Optionee to make any representation and warranty to the
Company as may be required by any applicable law or regulation.
6. NON-TRANSFERABILITY OF OPTION. This 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 Optionee only by the
Optionee. The terms of this Option shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
7. TERM OF OPTION. This Option may not be exercised more than five (5)
years from the date of grant of this Option, and may be exercised during such
period only in accordance with the Plan and the terms of this Option.
8. TAXATION UPON EXERCISE OF OPTION. Optionee understands that, upon
exercise of this Option, he or she will recognize income for tax purposes in
an amount equal to the excess of the then Fair Market Value of the Shares
purchased over the exercise price paid for such Shares. Since the Optionee is
subject to Section 16(b) of the Securities Exchange Act of 1934, as amended,
under certain limited circumstances the measurement and timing of such income
(and the commencement of any capital gain holding period) may be deferred,
and the Optionee is advised to contact a tax advisor concerning the
application of Section 83 in general and the availability a Section 83(b)
election in particular in connection with the exercise of the Option. Upon a
resale of such Shares by the Optionee, any difference between the sale price
and the Fair Market Value of the Shares on the date of exercise of the
Option, to the extent not included in income as described above, will be
treated as capital gain or loss.
DATE OF GRANT:
------------------------
ZapMe! CORPORATION,
a California corporation
By:
----------------------------------
Title:
--------------------------------
-2-
<PAGE>
Optionee acknowledges receipt of a copy of the Plan, a copy of which is
attached hereto, and represents that he or she is familiar with the terms and
provisions thereof, and hereby accepts this Option subject to all of the
terms and provisions thereof. Optionee hereby agrees to accept as binding,
conclusive and final all decisions or interpretations of the Board upon any
questions arising under the Plan.
Dated:
---------------------------------- -------------------------------------
Optionee
-3-
<PAGE>
EXHIBIT A
DIRECTOR OPTION EXERCISE NOTICE
ZapMe! Corporation
3000 Executive Pkwy, Suite 150
San Ramon, CA 94583
Attention: Corporate Secretary
1. EXERCISE OF OPTION. The undersigned ("Optionee") hereby elects to
exercise Optionee's option to purchase ______ shares of the Common Stock (the
"Shares") of ZapMe! Corporation (the "Company") under and pursuant to the
Company's 1998 Stock Plan and the Director Option Agreement dated
_____________ (the "Agreement").
2. REPRESENTATION OF OPTIONEE. Optionee acknowledges that Optionee has
received, read and understood the Agreement.
3. FEDERAL RESTRICTIONS ON TRANSFER. Optionee understands that the
Shares must be held indefinitely unless they are registered under the
Securities Act of 1933, as amended (the "1933 Act"), or unless an exemption
from such registration is available, and that the certificate(s) representing
the Shares may bear a legend to that effect. Optionee understands that the
Company is under no obligation to register the Shares and that an exemption
may not be available or may not permit Optionee to transfer Shares in the
amounts or at the times proposed by Optionee.
4. TAX CONSEQUENCES. Optionee understands that Optionee may suffer
adverse tax consequences as a result of Optionee's purchase or disposition of
the Shares. Optionee represents that Optionee has consulted with any tax
consultant(s) Optionee deems advisable in connection with the purchase or
disposition of the Shares and that Optionee is not relying on the Company for
any tax advice.
5. DELIVERY OF PAYMENT. Optionee herewith delivers to the Company the
aggregate purchase price for the Shares that Optionee has elected to purchase
and has made provision for the payment of any federal or state withholding
taxes required to be paid or withheld by the Company.
<PAGE>
6. ENTIRE AGREEMENT. The Agreement is incorporated herein by
reference. This Exercise Notice and the Agreement constitute the entire
agreement of the parties and supersede in their entirety all prior
undertakings and agreements of the Company and Optionee with respect to the
subject matter hereof. This Exercise Notice and the Agreement are governed by
California law except for that body of law pertaining to conflict of laws.
Submitted by: Accepted by:
OPTIONEE ZapMe! CORPORATION
- ---------------------------------- --------------------------------------
By
Title:
--------------------------------
Address:
- ----------------------------------
- ----------------------------------
- ----------------------------------
Dated: Dated:
--------------------------- --------------------------------
-2-
<PAGE>
Confidential treatment has been requested with respect to certain information
contained in this document. Confidential portions have been omitted from the
public filing and have been filed separately with the Securities and Exchanges
commission.
EXHIBIT 10.18
[LOGO] [LOGO]
- --------------------------------------------------------------------------------
February 10, 1999
Mr. Lance Mortensen
Chairman and CEO
ZapMe Corporation
3000 Executive Parkway
San Ramon, CA 94583
Ref.: Spacenet/ZapMe Agreement (Revision 3)
VIA EMAIL: [email protected]
Dear Mr. Mortensen:
The purpose of this letter is to outline our mutual understanding
between ZapMe Corporation ("ZapMe") and Spacenet, Inc. ("Spacenet") to proceed
with its plans to construct a formal contract to provide VSAT network shared hub
services. By its counter-signature below, ZapMe agrees to negotiate in good
faith with Spacenet to successfully execute a formal shared hub services
agreement based on the key business elements outlined in this letter. Spacenet
in turn agrees to begin proceeding in good faith to put into place the
infrastructure necessary to provide these shared hub services to ZapMe, on a
schedule determined by both parties.
In addition, provided for your review is Section B of Spacenet's
Standard Service Agreement. Section B is titled "General Terms and Conditions."
Specifics of Spacenet's and ZapMe's objectives are as follows, subject
to execution of a mutually satisfactory shared hub services agreement:
OBJECTIVES OF SPACENET
Spacenet will begin proceeding to finalize efforts already under way to
provide network services at our [*] Shared Hub facility and to have these
services available within 45 days or less, following signature between Spacenet
and ZapMe of a formal agreement for shared hub services. A specific schedule
(Gannet Chart) will be provided by a Spacenet assigned Program Manager upon
execution of this document. The services provided through this facility include:
- Uplinking to a [*]-Band satellite with [*] coverage
(GE-5Dedicated Satellite Space Segment)
- --------------------
[*]Confidential treatment has been requested with respect to certain information
contained in this document. Confidential portions have been omitted from the
public filing and have been filed separately with the Securities and Exchanges
commission.
<PAGE>
- [*]Equipment/Installation services for a 1.2 meter remote VSAT
systems (includes Antenna/LNB/Non-Penetrating Roof
Mount/interfaced with ZapMe provided PC system with installed
SkySurfer Cards) Maintenance services for the remote VSAT
systems (includes on-site maintenance for Spacenet provided
equipment including SkySurfer Cards as long as the ZapMe
provided PC is dedicated only to the VSAT network)
- Hub and network operations services and traffic management lab
- 24-hour Hub network management services
- Installation of Dedicated SkySurfer Hub (Provided by ZapMe)
- 24-hour 2nd level help desk
- Network design services to support ZapMe applications
- Terrestrial interconnection support (ZapMe Responsible for
costs)
Based on a minimum firm commitment from ZapMe of [*] remote sites for a
minimum 36-month term of service, Spacenet's service charges for the entire
service as outlined above will be approximately:
[*]
These prices are also based upon a roll-out schedule wherein all
current ZapMe sites will be transitioned from their current location/operations
to the Spacenet shared hub service or new sites installed within 3 months
following the availability of the shared hub services.
*Note: The price above assumes the following in terms of satellite
space segment allocation for [*] sites. If the amount of outbound (hub) and/or
inbound (VSAT) traffic exceeds the allocated space segment amounts indicated
below, Spacenet and ZapMe will work together to agree upon revised pricing based
on additional satellite bandwidth allocations.
In any case, Spacenet and ZapMe agree that after approximately one year
following the date of service, both parties will review actual space segment
utilization by ZapMe, and may agree upon an adjust of space segment pricing, as
well as bandwidth and power allocation based on actual usage.
Beginning Space Segment Allocation:
- Outbound Space Segment Allocation--[*]
- Inbound Space Segment Allocation--[*]
Spacenet and ZapMe agree that if additional sites are added above the
[*] site commitment, the per-site charge will remain the same provided each such
additional site has a 3-year term and provided that the ratio of bandwidth/per
site remains approximately equal to the ratio in the initial [*] sites.
- -------------------------------------------------------------------------------
[*]Confidential treatment has been requested with respect to certain information
contained in this document. Confidential portions have been omitted from the
public filing and have been filed separately with the Securities and Exchanges
commission.
<PAGE>
OBJECTIVES OF ZAPME
In return for the foregoing, ZapMe agrees, upon receipt from Spacenet
of a draft of this formal agreement, to use its best efforts to negotiate and
execute such agreement within thirty (30) days after receipt of the draft
agreement, unless the parties agree to an extension.
ZapMe agrees to guarantee its fulfillment of obligations addressed in
ZapMe issued Purchase Orders 000339 and 000340. These purchase orders, already
issued by ZapMe to Spacenet, include the procurement of a SkySurfer Hub, a
two-way satellite hub, two-way PC Cards and RFT, IP encapsulater, Optibase video
encoder, SkySurfer Cards, Optibase decoder per client, license, and training.
If you agree with the foregoing, please counter-sign below and return
this letter to me at 1750 Old Meadow Road, McLean, Virginia 22102.
Respectfully yours,
Stuart Chimes
Sr. Technical Marketing Manager
CC: B. Murray-ZapMe
D. Shiff-Spacenet
I. Kaplan-Spacenet
AGREED AND ACCEPTED
ZAPME CORPORATION
/s/ Lance Mortensen
- -------------
SIGNATURE
Lance Mortensen
- -------------
NAME
CEO
- -------------
TITLE
- -------------
DATE
<PAGE>
Service Agreement
Between
ZapMe! Corporation
and
Spacenet Inc.
Agreement No. 1654
June 11, 1999
<PAGE>
TABLE OF CONTENTS
Section A--Services and Prices....................................... 2
Overview.......................................................... 2
Network Information............................................... 3
Prices............................................................ 4
Notices and Points of Contact..................................... 6
Section B--General Terms and Conditions.............................. 7
1. Term............................................................ 7
2. Charges and Payments............................................ 7
3. Taxes and Fees.................................................. 8
4. Assignment...................................................... 8
5. Title and Risk of Loss.......................................... 8
6. Disposition of Equipment after Termination...................... 9
7. Governing Law................................................... 9
8. Responsibilities of the Parties................................. 9
9. Liability of Spacenet and Customer.............................. 9
10. Termination and Suspension of Service........................... 10
11. Force Majeure................................................... 11
12. Confidentiality................................................. 11
13. Severability.................................................... 11
14. Non-Waiver...................................................... 11
15. Relationship of the Parties..................................... 12
16. Notices and Points of Contact................................... 12
17. Counterparts.................................................... 12
18. Entire Agreement................................................ 12
Section C--Network Implementation.................................... 13
Ordering Procedures............................................... 13
Site Installations................................................ 13
Section D--Operation and Maintenance................................. 16
Network Operation................................................. 16
Out-of-Scope Services............................................. 16
Network Availability Commitment................................... 16
Site Maintenance.................................................. 17
Software License and Support...................................... 18
<PAGE>
[LOGO] Spacenet
- --------------------------------------------------------------------------------
SERVICE AGREEMENT
SPACENET INC., with its headquarters at 1750 Old Meadow Road, McLean, Virginia
22102 ("Spacenet") hereby agrees to provide its satellite-based
telecommunications services ("Service") to ZAPME! CORPORATION, having its
principal place of business at 3000 Executive Parkway, Suite 150, San Ramon, CA
94583 ("CUSTOMER" OR "ZAPME!") pursuant to this Service Agreement ("Agreement")
between them. Customer hereby agrees to take and pay for said Service pursuant
to this Agreement.
The following sections are an integral part of this Agreement:
Section A--Services and Prices
Section B--General Terms and Conditions
Section C--Network Implementation
Section D--Operation and Maintenance
Under the terms of this Agreement, as set forth in further detail under Sections
A - D herein, Spacenet will provide, install, and maintain certain
telecommunications equipment ("Equipment") and licensed software ("Software")
and will provide access to a geostationary orbit communications satellite
("Space Segment"), all of which will enable two-way data transmissions between
Customer's headquarters in San Ramon, California and its remote locations with
access to Customer's proprietary network ("Sites"). All obligations under this
Agreement shall be performed by and between (i) Spacenet and (ii) Customer or
its designated customers, agents or users. This Agreement does not create any
rights in end-users or in any other third party not a signatory hereto. This
Agreement will become effective on the date of the last party to sign below.
AGREED TO BY CUSTOMER: ACCEPTED BY SPACENET:
ZapMe! Corporation Spacenet Inc.
SIGNATURE: /s/ Lance Mortensen /s/ Sheldon Revkin
------------------- ------------------
PRINTED NAME: LANCE MORTENSEN Sheldon Revkin
--------------- --------------
TITLE: CEO President
--- ---------
DATE: 6/11/99 6/11/99
------- -------
<PAGE>
SECTION A--SERVICES AND PRICES
This Section contains Customer-specific information on the equipment and
services to be provided by Spacenet. In the event of any conflict between this
Services and Prices Section and the other Sections hereto, this Services and
Prices Section shall prevail.
OVERVIEW
Under this Agreement Spacenet will provide Customer with certain
SkyBlaster-TM-* equipment and services. SkyBlaster is a service comprised of
equipment and software which enables geographically dispersed locations to
exchange data transmissions via a satellite network. The SkyBlaster service
operates on a point-to-multipoint network architecture. This document
establishes the responsibilities of Spacenet and ZapMe!, and the prices,
terms, and conditions under which SkyBlaster equipment and network services
will be installed, operated, and maintained at Spacenet's shared hub and at
remote locations designated by ZapMe! across the continental USA.
* SkyBlaster is a trademark of Gilat Satellite Networks, Ltd.
Following is a diagram showing the key elements of the network:
[GRAPHIC]
<TABLE>
<CAPTION>
<S> <C>
NETWORK INFORMATION
Location of Spacenet's Shared Hub Uplinking Atlanta, Georgia, provided that Spacenet reserves the right to redesignate
facilities: the hub location with 90 days notice to ZapMe!.* * In the event Spacenet
elects to move Customer from its shared hub in Atlanta, Spacenet shall
reimburse ZapMe! for the following costs actually incurred by ZapMe! in
connection with the relocation: (i) one time termination fee for the
terrestrial interconnect (ii) one time connection fee for the terrestrial
interconnect and (iii) reasonable expedite fee for the terrestrial
interconnect.
Location of Customer's SkyBlaster Hub equipment: at Spacenet's Shared Hub Uplinking facilities
Minimum Site Order Quantity: [*] Sites (which includes retrofits of Legacy Site systems)*
* During the Agreement Term, Customer may order additional Sites at the
price set forth under "Standard Service" below.
Minimum Site Order Installation Period: Within 3 months from the Effective date of the Agreement
Minimum Site Service Term: 36 months from Site installation
Minimum Network Service Term: 36 months from installation of the Minimum Site Order Quantity
Protocols to be supported: TCP/IP and UDP at Spacenet's shared hub and at each remote Site
Customer's Bandwidth Allocation: Outbound channels (toward the remote sites)--bandwidth to support a [*] mbps
carrier. Inbound channels (from the remote sites)--[*] MHZ. Bandwidth is
subject to periodic review based on system performance and Customer will
purchase additional bandwidth as necessary at the prices set forth below.
- --------------------
[*]Confidential treatment has been requested with respect to certain information contained in this document. Confidential
portions have been omitted from the public filing and have been filed separately with the Securities and Exchanges commission.
<PAGE>
Service Demarcation Points: At the Hub: output ports at the Customer provided Ethernet hub
At the VSAT: with Expanded Service--output ports of the Spacenet provided PC's;
without Expanded Service--input ports of the Customer provided PC's
VSAT Maintenance Option selected: 8 am to 5 pm, Monday-Friday, local time, excluding holidays
Performance Specifications: Network Availability Commitment [*]
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
PRICES FREQUENCY PRICE
- ------ --------- -----
STANDARD EQUIPMENT AND SERVICE Monthly, Per Site [*]
- ------------------------------
Standard Service-Includes:
1.2 Meter Antenna,
One Standard Mount**
Up to 400 Feet of IFL Cable, Non-Plenum (dual 200' cable run)
Outdoor Unit-[*] ODU and LNB, Two PCI cards
- DVB Receiver
- Satellite Transmitter
Support for One (1) Spacenet-Supported Software Protocol,
Software License and Maintenance,
48-state [*]-Band satellite capacity, non-preemptible and intra-satellite
protected,
Use of Spacenet's Shared Hub Facilities,
Standard Installation,
24-hour 2nd Level Help Desk Support,
Standard On-Site Maintenance Support, 5 x 9 (8 am to 5 pm, Mon-Fri
Business Days),
Satellite Network capacity to support Customer's Bandwidth Allocation
specified under "Network Information"***
* The price for Standard Service shall constitute the sole amount due to
Spacenet from ZapMe! under this or any prior agreement for such
Standard Service, subject to additional charges for all non-standard
requirements and subject to the terms and conditions of this Agreement.
** "Standard" mounts are: Non-penetrating, Close-in Wall,
Medium Reach Wall, and I-Beam.
*** The space segment purchased from Spacenet as part of the Standard
Service shall be dedicated to ZapMe!.
EXPANDED EQUIPMENT AND SERVICE
- ------------------------------
Expanded Service*-Includes: Monthly, Per Site Quotation
One permanent server
Ethernet hub at the Receive Site
Up to 25 Feet of CAT5 LAN cable
5-15 client PCs.
Expanded installation
* Both parties recognize that as of the Effective Date, Spacenet is
unable to provide the Expanded Service and that Spacenet will notify
Customer when it is able to provide such service. Upon such
notification, Spacenet will provide and ZapMe! will have the option to
purchase such Expanded Service (in addition to the Standard Service) at
a mutually agreed to price for Sites not installed as of the date of
notification.
- --------------------
[*]Confidential treatment has been requested with respect to certain information
contained in this document. Confidential portions have been omitted from the
public filing and have been filed separately with the Securities and Exchanges
commission.
<PAGE>
ADDITIONAL (OPTIONAL)ACCESSORIES/EQUIPMENT/SERVICES
- ---------------------------------------------------
Upgrade to 1.8 Meter Antenna w/Non Penetrating Roof Mount, if required One-Time Charge [*]
Additional Required IFL Cable, Non-Plenum One-Time Charge [*]
Additional Required CAT5 LAN Cable (25 ft) One-Time Charge [*]
Additional client PC Monthly, Per PC [*]
Remote Network Management System (NMS) Console Each [*]
Additional one m/bps outbound channel (if available) Monthly [*]
Additional one MHz inbound channel (if available) Monthly [*]
Non-Standard Installation/Optional Antenna Mounts Each Quotation
7x16 Maintenance Option (8AM - Midnight, Local Time) Per Site [*]
Maintenance Call for Damaged Equipment or other "non-covered" calls T&M, with 1 hr minimum
Non-Covered Maintenance Call (T&M Rates):
Business hours Per Hour [*]
After business hours and Saturdays Per Hour [*]
Holidays and Sundays Per Hour [*]
Site Survey, if required Each [*]
Canceled Site Installation (Cancellation or Postponement with Four (4) Each [*]
Business Days Advance Notice or Less)
Terminated Site Visit Each [*]
Expedite Fee for Installations Each [*]
Site Charge for Unordered Minimum Site Quantity Monthly per Site [*]
(after Minimum Site Order Installation Period)
Relocation (de-install/re-install) of standard mount,
1.2-meter sites
(Same day, within 40 miles) Each [*]
Additional Requirements not detailed above shall be quoted on an individual basis.
</TABLE>
- --------------------
[*]Confidential treatment has been requested with respect to certain information
contained in this document. Confidential portions have been omitted from the
public filing and have been filed separately with the Securities and Exchanges
commission.
<PAGE>
Notices and Points of Contact
- -----------------------------
SPACENET:
<TABLE>
<CAPTION>
<S> <C> <C>
Program Manager: For Payments: Notices:
- ---------------- ------------- --------
Jack Rathjen Accounts Receivable (703) 848-1330 Customer Contracts Dept.
SPACENET INC. SPACENET INC. SPACENET INC.
1750 Old Meadow Road P.O. Box 60420 1750 Old Meadow Road
McLean, Virginia 22102 Charlotte, North Carolina 28260 McLean, Virginia 22102
Telephone: (703) 848-1000 Telephone: (703) 848-1511
FAX: (703) 848-1010 FAX: (703) 848-1184
CUSTOMER:
Technical Contact: Billing Address: Notices:
- ---------------- ------------- --------
Bruce Murray Accounts Payable Lance Mortensen, Chairman - CEO
ZAPME! CORPORATION ZAPME! CORPORATION ZAPME! CORPORATION
3000 Executive Parkway 3000 Executive Parkway 3000 Executive Parkway
San Ramon, CA 94583 San Ramon, CA 94583 San Ramon, CA 94583
(925) 543-0300 Phone (925) 543-0300 Phone
(925) 543-0301 Fax (925) 543-0301 Fax
copy to:
Bruce Bower
General Counsel
ZAPME! CORPORATION
3000 Executive Parkway
San Ramon, CA 94583
(925) 543-0300 Phone
(925) 277-9356 Fax
</TABLE>
<PAGE>
SECTION B - GENERAL TERMS AND CONDITIONS
1. TERM
The Term of this Agreement ("Agreement Term") shall commence on the date of the
last party to sign on the signature page of this document ("Effective Date").
Each installed Site hereunder shall have the Minimum Site Service Term ("Minimum
Site Service Term") set forth under "Network Information" of Section A. Service
at each Site shall automatically continue after the Minimum Site Service Term to
the End Date of the Agreement ("Agreement End Date"), which shall be the last
day of service provided at the last Site, or the last day of the Minimum Network
Service Term, whichever occurs last. To the extent that the Minimum Site Service
Term has not expired at the Site, ceasing to do business at such Site by
Customer shall not relieve Customer of its obligation pertaining to the Minimum
Site Service Term. Any Site having completed its Minimum Site Service Term may
be terminated by either party by providing at least sixty (60) days advance
notification of termination. Notwithstanding the above, Spacenet shall only be
obligated to provide the Services, equipment and software under this Agreement
for six years commencing on the Effective Date, provided that the parties may
mutually agree to extend this date.
2. CHARGES AND PAYMENTS
A. PAYMENTS-All payments made under this Agreement shall be in U.S. Dollars.
The fees or prices for Services are as set forth in Section A. Spacenet will
bill Customer for monthly charges one (1) month in advance of the month's
service due and payable the last day of the billing calendar month (e.g.
September 1 billing for October's service is due and payable September 30.)
Monthly charges for partial months of Services will be prorated on a thirty
(30) day month basis. Invoicing for each Site shall commence once the Site is
available for transmission service. Non-recurring charges will be accrued
monthly and billed in arrears.
B. CREDIT-Spacenet shall provide ZapMe! a credit against Service fees equal to
[*] per month for thirty-six months commencing on the Effective Date. In the
event monthly Service fees are less than [*] per month, the difference may be
applied to Service fees for subsequent months.
C. LATE PAYMENTS-In the event that any fees or charges are not paid in full by
Customer when due, then Spacenet shall provide Customer with written notice of
such non-payment. If Customer fails to cure such non-payment within ten (10)
days after the date of such notice, then Spacenet, in addition to and not in
lieu of its rights under Article 10 ("Termination and Suspension of Service")
below, reserves the right to charge Customer a late payment charge calculated on
the past due balance at the rate of one and one-half percent (1.5%) interest per
month for each month or part thereof from the date the payment was due. This
late payment charge will not be imposed on the portion of an invoice which may
reasonably be under dispute by Customer, provided that Customer has paid the
undisputed portion in full and has notified Spacenet of the disputed amount
within 15 days of receipt of Spacenet's invoice along with a written explanation
of the dispute based on the terms of this Agreement.
D. PRICE VALIDITY-With prior notice of 60 days, the hourly rates in Section A
may be increased by Spacenet once per calendar year beginning in 2000 in an
amount not to exceed the lesser of (a) five percent (5%), or (b) the
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[*]Confidential treatment has been requested with respect to certain information
contained in this document. Confidential portions have been omitted from the
public filing and have been filed separately with the Securities and Exchanges
commission.
<PAGE>
percentage change from the previous year to the then-current year in the
Consumer Price Index (the "Consumer Price Index for all Urban Consumers, All
City Average"), as set forth by the US Department of Labor, Bureau of Labor
Statistics, or any successor to such Index by such Bureau. Time and Materials
Charges shall be applied at Spacenet's then-effective Time and Materials
rate. All other prices contained herein shall remain fixed for service
through the end of the initial Term of this Agreement.
E. MINIMUM COMMITMENT-In the event Customer does not order the Minimum Site
Order Quantity for installation within the Minimum Site Order Installation
Period or causes a delay in installation past the Minimum Site Order
Installation Period, Spacenet shall commence billing for the
unordered/uninstalled Sites up to and including the Minimum Site Order Quantity
at the rate set forth for the pricing item entitled "Site Charge for Unordered
Minimum Site Quantity." This charge shall apply on a monthly basis for each such
unordered/uninstalled Site until such time as the Site has been installed, at
which time the Minimum Site Service Term shall commence. Partial months of the
Site Charge for Unordered Minimum Site Quantity shall be prorated based on a
thirty (30) day month. In addition, after the Minimum Site Order Installation
Period and until the Agreement End Date, Customer must pay each month, at a
minimum, the Standard Service fee for the Minimum Site Order Quantity.
F. PURCHASE OPTION-With respect to each Site comprising the Minimum Site Order
Quantity, on the last day of the Minimum Site Service Term, Customer has the
option to purchase from Spacenet for [*] (plus any amounts outstanding for
Standard Service with respect to such Site) all of the Spacenet provided
equipment at such Site used to provide Spacenet's services hereunder to such
Site. In the event Customer exercises its purchase option with respect to a
Site, title to the Spacenet provided equipment at such Site used to provide
Spacenet's services hereunder to such Site shall transfer to Customer upon
payment of [*] (plus any amounts outstanding for Standard Service with
respect to such Site).
3. TAXES AND FEES
The Service Fee and other charges under this Agreement are as set forth in
Section A. These charges exclude all present and future taxes, duties, or fees
of any nature, including, but not limited to federal, state, or local sales or
use taxes, fees, excises, property or gross receipts taxes or fees,
telecommunication taxes, license, access, or universal service fees, or other
taxes or duties which may now or hereafter be levied on the services provided or
on payments made under this Agreement. Any such taxes, fees, or duties, however
denominated, which may now or hereafter be levied on the services provided, the
Equipment installed, or payments made under this Agreement, excluding taxes
based on Spacenet's net income, shall be paid by Customer. If Spacenet is
required to pay or pays any of these, Customer shall promptly reimburse Spacenet
for such payments including applicable penalties and interest, if any. Taxes,
late payment charges, and other charges (other than those imposed due to
Spacenet's negligence) will be invoiced following their accrual. Spacenet agrees
to provide reasonable documentation supporting any such charges.
4. ASSIGNMENT
Either party may, on written notice to the other, assign its rights and
obligations hereunder to (i) its parent
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[*]Confidential treatment has been requested with respect to certain information
contained in this document. Confidential portions have been omitted from the
public filing and have been filed separately with the Securities and Exchanges
commission.
<PAGE>
corporation or an affiliated corporation owned by a common parent in
connection with any corporate restructuring, and (ii) a third party entity in
connection with the transfer of all or substantially all of the assigning
party's assets to such entity or (iii) a successor entity in connection with
a merger or acquisition resulting in a change of control of the assigning
party. Except as provided above in this Section, either party may assign its
rights and obligations under this Agreement to a third party only upon
receiving the prior written consent of the other party, which consent may be
reasonably conditioned but will not be unreasonably withheld. The parties
agree that no assignments will be made unless the assignee agrees to accept
in full the responsibilities and obligations of the assigning party.
5. TITLE AND RISK OF LOSS
A. TITLE-Title to the Equipment installed or provided by Spacenet under this
Agreement shall remain with Spacenet. Customer shall not move the Equipment, nor
permit the Equipment to be moved, modify the Equipment nor permit the Equipment
to be modified, and Customer shall not permit any liens or encumbrances to be
placed upon the Equipment. Spacenet shall have the right and authority acting in
its own name or the name of Customer to complete and file such documents as its
deems necessary to protect its security interest in or ownership of the
Equipment or other equipment and Customer shall fully cooperate with and support
all such filings by Spacenet.
B. RISK OF LOSS-Risk of loss or damage for Equipment shall pass to Customer upon
installation of the Equipment at a Customer designated Site. Customer shall
insure all Spacenet-owned equipment on Customer's premises against risk of loss
or damage due to any cause other than normal wear and tear, and shall name
Spacenet as a loss payee to the extent of its losses. Proof of such insurance by
a national carrier shall be made available to Spacenet by Customer upon request
by Spacenet. Customer shall notify Spacenet of any material change in such
insurance coverage or insurance carrier.
6. DISPOSITION OF EQUIPMENT AFTER TERMINATION
A. REMOVAL-Upon expiration or termination of this Agreement or termination of
Service at any Site, and unless ZapMe! has exercised its Purchase Option with
respect to such Equipment, Spacenet may elect to remove all or portions of
Spacenet-owned Equipment that was used to provide services hereunder, and,
Customer shall use reasonable efforts to facilitate Spacenet's entry into all
applicable premises to permit Spacenet to remove any such Equipment. Before
exercising its right of removal, Spacenet shall provide ZapMe! with sixty (60)
days advance written notice of its intention to exercise such right. Spacenet
shall have the right to abandon any Spacenet-owned Equipment in place if it so
elects, after written notice has been provided to Customer. If Customer wants
Spacenet to remove any Equipment (antennas, mounts, etc.) that Spacenet has
elected to abandon in place. Spacenet will do so on a time and materials basis.
With regard to any Spacenet-licensed software that is contained in equipment
that is abandoned in place, Customer agrees to follow Spacenet's instructions
regarding the removal or disabling of any such software.
7. GOVERNING LAW
This Agreement shall be construed and enforced in accordance with and shall be
governed by, the laws of the United States and of the State of New York. The
parties agree to submit to the jurisdiction of the state and federal courts
sitting in Denver, Colorado. Venue for any claims hereunder shall be a court of
competent jurisdiction in or near Denver, Colorado.
<PAGE>
8. RESPONSIBILITIES OF THE PARTIES
A. COMPLIANCE AND APPROVALS-Each party shall comply with all applicable
governmental laws, rules and regulations. Each party is responsible to obtain
local permits, landlord consents or other waivers or consents as set forth in
Section C under "Site Installations" as may be necessary for Spacenet to install
the Equipment and for Customer to make use of the communications services. The
Customer is advised to obtain any such required permits or approvals well in
advance of installation. If on-Site installation is prevented due to any of the
above areas that are Customer's responsibility, the Terminated Site Visit charge
shall apply. The obligations of Customer under this Agreement are not
conditioned upon Customer's receipt of such authorizations or approvals.
B. BACKHAUL-Customer shall be responsible for all charges, non-recurring and
recurring, and communications hardware, associated with all terrestrial
communications links required for this service. Spacenet shall have no warranty
obligations in connection with any terrestrial communications link, and the
failure or disruption of such link shall not be included in Spacenet's network
availability commitment.
C. INSURANCE-Each party, at its own expense, will obtain and/or maintain
insurance to cover risks associated with their respective business activities
detailed herein.
D. MINIMUM ORDER QUANTITY. Within the Minimum Site Order Installation Period
stated in Section A of this Agreement, the Minimum Site Order shall have been
installed.
E. MAINTENANCE OBLIGATIONS. Spacenet shall maintain the Equipment as provided in
Section D of this Agreement.
9. LIABILITY OF SPACENET AND CUSTOMER
A. Customer shall defend, indemnify and save Spacenet harmless from and against
injuries, loss or damage to Spacenet's employees or property or to the person or
property of third parties to the extent they are caused by the willful or
negligent acts or omissions of Customer (and all risk of loss and damage to the
property caused by anyone other than Spacenet and its subcontractors while the
property is in Customer's control or custody), and from and against all claims,
expenses, or losses (including reasonable attorneys' fees and expenses) arising
out of or in connection with the application or content of Customer's
transmissions through the provided transmission services.
B. Spacenet shall defend, indemnify and save Customer harmless from and against
injuries, loss or damage to Customer's employees or property or to the person or
property of third parties to the extent they are caused by the willful or
negligent acts or omissions of Spacenet (and all risk of loss and damage to the
property caused by anyone other than Customer and its subcontractors while the
property is in Spacenet's control or custody).
C. Each party shall defend, indemnify and save the other harmless from and
against injuries, loss or damage to the other's employees or property or to the
person or property of third parties to the extent they are caused by the willful
or negligent acts or omissions of the perpetrating party or that of its
subcontractors, agents, or representatives while performing their duties at
Customer's or End-User's Sites.
D. Except for (a) the obligations to defend, indemnify and hold harmless
provided in B and C above, and (b) any credits provided to Customer pursuant to
Section D Spacenet's total liability under this Agreement shall in no case
exceed the recurring charges paid to it by Customer during the six months
immediately preceding the cause of
<PAGE>
action. Customer has accepted this limitation of liability for Services
provided hereunder and understands that the price of the Services would be
higher if Spacenet were requested to bear additional liability for damages.
E. Except for (i) its obligation to defend, indemnify and hold harmless provided
in A and C above, (ii) any payment obligations hereunder and (iii) any liability
arising out of or in connection with the application or content of its
transmissions through the provided transmission services, Customer's total
liability under this Agreement shall in no case exceed the recurring charging
due to Spacenet during the six months immediately preceding the cause of action.
F. UNDER NO CIRCUMSTANCES SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY OR TO
ANY THIRD PARTIES FOR INCIDENTAL, INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES OF
ANY KIND, INCLUDING LOST PROFITS, LOSS OR USE OF EQUIPMENT OR SERVICES, OR
DAMAGES TO BUSINESS OR REPUTATION ARISING FROM THE PERFORMANCE OR
NON-PERFORMANCE OF ANY ASPECT OF THIS AGREEMENT WHETHER IN CONTRACT OR TORT OR
OTHERWISE, AND WHETHER ADVISORY HAS BEEN MADE OF THE POSSIBILITY OF SUCH
DAMAGES.
G. EXCEPT AS STATED HEREIN, SPACENET PROVIDES NO WARRANTIES, EXPRESS, IMPLIED OR
STATUTORY, INCLUDING BUT NOT LIMITED TO, ANY IMPLIED WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE RESPECTING SERVICES
PERFORMED, LICENSED SOFTWARE, OR EQUIPMENT FURNISHED UNDER THIS AGREEMENT.
10. TERMINATION AND SUSPENSION OF SERVICE
A. Either party may terminate this Agreement only for default in the event of
material breach by the other party if such breach continues for a period of
sixty (60) days after written notice of intention to terminate describing the
default is given by the non-breaching party and such event of breach is not
remedied within the stated period. Notwithstanding the foregoing, Spacenet may,
on thirty (30) days' written notice, suspend or terminate the Service to be
provided under this Agreement due to Customer's non-payment of charges due. Upon
termination for material default by either party. Customer shall cease utilizing
the Service and shall remit to Spacenet upon receipt of a final invoice all
amounts accrued or due to Spacenet up to and including the termination date.
Customer hereby consents to the jurisdiction of any court or administrative
agency having subject matter jurisdiction in which Spacenet may elect to bring
an injunctive action to require Customer to cease using service at any or all
Sites, as applicable, if Customer fails or refuses to do so after receipt of
notice pursuant to this Article.
B. If default is due to the Customer, then Customer shall pay Spacenet (i) all
applicable amounts due for Equipment and Services provided to date, (ii) all
applicable amounts due for the lesser of (a) the remaining term or (b) fourteen
(14) months, and (iii) deinstallation, all in accordance with this Agreement.
Either party may pursue any other remedies existing at law or in equity to the
extent consistent with this Agreement and its governing law. Spacenet and
Customer agree that damages to Spacenet resulting from a termination hereunder
are not readily determinable either at the time of signing of this Agreement or
at the time of its termination and that the amount of the liquidated damages is
both necessary and reasonable. Either party may bring legal action for the
violation or breach of this Agreement, and shall be entitled to recover
reasonable attorneys' fees incurred in enforcing obligations as stated herein.
C. Sites which have completed their Minimum Site Service Term may be terminated
without penalty, though Customer shall be liable to Spacenet for all obligations
then accrued to Spacenet as of the effective date of termination. With sixty
(60) days notice and if a) at least one year of service have been rendered, and
b) if more
<PAGE>
than six months remains under the term of the Agreement. Customer may
terminate this Agreement by paying [*] of the total outstanding monthly
Standard Service charges for all Sites not having completed the Minimum Site
Service Term.
11. FORCE MAJEURE
Neither party shall be liable for failure to perform its obligations under this
Agreement to the extent such failure is due to causes beyond its commercially
reasonable control, including but not limited to externally caused transmission
interference and irreparable facility failure. In the event of a force majeure,
the party invoking this Section shall notify the other party in writting of the
events creating the force majeure and the performance obligations of the parties
will be extended by a period of time equal to the length of the delay caused by
the force majeure; provided, that if any such delay exceeds forty-five (45)
days, then following such forty-five day period either party hereto may
terminate the unperformed portions of this Agreement on ten (10) days' prior
written notice to the other party.
12. CONFIDENTIALITY
The content of this Agreement shall be treated as confidential and shall not be
disclosed by Customer or Spacenet to third parties without the prior written
consent of the other party. The existence of this Agreement may be disclosed in
advertising or publicity by either party, provided that such disclosure is
approved in writing by the non-disclosing party prior to release for
publication; provided, however, that either party may include the name of the
other party in a serial list of customers or vendors (as applicable) of each
others' products and services. Neither party may use the trademarks, trade
names, or logos of the other party without prior written permission of the other
party. Neither party shall disclose to third parties any proprietary information
furnished or disclosed by the other party.
13. SEVERABILITY
In the event any one or more of the provisions of this Agreement shall for any
reason be held to be invalid or unenforceable, the remaining provisions of this
Agreement shall be unimpaired, and upon mutual agreement of the parties the
invalid or unenforceable provision shall be replaced by a provision which, being
valid and enforceable, comes as close as lawfully possible to the intention of
the parties underlying the invalid or unenforceable provisions.
14. NON-WAIVER
The failure of either party to insist upon strict adherence to any material term
or condition of this Agreement on any occasion shall not be considered a waiver
of any right thereafter to insist upon strict adherence to that term or
condition or any other material term or condition of this Agreement.
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[*]Confidential treatment has been requested with respect to certain information
contained in this document. Confidential portions have been omitted from the
public filing and have been filed separately with the Securities and Exchanges
commission.
<PAGE>
15. RELATIONSHIP OF THE PARTIES
This Agreement is not intended by the parties to constitute or create a joint
venture, pooling arrangement, partnership, agency or formal business
organization of any kind. Spacenet and Customer shall be independent contractors
with each other for all purposes at all times and neither party shall act as or
hold itself out as agent for the other unless so designated in a separate
writing signed by the principal, nor shall either party create or attempt to
create liabilities for the other party.
16. NOTICES AND POINTS OF CONTACT
Except as otherwise provided, all important notices or other communications
required or desired to be given or sent in connection with this Agreement shall
be in writing and transmitted to the applicable party by hand delivery or U.S.
certified mail, return receipt requested, postage prepaid. Invoices and other
non-emergency communications may be transmitted via regular US mail or
facsimile.
17. COUNTERPARTS
This Agreement may be executed in counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.
18. ENTIRE AGREEMENT
This Agreement, including all Sections listed herein, comprises the entire and
exclusive agreement of the parties with respect to the subject matter hereof and
supersedes any and all prior and contemporaneous agreements, understandings,
arrangements, proposals or representations whether written or oral, heretofore
made between the parties hereto and relating to this subject matter. It does
not, however, revoke or rescind any prior agreements for other services which
may have been executed by the parties. This Agreement may be modified, changed
or amended only by an express written agreement signed by duly authorized
representatives of both parties stating that it is an amendment. Waivers, or
purported waivers, of any provision of this Agreement shall be in writing and
signed by an authorized officer of both parties.
<PAGE>
SECTION C-NETWORK IMPLEMENTATION
ORDERING PROCEDURES
A. CONTENT OF ORDERS-Customer will notify Spacenet's designated Program Manager
(via purchase orders or other mutually agreed-upon means of communication) by
facsimile (or other mutually agreed upon means of communication) of specific
VSAT Sites that it wishes Spacenet to install. ZapMe! will provide a rolling
90-day forecast of anticipated installation sites by the end of each month. In
such notices, Customer must indicate:
- The street, city, and state where the VSAT Equipment will be
delivered and installed.
- The requested installation date (as outlined within the time
frames and procedures identified in this Agreement).
- The name or title and phone number of the person at each
VSAT Site authorized to work with Spacenet on all
installation activities.
- Any special instructions for the installation, including
deviations to the standard equipment configuration specified
in Section A.
- The Customer Unit number for the Site.
Additional ordering procedures applicable to "roll-out" installations are set
forth in section D under "Site Installations" below.
B. SCHEDULING-Customer agrees to use its best efforts to work with Spacenet to
schedule the initial Site roll-out in a geographically efficient manner.
C. PURCHASE ORDERS-Site Equipment and optional equipment and services may be
ordered via Customer's own purchase orders, within the lead times provided by
Spacenet. However, Customer understands and agrees that any such purchase orders
are to be used only for purposes of facilitating the ordering of Equipment and
Services under this Agreement, and for providing a purchase order number for
Customer's accounting purposes. Customer agrees that, notwithstanding any
statements to the contrary on Customer's purchase order or other documents, the
provision of Equipment and Services as contemplated in this Agreement shall be
governed solely by the terms and conditions of this Agreement, and that any
terms and conditions of Customer's purchase order or other documents shall be
null and void.
SITE INSTALLATIONS
A. STANDARD INSTALLATION-A Standard Installation includes the delivery and
installation of the equipment set forth under "Standard Service" in Section A,
and includes one (1) wall penetration for the cable run. The installation
process consists of VSAT assembly, installing and pointing the VSAT antenna,
installing the IFL cable, and installing and connecting the outdoor electronics.
Other required efforts, such as the installation of cable conduits, trenching,
or non-standard antenna mounts, are outside the scope of a Standard Installation
and subject to
<PAGE>
quotation.
Until Spacenet notifies Customer that it is able to supply "Expanded Service" as
set forth in Section A, the following shall apply:
(i) With respect to the SkyBlaster PCI hardware cards, at no additional cost to
ZapMe!, Spacenet will deliver such cards to ZapMe!'s designated computer
integrator for installation into ZapMe!-supplied PC's. ZapMe!'s computer
integrator will install the SkyBlaster PCI cards into the server PC's to allow
the SkyBlaster service to operate on the ZapMe!-supplied PC's. ZapMe! is
responsible for the integration and installation of the SkyBlaster cards and any
associated software (if required) for operation of ZapMe!'s services.
(ii) ZapMe! will provide to Spacenet, at Spacenet's expense, [*] fully
integrated servers to be used by Spacenet as testing units to verify the
installation and commissioning of the individual sites.
Following the successful commissioning of a site using a test server PC,
Spacenet will remove the test server and notify ZapMe! that the site is
available for ZapMe!'s designated computer integration service company to
install the permanent server, the ethernet hub, associated cabling and the
additional client PCs.
Spacenet recognizes that ZapMe! is currently utilizing SkySurfer 1 PCI cards in
connection with all of ZapMe!'s VSAT sites as of the Effective Date provided by
another service provider ("Legacy Sites"). As part of its Standard Service,
Spacenet will migrate and upgrade ("retrofit") these Legacy Sites to the
Spacenet provided service. Spacenet shall use commercially reasonable efforts to
complete the retrofitting of the Legacy Sites within 60 days of the date of this
Agreement.
Spacenet and ZapMe! will work together to perform the following items related to
the upgrade of ZapMe!'s Legacy Sites:
1. ZapMe! will provide a current list of Legacy Site locations.
2. ZapMe! will provide the site configurations of the Legacy Sites and a
description of the equipment at the Legacy Sites.
3. Spacenet will evaluate the Legacy Sites and determine the extent to
which ZapMe!'s existing equipment can be used with the Spacenet
provided service, including PCI cards and antennas. Spacenet may use
the existing equipment to meet its service obligations hereunder if it
determines that such equipment is compatible with its service.
4. ZapMe! and Spacenet will agree on a transition roll out schedule.
5. Once a transitioned Site becomes available for transmission on the
Spacenet provided service, Spacenet will commence invoicing for such
Site.
B. EXPANDED INSTALLATION-Both parties recognize that Spacenet will notify
Customer when it is able to deliver and install the equipment set forth under
"Expanded Service" in Section A. At such time Spacenet will provide and ZapMe!
will have the option to purchase such Expanded Service.
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[*]Confidential treatment has been requested with respect to certain information
contained in this document. Confidential portions have been omitted from the
public filing and have been filed separately with the Securities and Exchanges
commission.
<PAGE>
C. NON-STANDARD INSTALLATIONS-For any non-standard installation services or
equipment, if the cost of the service or equipment necessary to complete
installation is estimated to be equal to or less than [*] no prior approval is
needed from ZapMe! and Spacenet may complete the installation and bill
accordingly. However, if the non-standard installation service or equipment is
estimated to be greater than [*] Spacenet shall not complete the installation
unless they receive written approval from ZapMe!.
D. SPACENET RESPONSIBILITIES-As part of Spacenet's Standard installation
(above), Spacenet or its agents will:
- Obtain all licenses, permits, approvals, authorizations and
clearances required by the FCC for the operation of the VSAT
Equipment;
- Render reasonable assistance by telephone to support
Customer's efforts to secure landlord approvals at each
Site.
- Handle equipment orders
- Provide installation services as described herein
- Follow all applicable school safety procedures provided to
Spacenet by Customer in writing.
E. CUSTOMER RESPONSIBILITIES-At each Customer Site, Customer or its agents will:
- Designate one individual that is authorized to make decisions
relating to the installation of Spacenet-provided Equipment at
the particular Site and to interface with Spacenet during
installation.
- Obtain any landlord approvals, building or zoning permits or
zoning variances required for each Site;
- Provide to Spacenet any structural analyses or structural
drawings as may be needed by Spacenet.
- Pay Spacenet, on a Time and Materials basis, if Spacenet is
required to attend zoning hearings or other public meetings
in order to assist ZapMe! in obtaining a building or zoning
permit or zoning variance.
- Perform structural analyses, as required. The structure on
which the antenna shall be located must provide adequate
support for the antenna, and must provide an unobstructed
line-of-sight view of the satellite year-round.
- Provide building layout drawings as available for each Site
type to the Spacenet installation manager at least thirty
days prior to scheduled commencement of installation.
- Provide a suitable secure area for installation of the
antenna and all outdoor and indoor electronics associated
with the Equipment.
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[*]Confidential treatment has been requested with respect to certain information
contained in this document. Confidential portions have been omitted from the
public filing and have been filed separately with the Securities and Exchanges
commission.
<PAGE>
- Provide or cause to be provided standard electrical
requirements (a 120 volt electrical power receptacle within
five (5) feet of the server location, preferably with a
separate 15 amp. circuit breaker) and environmental
conditioning requirements as may be required in order to meet
Spacenet-provided specifications and/or local Building
Department codes. The server portion of the VSAT system shall
be located in an area suitable for a personal computer, in a
clear space, 18"D x 20"W x 10"H, adequately ventilated to
provide air circulation about the server and to be free of
excessive dust or dirt, preferably air conditioned.
- Subject to Customer's or schools' security policies and
procedures, provide Spacenet or its agents with access and
egress to the VSAT site and indoor communications equipment
location at all reasonable times for installation and
maintenance of the Equipment.
- Subject to the Non-Standard Installation paragraph above,
pay for any special conveyances (e.g. crane), services, or
facilities for transporting Equipment (e.g., the VSAT
antenna) and any materials that cannot be manually conveyed
to the point of installation.
- Arrange and pay for union labor if the local jurisdiction
requires labor union members to perform or supervise the
VSAT installation.
F. SCHEDULING ROLL-OUT INSTALLATIONS AND INDIVIDUAL INSTALLATIONS-For Roll-out
Installations (Minimum Site Order Quantity installed within Minimum Site Order
Installation Period", as set forth under the "Network Information" paragraph of
Section A), Spacenet and Customer shall agree to a mutually acceptable overall
roll-out installation schedule for the installation of Equipment at Customer's
Sites. Spacenet shall plan the specific roll-out schedule and routing of the
installations. For Individual Installations (installations outside the Roll-out
Installation described above), Spacenet will perform installations consistent
with the Spacenet-provided lead times. In any event, Spacenet will use
commercially reasonable efforts to install up to [*] Sites per month provided
that Customer delivers its purchase order for such installations at least thirty
(30) days prior to the requested installation date. There will be no Site Survey
charge applicable if Spacenet is able to perform an installation on its first
visit using one of the standard antenna mounts carried by the installer. Upon
arrival of the Spacenet installers at a Site, if it is determined that one of
the standard antenna mounts cannot be used, or if the Site is determined to be
non-Standard for other reasons, a Site Survey will be performed at that time
instead of the installation activity, and the installation will be rescheduled
to include the non-standard equipment and installation activities, subject to
Customer's approval of Spacenet's quotation for any non-standard items or
services not already priced in this Agreement. Late cancellation or postponement
of an installation, which is defined as cancellation or postponement less than
four (4) business days in advance of the scheduled installation, will result in
a Canceled Site Installation charge. A Terminated Site Visit charge will be paid
if Spacenet is not granted access to a site on the scheduled installation date,
or if the site is not ready for a VSAT installation on the scheduled install
date (e.g., site under construction, no A/C power, local approvals not obtained,
etc.)
- --------------------
[*]Confidential treatment has been requested with respect to certain information
contained in this document. Confidential portions have been omitted from the
public filing and have been filed separately with the Securities and Exchanges
commission.
<PAGE>
SECTION D-OPERATION AND MAINTENANCE
NETWORK OPERATION
Spacenet is responsible for the overall operation of Customer's network. This
consists of activating new sites and deleting and re-locating existing sites
under Customer's direction. Customer is responsible to promptly notify Spacenet
of potential site problems following Customer's first-level diagnostics.
Spacenet is responsible for the operation of the network to meet the Performance
Specifications identified under "Network Information" of Section A.
OUT-OF-SCOPE SERVICES
If Customer desires Spacenet's assistance for such tasks as adding new
applications to the network, network analyses, system optimization, etc.,
Customer may make such request by providing details of the request in writing to
the Spacenet program manager. Spacenet will then respond with a fixed-price
quotation for performing the requested tasks along with an estimate of the time
it will take to perform the tasks. If Customer accepts Spacenet's estimate and
price, Spacenet will proceed with the tasks.
NETWORK AVAILABILITY COMMITMENT
The transmission services provided by Spacenet to Customer under this Agreement
have an overall Network Availability Commitment as set forth under Network
Information in Section A (calculated by dividing the number of on-line service
minutes by the number of total possible service minutes), averaged over an
annual basis. The annual measurement period shall commence when the minimum site
commitment has been installed. Spacenet shall provide Customer a credit against
future Service fees whenever the total of all service interruptions causes the
actual annual average Network Availability to fall below the Network
Availability Commitment. The credit shall be [*] times the mathematical
product of (i) the Network Availability Commitment less the actual annual
average network availability rounded to the nearest tenth of a percent (for
example: .9953 would be rounded to .995), and (ii) the total Monthly Recurring
Service Fee times the number of active Sites. The total amount of such credit
shall not exceed the total of all Service Fees for one month.
The Network Availability Commitment is measured over a 12-month period and
includes the following elements:
VSAT equipment
Hub earth station equipment
Satellite transponder
Hub sun transit
Spacenet will be relieved of its Network Availability Commitment to the extent
that any service interruptions are due to:
- failure or interruption of service due to the failure or
non-performance of any terrestrial equipment, connections,
or services not provided to Customer by Spacenet's
affiliates,
- --------------------
[*]Confidential treatment has been requested with respect to certain information
contained in this document. Confidential portions have been omitted from the
public filing and have been filed separately with the Securities and Exchanges
commission.
<PAGE>
- action or inaction by Customer, its employees, invitees,
third parties, including, but not limited to, changes in
applications, protocols, or transmission parameters from
those tested and approved by Spacenet,
- Customer-scheduled/approved down-time (maintenance,
upgrades, etc.),
- breach of this Agreement by Customer,
- any other cause beyond Spacenet's reasonable control, to
include but not be limited to those actions set forth under
the Force Majeure provision of this Agreement,
- failure or unavailability of the Customer's Data Center.
SITE MAINTENANCE
A. MAINTENANCE DEFINITIONS-Subject to the terms and conditions hereof, Spacenet
shall provide maintenance support for all Equipment provided as part of this
Agreement as well as the PCI cards and SkyBlaster hub purchased from Gilat
Satellite Networks, Ltd. as of the Effective Date. Such maintenance shall
consist of:
- Equipment maintenance which includes travel to and from the
Site and technical trouble-shooting to isolate any problems;
- labor for on-Site repair and replacement, as required, of
malfunctioning Equipment;
- diagnostic support and repair of malfunctioning Equipment;
- software maintenance as needed for one protocol;
- coverage during Spacenet's normal Business Hours, provided,
however, that if the 7x16 ("Extended") maintenance option in
Section A is selected, the maintenance hours shall be from
8AM-Midnight, local time.
"Business Hours" means Monday through Friday, 8:00 a.m. to 5:00 p.m., excluding
holidays, local time of the serving field service center Business Day.
"Business Day" is defined as a day on which the serving field service center is
open for business. The excludes Saturdays, Sundays and Federal, state and local
holidays as applicable in the US, and Saturdays, Sundays, and local holidays as
applicable in each foreign country. US Federal holidays observed by Spacenet
maintenance and service personnel are:
New Year's Day* Labor Day
President's Day Thanksgiving Day
Memorial Day The day after Thanksgiving Day
Independence Day* Christmas Day*
* If the holiday falls on a Saturday or Sunday, it will be observed on
the nearest Friday or Monday, as observed by Federal employees.
B. MAINTENANCE RESPONSE TIME-Spacenet will respond to Maintenance Calls or other
indications of malfunction
<PAGE>
by dispatching a service technician to the Site to repair or replace the
defective component unless the trouble can be otherwise corrected through
remote repair. No less than [*] of the time, Spacenet shall respond to
Maintenance Calls no later than the next Business Day. In all other
instances, Spacenet shall respond to maintenance calls on a commercially
reasonable effort basis but no later than [*] Business Days. The average
response time will be based on results experienced during the prior 12-month
period of operation.
C. CUSTOMER'S MAINTENANCE RESPONSIBILITIES-Customer shall perform first-line
troubleshooting to attempt to assess whether a problem reported at a Site is due
to Spacenet-provided Equipment that needs repair, or some other cause. Calls and
requests for maintenance support shall be made only from Customer's "Central
Trouble Reporting Point." Response to maintenance calls from the Customer's
Central Trouble Reporting Point is predicated upon advisory by the Customer at
the time of notification of the service interruption that an authorized
representative shall be available at the Site to receive the Spacenet
maintenance technician(s), including security escort, if required. In the event
the Customer cannot verify that a representative and/or security escort will be
represent, Spacenet shall not dispatch or have dispatched a maintenance
technician until such time as the the Customer can verify that a representative
shall be available at the Site to receive the maintenance technician(s) and
contacts Spacenet with such information. Upon dispatch of a maintenance
technician, if an authorized representative is not available at the site to
receive the maintenance technician(s), including security escort, if required,
the Terminated Site Visit Charge shall apply and the period for Spacenet's
calculation of the service interruption period shall cease until such time as a
maintenance technician is granted access to the site.
ZapMe! will install and maintain a dedicated 56 Kbps line and equipment
connecting ZapMe!'s help desk in San Ramon, California to Spacenet's shared hub
network management system in order to perform remote diagnostics. Spacenet shall
provide Customer with remote access to Spacenet's shared hub network management
system in order for Customer to perform such remote diagnostics.
D. MAINTENANCE EXCLUSIONS-Spacenet's maintenance obligations under this
Agreement do not include provision of consumable supplies, repair or replacement
of Equipment failures or malfunctions caused by improper installation,
operations, or maintenance by other than Spacenet authorized representatives,
relocation or modification by Customer or others not under Spacenet's control,
failure or interruption of Customer-provided terrestrial communications or
electrical power, accident, fire, lightning, snow, snow removal, or other
hazards beyond normal range of use, vandalism, trouble calls where no problem is
found and the reported problem does not repeat within five calendar days, or
failures or malfunctions resulting from exposure of the Equipment to conditions
beyond its reasonable operating conditions. Any such failures and malfunctions
will be repaired as authorized by Customer on a commercially reasonable effort
basis and billed to Customer on a time and materials basis at Spacenet's
then-effective prices. Customer shall use reasonable efforts to facilitate
access as required for maintenance of the Equipment during maintenance hours,
including appropriate security escort when required. Failure to grant or have
granted access during a maintenance call will result in a Terminated Site Visit
charge.
SOFTWARE LICENSE AND SUPPORT
A. "Licensed SOFTWARE" means any computer program, including any modifications,
updates, or additions which may be included by Spacenet in any or with provided
Equipment as object code or in executable form in any medium, and related
materials such as diagrams, manuals and other documentation which are for use in
the Equipment provided to Customer under this Agreement.
B. By their signature of this Agreement, Spacenet grants to Customer and
Customer accepts a non-exclusive
- --------------------
[*]Confidential treatment has been requested with respect to certain information
contained in this document. Confidential portions have been omitted from the
public filing and have been filed separately with the Securities and Exchanges
commission.
<PAGE>
license to use or have used the Licensed Software as it resides in Spacenet's
Equipment, but only for the purpose of causing such Equipment to operate for
the provision of transmission services and not otherwise. Customer shall not
permit any third party to gain access to the Licensed Software or transfer
the Licensed Software to any third party, copy or permit to have copied the
Licensed Software, reverse engineer, disassemble, de-compile, or transmit the
Licensed Software in any form or by any means. Violation of these
restrictions shall entitle Spacenet to terminate this License of Software
without liability, take possession of the Equipment, software, and terminate
this Agreement for default. Licensed Software is and shall remain the
exclusive property of Spacenet or Spacenet's vendors. No license other than
the specifically stated herein is granted to Customer, and Customer shall
have no right under patent, trademark, copyright, trade secret or other
intellectual property of Spacenet or Spacenet's vendors other than that
granted herein.
C. Spacenet's monthly charges include Software License and software support for
the term of the Agreement. During this term, Spacenet will provide remedial
software support services so that Spacenet's software operates on the
Spacenet-provided equipment in accordance with the Performance Specifications of
this Agreement. For clarity, the parties understand that this software support
consists of software maintenance, fixes, work-arounds, etc. which implement the
features and functionality already committed to by Spacenet in this Agreement.
Software releases or upgrades which provide NEW product functionality or
features beyond the functionality or features already committed to under this
Agreement may be offered and quoted to Customer as they become available,
including new features and functionality specifically requested by Customer.
Otherwise, for so long as Customer remains current in its payment of monthly
charges hereunder, there is no additional charge for Software releases or
upgrades that Spacenet may incorporate into its shared hub services to Customer.
D. Spacenet warrants to Customer through the initial term of this Agreement that
the software that operates in the Spacenet-provided Equipment under this
Agreement is "Year 2000 Capable," meaning that (1) its functionality will not be
materially adversely affected as a result of the date change from 1999 to 2000,
including leap year calculations, provided that all Customer-provided or other
non-Spacenet-provided products and equipment used with the Equipment function
properly including, without limitation, property exchanging date data with the
Equipment; and (2) to the extent applicable to the Equipment's normal operating
specifications and subject to any upper and lower limits in the Equipment's
systems design, the Equipment will accept, store, retrieve, compare and
otherwise process dates of January 1, 2000 and later. This warranty is subject
to the limitations set forth in Article 9 of this Agreement.
<PAGE>
Amendment No. 1
To Services Agreement
Between ZapMe! Corporation and Spacenet Inc.
This document will become effective as Amendment No. 1 to the Services
Agreement between Spacenet Inc. ("Spacenet") and ZapMe! Corporation ("ZapMe!")
as of the date of the last party to sign below.
WHEREAS, Spacenet and ZapMe! executed a Services Agreement on June 11, 1999
(hereinafter collectively referred to as the "Agreement"); and
WHEREAS, the parties wish to amend the price for Standard Equipment and Service
in Section A of the Agreement.
NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants
and agreements set forth herein, the parties agree as follows:
1. The price for Standard Equipment and Service in Section A of the
Agreement is hereby deleted in its entirety and replaced with the
following:
STANDARD EQUIPMENT AND SERVICE FREQUENCY SITES PRICE(1)
- ------------------------------ --------- ----- --------
Monthly, Per Site 1-510 [*]
Monthly, Per Site 511-1,613 [*]
Monthly, Per Site 1,614 and up [*]
Standard Service - Includes:
1.2 Meter Antenna,
One Standard Mount(2)
Up to 400 Feet of IFL Cable, Non-Plenum (dual 200' cable run)
Outdoor Unit (3) - 500 mw ODU and LNB,
Two PCI cards
- DVB Receiver(4)
- Satellite Transmitter(5),
Support for One (1) Spacenet-Supported Software Protocol,
Software License and Maintenance,
48-state [*]-Band satellite capacity, non-preemptible and intra-satellite
protected,
Use of Spacenet's Shared Hub Facilities,
Standard Installation, 24-hour 2nd Level Help Desk Support,
Next Business Day Maintenance Support,
Satellite Network capacity to support Customer's Bandwidth Allocation
specified under "Network Information"(6)
- -----------------
(1) The price for Standard Equipment and Service shall constitute the sole
amount due to Spacenet from ZapMe! under this or any prior agreement
for such Standard Equipment and Service, subject to additional
- --------------------
[*]Confidential treatment has been requested with respect to certain information
contained in this document. Confidential portions have been omitted from the
public filing and have been filed separately with the Securities and Exchanges
commission.
<PAGE>
charges for all non-standard requirements and subject to the terms and
conditions of this Agreement.
(2) "Standard" mounts are: Non-penetrating, Close-in Wall, Medium Reach
Wall, and I-Beam.
(3) Outdoor Units will not be provided by Spacenet as part of the Standard
Service for the first 510 Sites installed under this Agreement. Outdoor
Units for such Sites will be provided by ZapMe!
(4) DVB Receivers will not be provided by Spacenet as part of the Standard
Service for the first 1,613 Sites installed under this Agreement. DVB
Receivers for such Sites will be provided by ZapMe!
(5) Satellite Transmitters will not be provided by Spacenet as part of the
Standard Service for the first 510 Sites installed under this
Agreement. Satellite Transmitters for such Sites will be provided by
ZapMe!
(6) The space segment purchased from Spacenet as part of the Standard
Service shall be dedicated to ZapMe!.
<PAGE>
2. Nothing contained in the Agreement effects Customer's
obligations to purchase from Gilat Satellite Networks, Inc.
("Gilat") the equipment specified in Customer's Purchase Order
No. 339 and Purchase Order No. 340 to Gilat dated November 24,
1998.
3. Terms not otherwise defined herein shall have the meanings set forth
in the Agreement.
4. This Amendment No. 1 and the Agreement comprise the entire agreement
and understanding between the parties with respect to the subject
matter hereof. Unless specifically amended herein, the terms and
conditions of the Agreement shall remain in full force and effect. In
the event of any conflict between the terms of this Amendment No. 1 and
the Agreement, the terms of this Amendment No. 1 shall prevail.
IN WITNESS WHEREOF, the parties have caused this Amendment No. 1 to the
Agreement to be executed as of the date of the last party to sign below.
AGREED TO BY ZAPME!: ACCEPTED BY SPACENET:
ZapMe! Corporation Spacenet Inc.
SIGNATURE: /s/ Robert A. Stoffregen /s/ Yoel Gat
------------------------- ------------
PRINTED NAME: Robert A. Stoffregen Yoel Gat
--------------------- --------
TITLE: CFO CEO
---- ---
DATE: 7/19/99 7/19/99
-------- -------
<PAGE>
Exhibit 10.19
Confidential treatment has been requested with respect to certain information
contained in this document. Confidential portions have been omitted from the
public filing and have been filed separately with the Securities and Exchanges
commission.
PRODUCTS AND SERVICES AGREEMENT
THIS PRODUCTS AND SERVICES AGREEMENT (this "Agreement") is dated as
of March 3, 1999, by and between Sylvan Learning Systems, Inc., a Maryland
corporation ("Sylvan") and ZapMe! Corporation, a California corporation
("ZapMe").
RECITALS
WHEREAS, Sylvan has developed or will develop those educational and
testing products and services enumerated on EXHIBIT A attached hereto (the
"Authorized Products and Services") for use on or with personal computers
("PCs");
WHEREAS, ZapMe is in the business of, among other things, providing
no cost PC-based computer systems consisting of a server networked with 5 to
15 personal computers and a laser printer to elementary, middle and high
schools at no cost (a "ZapMe" System"); the ZapMe Systems are connected to
the Internet via satellite or otherwise utilizing ZapMe's operating systems
and software; and
WHEREAS, Sylvan and ZapMe have agreed to enter into this Agreement
whereby ZapMe is entrusting Sylvan to maximize the value of certain business
opportunities available to ZapMe, by granting Sylvan the exclusive right to
provide the Authorized Products and Services through ZapMe Systems.
NOW THEREFORE, in consideration of the foregoing, the mutual
covenants and agreements contained herein and other good and valuable
consideration, the parties, intending to be legally bound, hereby agree as
follows:
SECTION 1. GRANT OF EXCLUSIVE RIGHT; RIGHTS RESERVED.
1.1 ZapMe hereby grants to Sylvan, and Sylvan hereby
accepts from ZapMe, the exclusive right to deliver the Authorized Products
and Services on ZapMe Systems in Eligible Schools, as defined below, to
Sylvan customers.
1.2 In consideration of ZapMe granting such rights
to Sylvan, Sylvan agrees to use its best efforts to maximize the value to
ZapMe of the opportunities to which ZapMe is hereby entrusting Sylvan by
delivering all of the Authorized Products and Services to Eligible Schools.
1.3 This Agreement does not include or address goods
and services to be delivered outside of the United States, which rights are
specifically reserved by ZapMe.
1
Sylvan/ZapMe! Agreement
<PAGE>
SECTION 2. SYLVAN'S RESPONSIBILITIES. At all times during the
term hereof, Sylvan shall:
2.1 Promote and support all of the Authorized
Products and Services to students, teachers, administrators and other
potential end users in those schools having an installed and fully
functioning ZapMe System ("Eligible Schools");
2.2 Develop other fee-based products and services
("Additional Sylvan Products and Services") to be provided by Sylvan directly
or by a third party through Sylvan in addition to the Authorized Products and
Services for introduction into the Eligible Schools. ZapMe shall have the
right to approve, in its sole discretion, all proposed terms and conditions
regarding Additional Sylvan Products and Services before they may be
delivered on or through ZapMe Systems in Eligible Schools ("Eligible
Systems"), including specifically the terms and conditions under which ZapMe
will be compensated in connection therewith;
2.3 Interact with teachers, students, administrators
and other end users in the Eligible Schools in order to facilitate and
encourage the use of the Eligible Systems for the Authorized Products and
Services;
2.4 Promptly pay to ZapMe all Profit Share Fees (as
hereinafter defined) in accordance with Section 5 hereof; and
2.5 Use reasonable efforts to cooperate and
facilitate the use of Eligible Systems by third parties designated by ZapMe,
in such a way as not to unduly interfere with Sylvan's rights to offer the
Authorized Products and Services or Additional Sylvan Products and Services.
SECTION 3. ZAPME'S RESPONSIBILITIES. At all times during the
term hereof, ZapMe shall:
3.1 Actively market the ZapMe Systems to school
districts and individual schools throughout the United States so as to
increase the number of schools that may become Eligible Schools;
3.2 Use commercially reasonable efforts to support,
maintain and repair the ZapMe Systems at Eligible Schools, including the PCs,
all software and other components, so that workstation and network downtime
is minimized;
3.3 Not accept any advertising on Eligible Systems
for products or services that are directly competitive with the Authorized
Products and Services; and
3.4 Promptly remit to Sylvan any fees received by
ZapMe which represent fees for Authorized Products and Services and
Additional Sylvan Authorized Products and Services.
2
Sylvan/ZapMe! Agreement
<PAGE>
SECTION 4. COOPERATION AND INFORMATION SHARING.
4.1 ZapMe shall, subject to any confidentiality
restrictions it may be under, keep Sylvan apprised of and consult with Sylvan
on the types of educational products and services ZapMe intends to offer on
or through the ZapMe!-TM- netspace (the "ZapMe Netspace"). If such products
or services are similar to the Authorized Products and Services or other
products and services Sylvan offers, ZapMe will provide Sylvan with notice
thereof prior to committing to offering such products or services on the
ZapMe Netspace.
4.2 Sylvan will keep ZapMe apprised of its efforts
to deliver the Authorized Products and Services in as many Eligible Schools
as is practical.
SECTION 5. PROFIT SHARE FEES.
5.1 PERCENTAGE. For each calendar quarter
during the term of this Agreement, Sylvan shall pay to ZapMe a cash fee equal
to the Applicable Percent (as defined below) of the Net Operating Profit (as
defined below) generated during such quarter by the Authorized Products and
Services (as expressed on EXHIBIT A hereto) at the Eligible Schools. For
purposes of the foregoing, Net Operating Profit shall be calculated by Sylvan
in accordance with EXHIBIT B attached hereto, and all fees paid to ZapMe
during the term of this Agreement pursuant to this Section 5 (excluding any
credit against Profit Share Fees otherwise owing by reason of Section 5.3
hereof) are hereinafter referred to as "Profit Share Fees." ZapMe
acknowledges that Sylvan provides products and services to schools,
administrators, teachers and students independent of ZapMe Systems and ZapMe
agrees that only those Authorized Products and Services actually provided
making use of Eligible Systems are subject to payment of Profit Share Fees.
The Applicable Percent shall initially be 35%, and for each $5 million in
cumulative Profit Share Fees paid to ZapMe, so long as this Agreement is in
effect, the Applicable Percent shall be reduced by 2.5% until it becomes 20%,
after which it shall not be further reduced.
5.2 PAYMENT OF PROFIT SHARE FEES. After the
end of each calendar quarter during the term of this Agreement, Sylvan shall
calculate the estimated Profit Share Fees payable on account of such quarter
and shall remit the estimated Profit Share Fees to ZapMe not later than the
15th of the month following the end of the quarter, in all cases subject to
the verification procedures described in Section 6.2 of this Agreement. Such
Profit Share Fees shall be calculated net of any previous net operating
losses reported for prior quarters in that particular calendar year.
5.3 MINIMUM PROFIT SHARE FEES.
(a) During 1999 only, Sylvan shall pay a
minimum quarterly Profit Share Fee of $50 for each school that was an
Eligible School on the last day of the applicable quarter (the "1999 Minimum
Per School Quarterly Fee"). For 1999, Sylvan shall pay to ZapMe not less
than $250,000 in cumulative Profit Share Fees. If the calculated amount of
1999 Profit Share Fees (including aggregate 1999 Minimum Per School Quarterly
Fees) is less than $250,000 Sylvan shall receive a credit against the fees to
be paid by Sylvan to ZapMe for
3
Sylvan/ZapMe! Agreement
- --------------------
[*]Confidential treatment has been requested with respect to certain information
contained in this document. Confidential portions have been omitted from the
public filing and have been filed separately with the Securities and Exchanges
commission.
<PAGE>
2000, which credit shall equal the excess of $250,000 over the amount of fees
otherwise owing for 1999.
(b) For each year during the term of this
Agreement beginning with the year 2000, Sylvan shall pay to ZapMe an annual
Minimum Profit Share Fee, calculated in accordance with the following
formula: MPSF = ES x FF, where "MPSF" represents the Minimum Profit Share
Fee; "ES" represents the number of Eligible Schools in which a ZapMe System
has been installed and is operational for at least one full year as of the
last day of the year in question; and "FF" represents the relevant Fee Factor
(as hereinafter defined).
(c) Sylvan shall calculate and pay the
MPSF no later than January 15th of the following year, subject to
verification as provided for in Section 6 below. For purposes of the
calculation of MPSF, the FF for each school in question shall be as follows:
<TABLE>
<CAPTION>
Number of Full Years as Eligible School Fee Factor
--------------------------------------- ----------
<S> <C>
1 $200
2 $300
3 $400
4 or more $500
</TABLE>
SECTION 6. REPORTING; AUDIT RIGHTS.
6.1 ZAPME SCHEDULES. Within 10 days after the
end of each calendar quarter during the term of this Agreement, ZapMe shall
provide Sylvan a schedule showing each Eligible School as of the end of the
preceding quarter (the "Eligible School Schedule"), which shall separately
identify each Eligible School, when such school became an Eligible School and
the number of Eligible Schools added and deleted during such quarter.
Promptly after the end of each year during the term of this Agreement, ZapMe
shall verify its calculations through an independent auditor or other means
of verification acceptable to Sylvan (the "Verified Annual Schedule"), and
ZapMe shall provide Sylvan the Verified Annual Schedule within 30 days after
the end of each year.
6.2 SYLVAN QUARTERLY REPORT. Within 30 days
after receipt of each Eligible School Schedule, Sylvan shall provide ZapMe
with an accounting showing revenues, operating expenses and Net Operating
Profit from the Authorized Products and Services during the quarter covered
by that Eligible School Schedule (the "Sylvan Quarterly Report"). For the
four quarters of 1999, the Sylvan Quarterly Report also shall include a
calculation of the 1999 Minimum Fee, based upon the number of Eligible
Schools contained in the Eligible School Schedule for the applicable quarter.
Each Sylvan Quarterly Report shall be accompanied by either payment of the
amount by which the verified Profit Share Fee exceeded the Profit Share Fee
made previously for that quarter, or a credit memorandum for the amount by
which the estimated Profit Share Fee exceeded the Profit Share Fee made
previously for the Quarter.
4
Sylvan/ZapMe! Agreement
- --------------------
[*]Confidential treatment has been requested with respect to certain information
contained in this document. Confidential portions have been omitted from the
public filing and have been filed separately with the Securities and Exchanges
commission.
<PAGE>
6.3 SYLVAN ANNUAL REPORT. Annually, Sylvan shall
cause its independent auditors to report on the accuracy of each Sylvan
Quarterly Report prepared by Sylvan during the preceding year (the "Sylvan
Annual Report") and to calculate the MPSF for each such year (beginning with
the year 2000), based upon the number of Eligible Schools shown on the
Verified Annual Schedule for that year. Sylvan shall provide the Sylvan
Annual Report to ZapMe by March 31 of the following year. If that Sylvan
Annual Report shows that Sylvan owes a MPSF for that year or that Sylvan has
underpaid the Profit Share Fees for that year, Sylvan shall pay the amount
due when it sends the Sylvan Annual Report to ZapMe. If the Sylvan Annual
Report shows that Sylvan has overpaid the Profit Share fees for the year, the
amount of the overpayment shall be credited against the Profit Share Fees for
the following year.
6.4 SYLVAN'S AUDIT RIGHTS. If Sylvan disagrees
with any Eligible Schools Schedule, Sylvan shall notify ZapMe of such
disagreement within 30 days of receiving such Eligible Schools Schedule.
Upon receipt of such notice, ZapMe shall promptly make available to Sylvan
and its auditors, during reasonable business hours, all books and records,
including financial records, pertaining to the Eligible Schools for purposes
of verifying the Eligible Schools Schedule. Sylvan's failure to provide
notice of disagreement within such 30 days shall constitute acceptance of the
Verified Annual Schedule. In the event the Sylvan audit determines that the
Eligible Schools Schedule has been overstated by more than 5%, then ZapMe
shall pay the reasonable cost of such audit.
6.5 ZAPME'S AUDIT RIGHTS. If ZapMe disagrees
with any Sylvan Quarterly Report or Sylvan Annual Report, ZapMe shall notify
Sylvan of such disagreement within 30 days of receiving such Sylvan Quarterly
Report and within one year of receiving such Sylvan Annual Report. Upon
receipt of such notice, Sylvan shall promptly make available to ZapMe and its
auditors, during reasonable business hours, all books and records, including
financial records, pertaining to Sylvan's revenues, operating expenses and
Net Operating Profit from the Authorized Products and Services for purposes
of verifying the Sylvan Quarterly Report or the Sylvan Annual Report, as the
case may be. ZapMe's failure to provide notice of disagreement within such
time frames shall constitute acceptance of the applicable report (subject in
the case of each Quarterly Report to final determination in the Annual
Report). In the event the ZapMe audit determines that the Profit Share Fees
have been understated by more than the greater of $25,000.00 or 5% of the
Profit Share Fees, then Sylvan shall pay the reasonable cost of such audit.
6.6 DISPUTES. If a dispute arises under
Section 6.4 or 6.5 which the parties are unable to resolve within 30 days,
the parties shall cause their respective auditors to seek to resolve the
dispute. If the auditors are unable to resolve the dispute within the next
30 days, the matter shall be submitted to binding arbitration in accordance
with Section 11 hereof.
SECTION 7. SPONSORSHIP; ADVERTISING.
7.1 CHARTER SPONSORSHIP. In 1999, Sylvan will
participate as a charter advertising sponsor on the ZapMe Network in the
amount of $500,000, payable as such
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[*]Confidential treatment has been requested with respect to certain information
contained in this document. Confidential portions have been omitted from the
public filing and have been filed separately with the Securities and Exchanges
commission.
<PAGE>
advertising expenses are incurred. As a charter sponsor, Sylvan shall be
entitled to require ZapMe to place Sylvan-created advertisements on the ZapMe
Network in accordance with ZapMe's charter sponsorship terms. Subject to
Sylvan's good faith determination that its customer acquisition cost goals
have been met for a particular year, Sylvan shall remain a sponsor of the
ZapMe Network for the following year, at a spending level of 20% above the
preceding annual level. In the event ZapMe is not able to deliver the minimum
amount of advertising substantially in accordance with reasonable
Sylvan-specified delivery frequencies to meet the sponsorship level provided
in this Section 7.1, then Sylvan shall receive an advertising credit the
following year in an amount equal to the value of advertising not delivered
which would have met the minimum sponsorship level.
7.2 ADVERTISING RATES. In 1999 and 2000,
Sylvan shall be entitled to preferred advertising rates that reflect a 50%
and 25% discount, respectively, to ZapMe's published rates for those years.
During the term of this Agreement, Sylvan shall be charged advertising rates
no greater than the lowest rates charged by ZapMe to any advertiser during
that year.
7.3 ANNUAL ADVERTISING CREDIT. ZapMe and
Sylvan agree that it is in their mutual best interests that the Authorized
Products and Services be promoted by advertisements on the ZapMe Network.
Sylvan shall be credited each calendar year of this agreement beginning in
1999 with an advertising credit equal (a) in 1999 to $500,000 and (b)
thereafter to the actual amount of spending by Sylvan on advertising on the
ZapMe Network the previous calendar year (the "Advertising Credit"). This
Advertising Credit will be repaid to ZapMe on a dollar for dollar basis until
repaid in full out of the Net Operating Profits from the sale of Authorized
Products and Services. Notwithstanding the foregoing, Sylvan will not be
required to repay any Advertising Credits to the extent that they in total
exceed cumulative Net Operating Profits, prior to termination of this
Agreement.
SECTION 8. TERM AND TERMINATION.
8.1 TERM. The initial term (the "Initial Term")
of this Agreement shall expire on December 31, 2003. Sylvan may renew this
Agreement for an additional five year period by providing written notice of
its intent to renew no later than November 15, 2003, but only if: (i) the
Profit Share Fees for the first three calendar quarters of 2003 would result
in an annualized Fee Factor (the "Annualized Fee Factor") of at least $650
per school (the "Renewal Right Amount"), such calculation to be based on the
number of Eligible Schools in which a ZapMe System has been installed and is
operational for at least one year, on September 30, 2003; or (ii) the
Annualized Fee Factor is less than the Renewal Right Amount and Sylvan remits
to ZapMe such additional payment as is necessary to achieve the Renewal Right
Amount.
8.2 TERMINATION. This Agreement may be
terminated as follows:
(a) by mutual written consent of Sylvan
and ZapMe; or
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[*]Confidential treatment has been requested with respect to certain
information contained in this document. Confidential portions have been
omitted from the public filing and have been filed separately with the
Securities and Exchanges commission.
<PAGE>
(b) by Sylvan, if ZapMe breaches any
provision of Section 3 of this Agreement, which breach has not been cured
within 30 days after written notice from Sylvan to ZapMe; or
(c) by ZapMe, if Sylvan breaches any
provision of Section 1, 2, 5, 6 or 7 of this Agreement, which breach has not
been cured within 30 days after written notice from ZapMe to Sylvan; or
(d) by ZapMe, on one year's written
notice, if Sylvan offers or delivers PC-based Authorized Products or Services
through third parties whose business model is based on installing free or
subsidized PC systems in schools; or
(e) by Sylvan for any reason, upon not
less than one year's prior written notice, accompanied by a termination fee
equal to the greater of (i) $1 million; or (ii) the MPSF for the 12 months
preceding the month in which Sylvan provides such notice of termination; or
(f) by Sylvan, by written notice at any
time after December 31, 1999, if ZapMe has not achieved (i) 500 Eligible
Schools by December 31, 1999, (ii) 1,500 Eligible Schools by December 31,
2000; and (iii) 2,500 Eligible Schools by December 31, 2001 and each year
thereafter.
8.3 If Sylvan is precluded by any governmental
authority (including judicial authorities) from delivering any one or more of
the Authorized Products and Services to any Eligible School, (a) Sylvan shall
immediately so inform ZapMe thereof and (b) at any time thereafter, ZapMe
may, by written notice to Sylvan, determine that such school is no longer an
Eligible School.
8.4 REMEDIES UPON TERMINATION. In the event of
the termination of this Agreement, all legal rights and equitable remedies,
if any, of the terminating party shall survive and remain enforceable.
SECTION 9. PERFORMANCE WARRANT. In consideration of the
agreements hereunder, ZapMe shall deliver to Sylvan a warrant in substantially
the form attached hereto as EXHIBIT D.
SECTION 10. CONFIDENTIALITY. Each party hereto will hold in
confidence and not reveal to any third parties any knowledge or information
of a confidential nature with respect to the business, products, know-how and
methods of operation of the other party hereto, and will not disclose,
publish or make use of the same, provided, however, that the foregoing shall
not be applicable to any disclosure or use of confidential information or
knowledge that can be demonstrated to have (i) been publicly known prior to
the date of this Agreement, (ii) become known by publication or otherwise not
due to the unauthorized act or omission on the part of the recipient, or
(iii) been supplied to the recipient by a third party without violation of
the rights of any of the parties to this Agreement or any other party's
rights. Upon termination or expiration of this Agreement, each party shall
immediately return to the other confidential information
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[*]Confidential treatment has been requested with respect to certain information
contained in this document. Confidential portions have been omitted from the
public filing and have been filed separately with the Securities and Exchanges
commission.
<PAGE>
(regardless of the medium) in its possession and belonging to such other
party. The parties agree that the remedy at law for any breach of this
Section 10 may be inadequate and that the aggrieved party shall be entitled
to injunctive and other equitable relief in addition to any other remedy
available to it in law or equity. This Section 10 shall survive termination
or expiration of this Agreement and shall remain enforceable by injunctive or
other equitable relief.
SECTION 11. INDEMNIFICATION. Sylvan shall be responsible for
the Authorized Products and Services, and shall indemnify and hold ZapMe
harmless from any claim asserted by, or liability to, any third party based
solely upon one or more of the Authorized Products and Services or the
negligence of Sylvan. ZapMe shall be responsible for the Computer Labs, the
ZapMe Systems, and all computers and related equipment, and shall indemnify
and hold Sylvan harmless from any claim asserted by, or liability to, any
third party based solely upon one or more of the Computer Labs, the ZapMe
Systems, the related computers and other equipment or the negligence of ZapMe.
SECTION 12. DISPUTE RESOLUTION; CONSENT TO JURISDICTION.
Sylvan and ZapMe agree that any controversy or claim arising out of or
relating to this Agreement or the alleged breach thereof shall be settled
exclusively by arbitration in Tulsa, Oklahoma in accordance with the National
Rules of the American Arbitration Association. The decision of the arbitrator
or arbitrators shall be binding on all parties hereto, and judgment upon the
arbitration award may be entered by any court having jurisdiction. In
reaching its decision, the arbitrator shall have no authority to change or
modify any provision of this Agreement. Any party hereto may seek specific
performance, injunctive relief or other equitable relief before a court of
competent jurisdiction for purposes of compelling the other party hereto to
perform its obligations hereunder, or compelling the other party to arbitrate
any controversy or claim in the manner provided for above. The failure of a
court to grant the equitable relief sought by a party hereto shall not bar
such party from seeking to arbitrate the same claim, and such failure shall
not be taken into account by arbitrators in any arbitration. For purposes of
the foregoing, ZapMe and Sylvan each hereby irrevocably consent to the
jurisdiction of the federal and state courts of the State of Maryland and
California, respectively, and to arbitration located in Tulsa, Oklahoma. For
purposes of Section 10 of this Agreement, ZapMe and Sylvan irrevocably
consent to the jurisdiction of the federal and state courts of the State of
Maryland and California, respectively.
SECTION 13. MISCELLANEOUS.
13.1 NO AGENCY, JOINT VENTURE, ETC. Sylvan and
ZapMe acknowledge and agree that each is not an agent of the other for any
purpose whatsoever, and that each shall have no authority to legally bind the
other. Nothing contained in this Agreement shall be deemed to create a joint
venture or partnership between the parties.
13.2 EXPENSES. Each party to this Agreement
shall pay all of its expenses relating hereto, including fees and
disbursements of its counsel, accountants and financial advisors.
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13.3 SURVIVAL. The covenants and agreement
made by the parties in Sections 5, 10, 11 and 12 of this Agreement shall
survive the termination or expiration of this Agreement.
13.4 NOTICES. Except as otherwise provided
herein, all notices, requests, demands and other communications under or in
connection with this Agreement shall be in writing, and:
(a) if to Sylvan, shall be addressed to:
Sylvan Learning Systems, Inc.
1000 Lancaster Street
Baltimore, Maryland 21202
Attention: Douglas L. Becker, Co-Chief
Executive Officer
Fax: 410-843-8060
with a copy to:
Sylvan Learning Systems, Inc.
1000 Lancaster Street
Baltimore, Maryland 21202
Attention: Robert W. Zentz, Esq., General
Counsel
Fax: 410-576-1763
(b) if to ZapMe, shall be addressed to:
ZapMe Corporation
3000 Executive Parkway, Suite 150
San Ramon, California 94583
Attention: Lance Mortensen, Chief Executive
Officer
Fax: 925-543-0301
with a copy to:
ZapMe Corporation
3000 Executive Parkway, Suite 150
San Ramon, California 94583
Attention: Bruce Bower, General Counsel
Fax: 925-277-9356
All such notices, requests, demands or communications
shall be sent by overnight delivery, or certified mail (return receipt
requested), and shall be deemed delivered when sent. Any party may change the
address at which it is to receive notice by like written notice to the other.
13.5 ENTIRE AGREEMENT. This Agreement
(including the exhibits hereto and the lists, schedules and documents
delivered hereunder, which are a part hereof) is intended by the parties to
and does constitute the entire agreement of the parties with respect to the
matters contemplated by this Agreement. This Agreement supersedes any and all
prior
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<PAGE>
understandings, written or oral, between the parties. This Agreement may be
amended, modified, waived, discharged or terminated only by an instrument in
writing signed by the party against which enforcement of the amendment,
modification, waiver, discharge or termination is sought. This Agreement may
not be amended except by an instrument in writing signed by each of the
parties hereto.
13.6 HEADINGS. The paragraph headings
contained in this Agreement are for reference purposes only and shall not
affect in any way the meaning or interpretation of this Agreement.
13.7 COUNTERPARTS. This Agreement may be
executed simultaneously in two or more counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the
same instrument.
13.8 ASSIGNMENT. This Agreement shall inure to
the benefit of and be binding upon the parties hereto and their respective
successors and permitted assigns, but nothing herein, express or implied, is
intended to or shall confer any rights, remedies or benefits upon any person
other than the parties hereto. This Agreement may be assigned by either party
with the other party's consent, not unreasonably to be withheld, in the event
of a merger, acquisition, or sale of substantially all of the assets of the
assigning party (provided that the succeeding entity agrees to honor all of
the commitments and obligations of the assigning party under this Agreement,
and without the other party's consent in the event of a merger in connection
with the reincorporation of the assigning party.
13.9 TECHNICAL SPECIFICATIONS. Each ZapMe
System is based on the technical specifications set forth in EXHIBIT C.
13.10 GOVERNING LAW. This Agreement shall be
construed in accordance with and governed by the laws of the State of New
York, without giving effect to the principles of conflicts of law.
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IN WITNESS WHEREOF, Sylvan and ZapMe have executed this Agreement as
of the day and year first above written.
SYLVAN LEARNING SYSTEMS, INC.
By: /s/ Douglas Becker
---------------------------
Name: Douglas Becker
-------------------------
Title: President & Co-CEO
-------------------------
ZAPME CORPORATION
By: /s/ Lance Mortensen
---------------------------
Name: Lance Mortensen
-------------------------
Title: CEO
------------------------
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<PAGE>
EXHIBIT A
to
Products and Services Agreement
AUTHORIZED PRODUCTS AND SERVICES
"Authorized Products and Services" include only the following items:
1. Student tutoring or information training services, delivered either
live or by computer.
2. Test preparation programs for academic tests, including but not
limited to the SAT, ACT and the PSAT ("Test Prep Programs").
3. The delivery of computer based tests, for a fee, for (i) academic or
institutional admission (e.g. SAT, ACT), (ii) academic recognition, or
scholarship (e.g. PSAT), (iii) professional or vocational designation or
certification (e.g. Microsoft Certified Systems Engineer), or (iv) academic
placement or credit (e.g. standardized AP testing).
Notwithstanding the foregoing, Authorized Products and Services shall in no
way:
(i) require that ZapMe block access to any sites available on the
Internet that are not operated by ZapMe;
(ii) preclude ZapMe from entering into agreements with on-line
retailers of educational material or content, other than on-line
retailers who specialize in 1, 2 or 3 above; or
(iii) preclude ZapMe from incorporating into the ZapMe Netscape
educational content (other than Test Prep Programs) for which
ZapMe is not compensated.
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EXHIBIT B
to
Products and Services Agreement
For purposes of Section 5.1 of the Products and Services Agreement between
Sylvan Learning Systems, Inc. and ZapMe Corporation dated January 15, 1999,
Net Operating Profit shall be deemed to be the result of subtracting from the
gross income derived from the delivery of Authorized Products and Services or
Additional Opportunity Products and Services at an Eligible School utilizing
Eligible Systems the sum of all expenses directly attributable thereto.
For purposes of the foregoing the term "gross income" shall mean the amount
of fees billable for services delivered and gross sales price billed for
products delivered exclusive of any sales taxes or shipping costs billed to
the recipient.
For purposes of the foregoing, expenses shall be directly attributable to
gross income derived from the marketing, delivery and support of Authorized
Products and Services or Additional Opportunity Products and Services to an
Eligible School utilizing Eligible Systems if they are for goods and services
actually delivered or provided to the Eligible School and would not be
incurred but for the activity of providing such Authorized Products and
Services or Additional Opportunity Products and Services. In no event shall
allocated expenses from support or development activities occurring at
locations other than Eligible Schools or depreciation or amortization charges
be utilized in determining Net Operating Profit, without ZapMe's prior
written approval, not unreasonably to be withheld.
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[*]Confidential treatment has been requested with respect to certain information
contained in this document. Confidential portions have been omitted from the
public filing and have been filed separately with the Securities and Exchanges
commission.
<PAGE>
EXHIBIT C
SKYSURFER PRO NETWORK SCHEME
[Graphic]
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[*]Confidential treatment has been requested with respect to certain information
contained in this document. Confidential portions have been omitted from the
public filing and have been filed separately with the Securities and Exchanges
commission.
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and
"Selected Financial Data" and to the use of our report dated April 2, 1999
(except for Note 8, as to which the date is October , 1999) with respect to
the financial statements of ZapMe! Corporation as of December 31, 1997 and 1998,
and for the period June 25, 1997 (inception) through December 31, 1997 and for
the year ended December 31, 1998, in the Registration Statement (Form S-1), as
amended, and the related Prospectus of ZapMe! Corporation for the registration
of shares of its common stock.
Walnut Creek, California
October , 1999
- --------------------------------------------------------------------------------
The foregoing consent is in the form that will be signed upon final
computation of the number of common shares which may be received by holders of
Series C and D preferred stock and computation of an additional dividend amount,
if any, as described in Note 3 to the financial statements, the effect on pro
forma weighted average shares as described in Note 1 to the financial
statements, and approval of the certificate of incorporation in the state of
Delaware as described in Note 8 to the financial statements.
/s/ ERNST & YOUNG LLP
Walnut Creek, California
October 14, 1999
